Rule 497(b)
Registration No. 33-37297
Prospectus Part A Dated October 28, 1999
INSURED MUNICIPAL SECURITIES TRUST
NEW JERSEY NAVIGATOR INSURED
SERIES 2
- --------------------------------------------------------------------------------
The Trust is a unit investment trust designated Series 2 ("New
Jersey Navigator Trust") with an underlying portfolio of long-term insured
tax-exempt bonds and was formed to preserve capital and to provide interest
income (including, where applicable, earned original issue discount) which, in
the opinions of bond counsel to the respective issuers, is, with certain
exceptions, currently exempt from regular federal income tax under existing law
and from New Jersey gross income tax. There can be no assurance that the Trust's
investment objectives will be achieved. Although the Supreme Court has
determined that Congress has the authority to subject the interest on bonds such
as the Bonds in the Trust to regular federal income taxation, existing law
excludes such interest from regular federal income tax. Such interest income
may, however, be a specific preference item for purposes of the federal
individual and/or corporate alternative minimum tax. (See "Description of
Portfolio" in this Part A for a list of those Bonds which pay interest income
subject to the federal individual alternative minimum tax.) In addition, capital
gains are subject to tax. (See "Tax Status" and "The Trust--Portfolio" in Part B
of this Prospectus.) The Sponsors are Reich & Tang Distributors, Inc. and
Gruntal & Co., L.L.C. (sometimes referred to as the "Sponsor" or the
"Sponsors"). The value of the Units of the Trust will fluctuate with the value
of the underlying bonds. Minimum purchase: 1 Unit.
This Prospectus consists of two parts. Part A contains the Summary
of Essential Information as of June 30, 1999 (the "Evaluation Date"), a summary
of certain specific information regarding the Trust and audited financial
statements of the Trust, including the related portfolio, as of the Evaluation
Date. Part B of this Prospectus contains a general summary of the Trust. Part A
of this Prospectus may not be distributed unless accompanied by Part B.
Investors should retain both parts of this Prospectus for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
THE TRUST. The Trust seeks to achieve its investment objectives
through investment in a fixed, diversified portfolio of long-term insured bonds
(the "Bonds") issued by or on behalf of states, municipalities and public
authorities which, because of irrevocable insurance, were rated "AAA" by
Standard & Poor's Corporation. All of the Bonds in the Trust were rated "AAA" by
Standard & Poor's Corporation at the time originally deposited in the Trust (see
"Portfolio"). This rating results from insurance relating only to the Bonds in
the Trust and not to Units of the Trust. The insurance does not remove market
risk, as it does not guarantee the market value of the Units. For a discussion
of the significance of such ratings, see "Description of Bond Ratings" in Part B
of this Prospectus. Some of the aggregate principal amount
82499.1
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of the Bonds in the Trust may be "Zero Coupon Bonds," which are original issue
discount bonds that provide for payment at maturity at par value, but do not
provide for the payment of current interest (for the amount of Zero Coupon Bonds
in the Trust, and the cost of such Bonds to the Trust, see "Description of
Portfolio" in this Part A). The payment of interest and preservation of capital
are, of course, dependent upon the continuing ability of the issuers of the
Bonds or the insurer thereof to meet their obligations.
Investment in the Trust should be made with an understanding of the
risks which an investment in long-term fixed rate debt obligations may entail,
including the risk that the value of the underlying portfolio will decline with
increases in interest rates, and that the value of Zero Coupon Bonds is subject
to greater fluctuation than coupon bonds in response to such changes in interest
rates. A Trust designated as a long-term trust must have a dollar-weighted
average portfolio maturity of more than ten years. (See "Portfolio" in Part B of
this Prospectus.)
Each Unit in the Trust represents a 1/4858th undivided interest in
the principal and net income of the Trust. The principal amount of Bonds
deposited in the Trust per Unit is reflected in the Summary of Essential
Information. (See "Organization" in Part B of this Prospectus.) The Units being
offered hereby are issued and outstanding Units which have been purchased by the
Sponsors in the secondary market.
INSURANCE. Each of the Bonds in the New Jersey Navigator Trust is
insured by a municipal bond guaranty insurance policy obtained by the Sponsors
(the "Navigator Sponsor-Insured Bonds") from MBIA Insurance Corporation ("MBIA
Corp.") covering regularly scheduled payments of principal thereof and interest
thereon when such amounts become due for payment but shall not have been paid.
For discussion of the effect of an occurrence of non-payment of principal or
interest on any Bonds in the New Jersey Navigator Trust see "Portfolio
Supervision" in Part B of this Prospectus. The premiums for the Navigator
Sponsor-Insured Bonds are obligations of the Sponsors. Additionally, some of the
Bonds in the New Jersey Navigator Trust may be Pre-Insured Bonds (as described
below). The premium for the Pre-Insured Bonds is an obligation of the issuers,
underwriters or prior owners of those Bonds. The insurance policy or policies
relating to the Navigator Sponsor-Insured Bonds provides that, to the extent
that Bonds are both Pre-Insured Bonds and Navigator Sponsor-Insured Bonds,
coverage is effective after a claim has been made upon the insurer of the
Pre-Insured Bonds.
Some of the Bonds in the New Jersey Navigator Trust may additionally
be insured by a municipal bond guaranty insurance policy obtained by issuers,
underwriters or prior owners of the Bonds ("Pre-Insured Bonds") and issued by
one of the insurance companies described under "Insurance on the Bonds" in Part
B of this Prospectus (the "Insurance Companies"). Such insurance covers the
scheduled payment of principal thereof and interest thereon when such amounts
shall become due for payment but shall not have been paid by the issuer or any
other insurer thereof.
None of the insurance will cover accelerated payments of principal or
penalty interest or premiums unrelated to taxability of interest on the Bonds.
The insurance relates only to the prompt payment of principal of and interest on
the securities in the portfolios, and does not remove market risks nor does it
guarantee the market value of Units in the Trusts. The terms of the insurance
are more fully described under "Insurance on the Bonds" in Part B of this
Prospectus. No representation is made herein as to any Bond
A-2
82499.1
<PAGE>
insurer's ability to meet its obligations under a policy of insurance relating
to any of the Pre-Insured Bonds. In addition, investors should be aware that
subsequent to the Date of Deposit the rating of the claims-paying ability of the
insurer of an underlying Pre-Insured Bond may be downgraded.
All of the Bonds in the New Jersey Navigator Trust are covered by
insurance obtained by the Sponsors from MBIA Corp. and 100% of the Bonds in the
New Jersey Navigator Trust are Pre-Insured Bonds. The approximate percentage of
the aggregate principal amount of the Trust that is insured by each Insurance
Company with respect to Pre-Insured Bonds is as follows: AMBAC Indemnity Corp.
("AMBAC"), 26.0%; Bond Investors Guaranty ("BIG"), 21.4%; Financial Guaranty
Insurance Company ("Financial Guaranty"), 31.0%; and MBIA Corp., 21.6%.
PUBLIC OFFERING PRICE. The secondary market Public Offering Price of
each Unit is equal to the aggregate offering price of the Bonds in such Trust
divided by the number of Units outstanding, plus a sales charge of 4.1% of the
Public Offering Price, or 4.275% of the net amount invested in Bonds per Unit.
The sales charge for secondary market purchases is based upon the number of
years remaining to maturity of each bond in the Trust's portfolio. (See "Public
Offering" in Part B of this Prospectus.) In addition, accrued interest to the
expected date of settlement is added to the Public Offering Price. If Units had
been purchased on the Evaluation Date, the Public Offering Price per Unit would
have been $518.35 plus accrued interest of $7.37 under the monthly distribution
plan, $9.75 under the semi-annual distribution plan and $24.25 under the annual
distribution plan, for a total of $525.72, $528.10 and $542.60, respectively.
The Public Offering Price per Unit can vary on a daily basis in accordance with
fluctuations in the aggregate bid price of the Bonds. (See "Public
Offering--Offering Price" in Part B of this Prospectus.)
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN. Units of
each Trust are offered to investors on a "dollar price" basis (using the
computation method described under "Public Offering--Offering Price" in Part B)
as distinguished from a "yield price" basis often used in offerings of tax
exempt bonds (involving the lesser of the yield as computed to maturity of bonds
or to an earlier redemption date). Since they are offered on a dollar price
basis, the rate of return on an investment in Units of each Trust is measured in
terms of "Estimated Current Return" and "Estimated Long Term Return".
Estimated Long Term Return is calculated by: (1) computing the yield
to maturity or to an earlier call date (whichever results in a lower yield) for
each Bond in the Trust's portfolio in accordance with accepted bond practices,
which practices take into account not only the interest payable on the Bond but
also the amortization of premiums or accretion of discounts, if any; (2)
calculating the average of the yields for the Bonds in the Trust's portfolio by
weighing each Bond's yield by the market value of the Bond and by the amount of
time remaining to the date to which the Bond is priced (thus creating an average
yield for the portfolio of the Trust); and (3) reducing the average yield for
the portfolio of the Trust in order to reflect estimated fees and expenses of
the Trust and the maximum sales charge paid by investors. The resulting
Estimated Long Term Return represents a measure of the return to investors
earned over the estimated life of the Trust. (For the Estimated Long Term Return
to Certificateholders under the monthly, semi-annual and annual distribution
plans, see "Summary of Essential Information".)
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82499.1
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Estimated Current Return is a measure of the Trust's cash flow.
Estimated Current Return is computed by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price per Unit. In contrast to
the Estimated Long Term Return, the Estimated Current Return does not take into
account the amortization of premium or accretion of discount, if any, on the
Bonds in the portfolio of the Trust. Moreover, because interest rates on Bonds
purchased at a premium are generally higher than current interest rates on newly
issued bonds of a similar type with comparable rating, the Estimated Current
Return per Unit may be affected adversely if such Bonds are redeemed prior to
their maturity.
The Estimated Net Annual Interest Income per Unit of the Trust will
vary with changes in the fees and expenses of the Trustee and the Evaluator
applicable to the Trust and with the redemption, maturity, sale or other
disposition of the Bonds in the Trust. The Public Offering Price will vary with
changes in the bid prices of the Bonds. Therefore, there is no assurance that
the present Estimated Current Return or Estimated Long Term Return will be
realized in the future. (For the Estimated Current Return to Certificateholders
under the monthly, semi-annual and annual distribution plans, see "Summary of
Essential Information". See "Estimated Long Term Return and Estimated Current
Return" in Part B of this Prospectus.)
A schedule of cash flow projections is available from the Sponsors
upon request.
DISTRIBUTIONS. Distributions of interest income, less expenses, will
be made by the Trust either monthly, semi-annually or annually depending upon
the plan chosen by the Certificateholder. Certificateholders purchasing Units in
the secondary market will initially receive distributions in accordance with the
elections of the prior owner. The first interest distributions will be made on
the First Payment Date to all Certificateholders of record on the First Record
Date and thereafter distributions will be made in accordance with the
distribution plan chosen by the Certificateholder. Distributions of principal,
if any, will be made semi-annually on June 15 and December 15 of each year. (See
"Rights of Certificateholders--Interest and Principal Distributions" in Part B
of this Prospectus. For estimated monthly, semi-annual and annual interest
distributions, the amount of the first interest distributions and the specific
dates representing the First Payment Date and the First Record Date see "Summary
of Essential Information.")
MARKET FOR UNITS. The Sponsors, although not obligated to do so,
intend to maintain a secondary market for the Units of each Trust after the
initial public offering has been completed. The secondary market repurchase
price will be based on the aggregate bid price of the Bonds in the Trust
portfolio; and the reoffer price will be based on the aggregate bid price of the
Bonds plus a sales charge of 4.1% of the Public Offering Price (4.275% of the
net amount invested), plus net accrued interest. If a market is not maintained a
Certificateholder will be able to redeem his or her Units with the Trustee at a
price based on the aggregate bid price of the Bonds. (See "Sponsor Repurchase"
in Part B of this Prospectus.)
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82499.1
<PAGE>
INSURED MUNICIPAL SECURITIES TRUST
NEW JERSEY NAVIGATOR INSURED
SERIES 2
SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1999
Date of Deposit*: October 25, 1990 Weighted Average Life to
Principal Amount of Bonds . $2,310,000 Maturity: 12.4 Years.
Number of Units ........... 4,858 Minimum Value of Trust:
Fractional Undivided Inter- Trust may be terminated if
est in Trust per Unit ... 1/4858 value of Trust is less than
Principal Amount of $2,400,000 in principal amount
Bonds per Unit .......... $475.50 of Bonds.
Secondary Market Public Mandatory Termination Date:
Offering Price** The earlier of December 31,
Aggregate Bid Price 2039 or the disposition of the
of Bonds in Trust ..... $2,414,435+++ last Bond in the Trust.
Divided by 4,858 Units .. $497.00 Trustee***: The Chase Manhattan
Plus Sales Charge of Bank.
4.1% of Public Trustee's Annual Fee: Monthly
Offering Price.......... $21.35 plan $.98 per $1,000; semi-
Public Offering Price annual plan $.52 per $1,000;
per Unit .............. $518.35+ and annual plan is $.34 per
Redemption and Sponsors' $1,000.
Repurchase Price Evaluator: Kenny S&P Evaluation
per Unit ................ $497.00+ Services.
+++ Evaluator's Fee for Each
++++ Evaluation: Minimum of $8
Excess of Secondary Market plus $.25 per each issue of
Public Offering Price Bonds in excess of 50 issues
over Redemption and (treating separate maturities
Sponsors' Repurchase as separate issues).
Price per Unit .......... $21.35++++ Sponsors: Reich & Tang
Difference between Public Distributors, Inc. and Gruntal
Offering Price per Unit & Co., L.L.C.
and Principal Amount per Sponsors' Annual Fee: Maximum
Unit Premium/(Discount) . $42.85 of $.25 per $1,000 principal
Evaluation Time: 4:00 p.m. amount of Bonds (see "Trust
New York Time. Expenses and Charges" in
Minimum Principal Distribution: Part B of this Prospectus).
$1.00 per Unit.
PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
Monthly Semi-Annual Annual
Option Option Option
------ ------ ------
Gross annual interest income# ......... $29.73 $29.73 $29.73
Less estimated annual fees and
expenses ............................ 1.57 1.21 1.05
Estimated net annual interest ------ ------ ------
income (cash)# ...................... $28.16 $28.52 $28.68
Estimated interest distribution# ...... 2.35 14.26 28.68
Estimated daily interest accrual# ..... .0782 .0792 .0797
Estimated current return#++ ........... 5.43% 5.50% 5.53%
Estimated long term return++ .......... 4.54% 4.61% 4.64%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15
A-5
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Footnotes to Summary of Essential Information
* The Date of Deposit is the date on which the Trust Agreement was signed
and the deposit of the Bonds with the Trustee made.
** Certain amounts distributable as of June 30, 1999 may be reported in the
Summary of Essential Information as if they had been distributed as of
year-end.
*** The Trustee maintains its principal executive office at 270 Park Avenue,
New York, New York 10017 and its unit investment trust office at 4 New
York Plaza, New York, New York 10004 (tel. no.: 1-800-882-9898). For
information regarding redemption by the Trustee, see "Trustee Redemption"
in Part B of this Prospectus.
+ Plus accrued interest to the expected date of settlement (approximately
three business days after purchase) of $7.37 monthly, $9.75 semi-annually
and $24.25 annually.
++ The estimated current return and estimated long term return are increased
for transactions entitled to a discount (see "Employee Discounts" in Part
B of this Prospectus), and are higher under the semi-annual and annual
options due to lower Trustee's fees and expenses.
+++ Based solely upon the bid side evaluation of the underlying Bonds
(including, where applicable, undistributed cash from the principal
account). Upon tender for redemption, the price to be paid will be
calculated as described under "Trustee Redemption" in Part B of this
Prospectus.
++++ See "Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price" in Part B of this Prospectus.
# Does not include income accrual from original issue discount bonds, if
any.
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding for the periods listed below:
Distribu-
Distributions of Interest tions of
During the Period (per Unit) Principal
---------------------------- During
Net Asset* Semi- the
Units Out- Value Monthly Annual Annual Period
Period Ended standing Per Unit Option Option Option (Per Unit)
- ------------ -------- -------- ------ ------ ------ ----------
June 30, 1997 $5,287 $802.27 $51.92 $52.43 $54.95 $ 78.42
June 30, 1998 5,262 801.16 48.90 49.37 49.85 2.15
June 30, 1999 4,858 506.39 37.82 38.24 48.64 273.50
- --------
* Net Asset Value per Unit is calculated by dividing net assets as disclosed
in the "Statement of Net Assets" by the number of Units outstanding as of
the date of the Statement of Net Assets. See Note 5 of Notes to Financial
Statements for a description of the components of Net Assets.
A-6
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INFORMATION REGARDING THE TRUST
AS OF JUNE 30, 1999
DESCRIPTION OF PORTFOLIO*
The portfolio of the Trust consists of 5 issues representing
obligations of 5 issuers located in the state of New Jersey. The Sponsors have
not participated as a sole underwriter or manager, co-manager or members of
underwriting syndicates from which any of the initial aggregate principal amount
of the Bonds were acquired. None of the Bonds are obligations of state and local
housing authorities; approximately 21.6% are hospital revenue bonds; none were
issued in connection with the financing of nuclear generating facilities; and
none are "mortgage subsidy" bonds. Four of the Bonds in the Trust are subject to
redemption prior to their stated maturity dates pursuant to sinking fund or call
provisions. The Bonds may also be subject to other calls, which may be permitted
or required by events which cannot be predicted (such as destruction,
condemnation, termination of a contract, or receipt of excess or unanticipated
revenues). None of the Bonds are general obligation bonds. Five issues
representing $2,310,000 of the principal amount of the Bonds are payable from
the income of a specific project or authority and are not supported by the
issuer's power to levy taxes. The portfolio is divided for purpose of issue as
follows: Convention Center 1, Hospital 1, Lease Rental 1, Sewer 1 and Waste 1.
For an explanation of the significance of these factors see "The
Trust--Portfolio" in Part B of this Prospectus.
As of June 30, 1999, $1,300,000 (approximately 52.6% of the
aggregate principal amount of the Bonds) were original issue discount bonds. Of
these original issue discount bonds, $200,000 (approximately 8.7% of the
aggregate principal amount of the Bonds) were Zero Coupon Bonds. Zero Coupon
Bonds do not provide for the payment of any current interest and provide for
payment at maturity at par value unless sooner sold or redeemed. The market
value of Zero Coupon Bonds is subject to greater fluctuations than coupon bonds
in response to changes in interest rates. None of the aggregate principal amount
of the Bonds in the Trust were purchased at a "market" discount from par value
at maturity, approximately 47.4% were purchased at a premium and none were
purchased at par. For an explanation of the significance of these factors see
"Discount and Zero Coupon Bonds" in Part B of this Prospectus.
None of the Bonds in the Trust are subject to the federal
individual alternative minimum tax under the Tax Reform Act of 1986. See "Tax
Status" in Part B of this Prospectus.
- ----------------
* Changes in the Trust Portfolio: From July 1, 1999 to September 15,
1999, $80,000 of the principal amount of the Bond in portfolio no. 4 was
sold and is no longer contained in the Trust. 139 Units were
redeemed from the Trust.
A-7
82499.1
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Report of Independent Accountants
To the Sponsor, Trustee and Certificateholders of
Insured Municipal Securities Trust, New Jersey Navigator Insured Series 2
In our opinion, the accompanying statement of net assets, including the
portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2 (the "Trust") at June 30, 1999, the
results of its operations and the changes in its net assets for each of the
three years in the period then ended and the financial highlights for each of
the four years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1999 by correspondence with the Trustee,
provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, MA
September 15, 1999
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Portfolio
June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Redemption
Aggregate Coupon Rate/ Feature (2)(4)
Portfolio Principal Name of Issuer and Ratings Date(s) of Maturity(2) S.F.-Sinking Fund Market
No. Amount Title of Bonds (1) Ref.-Refunding Value(3)
<S> <C> <C> <C> <C> <C> <C>
1 $500,000 N.J. Hlth. Care Facs. Finc. AAA 6.500% 7/01/10 @ 100 S.F. $511,050
Auth. Rev. Bonds Bayshore 7/01/2015 7/01/99 @ 102 Ref.
Cmmnty. Hosp. Issue Series
1989A (MBIA Corp.)
2 495,000 Atlantic Cnty. N.J. Imprvmt. AAA 7.400 3/01/07 @ 100 S.F. 584,506
Auth. Pub. Facs. Lease 3/01/2012 None
Rental Rev. Rfndg. Bonds
(Atlantic Cnty. Prjts.)
Series 1986A (MBIA Corp.)
3 600,000 Atlantic Cnty. N.J. Imprvmt. AAA 7.400 12/01/09 @ 100 S.F. 732,629
Auth. Convntn. Cntr. Rev. 7/01/2016 12/01/99 @ 102 Ref.
Bonds Series 1985 (MBIA
Corp.)
4 515,000 Mercer Cnty. N.J. Imprvmnt. AAA 6.000 12/15/10 @ 100 S.F. 521,335
Auth. Rev. Bonds (Rgnl. 12/15/2015 12/15/99 @ 100 Ref.
Sludge Prjt.) Series 1990
(MBIA Corp.)
5 200,000 Camden Cnty. N.J. Muni. AAA 0.000 No Sinking Fund 64,882
Utils. Auth. Cnty. Agreement 9/01/2019 None
Swr. Rev. Cap. Apprec. Bonds
Series 1990A (MBIA Corp.)
---------- ------------
$2,310,000 Total Investments (Cost (3) $2,053,663) $2,414,402
========== ============
</TABLE>
See accompanying footnotes to portfolio and notes to financial statements.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Footnotes to Portfolio
- --------------------------------------------------------------------------------
(1) All ratings are by Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies,
Inc. A brief description of the ratings symbols and their meanings is
set forth under "Description of Bond Ratings" in Part B of the
Prospectus.
(2) See "The Trust -- Portfolio" in Part B of the Prospectus for an
explanation of redemption features. See "Tax Status" in Part B of the
Prospectus for a statement of the Federal tax consequences to a
Certificateholder upon the sale, redemption or maturity of a bond.
(3) At June 30, 1999, the net unrealized appreciation of all bonds was
comprised of the following:
Gross unrealized appreciation $ 360,739
Gross unrealized depreciation -
-----------------
Net unrealized appreciation $ 360,739
=================
(4) The Bonds may also be subject to other calls, which may be permitted
or required by events which cannot be predicted (such as destruction,
condemnation, termination of a contract, or receipt of excess or
unanticipated revenues).
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Statement of Net Assets
June 30, 1999
- --------------------------------------------------------------------------------
Investments in Securities,
at Market Value (Cost $2,053,663) $ 2,414,402
--------------
Other Assets
Accrued Interest 51,632
--------------
Total Other Assets 51,632
--------------
Liabilities
Advance from Trustee 5,971
--------------
Total Liabilities 5,971
--------------
Excess of Other Assets over Total Liabilities 45,661
--------------
Net Assets (4,858 Units of Fractional Undivided
Interest Outstanding, $506.39 per Unit) $ 2,460,063
==============
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended June 30,
1999 1998 1997
<S> <C> <C> <C>
Investment Income
Interest $ 198,492 $ 269,663 $ 289,138
----------- ----------- ----------
Expenses
Trustee's Fees 5,982 6,860 6,355
Evaluator's Fee 2,250 2,369 2,182
Sponsor's Advisory Fee 976 1,015 1,165
----------- ----------- ----------
Total Expenses 9,208 10,244 9,702
----------- ----------- ----------
Net Investment Income 189,284 259,419 279,436
----------- ----------- ----------
Realized and Unrealized Gain (Loss)
Realized Gain on
Investments 12,180 153 26,019
Unrealized Appreciation
(Depreciation) on Investments (110,258) 4,346 18,756
----------- ----------- ----------
Net Gain (Loss) on Investments (98,078) 4,499 44,775
----------- ----------- ----------
Net Increase
in Net Assets
Resulting From Operations $ 91,206 $ 263,918 $ 324,211
=========== =========== ==========
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended June 30,
1999 1998 1997
<S> <C> <C> <C>
Operations
Net Investment Income $ 189,284 $ 259,419 $ 279,436
Realized Gain
on Investments 12,180 153 26,019
Unrealized Appreciation
(Depreciation) on Investments (110,258) 4,346 18,756
------------ ------------- -------------
Net Increase in
Net Assets Resulting
From Operations 91,206 263,918 324,211
------------ ------------- -------------
Distributions to Certificateholders
Investment Income 194,398 258,061 280,065
Principal 1,434,035 11,313 425,302
Redemptions
Interest 6,182 672 4,158
Principal 212,237 19,784 112,389
------------ ------------- -------------
Total Distributions
and Redemptions 1,846,852 289,830 821,914
------------ ------------- -------------
Total (Decrease) (1,755,646) (25,912) (497,703)
Net Assets
Beginning of Year 4,215,709 4,241,621 4,739,324
------------ ------------- -------------
End of Year (Including
Undistributed Net Investment
Income of $67,791, $79,087
and $78,401, Respectively) $ 2,460,063 $ 4,215,709 $ 4,241,621
============= ============ ============
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a unit of the Trust outstanding: *
<TABLE>
<CAPTION>
For the years ended June 30,
1999 1998 1997 1996
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year** $ 801.16 $ 802.27 $ 872.96 $ 893.15
---------- ---------- ---------- ----------
Interest Income 39.23 51.12 53.96 57.53
Expenses (1.82) (1.94) (1.81) (1.69)
---------- ---------- ---------- ----------
Net Investment Income 37.41 49.18 52.15 55.84
---------- ---------- ---------- ----------
Net Gain or Loss on Investments(1) (9.13) .90 (9.59) (16.70)
---------- ---------- ---------- ----------
Total from Investment Operations 28.28 50.08 61.74 39.14
---------- ---------- ---------- ----------
Less Distributions
to Certificateholders
Income 38.42 48.92 52.27 58.24
Principal 283.41 2.14 79.38 ----
for Redemptions
Interest 1.22 .13 .78 1.09
---------- ---------- ---------- ----------
Total Distributions 323.05 51.19 132.43 59.33
---------- ---------- ---------- ----------
Net Asset Value, End of Year** $ 506.39 $ 801.16 $ 802.27 $ 872.96
========== ========== ========== ==========
</TABLE>
(1) Net gain or loss on investments is a result of changes in outstanding units
since July 1, 1998, 1997, 1996 and 1995, respectively, and the dates of net
gain and loss on investments.
- ----------------------
* Unless otherwise stated, based upon average units outstanding during the
year of 5,060 ([5,262 + 4,858]/2) for 1999, 5,275 ([5,287 + 5,262]/2) for
1998, 5,358 (5,429 + 5,287]/2) for 1997 and of 5,549 ([5,668 + 5,429]/2)
for 1996.
** Based upon actual units outstanding
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization
Insured Municipal Securities Trust, New Jersey Navigator Insured Series
2, (the "Trust") was organized on October 25, 1990 by Bear, Stearns &
Co. Inc. and Gruntal & Co., LLC under the laws of the State of New York
by a Trust Indenture and Agreement, and is registered under the
Investment Company Act of 1940. The Trust was formed to preserve capital
and to provide interest income.
Effective September 28, 1995, Reich & Tang Distributors, Inc. ("Reich &
Tang") has become the successor sponsor (the "Sponsor") to certain of
the unit investment trusts previously sponsored by Bear, Stearns & Co.
Inc. As successor Sponsor, Reich & Tang has assumed all of the
obligations and rights of Bear, Stearns & Co. Inc., the previous
sponsor.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Trust in preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles ("GAAP"). The preparation of financial statements
in accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual amounts could differ from those estimates.
Interest Income
Interest income is recorded on the accrual basis. The discount on the
zero-coupon bonds is accreted by the interest method over the respective
lives of the bonds. The accretion of such discount is included in
interest income; however, it is not distributed until realized in cash
upon maturity or sale of the respective bonds.
Security Valuation
Investments are carried at market value which is determined by Kenny S&P
Evaluation Services, a business unit of J.J. Kenny Company, Inc., a
subsidiary of The McGraw-Hill Companies, Inc. The market value of the
portfolio is based upon the bid prices for the bonds at the end of the
year, which approximates the fair value of the security at that date,
except that the market value on the date of deposit represents the cost
to the Trust based on the offering prices for investments at that date.
The difference between cost (including accumulated accretion of original
issue discount on zero-coupon bonds) and market value is reflected as
unrealized appreciation (depreciation) of investments. Securities
transactions are recorded on the trade date. Realized gains (losses)
from securities transactions are determined on the basis of average cost
of the securities sold or redeemed.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Income Taxes
No provision for federal income taxes has been made in the accompanying
financial statements because the Trust intends to continue to qualify
for the tax treatment applicable to Grantor Trusts under the Internal
Revenue Code. Under existing law, if the Trust so qualifies, it will not
be subject to federal income tax on net income and capital gains that
are distributed to unitholders.
4. Trust Administration
The Chase Manhattan Bank (the "Trustee") has custody of assets and
responsibility for the accounting records and financial statements of
the Trust and is responsible for establishing and maintaining a system
of internal control related thereto. The Trustee is also responsible for
all estimates of expenses and accruals reflected in the Trust's
financial statements.
The Trust Indenture and Agreement provides for interest distributions as
often as monthly (depending upon the distribution plan elected by the
Certificateholders).
The Trust Indenture and Agreement further requires that principal
received from the disposition of bonds, other than those bonds sold in
connection with the redemption of units, be distributed to
Certificateholders.
The Trust Indenture and Agreement also requires the Trust to redeem
units tendered. For the years ended June 30, 1999, 1998 and 1997, 404,
25 and 142 units were redeemed, respectively.
The Trust pays an annual fee for trustee services rendered by the
Trustee that ranges from $.34 to $.98 per $1,000 of outstanding
investment principal. In addition, a minimum fee of $8.00 is paid to a
service bureau for each portfolio valuation. A maximum fee of $.25 per
$1,000 of outstanding investment principal is paid to the Sponsor. For
the years ended June 30, 1999, 1998 and 1997, the "Trustee's Fees" are
comprised of Trustee fees of $2,673, $3,508 and $2,884 and other
expenses of $3,309, $3,352 and $3,471, respectively. The other expenses
include professional, printing and miscellaneous fees.
<PAGE>
Insured Municipal Securities Trust,
New Jersey Navigator Insured Series 2
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Net Assets
At June 30, 1999, the net assets of the Trust represented the interest
of Certificateholders as follows:
<TABLE>
<S> <C>
Original cost to Certificateholders $ 6,055,356
Less Initial Gross Underwriting Commission 296,715
---------------
5,758,641
Accumulated Cost of Securities Sold,
Matured or Called (3,727,141)
Net Unrealized Appreciation 360,739
Undistributed Net Investment Income 67,791
Undistributed Proceeds from Investments 33
---------------
Total $ 2,460,063
===============
</TABLE>
The original cost to Certificateholders, less the initial gross
underwriting commission, represents the aggregate initial public
offering price net of the applicable sales charge on 6,000 units of
fractional undivided interest of the Trust as of the date of deposit.
Undistributed net investment income includes accumulated accretion of
original issue discount of $22,163.
6. Concentration of Credit Risk
Since the Trust invests a portion of its assets in municipal bonds, it
may be affected by economic and political developments in the
municipalities. Certain debt obligations held by the Trust may be
entitled to the benefit of insurance, standby letters of credit or other
guarantees of banks or other financial institutions.
<PAGE>
Note: Part B of This Prospectus May Not Be Distributed
Unless Accompanied by Part A.
Please Read and Retain Both Parts
of This Prospectus For Future Reference.
INSURED MUNICIPAL SECURITIES TRUST
Prospectus Part B
Dated: October 28, 1999
THE TRUST
---------
Organization. "Insured Municipal Securities Trust" (the "Trust")
consists of the "unit investment trust" designated as set forth in Part A.* The
Trust was created under the laws of the State of New York pursuant to the Trust
Indenture and Agreement** (collectively, the "Trust Agreement"), dated the Date
of Deposit, among Reich & Tang Distributors, Inc. or, depending on the
particular Trust, among Reich & Tang Distributors, Inc. and Gruntal & Co.,
L.L.C., as Co-Sponsors (the Sponsor or Co-Sponsors, if applicable, are referred
to herein as the "Sponsor"), Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies, as
Evaluator and The Chase Manhattan Bank, as Trustee. The name of the Sponsor for
a particular Trust is contained in the "Summary of Additional Information" in
Part A.
On the Date of Deposit, the Sponsor deposited with the Trustee
long-term insured bonds, and/or delivery statements relating to contracts for
the purchase of certain such bonds (the "Bonds") and cash or an irrevocable
letter of credit issued by a major commercial bank in the amount required for
such purchases. Thereafter, the Trustee, in exchange for the Bonds so deposited,
delivered to the Sponsor the Certificates evidencing the ownership of all Units
of the Trust. The Trust consists of the Bonds described under "The Trust" in
Part A, the interest (including, where applicable, earned original issue
discount) on which, in the opinions of bond counsel to the respective issuers
given at the time of original delivery of the Bonds, is exempt from regular
federal income tax under existing law.
Each "Unit" outstanding on the Evaluation Date represented an
undivided interest or pro rata share in the principal and interest of the Trust
in the ratio of one Unit to the principal amount of Bonds in the Trust on such
date as specified in Part A of this Prospectus. To the extent that
- ------------------------
* This Part B relates to the outstanding series of Insured Municipal
Securities Trust, Insured Municipal Securities Discount Trust,
Insured Municipal Securities New York Navigator Insured Trust,
Insured Municipal Securities New Jersey Navigator Insured Trust
and/or Insured Municipal Securities Pennsylvania Navigator Insured
Trust, as reflected in Part A attached hereto.
** References in this Prospectus to the Trust Agreement are qualified in
their entirety by the Trust Indenture and Agreement which is
incorporated herein.
112677.10
<PAGE>
any Units are redeemed by the Trustee, the fractional undivided interest or pro
rata share in the Trust represented by each unredeemed Unit will increase,
although the actual interest in the Trust represented by such fraction will
remain unchanged. Units will remain outstanding until redeemed upon tender to
the Trustee by Certificateholders, which may include the Sponsor or the
Underwriters, or until the termination of the Trust Agreement.
Objectives. The Trust, one of a series of similar but separate
unit investment trusts formed by the Sponsor, offers investors the opportunity
to participate in a portfolio of long-term insured tax-exempt bonds with a
greater diversification than they might be able to acquire themselves. The
objectives of the Trust are to preserve capital and to provide interest income
(including, where applicable, earned original issue discount) which, in the
opinions of bond counsel given at the time of original delivery of the Bonds, is
exempt from regular Federal income tax under existing law and exempt from state
and local income tax to the extent indicated herein when received by persons
subject to state and local taxation in a state in which the issuers of the Bonds
are located. Such interest income may, however, be subject to the corporate
alternative minimum taxes and to state and local taxes. (See "Description of
Portfolio" in Part A for a list of those Bonds which pay interest income subject
to federal individual alternative minimum tax. See also "Tax Status".)
Consistent with such objectives, the Sponsor has obtained bond insurance
guaranteeing the scheduled payment of principal and interest on certain of the
Bonds and has purchased, as to the remainder of each Trust Portfolio, Bonds
which are already covered by insurance. (See "Insurance on the Bonds".) An
investor will realize taxable income upon maturity or early redemption of the
market discount bonds in a Trust portfolio and will realize, where applicable,
tax-exempt income to the extent of the earned portion of interest, including
original issue discount earned on the Bonds in a Trust portfolio. Investors
should be aware that there is no assurance the Trust's objectives will be
achieved as these objectives are dependent on the continuing ability of the
issuers of the Bonds to meet their interest and principal payment requirements,
on the abilities of the Insurance Companies to meet their obligations under the
policies of insurance issued on the Bonds, on the continuing satisfaction of the
conditions required for the exemption of interest thereon from regular federal
income tax and on the market value of the Bonds, which can be affected by
fluctuations in interest rates and other factors.
Since disposition of Units prior to final liquidation of each
Trust may result in an investor receiving less than the amount paid for such
Units (see "Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price"), the purchase of a Unit should be looked upon as a long-term
investment. Neither the Trust nor the Total Reinvestment Plan are designed to be
complete investment programs.
Portfolio. All of the Bonds in the Trust were rated "AAA" by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies
("Standard & Poor's") at the time originally deposited in the Trust. (See
"Insurance on the Bonds.") The "AAA" rating was assigned to the Bonds by
Standard & Poor's because each Bond was insured by a municipal bond guaranty
insurance policy issued by a company whose claims-paying ability was rated "AAA"
by Standard & Poor's at that time. In the event of a downgrading of the
claims-paying ability of one of the insurers, as of the Evaluation Date, the
Bonds in the Trust which are insured by that company would no longer be rated
"AAA" by Standard & Poor's. The Units of Trusts containing the downgraded bonds
are no longer rated "AAA."
112677.10
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<PAGE>
For information regarding (i) the number of issues in the Trust,
(ii) the range of fixed maturities of the Bonds, (iii) the number of issues
payable from the income of a specific project or authority and (iv) the number
of issues constituting general obligations of a government entity, see
"Information Regarding the Trust" and "Portfolio" in Part A of this Prospectus.
When selecting Bonds for a Trust, the following factors, among
others, were considered by the Sponsor: (i) the quality of the Bonds and whether
such Bonds, whether Sponsor-Insured or Pre-Insured, were rated "AAA" by Standard
& Poor's, (ii) the yield and price of the Bonds relative to other tax-exempt
securities of comparable quality and maturity, (iii) income to the
Certificateholders of the Trust, (iv) whether a bond was insured, or insurance
was available for the Bonds at a reasonable cost, (v) in connection with Bonds
for which bond insurance was obtained by the Sponsor, the quality of the Bonds
and whether they were rated, without regard to such bond insurance, "A" or
better by either Standard & Poor's or Moody's Investors Service, Inc.
("Moody's"), and (vi) the diversification of the Trust portfolio, as to purpose
of issue and location of issuer, taking into account the availability in the
market of issues which meet the Trust's quality, rating, yield and price
criteria. Subsequent to the Date of Deposit, a Bond may cease to be rated or its
rating may be reduced below that specified above. Neither event requires an
elimination of such Bond from a Trust but may be considered in the Sponsor's
determination to direct the Trustee to dispose of the Bond. (See "Portfolio
Supervision".) For an interpretation of the bond ratings see "Description of
Bond Ratings".
Housing Bonds. Some of the aggregate principal amount of the
Bonds may consist of obligations of state and local housing authorities whose
revenues are primarily derived from mortgage loans to rental housing projects
for low to moderate income families. Since such obligations are usually not
general obligations of a particular state or municipality and are generally
payable primarily or solely from rents and other fees, adverse economic
developments including failure or inability to increase rentals, fluctuations of
interest rates, and increasing construction and operating costs may reduce
revenues available to pay existing obligations. See "Description of Portfolio"
in Part A for the amount of rental housing bonds contained therein.
Hospital Revenue Bonds. Some of the aggregate principal amount of
the Bonds may consist of hospital revenue bonds. Ratings of hospital bonds are
often initially based on feasibility studies which contain projections of
occupancy levels, revenues and expenses. Actual experience may vary considerably
from such projections. A hospital's gross receipts and net income will be
affected by future events and conditions including, among other things, demand
for hospital services and the ability of the hospital to provide them,
physicians' confidence in hospital management capability, economic developments
in the service area, competition, actions by insurers and governmental agencies
and the increased cost and possible unavailability of malpractice insurance.
Additionally, a major portion of hospital revenue typically is derived from
third-party payors and government programs such as Medicare and Medicaid. Both
private third-party payors and government programs have undertaken cost
containment measures designed to limit payments. Furthermore, government
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all of
which may materially decrease the rate of program payments for health care
facilities. There can be no assurance that payments under governmental programs
will remain at levels comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients
112677.10
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<PAGE>
participating in such programs. In addition, there can be no assurance that a
particular hospital or other health care facility will continue to meet the
requirements for participation in such programs.
The health care delivery system is undergoing considerable
alteration and consolidation. Consistent with that trend, the ownership or
management of a hospital or health care facility may change, which could result
in (i) an early redemption of bonds, (ii) alteration of the facilities financed
by the Bonds or which secure the Bonds, (iii) a change in the tax exempt status
of the Bonds or (iv) an inability to produce revenues sufficient to make timely
payment of debt service on the Bonds. Future legislation or changes in the areas
noted above, among other things, would affect all hospitals to varying degrees
and, accordingly, any adverse change in these areas may affect the ability of
such issuers to make payment of principal and interest on such bonds. See
"Description of Portfolio" in Part A for the amount of hospital revenue bonds
contained therein.
Nuclear Power Facility Bonds. Certain Bonds may have been issued
in connection with the financing of nuclear generating facilities. Electric
utilities which own or operate nuclear power plants are exposed to risks
inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the recovery
of replacement power costs. Risks of substantial liability also arise from the
operation of nuclear facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with the
ownership and operation of a nuclear plant and severe financial consequences
could result from a significant accident or occurrence. The Nuclear Regulatory
Commission has promulgated regulations mandating the establishment of funded
reserves to assure financial capability for the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from revenues in
amounts currently estimated to be sufficient to pay for decommissioning costs.
The Sponsor is unable to predict whether any such actions or whether any such
proposals or litigation, if enacted or instituted, will have an adverse impact
on the revenues available to pay the debt service on the Bonds in the portfolio
issued to finance such nuclear projects. See "Description of Portfolio" in Part
A for the amount of bonds issued to finance nuclear generating facilities
contained therein.
Mortgage Subsidy Bonds. Certain Bonds may be "mortgage subsidy
bonds" which are obligations of which all or a significant portion of the
proceeds are to be used directly or indirectly for mortgages on owner-occupied
residences. Section 103A of the Internal Revenue Code of 1954 provided as a
general rule that interest on "mortgage subsidy bonds" will not be exempt from
Federal income tax. An exception is provided for certain "qualified mortgage
bonds." Qualified mortgage bonds are bonds that are used to finance
owner-occupied residences and that meet numerous statutory requirements. These
112677.10
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<PAGE>
requirements include certain residency, ownership, purchase price and target
area requirements, ceiling amounts for state and local issuers, arbitrage
restrictions and (for bonds issued after December 31, 1984) certain information
reporting, certification, public hearing and policy statement requirements. In
the opinions of bond counsel to the issuing governmental authorities, interest
on all the Bonds in a Trust that might be deemed "mortgage subsidy bonds" will
be exempt from Federal income tax when issued. See "Description of Portfolio" in
Part A for the amount of mortgage subsidy Bonds contained therein.
Mortgage Revenue Bonds. Certain Bonds may be "mortgage revenue
bonds." Under the Internal Revenue Code of 1986, as amended (the "Code") (and
under similar provisions of the prior tax law) "mortgage revenue bonds" are
obligations the proceeds of which are used to finance owner-occupied residences
under programs which meet numerous statutory requirements relating to residency,
ownership, purchase price and target area requirements, ceiling amounts for
state and local issuers, arbitrage restrictions, and certain information
reporting certification, and public hearing requirements. There can be no
assurance that additional federal legislation will not be introduced or that
existing legislation will not be further amended, revised, or enacted after
delivery of these Bonds or that certain required future actions will be taken by
the issuing governmental authorities, which action or failure to act could cause
interest on the Bonds to be subject to Federal income tax. If any portion of the
Bond proceeds are not committed for the purpose of the issue, Bonds in such
amount could be subject to earlier mandatory redemption at par, including issues
of Zero Coupon Bonds (see "Discount and Zero Coupon Bonds"). See "Description of
Portfolio" in Part A for the amount of mortgage revenue bonds contained therein.
Private Activity Bonds. The portfolio of the Trust may contain
other Bonds which are "private activity bonds" (often called Industrial Revenue
Bonds if issued prior to 1987) which would be primarily of two types: (i) Bonds
for a publicly owned facility which a private entity may have a right to use or
manage to some degree, such as an airport, seaport facility or water system and
(ii) facilities deemed owned or beneficially owned by a private entity but which
were financed with tax-exempt bonds of a public issuer, such as a manufacturing
facility or a pollution control facility. In the case of the first type, bonds
are generally payable from a designated source of revenues derived from the
facility and may further receive the benefit of the legal or moral obligation of
one or more political subdivisions or taxing jurisdictions. In most cases of
project financing of the first type, receipts or revenues of the issuer are
derived from the project or the operator or from the unexpended proceeds of the
bonds. Such revenues include user fees, service charges, rental and lease
payments, and mortgage and other loan payments.
The second type of issue will generally finance projects which are
owned by or for the benefit of, and are operated by, corporate entities.
Ordinarily, such private activity bonds are not general obligations of
governmental entities and are not backed by the taxing power of such entities,
and are solely dependent upon the creditworthiness of the corporate user of the
project or corporate guarantor.
The private activity bonds in the Trust have generally been issued
under bond resolutions, agreements or trust indentures pursuant to which the
revenues and receipts payable under the issuer's arrangements with the users or
the corporate operator of a particular project have been assigned and pledged to
the holders of the private activity bonds. In certain cases, a
112677.10
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<PAGE>
mortgage on the underlying project has been assigned to the holders of the
private activity bonds or a trustee as additional security. In addition, private
activity bonds are frequently directly guaranteed by the corporate operator of
the project or by another affiliated company. See "Description of Portfolio" in
Part A for the amount of private activity bonds contained therein.
Litigation. Litigation challenging the validity under state
constitutions of present systems of financing public education has been
initiated in a number of states. Decisions in some states have been reached
holding such school financing in violation of state constitutions. In addition,
legislation to effect changes in public school financing has been introduced in
a number of states. The Sponsor is unable to predict the outcome of the pending
litigation and legislation in this area and what effect, if any, resulting
changes in the sources of funds, including proceeds from property taxes applied
to the support of public schools, may have on the school bonds in a Trust.
To the Sponsor's knowledge, there was no litigation pending as of
the initial Date of Deposit with respect to any Bonds which might reasonably be
expected to have a material adverse effect on a Trust. Subsequent to the Date of
Deposit, litigation may be initiated on a variety of grounds with respect to
Bonds in a Trust. Such litigation, as, for example, suits challenging the
issuance of pollution control revenue bonds under recently-enacted environmental
protection statutes, may affect the validity of such Bonds or the tax-free
nature of the interest thereon. The Sponsor is unable to predict whether any
such litigation may be instituted or, if instituted, whether it might have a
material adverse effect on a Trust.
Other Factors. The Bonds in the Trust, despite their optional
redemption provisions which generally do not take effect until 10 years after
the original issuance dates of such bonds (often referred to as "ten year call
protection"), do contain provisions which require the issuer to redeem such
obligations at par from unused proceeds of the issue within a stated period. In
recent periods of declining interest rates there have been increased redemptions
of bonds, particularly housing bonds, pursuant to such redemption provisions. In
addition, the Bonds in the Trusts are also subject to mandatory redemption in
whole or in part at par at any time that voluntary or involuntary prepayments of
principal on the underlying collateral are made to the trustee for such bonds or
that the collateral is sold by the bond issuer. Prepayments of principal tend to
be greater in periods of declining interest rates; it is possible that such
prepayments could be sufficient to cause a bond to be redeemed substantially
prior to its stated maturity date, earliest call date or sinking fund redemption
date.
The Bonds may also be subject to other calls, which may be
permitted or required by events which cannot be predicted (such as destruction,
condemnation, or termination of a contract).
In 1976 the federal bankruptcy laws were amended so that an
authorized municipal debtor could more easily seek federal court protection to
assist in reorganizing its debts so long as certain requirements were met.
Historically, very few financially troubled municipalities have sought court
assistance for reorganizing their debts; notwithstanding, the Sponsor is unable
to predict to what extent financially troubled municipalities may seek court
assistance in reorganizing their debts in the future and, therefore, what
effect, if any, the applicable federal bankruptcy law provisions will have on
the Trusts.
112677.10
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<PAGE>
The Trust may also include "moral obligation" bonds. Under
statutes applicable to such bonds, if any issuer is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question. See "Description of
Portfolio" in Part A of this Prospectus for the amount of moral obligation bonds
contained therein.
Certain of the Bonds in the Trust are subject to redemption prior
to their stated maturity dates pursuant to sinking fund or call provisions. A
sinking fund is a reserve fund appropriated specifically toward the retirement
of a debt. A callable bond 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 bond is redeemed at or before maturity from the proceeds of a new issue of
bonds. In general, call provisions are more likely to be exercised when the
offering side evaluation of a bond is at a premium over par than when it is at a
discount from par. A listing of the sinking fund and call provisions, if any,
with respect to each of the Bonds is contained under "Portfolio".
Certificateholders will realize a gain or loss on the early redemption of such
Bonds, depending upon whether the price of such Bonds is at a discount from or
at a premium over par at the time Certificateholders purchase their Units.
Neither the Sponsor nor the Trustee shall be liable in any way for
any default, failure or defect in any of the Bonds. Because certain of the Bonds
from time to time may be redeemed or will mature in accordance with their terms
or may be sold under certain circumstances, no assurance can be given that a
Trust will retain its present size and composition for any length of time. The
proceeds from the sale of a Bond or the exercise of any redemption or call
provision will be distributed to Certificateholders on the next distribution
date, except to the extent such proceeds are applied to meet redemptions of
Units. (See "Trustee Redemption".)
Puerto Rico Bonds. Certain of the Bonds in the Trust may be
general obligations and/or revenue bonds of issuers located in Puerto Rico. Such
bonds will be affected by general economic conditions in Puerto Rico. The
economy of Puerto Rico is fully integrated with that of the mainland United
States. During fiscal year 1998, approximately 90% of Puerto Rico's exports were
to the United States mainland, which was also the source of 61% of Puerto Rico's
imports. In fiscal 1998, Puerto Rico experienced a $8.5 billion positive
adjusted merchandise trade balance. The dominant sectors of the Puerto Rico
economy are manufacturing and services. Gross product in fiscal 1993 was $25.1
billion ($24.5 billion in 1992 prices) and gross product in fiscal 1997 was
$32.1 billion ($27.7 billion in 1992 prices). This represents an increase in
gross product of 27.7% from fiscal 1993 to 1997 (13.0% in 1992 prices).
According to the Labor Department's Household Employment Survey, during fiscal
1998, total employment increased 0.8% over fiscal 1997. The preliminary figure
of gross product for fiscal 1998, released in November 1998, was $34.7 billion
($28.5 billion in 1992 prices). This represents an increase of 8.1% (3.1% in
1992 prices) over fiscal 1997. This preliminary growth rate is 0.1% above the
original base line forecast for fiscal 1998. The Planning Board's gross product
forecast for fiscal 1999, made in February 1998, projected an increase of 2.7%
over fiscal 1998. According to the Labor Department's Household Employment
Survey, during the first five months of fiscal 1999, total employment decreased
1.2% over the same period for fiscal 1998. Total monthly employment averaged
1,124,800 during the first five months of fiscal 1999, compared to 1,138,400
over the same period in fiscal 1998. The seasonally adjusted unemployment rate
for November 1998 was 13.3%.
112677.10
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Discount And Zero Coupon Bonds. Some of the Bonds in a Trust may
be original issue discount bonds. The original issue discount, which is the
difference between the initial purchase price of the Bonds and the face value,
is deemed to accrue on a daily basis and the accrued portion will be treated as
tax-exempt interest income for regular federal income tax purposes. Upon sale or
redemption, any gain realized that is in excess of the earned portion of
original issue discount will be taxable as capital gain. (See "Tax Status".) The
current value of an original issue discount bond reflects the present value of
its face amount at maturity. The market value tends to increase more slowly in
early years and in greater increments as the Bonds approach maturity. Of these
original issue discount bonds, some of the aggregate principal amount of the
Bonds in the Trust may be Zero Coupon Bonds. (See "Description of Portfolio" in
Part A.) Zero Coupon Bonds do not provide for the payment of any current
interest and provide for payment at maturity at face value unless sooner sold or
redeemed. The market value of Zero Coupon Bonds is subject to greater
fluctuations than coupon bonds in response to changes in interest rates. Zero
Coupon Bonds generally are subject to redemption at compound accredit value
based on par value at maturity. Because the issuer is not obligated to make
current interest payments, Zero Coupon Bonds may be less likely to be redeemed
than coupon bonds issued at a similar interest rate, although certain zero
coupon housing bonds may be subject to mandatory call provisions.
Some of the Bonds in the Trust may have been purchased at a
"market" discount from par value at maturity. This is because the coupon
interest rates on the discount bonds at the time they were purchased and
deposited in each Trust were lower than the current market interest rates for
newly issued bonds of comparable rating and type. At the time of issuance, the
discount Bonds were for the most part issued at then current coupon interest
rates. The current yields (coupon interest income as a percentage of market
price) of discount bonds will be lower than the current yields of comparably
rated bonds of similar type newly issued at current interest rates because
discount bonds tend to increase in market value as they approach maturity and
the full principal amount becomes payable. Gain on the disposition of a Bond
purchased at a market discount generally will be treated as ordinary income,
rather than capital gain, to the extent of accrued market discount. A discount
bond held to maturity will have a larger portion of its total return in the form
of capital gain and less in the form of tax-exempt interest income than a
comparable bond newly issued at current market rates. Under the provisions of
the Internal Revenue Code in effect on the date of this Prospectus, any income
attributable to market discount will be taxable but will not be realized until
maturity, redemption or sale of the Bonds or Units. However, the
Administration's fiscal year 2000 Budget proposals would require accrual basis
taxpayers to accrue market discount income with respect to obligations acquired
after the date that the proposal is enacted. Discount Bonds with a large term to
maturity tend to have a higher current yield and a lower current market value
than otherwise comparable bonds with a shorter term to maturity. If interest
rates rise, the value of discount bonds will decrease; and if interest rates
decline, the value of discount bonds will increase. The discount does not
necessarily indicate a lack of market confidence in the issuer.
Year 2000 Issue. The Trust, like other businesses and entities,
could be adversely affected if the computer systems used by the Sponsor and
Trustee or other service providers to the Trust do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Sponsor and Trustee are taking
steps that they believe are reasonably designed to address the Year
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2000 Problem with respect to computer systems that they use and to obtain
reasonable assurances that comparable steps are being taken by the Trusts' other
service providers. However, there can be no assurance that the Year 2000 Problem
will be properly or timely resolved as to avoid any adverse impact to the Trust.
At this time, it is generally believed that municipal issuers may be more
vulnerable to Year 2000 issues or problems than will other issuers.
Insurance On The Bonds. Each of the Bonds in the Trust is insured
by a municipal bond guaranty insurance policy obtained by either the Sponsor
with respect to Bonds which were not insured prior to their deposit in the Trust
("Sponsor-Insured Bonds") or the issuer, underwriter or prior owner of the Bonds
("Pre-Insured Bonds"), and issued by one of the insurance companies described
under "Insurance on the Bonds" in Part B (the "Insurance Companies"). The
insurance policies are non-cancellable and will continue in force so long as the
Bonds are outstanding and the insurers remain in business. The insurance
policies guarantee the timely payment of principal and interest on the Bonds but
do not guarantee the market value of the Bonds or the value of the Units. No
representation is made herein as to any Bond insurer's ability to meet its
obligations under a policy of insurance relating to any of the Bonds. An
insurance company that is required to pay interest and/or principal in respect
of any Bond will succeed and be subrogated to the Trustee's right to collect
such interest and/or principal from the issuer and to other related rights of
the Trustee with respect to any such Bond.
Such insurance covers the scheduled payment of principal thereof
and interest thereon when such amounts shall become due for payment but shall
not have been paid by the issuer or any other insurer thereof. The insurance,
unless obtained by MBIA Insurance Corporation ("MBIA Corp."), will also cover
any accelerated payments of principal and any increase in interest payments or
premiums, if any, payable upon mandatory redemption of the Bonds if interest on
any Bonds is ultimately deemed to be subject to regular federal income tax.
Insurance obtained from MBIA Corp. only guarantees the full and complete
payments required to be made by or on behalf of an issuer of small industrial
revenue bonds and pollution control revenue bonds if there occurs an event which
results in the loss of tax-exempt status of the interest on such Bonds,
including principal, interest or premiums payments, if any, as and when
required. To the extent, therefore, that Bonds are only covered by insurance
obtained from MBIA Corp., such Bonds will not be covered for the full and
complete payments required to be made by or on behalf of an issuer of other than
small industrial revenue bonds or pollution control revenue bonds if there
occurs an event which results in the loss of tax-exempt status of the interest
on such Bonds. None of the insurance will cover accelerated payments of
principal or penalty interest or premiums unrelated to taxability of interest on
the Bonds. The insurance relates only to the prompt payment of principal of and
interest on the securities in the portfolios, and does not remove market risks
nor does it guarantee the market value of Units in the Trusts. The terms of the
insurance are more fully described herein. No representation is made herein as
to any Bond insurer's ability to meet its obligations under a policy of
insurance relating to any of the Pre-Insured Bonds. In addition, investors
should be aware that subsequent to the Date of Deposit the rating of the
claims-paying ability of the insurer of an underlying Pre-Insured Bond may be
down-graded.
Navigator Insured Trusts
Sponsor-Insured Bonds. Each of the Bonds in the Navigator Trusts
is insured by a financial guaranty insurance policy obtained by the Sponsor
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(the "Navigator Sponsor-Insured Bonds") from MBIA Corp. covering regularly
scheduled payments of principal thereof and interest thereon when such amounts
become due for payment but have not been paid. Such amounts shall be reduced by
any amounts received by the holders or the owners of the Bonds from any trustee
for the Bond issuers, any other Bond insurers or any other source other than
MBIA Corp. MBIA Corp. has issued such policy or policies covering each of the
Bonds in the Navigator Trusts and each such policy will remain in force until
the payment in full of such Bonds, whether or not such Bonds continue to be held
in the Navigator Trusts. The insurer's policies relating to small industrial
development bonds and pollution control revenue bonds also guarantee any
accelerated payments required to be made by or on behalf of an issuer of Bonds
pursuant to the terms of the Bonds if there occurs an event which results in the
loss of the tax-exempt status of the interest on such Bonds, including
principal, interest or premium payments, if any, as and when required. Such
insurance does not cover for any accelerated payments required to be made by or
on behalf of an issuer of other than small industrial revenue bonds or pollution
control revenue bonds if there occurs an event which results in the loss of the
tax exempt status of the interest on such Bonds nor will the insurance cover
accelerated payments of principal or penalty interest or premiums unrelated to
taxability of interest on any of the Bonds, including pollution control revenue
bonds or small industrial development bonds. In the event of such an
acceleration, the payments guaranteed by MBIA Corp. shall be made in such
amounts and at such times as such payments would have been made absent any such
acceleration. The insurance relates only to the prompt payment of principal of
and interest on the securities in the Navigator Portfolios and does not remove
market risk nor does it guarantee the market value of Units in the Navigator
Trusts. The terms of the insurance are more fully described herein. For
discussion of the effect of an occurrence of non-payment of principal or
interest on any Bonds in the Navigator Trusts see "Portfolio Supervision" in
Part B. No representation is made herein as to any bond insurer's ability to
meet its obligations under a policy of insurance relating to any of the Bonds in
the Navigator Trusts. In addition, investors should be aware that subsequent to
the Date of Deposit the rating of the claims-paying ability of MBIA Corp. may be
downgraded, which may result in a downgrading of the rating of the Units in the
Navigator Trusts. The premiums for the Navigator Sponsor-Insured Bonds are
obligations of the Sponsor. Additionally, some of the Bonds in the Navigator
Trusts may be Pre-Insured Bonds (as described below). The premium for the
Pre-Insured Bonds is an obligation of the issuers, underwriters or prior owners
of those Bonds. The insurance policy or policies relating to the Navigator
Sponsor-Insured Bonds provides that, to the extent that Bonds are both
Pre-Insured Bonds and Navigator Sponsor-Insured Bonds, coverage is effective
after a claim has been made upon the insurer of the Pre-Insured Bonds.
Upon notification from the trustee for any bond issuer or any
holder or owner of the Bonds that such trustee or paying agent has insufficient
funds to pay any principal or interest in full when due, MBIA Corp. will be
obligated to deposit funds promptly with Citibank, N.A., New York, New York, as
fiscal agent for MBIA Corp., sufficient to fully cover the deficit. If notice of
nonpayment is received on or after the due date, MBIA Corp. will provide for
payment within one business day following receipt of the notice. Upon payment by
MBIA Corp. of any Bonds, coupons, or interest payments, MBIA Corp. shall succeed
to the rights of the owner of such Bonds, coupons or interest payments with
respect thereto.
Pre-Insured Bonds. Some of the Bonds in the Trusts which are
insured under policies obtained by the Bond issuers, underwriters or prior
owners of the Bonds ("Pre-Insured Bonds") are insured either by Ambac
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Assurance Corporation ("Ambac"), Capital Guaranty Insurance Company ("Capital
Guaranty"), Connie Lee Insurance Company ("Connie Lee"), Financial Guaranty
Insurance Company ("Financial Guaranty"), Financial Security Assurance, Inc.
("Financial Security") or Municipal Bond Insurance Association ("MBIA"), MBIA
Corp.(collectively the "Insurance Companies"). The cost of this insurance is
borne by the respective issuers, underwriters or prior owners of the Pre-
Insured Bonds. The percentage of each Portfolio insured by each insurance
company, if any, is set forth under "Insurance" in Part A of this Prospectus.
Ambac is a Wisconsin-domiciled stock insurance corporation,
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Territory of Guam and the Commonwealth of Puerto Rico, with admitted assets
of approximately $3,573,000,000 (unaudited), and statutory capital of
approximately $2,139,000,000 (unaudited) as of June 30, 1999. Statutory capital
consists of Ambac's policyholders' surplus and statutory contingency reserve.
Standard & Poor's, Moody's and Fitch IBCA, Inc. ("Fitch") have each assigned a
triple-A financial strength rating to Ambac.
Ambac has obtained a ruling from the Internal Revenue Service to
the effect that the insuring of an obligation by Ambac will not affect the
treatment for federal income tax purposes of interest on such obligation and
that insurance proceeds representing maturing interest paid by Ambac under
policy provisions substantially identical to those contained in its municipal
bond insurance policy shall be treated for federal income tax purposes in the
same manner as if such payments were made by the issuer of the Bonds.
Connie Lee Insurance Company ("Connie Lee"), a Wisconsin stock
insurance corporation, is a wholly-owned subsidiary of Connie Lee Holdings, Inc.
(formerly Construction Loan Insurance Corporation, and herein, "Holdings"). On
December 18, 1997, Ambac acquired all of the outstanding capital stock of
Holdings. Holdings and Connie Lee are now wholly-owned subsidiaries of Ambac.
Connie Lee, which guaranteed bonds issued primarily for college and hospital
infrastructure projects, is not expected to write any new business. Ambac and
Connie Lee have arrangements in place to assure that Connie Lee maintains a
level of capital sufficient to support Connie Lee's outstanding obligations and
for Connie Lee insured bonds to retain their triple-A rating.
As of December 31, 1998, the qualified statutory capital of Connie
Lee was $234,425,505 (unaudited) and total admitted assets were $136,289,581, as
reported to the Commissioner of Insurance of the State of Wisconsin.
As of the Evaluation Date, the claims-paying ability of Connie Lee
has been rated "AAA" by Standard & Poor's.
Financial Guaranty is a wholly-owned subsidiary of FGIC
Corporation (the "Corporation"), a Delaware holding company. The Corporation is
a subsidiary of General Electric Capital Corporation ("GE Capital"). Neither the
Corporation nor GE Capital is obligated to pay the debts of or the claims
against Financial Guaranty. Financial Guaranty is a monoline financial guaranty
insurer domiciled in the State of New York and subject to regulation by the
State of New York Insurance Department. As of June 30, 1999, the total capital
and surplus of Financial Guaranty was $1,285,559,848. Financial Guaranty
prepares financial statements on the basis of both statutory accounting
principles and generally accepted accounting principles. Copies of such
financial statements may be obtained by writing to Financial Guaranty at 115
Broadway, New York, New York 10006, Attention: Communications Department
(telephone number: 212-312-3000) or to the New York State Insurance
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Department at 25 Beaver Street, New York, New York 10004-2319, Attention:
Financial Condition Property/Casualty Bureau (telephone number: 212-480-5187.
In addition, Financial Guaranty is currently licensed to write
insurance in all 50 states and the District of Columbia.
Financial Security is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include White Mountains Insurance Group
Inc., MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co.,
Ltd. and XL Capital Ltd. No shareholder of Holdings is obligated to pay any debt
of Financial Security or any claim under any insurance policy issued by
Financial Security or to make any additional contribution to the capital of
Financial Security.
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
or its domestic or Bermuda operating insurance company subsidiaries are
reinsured among such companies on an agreed upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security reinsures
a portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various 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. As of June 30, 1999,
total shareholders equity of Financial Security and its wholly-owned
subsidiaries was (unaudited) $1,137,952,000 and total unearned premium reserves
was (unaudited) $520,986,000.
As of the Evaluation Date, Financial Security's claims-paying
ability has been rated "AAA" by Standard & Poor's, Fitch IBCA, Inc., Japan
Rating and Investment Information, Inc. and Standard & Poor's (Australia) Pty.
Ltd. and "Aaa" by Moody's Investors Service.
MBIA Corp. is domiciled in the State of New York and licensed to
do business in and subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. MBIA Corp. has two European branches, one in the Republic of
France and the other in the Kingdom of Spain.
As of December 31, 1999, MBIA Corp. had admitted assets of $6.5
billion (audited), total liabilities of $4.2 billion (audited), and total
capital and surplus of $2.3 billion (audited) prepared in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. As of June 30, 1999, MBIA Corp. had admitted assets of $6.8 billion
(unaudited), total liabilities of $4.5 billion (unaudited), and total capital
and surplus of $2.3 billion (unaudited).
As of the Evaluation Date, the claims-paying ability of MBIA Corp.
has been rated "AAA" by Standard & Poor's and Fitch, and Aaa by Moody's.
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Insured Municipal Securities Trust
Sponsor-Insured Bonds. For those Bonds which are not covered by an
insurance policy obtained by the issuers of such Bonds, the Sponsor has obtained
bond insurance from either BIG, Financial Guaranty, MBIA or MBIA Corp. in an
effort to protect Certificateholders against nonpayment of principal and
interest in respect of such Bonds (the "Sponsor-Insured Bonds"). The bond
insurance on the Sponsor-Insured Bonds covers the Sponsor-Insured Bonds
deposited in a Trust at the time that they are physically delivered to the
Trustee (in the case of bearer bonds) or registered in the name of the Trustee
or its nominee or delivered along with an assignment (in the case of registered
bonds) or registered in the name of the Trustee or its nominee (in the case of
bonds held in book-entry form). Accordingly, although contracts to purchase
Sponsor-Insured Bonds are not covered by the bond insurance obtained by the
Sponsor, such Bonds will be insured when they are deposited in the Trust. When
selecting Bonds for a Trust prior to obtaining insurance thereon, the Sponsor
considers the factors listed under "Portfolio", among others. The insurers of
the Sponsor-Insured Bonds apply their own standards in determining whether to
insure the Sponsor-Insured Bonds. To the extent that the standards of such
insurers are more restrictive than those of the Sponsor, the Sponsor's
investment criteria have been limited to the more restrictive standards.
Pre-Insured Bonds. The Bonds which are insured under policies
obtained by the Bond issuers are insured by Ambac, Financial Guaranty, Financial
Security, or MBIA Corp. (collectively, the "Insurance Companies") on the date
the Bonds were originally deposited in the Trust. The cost of this insurance is
borne by the respective issuers of the Pre-Insured Bonds. The percentage of the
Portfolio insured by each Insurance Company, if any, is set forth under
"Insurance" in Part A.
Ratings. As of the Date of Deposit for each of the respective
Trusts, Standard & Poor's had rated the claims-paying ability of each of the
above insurance companies "AAA" and had rated each of the Bonds in the Portfolio
"AAA" because the insurance companies had insured the Bonds. The assignment of
such "AAA" ratings was due to Standard & Poor's assessment of the
creditworthiness of the insurance companies and their ability to pay claims on
their policies of insurance. Subsequently, the rating of the claims-paying
ability of the insurer of an underlying Bond may cease to be rated or may be
downgraded which may result in a downgrading of the rating of the Units in the
Trust. For a discussion of the rating of the claims-paying ability of each of
the Bond insurers see "Insurance On The Bonds". For a list of Bond Ratings as of
the Evaluation Date see the "Portfolio" in Part A of this Prospectus. For a
discussion of the rating assigned to the Units of the Trusts, see "the Trust" in
Part A of this Prospectus. The percentage of each Trust portfolio insured by
each Insurance Company, if any, is set forth under "Insurance" in Part A.
The foregoing information relating to the above insurance
companies is from published documents and other public sources and/or
information provided by such insurance companies. No representation is made
herein as to the accuracy or adequacy of such information or as to the absence
of material adverse changes in such information subsequent to the dates thereof,
but the Sponsor is not aware that the information herein is inaccurate or
incomplete.
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RISK CONSIDERATIONS
-------------------
Special Factors Affecting the Navigator Trusts. The Sponsor
believes the information summarized below describes some of the more significant
events relating to the Navigator Trusts. Sources of such information are the
official statements of issuers located in the states of the Navigator Trusts
which have been issued in connection with the debt offerings of such states, as
well as other publicly available documents and information. While the Sponsor
has not independently verified such information, it has no reason to believe
it is not correct in all material respects.
New York Navigator Trust
The information set forth below is derived from the official
statements and/or preliminary drafts of official statements prepared in
connection with the issuance of State and City municipal bonds. The Fund has not
independently verified this information.
Economic Trends. Over the long term, the State of New York (the
"State") and the City of New York (the "City") face serious economic problems.
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. The
State historically has been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its 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 State and its localities have used these
taxes to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, 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.
Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced budgets,
reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.4
million, is an international center of business and culture. Its non-manufac
turing economy is broadly based, with the banking and securities, life
insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the City's total
employment earnings. Additionally, the City is the nation's leading tourist
destination. The City's manufacturing activity is conducted primarily in apparel
and printing.
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For each of the 1981 through 1998 fiscal years, the City had an
operating surplus, before discretionary transfers, and achieved balanced
operating results as reported in accordance with then applicable generally
accepted accounting principles ("GAAP"), after discretionary transfers. The City
has been required to close substantial gaps between forecast revenues and
forecast expenditures in order to maintain balanced operating results. There can
be no assurance that the City will continue to maintain balanced operating
results as required by State law without tax or other revenue increases or
reductions in City services or entitlement programs, which could adversely
affect the City's economic base.
As required by 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 and outlines proposed
gap-closing programs for years with projected budget gaps. The City's current
financial plan projects a surplus in each of the 1999 and 2000 fiscal years,
before discretionary transfers, and budget gaps for each of the 2001, 2002 and
2003 fiscal years. This pattern of current year surplus operating results and
projected subsequent year budget gaps has been consistent through the entire
period since 1982, during which the City has achieved surplus operating results,
before discretionary transfers, for each fiscal year.
The City depends on aid from the State both to enable the City to
balance its budget and to meet its cash requirements. There can be no assurance
that there will not be reductions in State aid to the City from amounts
currently projected; that State budgets will be adopted by the April 1 statutory
deadline, or interim appropriations enacted; or that any such reductions or
delays will not have adverse effects on the City's cash flow or expenditures. In
addition, the Federal budget negotiation process could result in a reduction in
or a delay in the receipt of Federal grants which could have additional adverse
effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's financial plan,
including the City's current financial plan for the 2000 through 2003 fiscal
years (the "2000-2003 Financial Plan" or "Financial Plan"). 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. Such
assumptions and contingencies include the condition of the regional and local
economies, the provision of State and Federal aid and the impact on City
revenues and expenditures of any future Federal or State policies affecting the
City.
Implementation of the Financial Plan is dependent upon the City's
ability to market its securities successfully. The City's financing program for
fiscal years 1999 through 2003 contemplates the issuance of $10.091 billion of
general obligation bonds and $5.340 billion of bonds to be issued by the New
York City Transitional Finance Authority (the "Finance Authority") to finance
City capital projects. In addition, it is currently expected that approximately
$2.8 billion of bonds will be issued by the Tobacco Settlement Asset
Securitization Corporation ("TSASC") and paid from revenues received pursuant to
a settlement of litigation with the leading cigarette companies. The Finance
Authority and TSASC were created as part of the City's effort to assist in
keeping the City's indebtedness within the forecast level of the constitutional
restrictions on the amount of debt the City is authorized to incur. If TSASC is
not able to issue bonds in the amount expected, the City will need to find
another source of financing or substantially curtail or halt its capital
program. In addition, the City issues revenue and tax anticipation notes to
finance its seasonal working capital requirements. The
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success of projected public sales of City bonds and notes, New York City
Municipal Water Finance Authority ("Water Authority") bonds and Finance
Authority bonds will be subject to prevailing market conditions. The City's
planned capital and operating expenditures are dependent upon the sale of its
general obligation bonds and notes, and the Water Authority, Finance Authority
and TSASC bonds. Future developments concerning the City and public discussion
of such developments, as well as prevailing market conditions, may affect the
market for outstanding City general obligation bonds and notes.
For the 1998 fiscal year, the City had an operating surplus,
before discretionary and other transfers, and achieved balanced operating
results, after discretionary and other transfers, in accordance with GAAP. The
1998 fiscal year is the eighteenth year that the City has achieved an operating
surplus, before discretionary and other transfers, and balanced operating
results, after discretionary and other transfers.
The most recent quarterly modification to the City's financial
plan for the 1999 fiscal year, submitted to the New York State Financial Control
Board (the "Control Board") on June 14, 1999 (the "1999 Modification"), projects
a balanced budget in accordance with GAAP for the 1999 fiscal year.
On June 14, 1999, the City released the Financial Plan for the
2000 through 2003 fiscal years, which relates to the City and certain entities
which receive funds from the City. The Financial Plan reflects changes as a
result of the City's expense and capital budgets for fiscal year 2000, which
were adopted on June 7, 1999. The Financial Plan projects revenues and
expenditures for the 2000 fiscal year balanced in accordance with GAAP and
projects gaps of $1.8 billion, $1.9 billion and $1.8 billion for fiscal years
2001 through 2003, respectively.
Changes since adoption of the City's Expense Budget for the 1999
fiscal year in June 1998, prior to the financial plan submitted to the Control
Board on June 26, 1998 include: (i) an increase in projected tax revenues of
$976 million, $813 million, $558 million, $417 million and $1.4 billion in
fiscal years 1999 through 2003, respectively; (ii) $300 million, $250 million,
$300 million and $300 million of projected resources in fiscal years 2000
through 2003, respectively, from the receipt by the City of funds from the
settlement of litigation with the leading cigarette companies; (iii) a reduction
in the assumed collection of $350 million of projected rent payments for the
City's airports to $210 million and a delay in the receipt of such payments from
fiscal year 2000 to fiscal year 2001; (iv) anticipated proceeds from the
proposed sale of the Coliseum in fiscal year 2001 totaling $345 million; and (v)
net increases in spending of $638 million, $691 million, $679 million and $1.0
billion in fiscal years 2000 through 2003, including spending for Medicaid,
education initiatives, anti-smoking programs, employee fringe benefit costs, and
other agency programs. The 1999 Modification and the 2000- 2003 Financial Plan
includes a proposed discretionary transfer in the 1999 fiscal year of $2.6
billion to pay debt service due in fiscal year 2000, for budget stabilization
purposes, a proposed discretionary transfer in fiscal year 2000 to pay debt
service due in fiscal year 2001 totaling $429 million, and a proposed
discretionary transfer in fiscal year 2001 to pay debt service due in fiscal
year 2002 totaling $345 million.
In addition, the Financial Plan sets forth gap-closing actions to
eliminate a previously projected gap for the 2000 fiscal year and to reduce
projected gaps for fiscal years 2001 through 2003. The gap-closing actions for
the 2000 through 2003 fiscal years include: (i) additional agency actions
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totaling $605 million, $486 million, $409 million and $397 million for fiscal
years 2000 through 2003, respectively; (ii) additional Federal aid of $75
million in each of fiscal years 2000 through 2003, which include the proposed
restoration of $25 million of Federal revenue sharing and $50 million of
increased Federal Medicaid aid; and (iii) additional State actions totaling
approximately $125 million in each of fiscal years 2000 through 2003, including
Medicaid cost containment initiatives proposed in the Governor's Executive
Budget for State fiscal year 1999-2000, which would reduce expenditures by the
City by approximately $50 million in each of fiscal years 2000 through 2003, and
proposals by the City that the State enact tort reform legislation, increase
revenue sharing payments and expand State funding for low income uninsured
disabled children. The Financial Plan also reflects a tax reduction program,
which includes the elimination of the City's non-residents earning tax, the
proposed extension of current tax reductions for owners of cooperative and
condominium apartments and a proposed income tax credit for low income wage
earners.
The Financial Plan assumes: (i) approval by the Governor and the
State Legislature of the extension of the 14% personal income tax surcharge,
which is scheduled to expire on December 31, 1999, and which is projected to
provide revenue of $572 million, $585 million, $600 million and $638 million in
the 2000 through 2003 fiscal years, respectively; (ii) collection of projected
rent payments for the City's airports, totaling $365 million, $185 million and
$155 million in the 2001 through 2003 fiscal years, respectively, a substantial
portion of which may depend on the successful completion of negotiations with
The Port Authority of New York and New Jersey or the enforcement of the City's
rights under the existing leases through pending legal action; (iii) State and
Federal approval of the State and Federal gap- closing actions proposed by the
City in the Financial Plan; and (iv) receipt of the tobacco settlement funds
providing revenues or expenditure offsets in annual amounts ranging between $250
million and $300 million. The Financial Plan provides no additional wage
increases for City employees after their contracts expire in fiscal years 2000
and 2001. In addition, the economic and financial condition of the City may be
affected by various financial, social, economic and political factors which
could have a material effect on the City.
On June 7, 1999, the City Council adopted a budget for fiscal year
2000. The adopted budget includes lower estimated debt service expenditures in
fiscal year 2000 resulting from a $456 million increase, from $2.1 billion to
$2.6 billion, in the proposed discretionary transfer in the 1999 fiscal year to
pay debt service due in fiscal year 2000. The $456 million increase in the
discretionary transfer reflects increased tax revenues and decreased
expenditures in the 1999 fiscal year. The adopted budget also includes $220
million of spending initiatives proposed by the City Council, other increased
spending and the net cost of revised tax reduction proposals, which reflect the
repeal of all of the City non-resident earnings tax and the elimination of
certain of the previously proposed tax reduction initiatives.
On July 16, 1998, Standard & Poor's revised its rating of City
bonds upward from BBB+ to A-. Moody's rating of City bonds was revised in
February 1998 to A3 from Baa1. On March 8, 1999, Fitch revised its rating of
City bonds upward to A. Moody's, Standard & Poor's and Fitch currently rate the
City's outstanding general obligation bonds A3, A- and A, respectively.
New York State and its Authorities. The State ended the 1998-1999
fiscal year in balance on a cash basis for the 1998-1999 fiscal year, with a
reported closing balance in the General Fund of $892 million, after reserving a
projected $1.8 billion surplus for use in future years. The Governor's
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Executive Budget projects balance on a cash basis for the 1999-2000 fiscal year,
with a closing balance in the General Fund of $2.5 billion, including a
projected reserve of $1.79 billion for use in fiscal years 2000-2001 and 2001-
2002. Subsequently, as a result of revisions to national and State economic
forecasts, the State Division of the Budget has revised its estimate of receipts
for the 1999-2000 fiscal year to include an additional $150 million in receipts.
The Legislature and the State Comptroller will review the Governor's Executive
Budget and are expected to comment on it. The State Assembly and the State
Senate have each adopted budget resolutions which provide an outline of intended
spending and revenue changes to the 1999-2000 Executive Budget which, the
Division of the Budget believes, would, if enacted, increase the size of the
State's future budget gaps. There can be no assurance that the Legislature will
enact the Executive Budget into law, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth in the Executive Budget. Depending on the amount of State aid provided to
localities, and whether the Medicaid cost containment initiatives proposed in
the Executive Budget are approved by the State, the City might be required to
make substantial additional changes in its Financial Plan. The State budget for
the State's 1999-2000 fiscal year was not adopted by the statutory deadline of
April 1, 1999. However, legislation making interim appropriations has been
enacted. A prolonged delay in the adoption of the State's budget beyond the
statutory April 1 deadline without continuing interim appropriations could delay
the projected receipt by the City of State aid.
The State Financial Plan for the 1999-2000 fiscal year, which
reflects the 1999-2000 Executive Budget, contains projections of a potential
imbalance in the 2000-2001 fiscal year of $1.14 billion and in the 2001-2002
fiscal year of $2.07 billion, assuming implementation of the 1999-2000 Executive
Budget recommendations, the application of the $1.79 billion reserve fund and
implementation of $500 million of unspecified efficiency initiatives and other
actions in each of the 2000-2001 and 2001-2002 fiscal years, respectively. The
Executive Budget identifies various risks, including either a financial market
or broader economic correction during the period, which could adversely affect
these projections.
Standard & Poor's rates the State's general obligation bonds A,
and Moody's rates the State's general obligation bonds A2. On August 28, 1997,
Standard & Poor's revised its rating on the State's general obligation bonds
from A- to A.
Litigation. A number of court actions have been brought involving
State finances. The court actions in which the State is a defendant generally
involve State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the State of
those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
State's ability to carry out the 1999 Modification and 2000-2003 Financial Plan.
The City has estimated that its potential future liability on
account of outstanding claims against it as of June 30, 1998 amounted to
approximately $3.5 billion.
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New Jersey Navigator Trust
New Jersey Risk Factors
State Finance. New Jersey is the ninth largest state in population
and the fifth smallest in land area. With an average of 1,071 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 1998 the State ranked second among the states
in per capital personal income ($32,779).
The Trust is susceptible to political, economic or regulatory
factors affecting issuers of the New Jersey securities. 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.
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 4.8% in July 1999, which is above the national average of 4.3% in July
1999. 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 as a result of 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, 1996, there was a total authorized bond indebtedness of
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approximately $10.31 billion, of which $3.69 billion was issued and outstanding,
$4.76 billion was retired (including bonds for which provisions for payment have
been made through the sale and issuance of refunding bonds) and $1.86 billion
was unissued. The debt service obligation of such outstanding indebtedness was
$446.9 million for Fiscal Year 1997 and was $501 million for Fiscal Year
1998-1999.
On June 25, 1997, the New Jersey Economic Development Authority
(EDA) issued State Pension Funding Bonds (PFB) in the amount of $2.803 billion
to finance a portion of the unfunded accrued liability of the State administered
retirement systems. Under the authorizing legislation the bonds are limited
obligations of the EDA and are not a legal debt or liability of the State. The
following section, New Jersey Budget and Appropriation System, contains a full
description of the PFB.
New Jersey Budget and Appropriation System. The State operates on
a fiscal year beginning July 1 and ending June 30. At the end of Fiscal Year
1993 there was a surplus of $937.4 million. In 1994, New Jersey closed its
fiscal year with a surplus of $926.0 million, in 1995 New Jersey closed its
fiscal year with a surplus of $569.2, in 1996 New Jersey closed its fiscal year
with a surplus of $442.0 million, in 1997 New Jersey closed its fiscal year with
a surplus of $276.2 million, in 1998 New Jersey closed its fiscal year with a
surplus of $1.25 billion and in 1999 New Jersey closed its fiscal year with an
estimated surplus of $1.33 billion.
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, former 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 and 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 would help reduce local property tax increases by providing more state
aid to municipalities. Under the income tax legislation, the State would
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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% to 10% in income tax rates took effect.
Governor Whitman recently signed into law further reductions up to 15% for some
taxpayers effective January 1, 1996, thus reducing income taxes by up to 30% for
most taxpayers within three years.
On or about June 30, 1999, Governor Whitman signed the New Jersey
Legislature's $19.515 billion budget for Fiscal Year 2000. The balanced budget,
which includes anticipated revenue of $20.297 billion, will thereby result in an
anticipated surplus of $2.782 billion. 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. Projections and estimates of receipts
from taxes have been subject to variance in recent years as a result of several
factors, most recently a significant slowdown in the national, regional and
State economies, sluggish employment and uncertainties in taxpayer behavior as a
result of actual and proposed changes in Federal tax laws.
On June 25, 1997, the New Jersey Economic Development Authority
(EDA) issued State Pension Funding Bonds (PFB) in the amount of $2.803 billion
to finance a portion of the unfunded accrued liability of the State-
administered retirement systems. Under the authorizing legislation, the bonds
are limited obligations of the EDA and contain a statement that they are not a
legal debt or liability of the State. This is true even though the principal and
interest on the bonds will be paid through annual State appropriations from the
General Fund. Because the pension bonds are issued by an authority, they are not
General Obligation (G.O.) Bonds which are backed by the "full faith and credit"
of the State. G.O. bonds would require voter approval.
The PFB sold at an average interest rate of 7.64% after the State
purchased insurance against default. In concept, the proceeds of the PFB are
invested with the anticipation that the interest rate on investment earnings
will at least equal and, hopefully, exceed the interest rate cost of the bonds,
thereby lowering future State costs to fund the retirement systems. However,
there is always a risk of uncertainty in investing funds.
The unfunded accrued liability of the several State-administered
retirement systems is $3.2 billion, according to the actuarial valuations
prepared by Fiscal Year 1998. Of that amount, $2.75 billion is funded from the
sale of the Pension Bonds. The balance, an estimated $450 million, was made
available through the passage of companion legislation. That law authorized a
one-time accounting change in the value of the assets of the retirement systems
to full-market value as of the valuation reports applicable to Fiscal Year 1998.
This one-time revaluation from the current market- related value of assets
(which recognizes 20% of full-market) to full-market value, immediately
recognizes all capital gains up to the validation date, resulting in an
increased value of the accumulated assets of the retirement systems. The assets
of the retirement systems at full-market value are
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approximately $2.4 billion greater than they are when measured at their
market-related value.
Debt Ratings. For many years, both Moody's Investors Service,
Inc., and Standard & Poor's Corporation have rated New Jersey general obligation
bonds "Aaa" and "AAA", respectively. Currently, however, Moody's Investors
Service, Inc. rates New Jersey general obligation bonds Aa1 and Standard &
Poor's Ratings Group rates such bonds AA+. On July 3, 1991, however, Standard &
Poor's Corporation downgraded New Jersey general obligation bonds to "AA+." On
June 4, 1992 Standard & 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 current budget must be closed before the new
budget year begins on July 1, 1992. Standard & Poor's Corporation 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 & Poor's Corporation reaffirmed its "AA+" rating for New
Jersey general obligation bonds and removed the debt from its Credit Watch list,
although it stated that New Jersey's long-term financial outlook is negative.
Standard & Poor's Corporation was concerned that the State was entering the 1993
fiscal year that began July 1, 1992 with a slim $26 million surplus and remained
concerned about whether the sagging 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 & 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 & Poor's reaffirmed its "AA+" rating at the same
time. There can be no assurance that these ratings will continue or that
particular bond issues may not be adversely affected by changes in the State or
local economic and political conditions.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New
Jersey general obligation bonds to "Aa1", stating that the reduction reflected a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures would
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 (although rising) debt
ratios, and, on the negative side, a continued reliance on one-time revenue and
a dependence on pension-related savings to achieve budgetary balance.
Capital Construction. In addition to payment from bond proceeds,
capital construction can also be funded by appropriation of current revenues on
a pay-as-you go basis. Capital Construction expenditures for Fiscal Year 1995
represent 1.9% of the total Fiscal Year 1995 expenditures. In Fiscal Year 1995,
total Capital Construction expenditures were $289.8 million, a decrease of $83.4
million from Fiscal Year 1994. This amount reflects a
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reduction of $136.4 million in capital projects and an increase of $53.0 million
in expenditures to the Transportation Trust Fund Authority.
All appropriations for capital projects and all proposals for
State bond authorizations are subject to the review and recommendation of the
New Jersey Commission on Capital Budgeting and Planning. This permanent
commission was established in November 1975, and is charged with the preparation
of the State Capital Improvement Plan, which contains proposals for State
spending for capital projects.
Lease Financing. The State has entered into a number of leases
relating to the financing of certain real property and equipment. The State
leases the State Tax Processing Building and the Richard J. Hughes Justice
Complex in Trenton, both from the Mercer County Improvement Authority (the
"Authority"). On August 8, 1991 the Authority defeased outstanding bonds
originally issued to finance construction of the Richard J. Hughes Justice
Complex through the issuance of custody receipts (the "Custody Receipts") in the
aggregate principal amount of $95,760,000. The rental is sufficient to cover the
debt service on the Authority's Custody Receipts. Maximum annual rental payments
on these leases, including debt service, maintenance and payments in lieu of
taxes, will be approximately $11 million. The State's obligation to pay the
rentals is subject to appropriations being made by the State Legislature. The
Custody Receipts will mature in the years 1992 through 2018.
The State has also entered into a lease agreement, as lessee, with
the New Jersey Economic Development Authority, as lessor (the "EDA") to lease
(i) office buildings that are presently under construction and, when finished,
are expected to house the New Jersey Division of Motor Vehicles, New Jersey
Network (the State's public television station) and a branch of the United
States Postal Service and (ii) a parking facility that is also under
construction, all of which were financed by the EDA's $114,391,434.70 initial
aggregate principal amount of Trenton Office Complex Revenue Bonds, 1980 Series
dated December 1, 1989. The State has also entered into a lease agreement, as
lessee, with the EDA to lease approximately 13 acres of real property and
certain infrastructure improvements thereon located in the City of Newark. This
property is in a geographical area generally bounded by McCarter Highway,
Mulberry Street and Saybrook Place and its purchase was financed by $21,510,000
aggregate principal amount of New Jersey Economic Development Authority Revenue
Bonds, New Jersey Performing Arts Center Site Acquisition Project, 1991 Series,
issued on August 20, 1991. The rental payments required to be made by the State
under such lease agreements are sufficient to cover debt service on such bonds
and other amounts payable to the EDA, including certain administrative expenses
of the EDA, and such rental payments are subject to annual appropriation by the
State Legislature. Maximum annual debt service on such bonds is approximately
$12,200,000. All of such bonds are still outstanding and mature in the years
1992 through 2012.
The State has also entered into a sublease with the EDA to lease
two parking lots, certain infrastructure improvements and related elements
located at Liberty State Park in the City of Jersey City. These parking lots and
improvements have been financed by a $13,683,767.50 aggregate principal amount
of New Jersey Economic Development Authority Lease Rental Bonds, 1992 Series
(Liberty State Park Project) dated March 15, 1992. The rental payments that will
be required to be made by the State under such sublease agreement will be
sufficient to cover debt service on such bonds and other amounts payable to the
EDA, and such rental payments will be subject to appropriation by the State
Legislature.
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In 1981, the Governor signed into law a bill creating the New
Jersey Building Authority (the "Building Authority") having the power to
construct facilities for leasing to the State (P.L. 1981, c. 120). The law
provides for leasing to the State on a basis similar to that described above.
The Building Authority is authorized to have not more than $250 million of its
notes and bonds outstanding exclusive of refunded bonds and notes, provided that
if the Building Authority issues bonds or notes to finance the total cost of a
project based on estimates prepared by an independent consultant and the
consultant determines later that the costs of the project as initially approved
have increased, the Building Authority may issue additional bonds or notes to
finance the increased cost notwithstanding the $250 million limitation. In 1985
the Building Authority issued $129,635,000 of 1985 Series Bonds for five office
building projects in the Trenton area. During April 1987 the Building Authority
issued $103,760,000 of the 1987 Series Bonds to refund the outstanding term
bonds of the 1985 issue. On April 6, 1989 the Building Authority issued
$49,752,390.30 of 1989 Series Bonds for the renovation and historical
restoration of portions of the State Capital Complex in Trenton. On October 9,
1991 the Building Authority issued $74,999,815.75 of State Building Revenue
Bonds, 1991 Series (Garden State Savings Bonds, 1991A), as capital appreciation
bonds, under the Garden State Savings Act of 1991, for the continued renovation
and historical restoration of portions of the State Capital Complex in Trenton
and for the construction of a structured parking facility. As of December 31,
1991 the total amount of Building Authority Bonds outstanding was
$238,687,206.05. Outstanding Building Authority Bonds are secured by annual
rentals from the State which are subject to annual appropriations by the State
Legislature. The State's combined annual rental payment for all leases with the
Building Authority will be (i) approximately $17.5 million per year for the
years ending June 15, 1992 through 1998, 2012 and 2013 and (ii) approximately
$31.0 million per year for the years ending June 15, 1999 through 2011.
Beginning in April 1984, the State, acting through the Director of
the Division of Purchase and Property, entered into a series of lease purchase
agreements which provide for the acquisition of equipment and real property to
be used by various departments and agencies of the State. To date, the State has
completed nine lease purchase agreements which have resulted in issuance of
Certificates of Participation totaling $541,085,000. A Certificate of
Participation evidences a proportionate interest of the owner thereof in the
lease payments to be made by the State under the terms of the agreement. As of
December 31, 1991, $305,400,000 Certificates of Participation remain
outstanding. The agreements relating to these transactions provide for
semiannual rental payments. The State's obligation to pay rentals due under
these leases is subject to annual appropriations being made by the State
Legislature. The final maturity of the outstanding Certificates of Participation
is December 15, 2013. The majority of proceeds from these transactions have been
or will be used to acquire equipment for the State and its agencies. The rentals
payable by the State will be made from monies appropriated by the State
Legislature. The State intends to continue to use this financing technique for a
substantial portion of its future equipment requirements.
"Moral Obligation" Financing. Aside from its general obligation
bonds, the State's "moral obligation" backs certain obligations issued by the
New Jersey Housing and Mortgage Finance Agency, the South Jersey Port
Corporation and the Higher Education Assistance Authority.
New Jersey Housing and Mortgage Finance Agency. Neither the New
Jersey Housing and Mortgage Finance Agency nor its predecessors, the New
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Jersey Housing Finance Agency and the New Jersey Mortgage Finance Agency, have
had a deficiency in a debt service reserve fund which required the State to
appropriate funds to meet its "moral obligation". It is anticipated that this
agency's revenues will continue to be sufficient to cover debt service on its
bonds.
South Jersey Port Corporation. The State provides the South Jersey
Port Corporation (the "Corporation") with funds to cover all debt service and
property tax requirements, when earned revenues are anticipated to be
insufficient to cover these obligations.
Higher Education Assistance Authority. The Higher Education
Assistance Authority has issued $24,996,064 aggregate principal amount of
revenue bonds, the interest on which has been capitalized to but not including
January 1, 1993. After the period of capitalized interest has ended, it is
anticipated that the authority's revenues will be sufficient to cover debt
service on its bonds.
Below are listed State appropriations made since 1986 which
covered deficiencies in revenues of the Corporation, for debt service and
property tax payments.
<TABLE>
<CAPTION>
Appropriation for Appropriation for
Calendar Year Debt Service Property Tax
------------- ----------------- -----------------
<S> <C> <C>
1986................................................ $ 0 $1,647,216.00
1987................................................ 0 1,647,216.00
1988................................................ 0 1,647,216.00
1989................................................ 1,281,793.58 1,745,917.00
1990................................................ 2,362,850.67 1,850,000.00
1991................................................ 2,770,851.00 1,850,000.00
</TABLE>
On April 2, 1987, the Corporation issued $31,580,000 aggregate principal
amount of Revenue Bonds, 1987 Series C (the "Series C Bonds"), a portion of the
proceeds of which will be used (i) on January 1, 1995, to refund all of the
Corporation's Marine Terminal Revenue Bonds, 1985 Refunding Series and (ii) to
pay interest on the Series C Bonds until January 1, 1995. Because of the funded
escrow, it is expected that there will not be any need for the State to provide
funds to pay debt service on the Series C Bonds through January 1, 1995. Also,
in addition to the bonded indebtedness of the Corporation set forth above, on
April 2, 1987, the Corporation issued $10,295,000 Marine Terminal Revenue Bonds,
1987 Series D, to provide funds for financing a portion of the costs of various
capital improvements. On February 10, 1989, the Corporation issued $4,085,000
Marine Terminal Revenue Bonds, 1989 Series E, to provide funds for financing a
portion of the costs of various capital improvements and additions to the
Corporation's marine terminal facilities. On November 21, 1989, the Corporation
issued $3,655,000 Marine Terminal Revenue Bonds, 1989 Series F, to provide for
the costs of acquiring land in the City of Camden, for the purpose of expanding
the Corporation's marine terminal facilities.
Municipal Finance. New Jersey's local finance system is regulated
by various statutes designed to assure that all local governments and their
issuing authorities remain on a sound financial basis. Regulatory and
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remedial statutes are enforced by the Division of Local Government Services (the
"Division") in the State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A.
40A:4-1 et seq.) imposes specific budgetary procedures upon counties and
municipalities ("local units"). Every local unit must adopt an operating budget
which is balanced on a cash basis, and items of revenue and appropriation must
be examined by the Director of the Division (the "Director"). The accounts of
each local unit must be independently audited by a registered municipal
accountant. State law provides that budgets must be submitted in a form
promulgated by the Division and further provides for limitations on estimates of
tax collection and for reserves in the event of any shortfalls in collections by
the local unit. The Division reviews all municipal and county annual budgets
prior to adoption for compliance with the Local Budget Law. The Director is
empowered to require changes for compliance with law as a condition of approval;
to disapprove budgets not in accordance with law; and to prepare the budget of a
local unit, within the limits of the adopted budget of the previous year with
suitable adjustments for legal compliance, if the local unit is unwilling to
prepare a budget in accordance with law. This process insures that every
municipality and county annually adopts a budget balanced on a cash basis,
within limitations on appropriations or tax levies, respectively, and making
adequate provision for principal of and interest on indebtedness falling due in
the fiscal year, deferred charges and other statutory expenditure requirements.
The Director also oversees changes to local budgets after adoption as permitted
by law, and enforces regulations pertaining to execution of adopted budgets and
financial administration. In addition to the exercise of regulatory and
oversight functions, the Division offers expert technical assistance to local
units in all aspects of financial administration, including revenue collection
and cash management procedures, contracting procedures, debt management and
administrative analysis.
The local Government Cap Law (N.J.S.A. 40A:4-45.1 et seq.) (the
"Cap Law") generally limits the year-to-year increase of the total
appropriations of any municipality and the tax levy of any county to either 5%
or an index rate determined annually by the Director, whichever is less.
However, where the index percentage rate exceeds 5%, the Cap law permits the
governing body of any municipality or county to approve the use of a higher
percentage rate up to the index rate. Further, where the index percentage rate
is less than 5%, the Cap Law also permits the governing body of any municipality
or county to approve the use of a higher percentage rate up to 5%. Regardless of
the rate utilized, certain exceptions exist to the Cap Law's limitation on
increases in appropriations. The principal exceptions to these limitations are
municipal and county appropriations to pay debt service requirements; to comply
with certain other State or federal mandates; amounts approved by referendum;
and, in the case of municipalities only, to fund the preceding year's cash
deficit or to reserve for shortfalls in tax collections. The Cap Law, scheduled
to expire on December 31, 1990, was re-enacted with amendments and made a
permanent part of the Municipal Finance System.
State law also regulates the issuance of debt by local units. The
Local Budget Law limits the amount of tax anticipation notes that may be issued
by local units and requires the repayment of such notes within three months of
the end of the fiscal year (six months in the case of the counties) in which
issued. The local Bond Law (N.J.S.A. 40A:2-1 et seq.) governs the issuance of
bonds and notes by the local units. No local unit is permitted to issue bonds
for the payment of current expenses (other than Fiscal Year Adjustment Bonds
described more fully below). Local units may not issue bonds
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to pay outstanding bonds, except for reflecting purposes, and then only with the
approval of the Local Finance Board. Local units may issue bond anticipation
notes for temporary periods not exceeding in the aggregate approximately ten
years from the date of first issue. The debt that any local unit may authorize
is limited to a percentage of its equalized valuation basis, which is the
average of the equalized value of all taxable real property and improvements
within the geographic boundaries of the local unit, as annually determined by
the Director of the Division of Taxation, for each of the three most recent
years. In the calculation of debt capacity, the local Bond Law and certain other
statutes permit the deduction of certain classes of debt ("statutory
deductions") from all authorized debt of the local unit ("gross capital debt")
in computing whether a local unit has exceeded its statutory debt limit.
Statutory deductions from gross capital debt consist of bonds or notes (i)
authorized for school purposes by a regional school district or by a
municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self-liquidating, but only to the extent permitted by the
Local Bond Law; (iii) authorized by a public body other than local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made; or (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5% of the
equalized valuation basis in the case of municipalities and 2% of the equalized
valuation basis in the case of counties. The debt limit of a county or
municipality, with certain exemptions, may be exceeded only with the approval of
the Local Finance Board.
Chapter 75 of the Pamphlet Laws of 1991 signed into law on March
28, 1991 requires certain municipalities and permits all other municipalities to
adopt the State fiscal year in place of the existing calendar fiscal year.
Municipalities that change fiscal years must adopt a six month transition budget
for January to June. Since expenditures would be expected to exceed revenues
primarily because state aid for the calendar year would not be received by the
municipality until after the end of the transition year budget, the act
authorizes the issuance of Fiscal Year Adjustment Bonds to fund the one time
deficit for the six month transition budget. The act provides that the deficit
in the six month transition budget may be funded initially with bond
anticipation notes based on the estimated deficit in the six month transition
budget. Notes issued in anticipation of Fiscal Year Adjustment Bonds, including
renewals, can only be issued for up to one year unless the Local Finance Board
permits the municipality to renew them for a further period of time. The Local
Finance Board must confirm the actual deficit experienced by the municipality.
The municipality then may issue Fiscal Year Adjustment Bonds to finance the
deficit on a permanent basis. The purpose of the Act is to assist municipalities
that are heavily dependent on state aid and that have had to issue tax
anticipation notes to fund operating cash flow deficits each year. While the act
does not authorize counties to change their fiscal years, it does provide that
counties with cash flow deficits may issue Fiscal Year Adjustment Bonds as well.
State law authorizes State officials to supervise fiscal
administration in any municipality which is in default on its obligations; which
experiences severe tax collection problems for two successive years; which has a
deficit greater than 4% of its tax levy for two successive years; which has
failed to make payments due and owing to the State, county, school district or
special district for two consecutive years; which has an
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appropriation in its annual budget for the liquidation of debt which exceeds 25%
of its total operating appropriations (except dedicated revenue appropriations)
for the previous budget year; or which has been subject to a judicial
determination of gross failure to comply with the Local Bond Law, the Local
Budget Law or the Local Fiscal Affairs Law which substantially jeopardizes its
fiscal integrity. State officials are authorized to continue such supervision
for as long as any of the conditions exist and until the municipality operates
for a fiscal year without incurring a cash deficit.
There are 567 municipalities and 21 counties in New Jersey. During
1987, 1988, and 1989 no county exceeded its statutory debt limitations or
incurred a cash deficit in excess of 4% of its tax levy. The number of
municipalities which have a cash deficit greater than 4% of their tax levies was
five for 1987, zero for 1988, and six for 1989. The number of municipalities
which exceeded statutory debt limits was six, five, and one as of December 31,
1987, 1988, and 1989, respectively. No New Jersey municipality or county has
defaulted on the payment of interest or principal on any outstanding debt
obligation since the 1930's.
School Districts. All New Jersey school districts are coterminous
with the boundaries of one or more municipalities. They are characterized by the
manner in which the board of education, the governing body of the school
district, takes office. Type I school districts, most commonly found in cities,
have a board of education appointed by the mayor or the chief executive officer
of the municipality constituting the school district. In a Type II school
district, the board of education is elected by the voters of the district.
Nearly all regional and consolidated school districts are Type II school
districts.
School Budgets. In every school district having a board of school
estimate, the board of school estimate examines the budget request and fixes the
appropriation amounts for the next year's operating budget after a public
hearing at which the taxpayers and other interested persons shall have an
opportunity to raise objections and to be heard with respect to the budget. This
board, whose composition is fixed by statute, certifies the budget to the
municipal governing bodies and to the local board of education. If either
disagrees, they must appeal to the State Commissioner of Education (the
"Commissioner") to request changes.
The Quality Education Act of 1990 (N.J.S.A. 18A:7D-1 et seq.)
limits the annual increase of a school district's net current expense budget.
The Commissioner certifies the allowable amount of increase for each school
district but may grant a higher level of increase in certain limited instances.
A school district may also submit a proposal to the voters to raise amounts
above the allowable amount of increase. If defeated, such a proposal is subject
to further review or appeal only if the Commissioner determines that additional
funds are required to provide a thorough and efficient education.
The Quality Education Act has been declared unconstitutional by
the New Jersey Supreme Court in 1994. The Supreme Court, while retaining
jurisdiction over this issue, has stated that the State was required to address
the "special education needs" of 30 special needs districts for which funding
was required in addition to that necessary to achieve parity for richer
districts. The Supreme Court stated that it will not immediately intervene if
substantial equivalence of the special needs districts and wealthier districts
is achieved by the State for the 1997-1998 school year.
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The Court further ordered the State to adopt a law assuring such substantial
equivalence by September 1996.
In May, 1997, in its further review of school funding, the Supreme
Court in Abbott by Abbott v. Burke, 149 N.J. 145 (1997), held that the
Comprehensive Educational Improvement and Financing Act ("Act") which was
enacted by the legislature in response to previous state Supreme Court orders
was unconstitutional as it applied to special needs districts.
The Court held that the Act's funding levels were insufficient and
failed to address problems of dilapidated, unsafe and overcrowded facilities. As
interim relief pending legislative solution, the Court ordered increased funding
on parity with per-pupil expenditures for regular education, required the State
Commissioner of Education to ensure that increased funding be put to optimal
educational use, required the State, commencing September 1997, to provide
special needs districts with money to enable such districts with sufficient
money to spend at the level of average budgeted per-pupil expenditures in
successful districts and remanded the case for a determination of immediate
implementation of programs to meet the needs of at-risk children.
As a result of this decision, the State's 1998 fiscal year budget
provided for an additional $246 million to special needs districts. Much of this
funding is attributable to the State Pension Fund Bonds sale.
In Type I or Type II school districts which have failed monitoring
over a period of time by the State because of continued educational
deficiencies, and are implementing an approved corrective action plan, the
Commissioner is required to determine the cost to the school district of the
implementation of those portions of the corrective action plan which are
directly responsive to the district's deficiencies as identified in the
monitoring process. Where appropriate, the Commissioner is required to
reallocate funds within the district's budget to support the corrective action
plan. The Commissioner is also required to determine the amount of additional
revenue needed to implement the corrective action plan, and to recertify the
budget for the district.
In State operated school districts the State District
Superintendent has the responsibility for the development of the budget subject
to appeal by the governing body of the municipality to the Commissioner and the
Director of the Division of Local Government Services in the State Department of
Community Affairs. Based upon his review, the Director is required to certify
the amount of revenues which can be raised locally to support the budget of the
State operated district. Any difference between the amount which the Director
certifies, and the total amount of local revenues required by the budget
approved by the Commissioner, is to be paid by the State in the fiscal year in
which the expenditures are made subject to the availability of appropriations.
School District Bonds. School district bonds and temporary notes
are issued in conformity with N.J.S.A 18A:24-1 et seq. (the "School Bond Law"),
which closely parallels the Local Bond Law. Although school districts are
exempted from the 5% down payment provision generally applied to bonds issued by
municipalities and counties, they are subject to debt limits (which vary
depending on the type of school system provided) and to State regulation of
their borrowing. The debt limitation on school district bonds depends upon the
classification of the school district but may be as high as 4% of the average
equalized valuation basis of the constituent municipality. In certain cases
involving school districts in cities with populations exceeding 100,000
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the debt limit is 8% of the average equalized valuation basis of the constituent
municipality, and in cities with populations in excess of 80,000 the debt limit
is 6% of the aforesaid average equalized valuation.
School bonds are authorized by (i) an ordinance adopted by the
governing body of a municipality within a Type I school district; (ii) adoption
of a proposal by resolution by the board of education of a Type II school
district having a board of school estimate; or (iii) adoption of a proposal by
resolution by the board of education and approval of the proposal by the legal
voters of any other Type II school district. If school bonds will exceed the
school district borrowing capacity, a school district (other than a regional
school district) may use the balance of the municipal borrowing capacity. If the
total amount of debt exceeds the school district's borrowing capacity and any
available remaining municipal borrowing capacity, the Commissioner and the Local
Finance Board must approve the proposed authorization before it is submitted to
the voters. All authorizations of debt in a Type II school district without a
board of school estimate require an approving referendum, except where, after
hearing, the Commissioner and the State Board of Education determine that the
issuance of such debt is necessary to meet the constitutional obligation to
provide a thorough and efficient system of public schools. When such obligations
are issued, they are issued by, and in the name of, the school district.
In Type I and II school districts with a board of school estimate,
that board examines the capital proposal of the board of education and certifies
the amount of bonds to be authorized. When it is necessary to exceed the
borrowing capacity of the municipality, the approval of a majority of the
legally qualified voters of the municipality is required, together with the
approval of the Commissioner and the Local Finance Board. When such bonds are
issued for a Type I school district, they are issued by the municipality and
identified as school bonds. When bonds are issued by a Type II school district
having a board of school estimate, they are issued by, and in the name of, the
school district.
All authorizations of debt must be reported to the Division of
Local Government Services by a supplemental debt statement prior to final
approval.
School District Lease Purchase Financings. In 1982, school
districts were given an alterative to the traditional method of bond financing
capital improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase
Law"). The Lease Purchase Law permits school districts to acquire a site and
school building through a lease purchase agreement with a private lessor
corporation. For Type II school districts, the lease purchase agreement does not
require voter approval. The rent payments attributable to the lease purchase
agreement are subject to annual appropriation by the school district and are
required, pursuant to N.J.A.C. 6:22-A-1.2(h), to be included in the annual
current expense budget of the school district. Furthermore, the rent payments
attributable to the lease purchase agreement do not constitute debt of the
school district and therefore do not impact on the school district's debt
limitation. Lease purchase agreements in excess of five years require the
approval of the Commissioner and the Local Finance Board.
Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c.
38 and c. 39) which provides for the issuance by municipalities and school
districts of "qualified bonds." Whenever a local board of education or the
governing body of a municipality determines to issue bonds, it may file an
application with the Local Finance Board, and, in the case of a local board of
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education, the Commissioner, to qualify bonds pursuant to P.L. 1976, c. 38 or c.
39. Upon approval of such an application and after receipt of a certificate
stating the name and address of the paying agent for such bonds, the maturity
schedule, interest rates and payment dates, the State Treasurer shall, in the
case of qualified bonds for school districts, withhold from the school aid
payable to such municipality or school district and in the case of qualified
bonds for municipalities, withhold from the amount of business personal property
tax replacement revenues, gross receipts, tax revenues, municipal purposes tax
assistance fund distributions, State urban aid, State revenue sharing, and any
other funds appropriated as State aid and not otherwise dedicated to specific
municipal programs, payable to such municipalities, an amount sufficient to
cover debt service on such bonds. These "qualified bonds" are not direct,
guaranteed or moral obligations of the State, and debt service on such bonds
will be provided by the State only if the above mentioned appropriations are
made by the State. Total outstanding indebtedness for "qualified bonds"
consisted of $103,720,500 by various school districts as of June 30, 1992 and
$830,037,105 by various municipalities as of June 30, 1992.
New Jersey School Bond Reserve Act. The New Jersey School Bond
Reserve Act (N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve
within the constitutionally dedicated Fund for the Support of Free Public
Schools. Under this law the reserve is maintained at an amount equal to 1.5% of
the aggregate outstanding bonded indebtedness of counties, municipalities or
school districts for school purposes (exclusive of bonds whose debt service is
provided by State appropriations), but not in excess of monies available in such
Fund. If a municipality, county or school district is unable to meet payment of
the principal of or interest on any of its school bonds, the trustee of the
school bond reserve will purchase such bonds at the face amount thereof or pay
the holders thereof the interest due or to become due. On June 30, 1991, the
book value of the Fund's assets aggregated $59,352,429 and the reserve, computed
as of June 30, 1991, amounted to $19,668,349. There has never been an occasion
to call upon this Fund.
Local Financing Authorities. The Local Authorities Fiscal Control
Law (N.J.S.A. 40A:5A-l et seq.) provides for State supervision of the fiscal
operations and debt issuance practices of independent local authorities and
special taxing districts by the State Department of Community Affairs. The Local
Authorities Fiscal Control Law applies to all autonomous public bodies created
by counties or municipalities, which are empowered to issue bonds, to impose
facility or service charges, or to levy taxes in their districts. This
encompasses most autonomous local authorities (sewerage, municipal utilities,
parking, pollution control, improvement, etc.) and special taxing districts
(fire, water, etc.). Authorities which are subject to differing State or federal
financial restrictions are exempted, but only to the extent of that difference.
Financial control responsibilities over local authorities and
special districts are assigned to the Local Finance Board and the Director of
the Division of Local Government Services. The Local Finance Board exercises
approval power over the creation of new authorities and special districts as
well as their dissolution. The Local Finance Board also reviews, conducts public
hearings and issues findings and recommendations on any proposed project
financing of an authority or district, and on any proposed financing agreement
between a municipality or county and an authority or special district. The Local
Finance Board prescribes minimum audit requirements to be followed by
authorities and special districts in the conduct of their annual
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audits. The Director reviews and approves annual budgets of authorities and
special districts.
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 which challenge the
following: the funding of teacher's pension funds; the hospital assessment
authorized by the Health Care Reform Act of 1992; the State's role in a consent
order concerning the construction of a resource facility in Passaic County; the
State's actions regarding alleged chromium contamination of State-owned property
in Hudson County; the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy; the State's funding formula that attempts to close the
spending gap between poor urban school districts and wealthy suburban districts;
the use by the State assessments on certain insurances to retire debt of the
Market Transition Fund; the manner in which mental health services are provided
to inmates with serious mental disorders who are confined within the facilities
of the Department of Corrections; the spousal impoverishment provisions of the
Medicare Catastrophic Coverage Act; Medicaid hospital reimbursements since
February 1995; and the efforts to revitalize Atlantic City through the design
and construction of a highway and tunnel. 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.
Pennsylvania Trust
The following information constitutes only a brief summary of a
number of the complex factors which may impact issuers of Pennsylvania municipal
securities and does not purport to be a complete or exhaustive description of
all conditions to which issuers of Pennsylvania municipal securities may be
subject. Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Pennsylvania Trust cannot predict whether or to what extent such
factors or other factors may affect the issuers of Pennsylvania municipal
securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities held by the Pennsylvania Trust to
pay interest on or principal of such securities. 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 of Pennsylvania to make
payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within Pennsylvania, and it is possible the Pennsylvania Trust
has invested in obligations of particular issuers as to which such specific
factors are applicable. However, the information set forth below is intended
only as a
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general summary and not as a discussion of any specific factors that may affect
any particular issuer of Pennsylvania municipal securities.
State Finance
State Economy. The Commonwealth of Pennsylvania is one of the most
populous states, ranking fifth behind California, New York, Texas and Florida.
Pennsylvania is an established yet growing state with a diversified economy. It
is the headquarters for many major corporations. Pennsylvania historically has
been identified as a heavy industry state although that reputation has changed
over the last thirty years as the industrial composition of the Commonwealth
diversified when the coal, steel and railroad industries began to decline. A
more diversified economy was necessary as the traditionally strong industries in
the Commonwealth declined due to a long-term shift in jobs, investment and
workers away from the northeast part of the nation. The major sources of growth
in Pennsylvania are in the service sector, including trade, medical and the
health services, education and financial institutions. Pennsylvania's
agricultural industries are also an important component of the Commonwealth's
economic structure, accounting for more than $3.6 billion in crop and livestock
products annually, while agribusiness and food related industries support $39
billion in economic activity annually.
Non-agricultural employment in Pennsylvania over the ten years
ending in 1998 increased at an annual rate of 0.75%. This rate compares to a
0.29% rate for the Middle Atlantic region and 1.72% for the U.S. during the
period 1989 through 1998. For the five years ending with 1998, employment in the
Commonwealth has increased 7.0%. The growth in employment experienced in
Pennsylvania during this period is higher than the 2.7% growth in the Middle
Atlantic region. Non-manufacturing employment has increased in recent years to
82.8% as of December 1998. Consequently, manufacturing employment constitutes a
diminished share of total employment within the Commonwealth. Manufacturing,
contributing 17.2% of 1998 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 1998, the services sector accounted for
32.3% of all non-agricultural employment while the trade sector accounted for
22.4%.
Pennsylvania's annual average unemployment rate was below the
national average from 1986 until 1990. Slower economic growth caused the
unemployment rate in the Commonwealth to rise to 7.0% in 1991 and 7.6% in 1992.
The resumption of faster economic growth resulted in a decrease in the
Commonwealth's unemployment rate to 7.1% in 1993. From 1994 through 1998,
Pennsylvania's annual average unemployment rate was below the Middle Atlantic
Region's average, but slightly higher than that of the United States. As of
April 1999, the most recent month for which data is available, the seasonally
adjusted unemployment rate for the Commonwealth was 4.4%, compared to 4.3% for
the United States.
The Commonwealth operates under an annual budget which is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth in detail proposed expenditures to be financed from the
proceeds of obligations of the
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Commonwealth or its agencies or authorities or from operating funds; and (iii) a
financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. A gubernatorial veto can be overridden only by a two-thirds
majority of all members of each house. The Commonwealth's fiscal year begins on
July 1 and ends on June 30.
The Constitution and the laws of the Commonwealth require all
payments from the treasury, with the exception of refunds of taxes, licenses,
fees and other charges, to be made only by duly enacted appropriations. Amounts
appropriated from a fund may not exceed its actual and estimated revenues for
the fiscal year plus any unappropriated surplus available. Appropriations from
the principal operating funds of the Commonwealth (the General Fund, the Motor
License Fund and the State Lottery Fund) are generally made for one fiscal year
and are returned to the unappropriated surplus of the fund (a lapse) if not
spent or encumbered by the end of the fiscal year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an independent
fiscal and accounting entity with a self-balancing set of accounts. Each fund
records the cash and/or other resources together with all related liabilities
and equities that are segregated for the purpose of the fund. In the
Commonwealth, funds are established by legislative enactment or in certain
limited cases by administrative action. Over 150 funds have been established and
currently exist for the purpose of recording the receipt and disbursement of
moneys received by the Commonwealth. Annual budgets are adopted each fiscal year
for the principal operating funds of the Commonwealth and several other special
revenue funds. Expenditures and encumbrances against these funds may be made
only pursuant to appropriation measures enacted by the General Assembly and
approved by the Governor. The General Fund, the Commonwealth's largest fund,
receives all tax revenues, non-tax revenues and federal grants and entitlements
that are not specified by law to be deposited elsewhere. The majority of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. Debt service on all bond indebtedness of the Commonwealth, except
that issued for highway purposes or for the benefit of other special revenue
funds, is payable from the General Fund.
Financial information for the principal operating funds of the
Commonwealth is maintained on a budgetary basis of accounting. The Commonwealth
also prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Financial statements prepared in accordance with
GAAP are audited jointly by the Auditor General of the Commonwealth and an
independent public accounting firm. Budgetary basis financial reports are based
on a modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by 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.
Financial Results for Recent Fiscal Years (GAAP Basis). During the
five-year period from fiscal 1994 through fiscal 1998, revenues and other
sources increased by an average 5.0% annually. Tax revenues during this same
period increased by an annual average of 4.2%. Intergovernmental revenues, with
a 6.7% annual average rate of increase, had the largest rate of growth
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over the five-year period. An accounting change in fiscal 1996 that made food
stamp coupon revenue from the federal government an item of intergovernmental
revenue is responsible for a major portion of this increase. Other revenues
during this five-year period grew at a 20.5% annual rate. Increases in charges
for sales and services and in investment income constitute the largest portion
of other revenues.
Expenditures and other uses during the fiscal 1994 through fiscal
1998 period rose at an average annual rate of 5.0%. Program costs for protection
of persons and property increased an average 11.8% annually, the largest growth
rate of all programs. This high rate of increase reflects the costs to acquire,
staff and operate expanded prison facilities to house a larger prison
population. Public health and welfare program costs increased at a 5.8% annual
average rate during the period. Efforts to control costs for various social
programs and the presence of favorable economic conditions have helped restrain
these costs.
The fund balance at June 30, 1998 totaled $1,958.9 million, an
increase of $594.0 million over the $1,364.9 million balance at June 30, 1997.
Of the $1,144.0 million unreserved-designated component of fund balance, over
one-half of that amount is represented by the balance in the Tax Stabilization
Reserve Fund. The fiscal 1998 year-end unreserved-undesignated balance of $497.6
million is the largest balance recorded since audited GAAP reporting was
instituted in 1984 for the Commonwealth.
Fiscal 1997 Financial Results (GAAP Basis). For fiscal 1997,
assets increased $563.4 million and liabilities declined $166.3 million to
produce a $729.7 million increase in fund balance at June 30, 1997. The fund
balance increase during fiscal 1997 has brought a restoration of an
undesignated-unreserved balance. The $187.3 million undesignated-unreserved
balance was the first recorded since fiscal 1994 and at that time the largest
amount since fiscal 1987. Total revenues and other sources rose 3.5% for fiscal
1997. An increase of 5.5% in tax revenue aided by an improving state economy was
partially offset by a $175.2 million decline in intergovernmental revenues.
Expenditures and other uses increased by 1.0% for the fiscal year.
As in the past several fiscal years, expenditure increases were led by
protection of persons and property program costs. Fiscal 1997 costs for this
program rose by 4.7%, the largest increase for a program, but well below the
17.1% average annual increase that occurred over the four fiscal years prior to
fiscal 1997. General government program costs for fiscal 1997 declined by 14.3%
from the fiscal year earlier. A reduction in estimated expenditures for
maintaining the Commonwealth's self-insured worker's compensation program is
largely responsible for the decline.
Budgetary Basis. The unappropriated balance of Commonwealth
revenues increased during the 1997 fiscal year by $432.9 million. Higher than
estimated revenues and slightly lower expenditures than budgeted caused the
increase. The unappropriated balance rose from an adjusted amount of $158.5
million at the beginning of fiscal 1997 to $591.4 million (prior to reserves for
transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal year.
Transfers to the Tax Stabilization Reserve Fund for fiscal 1997 operations were
$188.7 million, of which $88.7 million represents the normal 15% of the ending
unappropriated balance, plus an additional $100 million authorized by the
General Assembly when it enacted the fiscal 1998 budget.
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Commonwealth revenues (prior to tax refunds) during the fiscal
year totaled $17,320.6 million, $576.1 million (3.4%) above the estimate made at
the time the budget was enacted. Revenue from taxes was the largest contributor
to higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1% over tax
revenues in fiscal 1996. This rate of increase is not adjusted for legislated
tax reductions that affected receipts during both of those fiscal years and
therefore understates the actual underlying rate of tax revenue growth during
fiscal 1997. Receipts from the personal income tax produced the largest single
component of higher revenues for the fiscal year. Personal income collections
were $236.3 million over estimate representing a 6.9% increase over fiscal 1996
receipts. Receipts of the sales and use tax were $185.6 million over estimate
representing a 6.2% increase. Collections of corporate taxes, led by the capital
stock and franchise and the gross receipts taxes, also exceeded their estimates
for the fiscal year. Non-tax revenues were $19.8 million (5.8%) over estimate
mostly due to higher than anticipated interest earnings.
Expenditures from Commonwealth revenues (excluding pooled
financing expenditures) during fiscal 1997 totaled $16,347.7 million and were
close to the estimate made in February 1997 with the presentation of the
Governor's fiscal 1998 budget request. Total expenditures represent an increase
over fiscal 1996 expenditures of 1.7%. Lapses of appropriation authority during
the fiscal year totaled $200.6 million compared to an estimate of $100 million.
The higher amount of appropriation lapses was used to support an additional
$79.8 million in fiscal 1997 supplemental appropriations to those proposed in
February 1997. Supplemental appropriations for fiscal 1997 totaled $169.3
million. The largest supplemental appropriations included $100.1 million for
medical assistance costs due to implementation of managed medical care for a
portion of the medical assistance caseload, and an additional $50 million for
bond debt service for potential use to produce present value savings.
Fiscal 1998 Financial Results (GAAP Basis). For fiscal 1998,
General Fund (including the Tax Stabilization Reserve Fund) assets increased
$705.1 million and liabilities rose by $111.1 million during the fiscal year.
These changes contributed to a $310.3 million rise in the undesignated-
unreserved balance for June 30, 1998 to $497.6 million, the highest level
achieved since audited GAAP reporting was instituted in 1984 for the
Commonwealth. Fiscal 1998 total revenues and other sources rose 4.3% led by an
11.1% increase in other revenues, largely charges for sales and services and
investment income. Tax revenues rose 4.2%.
Expenditures and other uses during fiscal 1998 rose by 4.5%.
Program areas with the largest percentage increase for the fiscal year were
economic development and assistance (21.3%), transportation (19.3%) and general
government (14.3%). A drop in general government expenditures for fiscal 1997
exaggerates the increase for fiscal 1998.
Budgetary Basis. Operations during the 1998 fiscal year increased
the unappropriated balance of Commonwealth revenues during that period by $86.4
million to $488.7 million at June 30, 1998 (prior to transfers to the Tax
Stabilization Reserve Fund). Higher than estimated revenues, offset in part by
increased reserves for tax refunds and by slightly lower expenditures than
budgeted were responsible for the increase. Transfers to the Tax Stabilization
Reserve Fund for fiscal 1998 operations total $223.3 million consisting of $73.3
million representing the required transfer of 15% of the ending unappropriated
surplus balance, plus an additional $150 million authorized by the General
Assembly when it enacted the fiscal 1999 budget.
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With these transfers, the balance in the Tax Stabilization Reserve Fund exceeds
$668 million and represents 3.7% of fiscal 1998 revenues.
Commonwealth revenues (prior to tax refunds) during the fiscal
year totaled $18,123.2 million, $676.1 million (3.9%) above the estimate made at
the time the budget was enacted. Tax revenue received in fiscal 1998 grew 4.8%
over tax revenues received during fiscal 1997. This rate of increase includes
the effect of legislated tax reductions that affected receipts during both
fiscal years and therefore understates the actual underlying rate of growth of
tax revenue during fiscal 1998. Receipts from the personal income tax produced
the largest single component of higher revenues during fiscal 1998. Personal
income tax collections were $416.6 million over estimate representing an 8.5%
increase over fiscal 1997 receipts. Sales and use tax receipts were $6.2 million
over estimate representing a 1.9% increase, although receipts from non-motor
vehicle sales were 0.7% below estimate. Sales tax receipts on motor vehicle
sales were above estimate and offset the shortfall in non-motor vehicle sales
tax receipts. Aggregate receipts from corporate taxes exceeded the estimate for
the fiscal year, led by the capital stock and franchise tax and the corporate
net income tax, which were over estimate by 7.8% and 2.7%, respectively.
Receipts from the utility property tax, a state corporate tax, were below
estimate by $102.3 million or 30.8%. This shortfall was due in large part to the
recent deregulation of the electric industry in Pennsylvania. Non-tax revenues
were $27.5 million (8.6%) over estimate, mostly due to greater than anticipated
interest earnings for the fiscal year.
Reserves established during fiscal 1998 for tax refunds totaled
$910 million. This amount is a $370 million increase over tax refund reserves
for fiscal 1997 representing an increase of 68.5%. The fiscal 1998 amount
includes a one-time addition intended to fund all fiscal 1998 tax refund
liabilities, including that portion to be paid during fiscal 1999. In prior
fiscal years, tax refunds generally were budgeted for the year in which the
disbursement was anticipated to occur. This change in the recognition of tax
refund liabilities on a budgetary basis helped eliminate the negative difference
between the budgetary basis unappropriated balance and the GAAP basis
unreserved-undesignated balance for the 1998 fiscal year.
Expenditures from all fiscal 1998 appropriations of Commonwealth
revenues totaled $17,229.8 million (excluding pooled financing expenditures and
net of current year appropriation lapses). This amount represents an increase of
4.5% over fiscal 1997 appropriation expenditures. Lapses of appropriation
authority during the fiscal year totaled $161.8 million, including $58.8 million
from fiscal 1998 appropriations. These appropriation lapses were used to fund
$120.5 million of supplemental fiscal 1998 appropriations. Of the total fiscal
1998 supplemental appropriations, an amount of $111.6 million was made to the
Department of Public Welfare, mostly for the medical assistance program. The
need for supplemental appropriations arose from the delay in implementation of
the movement of the final client group to the HealthChoices managed health care
program resulting in unanticipated fee for service costs.
Fiscal 1999 Budget (Budgetary Basis). The budget for fiscal 1999
was enacted in April 1998 at which time the official revenue estimate for the
1999 fiscal year was established at $18,456.6 million. Enactment of tax
legislation in November 1998 reduced estimated revenues by a net $2.4 million.
Only Commonwealth funds are included in the official revenue estimate. The
official revenue estimate is based on an economic forecast for national gross
domestic product, on a year-over-year basis, to slow from an estimated
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annualized 3.9% rate in the fourth quarter of 1997 to a projected 1.8%
annualized growth rate by the second quarter of 1999. The forecast of slowing
economic activity is based on the expectation that consumers will reduce their
pace of spending, particularly on motor vehicles, housing and other durable
goods. Business is also expected to trim its spending on fixed investments.
Foreign demand for domestic goods is expected to decline in reaction to economic
difficulties in Asia and Latin America, while an economic recovery in Europe is
expected to proceed slowly. The underlying growth rate, excluding any effect of
scheduled or proposed tax changes, for the General Fund fiscal 1999 official
revenue estimate is 3.0% over actual fiscal 1998 revenues. When adjusted to
include the estimated effect of enacted tax changes, fiscal 1999 Commonwealth
revenues are projected to increase by 1.6% over actual Commonwealth revenues for
fiscal 1998.
Tax reductions enacted with the 1999 fiscal year budget totaled an
estimated $241.0 million for fiscal 1999. The major components of the enacted
tax reductions and their estimated fiscal 1999 cost are: (i) reduce the capital
stock and franchise tax rate from 12.75 mills to 11.99 mills ($72.5 million);
(ii) increase the eligibility income limit for qualification for personal income
tax forgiveness ($57.1 million); (iii) eliminate personal income tax on gains
from the sale of an individual's residence ($30.0 million); (iv) extend the time
period from three to ten years over which net operating loss deductions may be
taken for the corporate net income tax ($17.8 million); (v) expand various sales
tax exemptions ($40.4 million); and (vi) reduce various other miscellaneous
items ($23.2 million). The major tax changes were enacted with January 1, 1998
effective dates. Consequently, the cost of these changes during fiscal 1999 may
be above the expected annualized cost of the changes.
Appropriations enacted for fiscal 1999 when the budget was adopted
in April 1998 were 4.1% ($713.2 million) above the appropriations enacted for
fiscal 1998 (including supplemental appropriations). Major increases in
expenditures budgeted for fiscal 1999 at that time included: (i) $249.5 million
in direct support of local school district education costs (local school
districts will also benefit from an estimated $104 million of reduced
contributions by school districts to their worker's retirement costs from a
reduced employer contribution rate); (ii) $60.4 million for higher education,
including scholarship grants; (iii) $56.5 million to fund the correctional
system, including $21 million to operate a new correctional facility; (iv)
$121.1 million for long-term care medical assistance costs; (v) $14.4 million
for technology and Year 2000 investments; (vi) $55.9 million to fund the first
year's cost of a July 1, 1998 annuitant cost of living increase for state and
school district employees; and (vii) $20 million to replace bond funding for
equipment loans for volunteer fire and rescue companies. The balance of the
increase is spread over many departments and program operations. In May 1999,
along with the adoption of the fiscal 2000 budget, supplemental fiscal 1999
appropriations totaling $357.8 million were enacted. Of this amount, $200
million was appropriated for general obligation debt service that will be
available for possible use to retire outstanding debt; $59 million to accrue the
fourth quarterly Commonwealth contribution to the School Employees' Retirement
System; and $90 million is proposed for the Public Welfare department to pay
additional medical assistance costs anticipated to occur in the current fiscal
year. With these additional amounts, total appropriations for fiscal 1999
represent a 6.2% increase over fiscal 1998 appropriations. An anticipated $180
million of appropriation lapses and anticipated additional revenues provide the
funding for the additional appropriations. Appropriation lapses in fiscal 1998
and 1997 were $161.8 million and $200.6 million respectively.
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Reserves for tax refunds for fiscal 1999 total $631.0 million, a
$26.2 million increase over the budget as enacted. This amount includes $33.1
million of tax refunds anticipated from the enacted fiscal 1999 tax changes and
included in the estimated cost of those changes. Reserves for tax refunds for
fiscal 1999 are $279.0 million below the reserve established for fiscal 1998.
The fiscal 1998 amount, as described above under "Fiscal 1998 Financial Results
(Budgetary Basis)," includes a one-time addition intended to fund all fiscal
1998 tax refund liabilities, including that portion to be paid during fiscal
1999. Without the necessity to pay fiscal 1998 tax refund liabilities from
fiscal 1999 reserves, the fiscal 1999 reserve need only be in an amount equal to
the estimated fiscal 1999 estimate for tax refund liabilities.
Current revenue estimates for fiscal 1999 anticipate $722 million
of receipts above the official estimate used in the enactment of the fiscal 1999
budget. As of the fiscal year through April 1999, revenues are $547 million over
the official estimate, principally due to receipts from the sales tax and the
personal income tax. The higher revenues, if maintained during the remainder of
the fiscal year, will more than offset the planned draw down of the $265.4
million beginning unappropriated balance. Using the most recent fiscal 1999
estimates for revenues and expenditures, the fiscal year-end unappropriated
surplus is projected to rise by $364.3 million to $629.7 million, before
transfers to the Tax Stabilization Reserve Fund. The transfer to the Tax
Stabilization Reserve Fund for fiscal 1999 is currently estimated at $244.5
million, including a $150 million one-time transfer authorized by the General
Assembly in May 1999. With this transfer, the Tax Stabilization Reserve fund
will total approximately $932 million and represent 4.9% of General Fund
Revenues.
Fiscal 2000 Budget (Budgetary Basis). The General Fund budget for
the 1999-2000 fiscal year was approved by the General Assembly in May 1999. The
adopted budget includes estimated spending of $19,103.8 million and estimated
revenues (net of estimated tax refunds and enacted tax changes) of $18,718.5
million. Funds to cover the $342.1 million difference between estimated revenues
and projected spending will be obtained from a draw down of the projected fiscal
1999 year-end balance. The level of proposed spending represents an increase of
3.8% over the revised spending authorized for fiscal 1999 of $18,360.3 million.
Enacted tax changes effective for fiscal 2000 total a net reduction of $380.2
million for the General Fund.
The estimate of Commonwealth revenues for fiscal 1999 is based on
an economic forecast for real gross domestic product to grow at a 1.4% rate from
the second quarter of 1999 to the second quarter of 2000. Growth of real gross
domestic product is expected to be restrained by a slowing of the rate of
consumer spending to a level consistent with personal income gains and by
smaller gains in business investment in response to falling capacity utilization
and profits. Slowing economic growth is expected to cause the unemployment rate
to rise through the fiscal year but inflation is expected to remain quite
moderate. Trends for the Pennsylvania economy are expected to maintain their
close association with national economic trends. Personal income growth is
anticipated to remain slightly below that of the U.S. while the Pennsylvania
unemployment rate is anticipated to be very close to the national rate.
Commonwealth revenues (excluding the estimated cost of enacted tax
reductions) are projected to increase by 3.1% over revised fiscal 1999
estimates. Tax revenues are expected to rise by 2.9%, led by a 31% increase in
the gross receipts tax. This large increase represents the receipt of the
revenue neutral reconciliation charge enacted as a part of the electric
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deregulation legislation in 1996 that is intended to cover tax revenue losses to
Pennsylvania from electricity deregulation. The structure of the revenue neutral
reconciliation charge causes it to recover revenue losses with an approximate
one year lag. Projected increases for the sales and use tax and the personal
income tax are estimated at 2.2% and 2.9%, respectively. These estimates compare
to estimates of 5.5% and 4.4%, respectively, for fiscal 1999. Non-tax
Commonwealth revenues are estimated to total $324 million, a 6.6% reduction from
the estimate for fiscal 1999. The largest items accounting for the reduction are
lower receipts from sale of state property and lower investment earnings.
Appropriations from Commonwealth funds are projected to increase
by 3.8% over revised fiscal 1999 appropriations. Program areas that have been
proposed to receive funding increases above the 2.9% average include corrections
(4%), basic education (3%), special education (6.2%), and medical assistance
(6.1%).
The fiscal 2000 budget continues the Governor's emphasis of tax
cuts targeted to making Pennsylvania competitive for attracting new employment
opportunities and retaining existing jobs. Enacted tax cuts for fiscal 2000
total an estimated $380.2 million in the General Fund. The major components of
the tax reductions and their estimated fiscal 2000 General Fund cost are: (i)
reduce the tax rate for the capital stock and franchise taxes by one mill to
10.99 mills ($91.6 million); (ii) repeal the gross receipts tax on regulated gas
companies ($78.4 million); (iii) lower the current $300 minimum capital stock
and franchise tax to $200 ($16.2 million); (iv) raise the annual cap on net
operating loss credits per taxpayer from $1 million to $2 million ($35.5
million); (v) increase the weighting from 50% to 60% of the sales factor used in
the apportionment formula to calculate Pennsylvania taxable income for corporate
net income purposes ($31.5 million); (vi) restructure the public utility realty
tax ($54.6 million); and (vii) expand the income limit to qualify for personal
income tax forgiveness by $500 to $6,500 per dependent ($7.5 million). Most
major changes are effective January 1, 1999 except for the repeal of gross
receipts tax on natural gas companies which is to be effective after the state
gas utility industry is deregulated. The retroactive nature of tax reductions
will not affect fiscal 1999 estimated revenues, but is expected to result in
revenue reduction in fiscal 2000 that are likely above reductions in fiscal
2001.
Tax Structure. The Commonwealth, through its principal operating
funds -- the General Fund, the Motor License Fund and the State Lottery Fund --
receives over 57% of its revenues from taxes levied by the Commonwealth.
Interest earnings, licenses and fees, lottery ticket sales, liquor store
profits, miscellaneous revenues, augmentations and federal government grants
supply the balance of receipts to these funds.
Tax and fee proceeds relating to motor fuels and vehicles are
constitutionally dedicated for highway purposes and are deposited into the Motor
License Fund. Lottery ticket sale revenues are deposited into the State Lottery
Fund and are reserved by statute for programs to benefit senior citizens.
Revenues, other than those specified to be deposited in a particular fund, are
deposited into the General Fund.
The major tax sources for the General Fund of the Commonwealth are
the sales tax enacted in 1953, the personal income tax enacted in 1971, and the
corporate net income tax which in its present form dates back to 1935. The last
restructuring of the Commonwealth's tax system occurred with the
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enactment of the Tax Reform Code of 1971 that codified many of the taxes levied
by the Commonwealth.
The major tax sources for the Motor License Fund are the liquid
fuels taxes and the oil company franchise tax. The Motor License Fund also
receives revenues from fees levied on heavy trucks and from taxes on fuels used
for aviation purposes. Use of these revenues is restricted to the repair and
construction of highway bridges and aviation programs, respectively.
The Tax Stabilization Reserve Fund was established in 1986 to
provide a source of funds that can be used to alleviate emergencies threatening
the health, safety or welfare of the Commonwealth's citizens or to offset
unanticipated revenue shortfalls due to economic downturns. Income to the fund
is provided by specific appropriation from available balances of other funds by
the General Assembly, from investment income and by the transfer to the Tax
Stabilization Reserve Fund of 15% of the budgetary basis unappropriated surplus
in the General Fund at the close of any fiscal year. In addition, the proceeds
received from the disposition of assets of the Commonwealth not specified to be
deposited elsewhere are also to be deposited into the Tax Stabilization Reserve
Fund. The Commonwealth has not prepared estimates of such sales.
Assets of the Tax Stabilization Reserve Fund may be used only upon
the recommendation by the Governor and approval by the vote of two-thirds of the
members of each house of the General Assembly. In February 1991, in response to
a projected fiscal 1991 General Fund budgetary deficit caused by lower revenues
and higher expenditures than budgeted, the Governor recommended, and the General
Assembly authorized, the available balance of $133.8 million in the Tax
Stabilization Reserve Fund be used to pay medical assistance and special
education costs not covered by budgeted funds. Since 1991, deposits to the fund
and interest earnings have produced a $668.8 million balance in the Tax
Stabilization Reserve Fund as of December 31, 1998. In May 1999, the General
Assembly authorized a one-time transfer of an additional $150 million from the
General Fund to the Tax Stabilization Reserve Fund. With this one-time transfer
and a projected $94.5 million transfer representing 15% of the fiscal 1999
year-end balance, the fund balance is anticipated to be in excess of $932
million following all fiscal 1999 transfers.
Debt Limits and Outstanding Debt. The Pennsylvania Constitution
permits the Commonwealth to issue the following types of debt: (i) debt to
suppress insurrection or rehabilitate areas affected by disaster, (ii)
electorate approved debt, (iii) debt for capital projects subject to an
aggregate debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years, and (iv) tax anticipation notes payable in the
fiscal year of issuance. All debt except tax anticipation notes must be
amortized in substantial and regular amounts.
Outstanding general obligation debt totaled $4,724.5 million on
June 30, 1998, a decrease of $70.6 million from June 30, 1997. A $81.7 million
increase in sinking fund balances during fiscal 1998 accounted for all of this
decrease. Over the 10-year period ending June 30, 1998, total outstanding
general obligation debt increased at an annual rate of 0.1%. Within the most
recent 5-year period, outstanding general obligation debt has decreased at an
annual rate of 1.3%. The decline in outstanding debt is due to the
Commonwealth's current policy to keep debt issuance amounts in close proximity
to debt retirement amounts, the use of current funding for highway
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projects, and an increase in sinking fund balances during fiscal 1998 of $81.7
million.
General obligation debt for non-highway purposes of $4,082.4
million was outstanding on June 30, 1998. Outstanding debt for these purposes
increased $35.5 million since June 30, 1997. An increase in sinking fund
balances of $81.7 million mitigated the increase. For the period ending June 30,
1998, the 10-year and 5-year average annual compounded growth rate for total
outstanding debt for non-highway purposes has been 3.3% and 1.9%, respectively.
In its current debt financing plan, Commonwealth infrastructure investment
projects include improvement and rehabilitation of existing capital facilities,
such as water supply systems, and construction of new facilities, such as
prisons, transit facilities, economic development and community facilities, and
public buildings. The debt financing plan also includes a disaster relief
program enacted by the General Assembly in June of 1996.
Outstanding general obligation debt for highway purposes was
$642.1 million on June 30, 1998, a decrease of $106.1 million from June 30,
1997. Highway outstanding debt has declined over the most recent 10-year and
5-year periods ending June 30, 1998 by the annual average rates of 9.5% and
13.4%, respectively. The decline in outstanding highway debt is due to the
policy begun in 1980 of funding highway capital projects with current revenues
except for various limited exceptions. No debt issuance for highway capital
projects is currently planned.
The Commonwealth may incur debt to fund capital projects for
community colleges, highways, public improvements, transportation assistance,
flood control, redevelopment assistance, site development and the Pennsylvania
Industrial Development Authority. Before a project may be funded, it must be
itemized in a capital budget bill adopted by the General Assembly. An annual
capital budget bill states the maximum amount of debt for capital projects that
may be incurred during the current fiscal year for projects authorized in the
current or previous years' capital budget bills. Capital projects debt is
subject to a constitutional limit on debt. As of December 31, 1998, $4,791.4
million of capital projects debt was outstanding.
The issuance of electorate approved debt is subject to the
enactment of legislation which places on the ballot the question of whether debt
shall be incurred. Such legislation must state the purposes for which the debt
is to be authorized and, as a matter of practice, includes a maximum amount of
funds to be borrowed. Upon electorate approval and enactment of legislation
implementing the proposed debt-funded program, bonds may be issued. As of
December 31, 1998, the Commonwealth had $881.4 million of electorate approved
debt outstanding.
Debt issued to rehabilitate areas affected by disasters is
authorized by specific legislation. The Commonwealth had $51.3 million of
disaster relief debt outstanding as of December 31, 1998.
Due to the timing of major tax payment dates, the Commonwealth's
cash receipts are generally concentrated in the last four months of the fiscal
year, from March through June. Disbursements are distributed more evenly
throughout the fiscal year. As a result, operating cash shortages can occur
during certain months of the fiscal year. The Commonwealth engages in short-term
borrowing to fund expenses within the fiscal year through the sale of tax
anticipation notes. Currently, the Commonwealth has no tax anticipation notes
outstanding. The fiscal 1999 budget includes the issuance of $560 million of
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tax anticipation notes. The Commonwealth has no plans to issue tax anticipation
notes for fiscal 1999.
Pending the issuance of bonds, the Commonwealth may issue bond
anticipation notes subject to the applicable statutory and constitutional
limitations generally imposed on bonds. The term of such borrowings may not
exceed three years. Currently, $60 million of bond anticipation notes are
authorized to be issued in the form of commercial paper notes. All bond
anticipation notes issued under this program must mature by February 2, 2000. As
of April 30, 1999, $21.4 million was issued and outstanding.
Certain state-created organizations have statutory authority to
issue debt for which state appropriations to pay debt service thereon are not
required. The debt of these organizations is supported by assets of, or revenues
derived from, the various projects financed and is not an obligation of the
Commonwealth. Some of these agencies, however, are indirectly dependent on
Commonwealth appropriations. These entities include: Delaware River Joint Toll
Bridge Commission, Delaware River Port Authority, Pennsylvania Economic
Development Financing Authority, Pennsylvania Energy Development Authority,
Pennsylvania Higher Education Assistance Agency, Pennsylvania Higher Educational
Facilities Authority, Pennsylvania Industrial Development Authority,
Pennsylvania Infrastructure Investment Authority, Pennsylvania State Public
School Building Authority, Pennsylvania Turnpike Commission, and Philadelphia
Regional Port Authority. As of June 30, 1998, the aggregate outstanding
indebtedness of these entities was $8,518.0 million.
The Pennsylvania Housing Finance Agency ("PHFA"), as of June 30,
1998, had $2,716.4 million of revenue bonds outstanding. The statute creating
PHFA provides that if there is a potential deficiency in the capital reserve
fund or if funds are necessary to avoid default on interest, principal or
sinking fund payments on bonds or notes of PHFA, the Governor, upon notification
from PHFA, shall place in the budget of the Commonwealth for the next succeeding
year an amount sufficient to make up any such deficiency or to avoid any such
default. The budget as finally adopted by the General Assembly may or may not
include the amount so placed therein by the Governor. PHFA is not permitted to
borrow additional funds so long as any deficiency exists in the capital reserve
fund.
The Hospitals and Higher Education Facilities Authority of
Philadelphia, as of June 30, 1998, had $21.1 million of bonds outstanding which
benefit from a moral obligation of the Commonwealth's Department of Public
Welfare to request a budget appropriation to make up any deficiency in the debt
service reserve fund for said bonds. The budget as finally adopted may or may
not include the amount requested.
The Commonwealth, through several of its departments and agencies,
has entered into various agreements to lease, as lessee, certain real property
and equipment and to make lease rental payments. Some of those lease payments
are pledged as security for various outstanding debt obligations issued by
certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law to
appropriate or otherwise provide moneys from which the lease payments are to be
paid. The obligations to be paid from such lease payments are not bonded debt of
the Commonwealth.
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The Commonwealth maintains contributory benefit pension plans
covering all state employees, public school employees and employees of certain
other state-related organizations. Unfunded actuarial accrued liabilities for
the Public School Employees' Retirement Fund as of June 30, 1998 were negative
$3,833 million, and for the State Employees' Retirement Fund were negative
$1,277 million as of December 31, 1997.
Municipal Finance
Local Finance. The Local Government Unit Debt Act (Act 52 of 1978,
as amended) (the "Debt Act") establishes debt limits for local government units.
Local government units include municipalities (except a first class city or
county), school districts and intermediate units. The Act establishes three
classes of debt for a local government unit: (i) electoral debt (debt incurred
with the approval of the electors of the municipality for which there is no
limitation on the amount that may be incurred); (ii) nonelectoral debt (debt of
a local government unit not being electoral or lease rental debt); (iii) lease
rental debt (the principal amount of debt of an authority organized by a
municipality or debt of another local government unit, which debt is to be
repaid by the local government unit through a lease, subsidy contract, guarantee
or other form of agreement evidencing acquisition of a capital asset, payable or
which may be payable out of tax revenues and other general revenues. Each local
government unit is subject to a limitation as to the amount of class "ii" and
class "iii" debt which may be issued which is based upon such local government
unit's Borrowing Base.
Borrowing Base is defined in the Debt Act as the annual arithmetic
average of the total revenues for the three full fiscal years ended next
preceding the date of the incurring of nonelectoral debt or lease rental debt.
Total revenues for the purposes of the Debt Act excludes, inter alia, certain
state and federal subsidies and reimbursements, certain pledged revenues,
interest on pledged funds and nonrecurring items.
The debt limitations applicable to the various local government
units are set forth below:
Nonelectoral plus
Nonelectoral Lease Rental
------------ -----------------
First Class
School District 100% of Borrowing Base 200% of Borrowing Base
Other School
Districts N/A 225% of Borrowing Base
County 300% of Borrowing Base 400% of Borrowing Base
Other 250% of Borrowing Base 350% of Borrowing Base
A county may utilize an additional debt limit of 100% of its
Borrowing Base for additional nonelectoral or additional lease rental debt, or
both, if such county has assumed countywide responsibility for hospitals and
other public health services, air and water pollution control, flood control,
environmental protection, water distribution and supply systems, sewage and
refuse collection and disposal systems, education at any level, highways, public
transportation, or port operations, but such additional debt limit may be so
utilized only to provide funds for and towards the costs of capital facilities
for any or any combination of the foregoing purposes.
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City of Philadelphia. The City of Philadelphia ("Philadelphia") is
the largest city in the Commonwealth, with an estimated population of 1,585,577
according to the 1990 Census. Philadelphia functions both as a city of the first
class and a county for the purpose of administering various governmental
programs.
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. At this time, Philadelphia is operating under a five-year fiscal
plan approved by PICA on June 9, 1998.
PICA has issued $2,371.7 million of its Special Tax Revenue Bonds
in the following series: Series of 1992 in the amount of $474.6 million; Series
of 1993 in the amount of $643.4 million; Series of 1993A in the amount of $178.7
million (issued to advance refund a portion of the Series of 1992); Series of
1994 in the amount of $122.0 million; Series of 1996 in the amount of $343.0
million (issued to advance refund the Series of 1994 and the remaining
outstanding portion of the Series of 1992); and Series of 1999 in the amount of
$610 million (issued to advance refund the Series of 1993). This financial
assistance has included the refunding of certain city general obligation bonds,
the funding of capital projects and the liquidation of the cumulative General
Fund balance deficit of Philadelphia as of June 30, 1992 of $224.9 million. The
audited General Fund balance of Philadelphia as of June 30, 1998 showed a
surplus of approximately $169.2 million.
No further bonds are to be issued by PICA for the purpose of
financing a capital project or deficit as the authority for such bond sales
expired December 31, 1994. PICA's authority to issue debt for the purpose of
financing a cash flow deficit expired on December 31, 1996. Its ability to
refund existing outstanding debt is unrestricted. PICA had $1,054.3 million in
special revenue bonds outstanding as of April 15, 1999.
Litigation. According to the Official Statement dated June 1, 1999
describing General Obligation Bonds of the Commonwealth of Pennsylvania, the
Office of Attorney General and the Office of General Counsel have reviewed the
status of pending litigation against the Commonwealth, its officers and
employees, and have identified the following cases as ones where an adverse
decision could materially affect the Commonwealth's governmental operations.
Listed below are all litigation items so identified that may have a material
effect on government operations of the Commonwealth and consequently, the
Commonwealth's ability to pay debt service on its obligations.
Under Act No. 1978-152 approved September 28, 1978, as amended,
the General Assembly approved a limited waiver of sovereign immunity. Damages
for any loss are limited to $250,000 for each person and $1 million for each
accident. The Supreme Court of Pennsylvania has held that this limitation is
constitutional. Approximately 3,500 suits against the Commonwealth remain open.
Tort claim payments for the departments and agencies, other than the Department
of Transportation, are paid from departmental and agency operating and program
appropriations. Tort claim payments for the Department of Transportation are
paid from an appropriation from the Motor License Fund. The Motor License Fund
tort claim appropriation for fiscal 1999 is $20.0 million.
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Dom Giordano v. Tom Ridge, Governor, et al. On February 12, 1999,
Dom Giordano, a taxpayer of the Commonwealth of Pennsylvania, filed in the
Commonwealth Court of Pennsylvania a petition for review requesting that
Commonwealth Court declare that Chapter 5 (relating to sports facilities
financing) of the Capital Facilities Debt Enabling Act (enacted by Act 199-1)
violates Article VIII, ss.ss. 7 and 8, of the Pennsylvania Constitution. Also
seeking an order enjoining any action under Chapter 5 of the Act, Mr. Giordano
named as respondents the Commonwealth of Pennsylvania, the Governor, the
Attorney General, and the Cities of Philadelphia and Pittsburgh.
Along with his petition for review, Mr. Giordano filed an
application for special relief in the form of a preliminary injunction.
Following a hearing held February 25, 1999, Commonwealth Court denied Mr.
Giordano's application for preliminary injunction. Giordano appealed the denial
of a preliminary injunction to the Supreme Court of Pennsylvania and asked that
court for an injunction pending appeal. The Supreme Court denied the request for
an injunction pending appeal on March 26, 1999, and directed the filing of
briefs for consideration of the merits of the appeal no later than April 9,
1999. The appeal remains pending before the Supreme Court.
In response to the petition for review, the respondents on
February 22, 1999, filed in Commonwealth Court preliminary objections in the
nature of demurrer. In their preliminary objections, the respondents have asked
Commonwealth Court to dismiss the petitioner's action with prejudice. The
respondents filed their brief in support of preliminary objections on April 15,
1999, and the petitioner's brief in opposition was due to be filed in May. The
Commonwealth Court, sitting en banc, heard oral argument regarding the
respondents' preliminary objections in Philadelphia on May 19, 1999.
Powell v. Ridge. On March 9, 1998, several residents of the City
of Philadelphia on behalf of themselves and their school-aged children, along
with the School District of Philadelphia, the Philadelphia Superintendent of
Schools, the chairman of the Philadelphia Board of Education, the City of
Philadelphia, the Mayor of Philadelphia, and several membership organizations
interested in the Philadelphia public schools, brought suit in the United States
District Court for the Eastern District of Pennsylvania against the Governor,
the Secretary of Education, the chairman of the State Board of Education, and
the State Treasurer. In their suit, the plaintiffs claimed that the defendants
are violating a regulation of the U.S. Department of Education promulgated under
Title VI of the Civil Rights Act of 1964 in that the Commonwealth's system for
funding public schools has the effect of discriminating on the basis of race.
The plaintiffs asked the court to declare the funding system to be
illegal, to enjoin the defendants from violating the regulation in the future,
to award counsel fees and costs, and to grant such other relief as the court
might find just and proper.
The district court allowed two petitions to intervene. The
Philadelphia Federation of Teachers intervened on the side of the plaintiffs,
while several leaders of the Pennsylvania General Assembly intervened on the
side of the defendants. In addition, the U.S. Department of Justice intervened
to defend against a claim made by the legislator intervenors that a statute
waiving states' immunity under the Eleventh Amendment to the U.S. Constitution
for Title VI claims is unconstitutional.
The defendants filed a motion to dismiss the complaint, arguing
that the plaintiffs sued the wrong parties, that some of the plaintiffs lack
standing or the capacity to sue the Commonwealth officials, that the plaintiffs'
claims
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are barred by the doctrines of claim preclusion and issue preclusion, and that
Congress has not authorized private parties to bring actions in court to enforce
the regulations of federal administrative agencies issued under Section 602 of
the Civil Rights Act of 1964.
The legislator intervenors filed a motion to dismiss or, in the
alternative, a motion for judgment on the pleadings. The legislator intervenors
claimed that the defendants are immune from suit under the Eleventh Amendment,
that the statute purporting to waive Eleventh Amendment immunity for Title VI
claims is not applicable or, in the alternative, is unconstitutional, and that
the plaintiffs have otherwise failed to state a claim.
On November 18, 1998, the district court granted in part and
denied in part the various motions by the parties. However, because the court
found ultimately that the plaintiffs had failed to state a claim under the Title
VI regulation at issue or under 42 U.S.C. ss. 1983, the court dismissed the
action in its entirety with prejudice.
The plaintiffs have appealed. Although the Court of Appeals denied
the appellants' motion for expedited consideration, the matter has now been
fully briefed and the parties await the scheduling of oral argument.
Baby Neal v. Commonwealth et al. In April of 1990, the American
Civil Liberties Union ("ACLU") and various named plaintiffs filed a lawsuit
against the Commonwealth, the City of Philadelphia, and others in federal court
seeking an order that, among other things, would require the Commonwealth to
provide additional funding for child welfare services. No figures for the amount
of funding sought are available. A similar lawsuit filed in the Commonwealth
Court of Pennsylvania, captioned as The City of Philadelphia, Hon. Wilson Goode,
et al. v. Commonwealth of Pennsylvania, Hon. Robert P. Casey, et al., was
resolved through a court approved settlement providing, inter alia, for more
Commonwealth funding for these services for fiscal year 1991 as well as a
commitment to pay to counties $30.0 million over five years. The Commonwealth
sought dismissal of the federal action based on, among other things, the
settlement of the Commonwealth Court case.
In January of 1992, the U.S. District Court for the Eastern
District of Pennsylvania, per Judge Robert Kelly, denied the ACLU's motion for
class certification and held that the "next friends" seeking to represent the
interests of the 16 minor plaintiffs in the case were inadequate
representatives. The Commonwealth filed a motion for summary judgment on most of
the counts in the ACLU's complaint on the basis of, among other things, Suter v.
Artist M. After the motion for summary judgment was filed, the ACLU filed a
renewed motion to certify sub-classes.
In December of 1994, the U.S. Court of Appeals for the Third
Circuit reversed Judge Robert Kelly's ruling, finding that he erred in refusing
to certify the class. Consistent with the Third Circuit's ruling, the District
Court certified the class, and the parties have resumed discovery.
In July of 1998, the plaintiffs entered into a settlement
agreement with the City of Philadelphia and related parties and submitted the
agreement to the District Court for approval. The District Court has
preliminarily approved the settlement. Recently, the remaining parties,
including the Commonwealth, have agreed to settle the claims made against them.
The Commonwealth has agreed to pay $100,000 to settle plaintiffs' $1.4 million
claim for attorneys' fees and to take other actions in exchange for a full and
final release and dismissal of
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the case against the Commonwealth parties. The settlement was approved by the
District Court on February 1, 1999, and the case was dismissed.
County of Allegheny v. Commonwealth of Pennsylvania. On December
7, 1987, the Supreme Court of Pennsylvania held in County of Allegheny v.
Commonwealth of Pennsylvania that the statutory scheme for county funding of
the judicial system is in conflict with the Pennsylvania Constitution. However,
the Supreme Court of Pennsylvania stayed its judgment to afford the General
Assembly an opportunity to enact appropriate funding legislation consistent with
its opinion and ordered that the prior system of county funding shall remain in
place until this is done.
On December 7, 1992, the State Association of County Commissioners
filed an action in mandamus seeking to compel the Commonwealth to comply with
the decision in County of Allegheny. The Court in Pennsylvania State Association
of County Commissioners v. Commonwealth of Pennsylvania issued the writ on July
26, 1996, and appointed retired Justice and Senior Judge Frank J. Montemuro, Jr.
as special master to devise and submit a plan for implementation no later than
January 1997. The Court indicated in its order that it intended to require
implementation by January 1, 1998.
Following issuance of the writ, the President Pro Tempore of the
Senate and the Speaker of the House filed a petition seeking reconsideration
from the Court. The Court has not acted on the petition.
On January 28, 1997, the Supreme Court granted Justice Montemuro's
request for a 90-day extension of time within to file his report. The Court also
announced the establishment of a tripartite committee, including representatives
of the Executive Department, the Legislative Department and Justice Montemuro,
to develop an implementation plan. On July 26, 1997, Justice Montemuro filed the
Interim Report of the Master wherein he recommended a four phase transition to
state funding of a unified judicial system, during each of which specified court
employees would transfer into the state payroll system. Justice Montemuro
recommended implementation of Phase I effective July 1, 1998 with completion of
the final phase early next century. Numerous objections to the report were filed
by September 1, 1997, but the Court has taken no action on them.
As Phase I of his proposed plan, Justice Montemuro recommended
that the General Assembly provide for an administrative structure of local court
administrators to be employed by the Administrative Office of Pennsylvania
Courts, a state agency. Numbering approximately 150 people statewide, local
court administrators are currently employees of the counties in which they work.
On April 22, 1998, the General Assembly enacted the General Appropriation Act of
1998, including an appropriation to the Supreme Court of approximately $12
million for the purpose of funding county court administrators. This
appropriation was designed to enable the Commonwealth to implement Phase I of
Justice Montemuro's plan. However, the Act also provides that no funds from the
appropriation may be expended until legislation has been approved by the General
Assembly providing for the payment of Commonwealth compensation of county court
administrators. Because no such legislation has yet been enacted, the $12
million appropriated to the Judicial Department cannot be used. In his budget
proposal for fiscal year 1999-2000, the Governor has recommended another
appropriation of $12 million for the same purpose.
On May 11, 1998, the Administrative Governing Board of the First
Judicial District (comprising the Court of Common Pleas of Philadelphia, the
Philadelphia Municipal Court, and the Traffic Court of Philadelphia) filed an
action in mandamus in the Commonwealth Court of Pennsylvania against the City of
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Philadelphia and several City officials, claiming that the City government had
failed to provide adequate funds for the operation of the courts of the First
Judicial District. The petitioners in that case have demanded that the court
order the City of Philadelphia to disburse all funds reasonably necessary for
the continued operation of the courts during fiscal year 1998-99 in an amount
totaling at least $110 million. The case is captioned Alex Bonavitacola, et al.
v. Edward G. Rendell, et al.
Also, on May 11, 1998, the City of Philadelphia and related
respondents in Bonavitacola filed a complaint joining the Commonwealth of
Pennsylvania, the General Assembly and its elected leadership as additional
respondents. In their complaint, the City respondents assert that under the
Supreme Court's order issued July 26, 1996 in Pa. State Ass'n of County of
Commissioners v. Commonwealth of Pennsylvania, the General Assembly was
obligated to enact a funding scheme for a unified court system no later than
January 1, 1998. Because the General Assembly has not done so, the City
respondents allege, the Commonwealth has failed to comply with the Supreme
Court's order. Thus, the City respondents have requested Commonwealth Court to
require the General Assembly to comply with the Supreme Court's mandamus order
and to order the Commonwealth to pay whatever sums are necessary to fund the
cost of operating the courts in fiscal year 1998-99. The First Judicial District
Governing Board joined in the City respondents' request as an alternative to its
demanded relief against the City defendants.
On June 15, 1998, upon motion of the First Judicial District
Governing Board, the Supreme Court of Pennsylvania assumed extraordinary
jurisdiction over the case and directed Commonwealth Court, on an expedited
basis, to prepare proposed findings of fact and conclusions of law. Acting
pursuant to the Supreme Court's June 15, 1998 order, President Judge James
Gardner Colins of Commonwealth Court on June 17, 1998 issued findings of fact,
conclusions of law and a proposed order. In his proposed order, President Judge
Colins recommended that the Supreme Court order the President of the
Philadelphia City Council immediately to introduce legislation to fund the
courts of the First Judicial District for fiscal year 1998-99 and to take all
necessary steps to ensure its passage. President Judge Colins also recommended
that the Supreme Court order the General Assembly to pass legislation, prior to
June 30, 1999, to fund the entire state judicial system. By order entered June
23, 1998, Commonwealth Court forwarded its findings of fact and conclusions of
law and proposed order to the Supreme Court for final disposition. The
Commonwealth and the General Assembly have objected to President Judge Colins'
proposed order.
Subsequent to Commonwealth Court's issuance of its findings of
fact, conclusions of law and proposed order, the City Council and Mayor of
Philadelphia acceded partially to President Judge Colins' proposed mandate that
the City fund the First Judicial District's courts for fiscal year 1998-99. In
June 1998, the City enacted an ordinance transferring to the First Judicial
District funds sufficient to enable the Philadelphia Court system to operate
through December 31, 1998, thus obviating the First Judicial District's request
for emergency relief. The First Judicial District petitioners and the City of
Philadelphia respondents, however, continue to press their demands that the
General Assembly be required to enact legislation providing for state funding of
the courts. In addition, the County of Allegheny has petitioned the Supreme
Court for leave to intervene in the Bonavitacola case to secure the same relief
against the Commonwealth -- an order requiring the Commonwealth to fund its
courts. The Bonavitacola case remains pending before the Supreme Court for
disposition.
On November 25, 1998, the First Judicial District Governing Board
filed with the Supreme Court a renewed motion for entry of an order providing
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emergency relief. In their renewed motion, the Bonavitacola plaintiffs asked the
court to order the City of Philadelphia to provide funds to the First Judicial
District's courts sufficient to maintain necessary judicial operations through
the end of the fiscal year. Though the Supreme Court issued no order, the City
apparently is continuing its funding of the courts.
Bank Shares Tax Litigation. On November 30, 1989, Fidelity Bank,
N.A. ("Fidelity") filed a declaratory judgment action in the Commonwealth Court
of Pennsylvania in which Fidelity raised various challenges to the
constitutional validity of the Amended Bank Shares Act (Act No. 1989-21) and
related legislation. After the Commonwealth Court ruled in favor of the
Commonwealth, finding no constitutional deficiencies, Fidelity, the
Commonwealth, and certain intervenor banks filed Notices of Appeal to the
Pennsylvania Supreme Court on August 5, 1994.
Pursuant to a Settlement Agreement dated as of April 21, 1995, the
Commonwealth agreed to enter a credit in favor of Fidelity in the amount of $4.1
million in settlement of the constitutional and non-constitutional issues,
including interest. This credit represents approximately five percent (5%) of
the potential claim of Fidelity, had the constitutional issues been resolved in
favor of Fidelity.
Pursuant to a separate Settlement Agreement dated as of April 21,
1995, the Commonwealth settled with the intervening banks, referred to as "New
Banks," in connection with issues concerning the New Bank Tax Credit law which
were raised in the above-referenced Pennsylvania Supreme Court appeal. As part
of the settlement, the Commonwealth agreed neither to assess nor attempt to
recoup any new bank tax credits which had been granted or taken by any of the
intervening banks. No expenditure of the Commonwealth funds is required in order
to implement this aspect of the settlement with the intervening banks, since the
credits have already been claimed by said banks.
Although the described settlements have eliminated the
Commonwealth's exposure to Fidelity and the intervening banks, other banks have
filed petitions which are currently pending with the Commonwealth Court. One of
these banks, Royal Bank of Pennsylvania, has filed a Stipulation of Facts with
the Court and in effect is proceeding forward on behalf of all the other banks.
These appeals raise the issues which were advanced by Fidelity, although not
brought to final resolution by the Pennsylvania Supreme Court. By decision dated
January 8, 1998, a panel of the Commonwealth Court ruled in favor of the
Commonwealth, finding no constitutional violation. Royal Bank filed exceptions.
On July 30, 1998, the Commonwealth Court, en banc, denied those exceptions.
Royal Bank has appealed to the Pennsylvania Supreme Court and briefing has been
completed. The Court has not scheduled oral argument.
Pennsylvania Association of Rural and Small Schools (PARSS) v.
Ridge. This litigation was filed in January 1991 by an association of rural and
small schools, several individual school districts, and a group of parents and
students, against former Governor Robert P. Casey and former Secretary of
Education Donald M. Carroll, Jr. The litigation challenges the constitutionality
of the Commonwealth's system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court, and one in the
United States District Court for the Middle District of Pennsylvania. The
federal court case has been indefinitely stayed, pending resolution of the state
court case. After a lengthy trial, Judge Dan Pellegrini on July 9, 1998, issued
an opinion and decree nisi dismissing the petitioners' claim in its entirety.
Judge Pellegrini held that Pennsylvania's system for funding public schools is
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constitutional under both the education clause and the equal protection clause
of the Pennsylvania Constitution.
On July 20, 1998, the petitioners filed a timely motion for
post-trial relief, taking exception to many of Judge Pellegrini's findings of
fact and conclusions of law, and again asking Commonwealth Court to declare
Pennsylvania's public school funding system to be unconstitutional. Also, the
petitioners on July 21, 1998, filed an application asking the Supreme Court of
Pennsylvania to assume extraordinary, plenary jurisdiction over the case to
decide one legal issue -- whether the petitioners' constitutional claims are
justiciable in the courts of the Commonwealth. The petitioners have asked the
court to consider the issue in conjunction with a separate appeal pending in
another case, Marrero v. Commonwealth of Pennsylvania, involving the same
provisions of the Constitution and a similar issue of justiciability. On
September 2, 1998, the Supreme Court granted the petitioners' application and
directed the filing of briefs.
The respondents asked the Supreme Court to clarify its assumption
of jurisdiction. Specifically, the respondents asked the Court to state
expressly that it will consider only the issue of justiciability, as requested
in the petitioners' application and not other issues presented in petitioners'
motion for post-trial relief pending in the Commonwealth Court. The Supreme
Court denied the respondents' motion and, therefore, the parties have addressed
in their briefs all of the issues presented in the petitioners' motion for
post-trial relief.
The Supreme Court has indicated that it will not hear oral
argument in the case but will decide the petitioners' motion based on the briefs
alone.
Pennsylvania Human Relations Commission v. School District of
Philadelphia, et al. v. Commonwealth of Pennsylvania, et al. On November 3,
1995, the Commonwealth of Pennsylvania and the Governor of Pennsylvania, along
with the City of Philadelphia and the Mayor of Philadelphia, were joined as
additional respondents in an enforcement action commenced in Commonwealth Court
in 1973 by the Pennsylvania Human Relations Commission against the School
District of Philadelphia pursuant to the Pennsylvania Human Relations Act. The
enforcement action was pursued to remedy unintentional conditions of segregation
in the public schools of Philadelphia. The Commonwealth and the City were joined
in the "remedial phase" of the proceeding "to determine their liability, if any,
to pay additional costs necessary to remedy the unlawful conditions found to
exist in the Philadelphia public schools."
On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking
Commonwealth Court to require the Commonwealth to "supply such funding as is
necessary for full compliance with the November 28, 1994 and other remedial
Orders of the Commonwealth Court." In addition, a group of intervenors (led by
ASPIRA of Pennsylvania) on March 4, 1996 filed a third-party complaint against
the Commonwealth of Pennsylvania and the City of Philadelphia requesting
Commonwealth Court to declare that "it is the obligation of the Commonwealth and
the City to supply the additional funds identified as necessary for the District
to fully comply with the orders of the Commonwealth Court," and to require the
Commonwealth and the City to supply such additional funding as is necessary for
the District to comply with the orders.
By order dated April 30, 1996, Judge Doris A. Smith of
Commonwealth Court overruled the Commonwealth's and the City's preliminary
objections seeking dismissal of the claims against them. The Commonwealth and
the City thereafter filed answers to the complaints, asserting numerous
defenses. The Commonwealth
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also asserted a cross-claim against the City of Philadelphia claiming that if
any party is liable, sole liability rests with the City; in the alternative, the
Commonwealth argued that if it is held to be liable, it has a right of indemnity
or contribution against the City.
Trial commenced on May 30, 1996. During the course of the trial,
upon motion of the Commonwealth, the Supreme Court of Pennsylvania on July 3,
1996 assumed extraordinary plenary jurisdiction and directed Judge Smith to
conclude the proceedings within 60 days and to file with the Supreme Court
findings of fact, conclusions of law and a final opinion. The Supreme Court
retained jurisdiction.
The evidence in the trial was concluded on July 11, 1996, after 19
days of trial. On August 20, 1996, Judge Smith issued an Opinion and Order. The
Order stated, in relevant part, as follows: 1. Judgment is entered in favor of
the School District of Philadelphia and ASPIRA and against the Commonwealth of
Pennsylvania and Governor of Pennsylvania. 2. Judgment is entered in favor of
the City of Philadelphia and the Mayor of Philadelphia on the ASPIRA claim and
on the cross-claim filed by the Commonwealth and Governor. 3. The Commonwealth
and Governor shall submit a plan to the Court within thirty days from the date
of this order detailing the means by which the Commonwealth will effectuate the
transfer of additional funds payable to the School District to enable it to
comply with the remedial order during fiscal 1997 and any future years during
which the School District of Philadelphia establishes its fiscal incapacity to
fund the remedial programs.
Judge Smith specifically found that "[b]ecause of the lack of
adequate funds to comply with the remedial order, the School District [of
Philadelphia] is entitled to additional resources for 1996-97 of $45.1 million."
On August 30, 1996, the Commonwealth filed with the Supreme Court of
Pennsylvania the following documents: 1. Exceptions to the Findings of Fact,
Conclusions of Law, Opinion and "Order" of the Honorable Doris A. Smith; 2.
Motion to Vacate Purported "Order" of the Honorable Doris A. Smith; and 3.
Notice of Appeal and Jurisdictional Statement. In their filings, the
Commonwealth requested the Supreme Court to enter judgments in favor of the
Commonwealth and the Governor on all claims.
On September 10, 1996, the Supreme Court of Pennsylvania issued an
order granting the Commonwealth's Motion to Vacate. The Court directed its
Prothonotary to establish a briefing schedule and a date for oral argument and
indicated that it would issue a further order limiting the issues to be
addressed. Finally, the Supreme Court stated that the Commonwealth Court "is
divested of jurisdiction of th[e] matter..., and all further proceedings in the
Commonwealth Court are stayed pending further order of th[e Supreme] Court." The
Supreme Court again retained jurisdiction.
On January 28, 1997, the Supreme Court issued an order directing
the parties to brief the following issues: 1. Whether the lower court erred in
its order of November 3, 1995, joining the Commonwealth and Governor, the City
of Philadelphia and Mayor, as additional respondents? 2. Whether the lower court
exceeded its authority in fashioning remedies to redress de facto segregation in
the Philadelphia School District? 3. Whether an enforcement action is to be
treated in the lower court's original or appellate jurisdiction? The Supreme
Court heard oral argument on these three issues on February 3, 1998 and took the
matter under advisement.
Ridge v. State Employees' Retirement Board. On August 1, 1983, the
United States Supreme Court in Arizona Governing Committee v. Norris, 463 U.S.
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1073 (1983) held that the use of gender distinct actuarial factors to calculate
pension benefits violated federal civil rights laws. Norris and the subsequent
Florida v. Long, 487 U.S. 223 (1988), limited required application of gender
neutral actuarial factors to benefits based on service credited on or after
August 1, 1983. Benefits based upon service credited before August 1, 1983,
could continue to be calculated using gender distinct actuarial factors. The
State Employees' Retirement Board and its sister agency, the Public School
Employees' Retirement Board, have been in full compliance with Norris, using
gender neutral factors for benefits based upon post-July 31, 1983 service and
gender distinct actuarial factors for benefits based upon pre-August 1, 1983
service.
On December 29, 1993, Joseph H. Ridge, former judge of the
Allegheny Court of Common Pleas, filed in the Commonwealth Court a Petition for
Review in the Nature of Complaint in Mandamus and for a Declaratory Judgment
against the State Employees' Retirement Board. Judge Ridge filed an amended
Petition for Review on February 7, 1995.
Judge Ridge alleges that the Retirement Board's use of gender
distinct actuarial factors for benefits based upon his pre-August 1, 1983
service violates Article I, Section 26 (equal protection) and Article I, Section
28 (equal rights) of the Pennsylvania Constitution. He seeks "topped up"
benefits equal to those that a similarly situated female would be receiving. Due
to the constitutional nature of the claim, it is possible that a decision
adverse to the Retirement Board would be applicable to other members of the
State Employees' Retirement System and Public School Employees' Retirement
System who accrued service between the effective date of the state
constitutional provisions and before August 1, 1983, and who have received, are
receiving, or will receive benefits less than those received by other members of
the systems because of their sex or the sex of their survivors' annuitants.
The Commonwealth Court granted the Retirement Board's preliminary
objections to Judge Ridge's claims for punitive damages, attorneys' fees and
compensatory damages other than a recalculation of his pension benefits should
he prevail. The Commonwealth Court also denied Judge Ridge's preliminary
objections to the Retirement Board's New Matter. On November 20, 1996, the
Commonwealth Court heard oral argument en banc on Judge Ridge's motion for
judgment of the pleadings. On February 13, 1997, the Commonwealth Court, after
oral argument en banc, denied Judge Ridge's motion for judgment on the
pleadings. The case is currently in discovery.
Yesenia Marrero, et al. v. Commonwealth, et al. On February 24,
1997, five residents of the City of Philadelphia, on their own behalf and on
behalf of their school-aged children, joined by the City of Philadelphia, the
School District of Philadelphia, and two non-profit organizations, ASPIRA, Inc.
of Pennsylvania and the Philadelphia Branch of the NAACP, filed in the
Commonwealth Court of Pennsylvania a civil action for declaratory judgment
against the Commonwealth of Pennsylvania, the General Assembly of Pennsylvania,
the presiding officers of the General Assembly, the Governor of Pennsylvania,
the State Board of Education, the Department of Education, and the Secretary of
Education.
Citing the Education Clause of the Constitution of Pennsylvania,
as well as provisions of the Declaration of Rights under the Pennsylvania
Constitution, the petitioners claim, inter alia, that Pennsylvania's "statutory
education financing system is unconstitutional as applied to the School District
[of Philadelphia];" that "[t]he system of funding public education violates the
constitutional mandate to provide a thorough and efficient system of public
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education in the City [of Philadelphia];" that "[t]he scheme for financing
public education precludes the Commonwealth from providing the constitutionally
required 'thorough and efficient system of public education' in the
circumstances faced by the School District [of Philadelphia];" and that
"Defendants have failed to provide the School District [of Philadelphia] with
the resources and other assistance necessary to provide all of its students with
the quality of education to which they are [c]onstitutionally entitled."
Petitioners seek an order that provides, inter alia, as follows: 1. A
declaration "that the Commonwealth has failed to fulfill its obligations to
provide for an adequate system of public schools in the School District [of
Philadelphia]." 2. A declaration "that the present statutory scheme employed for
funding public education in the Commonwealth as applied to the School District
[of Philadelphia] violates Article III, Section 14 of the Pennsylvania
Constitution." 3. A declaration "that the [l]egislature must amend the present
or enact new education legislation so as to assure that education funding for
the School District [of Philadelphia] accounts and makes adequate provision for
the greater and special educational challenges and needs of students in the
School District in order to redress their disadvantage."
The respondents filed preliminary objections seeking dismissal of
the action. On March 2, 1998, the Commonwealth Court sustained the respondents'
preliminary objections and dismissed the case on the grounds that the issues
presented are not justiciable. An appeal to the Supreme Court of Pennsylvania is
pending and briefing is complete. The Court has indicated that it will decide
the case based solely on the briefs; it will not hear oral argument.
Rite Aid of Pennsylvania, Inc. v. Houstoun. On March 24, 1997,
Rite Aid of Pennsylvania, Inc. ("Rite Aid") filed in the U.S. District Court for
the Eastern District of Pennsylvania a civil action against the Secretary of
Public Welfare. In its complaint, Rite Aid alleged that in promulgating
regulations on October 1, 1995 governing payment rates for prescription drugs
and related services provided to recipients of benefits under the Pennsylvania
Medical Assistance Program, the Secretary violated various provisions of Title
XIX of the Social Security Act (commonly known as the Medicaid Act) and
regulations of the U.S. Department of Health and Human Services, as well as
provisions of state law and federal constitutional due process.
On November 3, 1997, the District Court granted in part and denied
in part the parties' cross-motions for judgment on the pleadings. The court
granted judgment in favor of the Secretary on Rite Aid's federal due process
claim and Rite Aid's claim that the Secretary had violated a federal regulation
(42 C.F.R. ss. 447.205) requiring public notice 60 days prior to revising the
reimbursement rates. However, the court denied the Secretary's motion for
judgment on the pleadings regarding Rite Aid's procedural claim under 42 U.S.C.
ss. 1396(a)(30)(A). The court also granted judgment on the pleadings in favor of
Rite Aid on its claim that the Secretary violated a federal regulation (42
C.F.R. ss. 447.205(c)(4)) requiring the Secretary to identify a local agency
where the proposed reimbursement changes were available for public view.
After allowing the Pennsylvania Pharmacists Association ("PPA") to
intervene as a plaintiff, the District Court on May 8, 1998 granted a motion
filed by Rite Aid and PPA to limit its review of the Secretary's compliance with
42 U.S.C. ss. 1396(a)(30)(A) "to the information before [the Secretary] at the
time [she] made [her] decision to lower" the reimbursement rates.
On August 31, 1998, the District Court granted the motions of Rite
Aid and PPA for summary judgment and denied the cross-motion of the Secretary.
The court declared that the pharmacy reimbursement rates made effective after
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October 1, 1995, were adopted by the Secretary in violation of Section
1396(a)(30)(A) of the Medicaid Act and enjoined the Secretary from using those
rates to reimburse for any prescription drugs and related services provided to
Medicaid recipients on and after October 1, 1998. The court held that the
Secretary acted arbitrarily and capriciously by failing to consider whether the
revised rates were consistent with the statutory standards of efficiency,
economy, and quality of care.
The Secretary timely appealed the District Court's orders, and
Rite Aid and PPA filed cross-appeals in the U.S. Court of Appeals for the Third
Circuit. The Secretary filed motions to stay the District Court's injunction
order pending appeal. However, the District Court denied the motion on September
18, 1998, and the Court of Appeals denied the application for stay on October
26, 1998. The Court of Appeals, however, did grant the Secretary's motion for
expedited appeal. On March 22, 1999, the Court of Appeals reversed the District
Court's order and remanded for further proceedings. The Court of Appeals held
that the Secretary had not violated the Medicaid Act in adopting rates in 1995,
but the court remanded the case to allow the plaintiffs to pursue any claim
which they might have that the rates substantively do not satisfy the statutory
standard prescribed by 42 U.S.C. ss. 1396(a)(30)(A). The plaintiffs on April 5,
1999 filed an application for rehearing.
PUBLIC OFFERING
---------------
Offering Price. The secondary market Public Offering Price per
Unit is computed by adding to the aggregate bid price of the Bonds in the Trust
divided by the number of Units outstanding, an amount based on the applicable
sales charge times the aggregate offering price of the Bonds (see "Public
Offering Price" in Part A for the applicable sales charge for the Trust). A
proportionate share of accrued interest on the Bonds to the expected date of
settlement for the Units is added to the Public Offering Price. Accrued interest
is the accumulated and unpaid interest on a Bond from the last day on which
interest was paid and is accounted for daily by the Trust at the initial daily
rate set forth under "Summary of Essential Information" in Part A of this
Prospectus. This daily rate is net of estimated fees and expenses. The Public
Offering Price can vary on a daily basis from the amount stated in Part A in
accordance with fluctuations in the prices of the Bonds and the price to be paid
by each investor will be computed as of the date the Units are purchased. The
aggregate bid price evaluation of the Bonds is determined in the manner set
forth under "Trustee Redemption."
The Evaluator may obtain current bid or offering prices for the
Bonds from investment dealers or brokers (including the Sponsor) that
customarily deal in tax-exempt obligations or from any other reporting service
or source of information which the Evaluator deems appropriate.
The sales charge computed by the Evaluator is based upon the
number of years remaining to maturity of each Bond. Bonds will be deemed to
mature on their stated maturity dates unless bonds have been called for
redemption, funds have been placed in escrow to redeem them on an earlier call
date or are subject to a "mandatory put," in which case the maturity will be
deemed to be such other date.
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The table below sets forth the various sales charges based on the
length of maturity of each Bond:
As Percent of Public
Time to Maturity Offering Price
- ---------------- --------------
less than 6 months 0%
6 mos. to 1 year 1%
over 1 yr. to 2 yrs. 1 1/2%
over 2 yrs. to 4 yrs. 2 1/2%
over 4 yrs. to 8 yrs. 3 1/2%
over 8 yrs. to 15 yrs. 4 1/2%
over 15 years 5 1/2%
Accrued Interest. An amount of accrued interest which represents
accumulated unpaid or uncollected interest on a Bond from the last day on which
interest was paid thereon will be added to the Public Offering Price and paid by
the Certificateholder at the time Units are purchased. Since the Trust normally
receives the interest on Bonds twice a year and the interest on the Bonds in the
Trust is accrued on a daily basis (net of estimated fees and expenses), the
Trust will always have an amount of interest accrued but not actually received
and distributed to Certificateholders. A Certificateholder will not recover his
proportionate share of accrued interest until the Units are sold or redeemed, or
the Trust is terminated. At that time, the Certificateholder will receive his
proportionate share of the accrued interest computed to the settlement date in
the case of a sale or termination and to the date of tender in the case of
redemption.
Employee Discounts. Employees (and their immediate families) of
Reich & Tang Distributors, Inc. and its affiliates, Gruntal & Co., L.L.C. and of
any underwriter of a Trust, pursuant to employee benefit arrangements, may
purchase Units of a Trust at a price equal to the offering side evaluation of
the underlying securities in a Trust during the initial offering period and at
the bid side thereafter, divided by the number of Units outstanding plus a
reduced charge. Such arrangements result in less selling effort and selling
expenses than sales to employee groups of other companies. Resales or transfers
of Units purchased under the employee benefit arrangements may only be made
through the Sponsor's secondary market, so long as it is being maintained.
Distribution Of Units. Certain banks and thrifts will make 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.
Under the Glass-Steagall Act, banks are prohibited from underwriting 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.
The Sponsor intends to qualify the Units for sale in substantially
all States through the Underwriters and through dealers who are members of the
National Association of Securities Dealers, Inc. Units may be sold to dealers at
prices which represent a concession of up to (a) 4% of the Public Offering Price
for the Insured Municipal Securities Trust Series, (b) $25.00 per Unit for the
Insured Municipal Securities Trust Discount Series or (c) $33.00 per Unit,
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for the Insured Municipal Securities Navigator Trust, subject to the Sponsor's
right to change the dealers' concession from time to time. In addition, for
transactions of 1,000,000 Units or more, the Sponsor intends to negotiate the
applicable sales charge and such charge will be disclosed to any such purchaser.
Such Units may then be distributed to the public by the dealers at the Public
Offering Price then in effect. The Sponsor reserves the right to reject, in
whole or in part, any order for the purchase of Units. The Sponsor reserves the
right to change the discounts from time to time.
Sponsor's Profits. The Sponsor will receive a gross commission on
all Units sold in the secondary market equal to the applicable sales charge on
each transaction. (See "Offering Price".) In addition, in maintaining a market
for the Units (see "Sponsor Repurchase") the Sponsor will realize profits or
sustain losses in the amount of any difference between the price at which they
buy Units and the price at which they resell such Units.
Comparison of Public Offering Price, Sponsor's Repurchase Price
And Redemption Price. The secondary market Public Offering Price of Units will
be determined on the basis of the current bid prices of the Bonds in the Trust,
plus the applicable sales charge. The value at which Units may be resold in the
Secondary Market or redeemed will be determined on the basis of the current bid
prices of the Bonds without any sales charge. On the Evaluation Date, the Public
Offering Price and the Sponsor's initial Repurchase Price per Unit (each based
on the bid side evaluation of the Bonds in the Trust) each exceeded the
Redemption Price and the Sponsor's secondary market Repurchase Price per Unit
(based upon the current bid side evaluation of the Bonds in the Trust) by the
amounts shown under "Summary of Essential Information" in Part A of this
Prospectus. For this reason, among others (including fluctuations in the market
prices of such Bonds and the fact that the Public Offering Price includes the
applicable sales charge), the amount realized by a Certificateholder upon any
redemption of Sponsor repurchase of Units may be less than the price paid for
such Units.
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN
-------------------------------------------------------
The rate of return on an investment in Units of the Trust is
measured in terms of "Estimated Current Return" and "Estimated Long Term
Return".
Estimated Long Term Return is calculated by: (i) computing the
yield to maturity or to an earlier call date (whichever results in a lower
yield) for each Bond in a Trust's portfolio in accordance with accepted bond
practices, which practices take into account not only the interest payable on
the Bond but also the amortization of premiums or accretion of discounts, if
any; (ii) calculating the average of the yields for the Bonds in each Trust's
portfolio by weighing each Bond's yield by the market value of the Bond and by
the amount of time remaining to the date to which the Bond is priced (thus
creating an average yield for the portfolio of each Trust); and (iii) reducing
the average yield for the portfolio of each Trust in order to reflect estimated
fees and expenses of that Trust and the maximum sales charge paid by
Unitholders. The resulting Estimated Long Term Return represents a measure of
the return to Unitholders earned over the estimated life of each Trust. The
Estimated Long Term Return as of the day prior to the Evaluation Date is stated
for the Trust under "Summary of Essential Information" in Part A.
Estimated Current Return is computed by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price per Unit. In
contrast to the Estimated Long Term Return, the Estimated Current Return does
not
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take into account the amortization of premium or accretion of discount, if any,
on the Bonds in the portfolios of the Trust. Moreover, because interest rates on
Bonds purchased at a premium are generally higher than current interest rates on
newly issued bonds of a similar type with comparable rating, the Estimated
Current Return per Unit may be affected adversely if such Bonds are redeemed
prior to their maturity. On the day prior to the Evaluation Date, the Estimated
Net Annual Interest Income per Unit divided by the Public Offering Price
resulted in the Estimated Current Return stated for the Trust under "Summary of
Essential Information" in Part A.
The Estimated Net Annual Interest Income per Unit of the Trust
will vary with changes in the fees and expenses of the Trustee and the Evaluator
applicable to the Trust and with the redemption, maturity, sale or other
disposition of the Bonds in the Trust. The Public Offering Price will vary with
changes in the bid prices of the Bonds. Therefore, there is no assurance that
the present Estimated Current Return or Estimated Long Term Return will be
realized in the future.
A schedule of cash flow projections is available from the Sponsor
upon request.
RIGHTS OF CERTIFICATEHOLDERS
----------------------------
Certificates. Ownership of Units of the Trust is evidenced by
registered Certificates executed by the Trustee and the Sponsor. Certificates
may be issued in denominations of one or more Units and will bear appropriate
notations on their faces indicating which plan of distribution has been selected
by the Certificateholder. Certificates are transferable by presentation and
surrender to the Trustee properly endorsed and/or accompanied by a written
instrument or instruments of transfer. Although no such charge is presently made
or contemplated, the Trustee may require a Certificateholder to pay $2.00 for
each Certificate reissued or transferred and any governmental charge that may be
imposed in connection with each such transfer or interchange. Mutilated,
destroyed, stolen or lost Certificates will be replaced upon delivery of
satisfactory indemnity and payment of expenses incurred.
Interest And Principal Distributions. Interest received by the
Trust is credited by the Trustee to an Interest Account and a deduction is made
to reimburse the Trustee without interest for any amounts previously advanced.
Proceeds representing principal received from the maturity, redemption, sale or
other disposition of the Bonds are credited to a Principal Account.
Distributions to each Certificateholder from the Interest Account
are computed as of the close of business on each Record Date for the following
Payment Date and consist of an amount substantially equal to one-twelfth,
one-half or all of such Certificateholder's pro rata share of the Estimated Net
Annual Interest Income in the Interest Account, depending upon the applicable
plan of distribution. Distributions from the Principal Account (other than
amounts representing failed contracts, as previously discussed) will be computed
as of each semi-annual Record Date, and will be made to the Certificateholders
on or shortly after the next semi-annual Payment Date. Proceeds representing
principal received from the disposition of any of the Bonds between a Record
Date and a Payment Date which are not used for redemptions of Units will be held
in the Principal Account and not distributed until the second succeeding
semi-annual Payment Date. No distributions will be made to Certificateholders
electing to participate in the Total Reinvestment Plan. Persons who purchase
Units between
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a Record Date and a Payment Date will receive their first distribution on the
second Payment Date after such purchase.
Because interest payments are not received by the Trust at a
constant rate throughout the year, interest distributions may be more or less
than the amount credited to the Interest Account as of a given Record Date. For
the purpose of minimizing fluctuations in the distributions from the Interest
Account, the Trustee will advance sufficient funds, without interest, as may be
necessary to provide interest distributions of approximately equal amounts. All
funds in respect of the Bonds received and held by the Trustee prior to
distribution to Certificateholders may be of benefit to the Trustee and do not
bear interest to Certificateholders.
As of the first day of each month, the Trustee will deduct from
the Interest Account, and, to the extent funds are not sufficient therein, from
the Principal Account, amounts necessary to pay the expenses of the Trust (as
determined on the basis set forth under "Trust Expenses and Charges"). The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any applicable taxes or other governmental
charges that may be payable out of the Trust. Amounts so withdrawn shall not be
considered a part of the Trust's assets until such time as the Trustee shall
return all or any part of such amounts to the appropriate accounts. In addition,
the Trustee may withdraw from the Interest and Principal Accounts such amounts
as may be necessary to cover purchases of Replacement Bonds and redemptions of
Units by the Trustee.
The estimated monthly, semi-annual or annual interest distribution
per Unit will initially be in the amount shown under Summary of Essential
Information and will change and may be reduced as Bonds mature or are redeemed,
exchanged or sold, or as expenses of the Trust fluctuate. No distribution need
be made from the Principal Account until the balance therein is an amount
sufficient to distribute $1.00 per Unit.
Distribution Elections. Interest is distributed monthly,
semi-annually or annually, depending upon the distribution plan applicable to
the Unit purchased. Record Dates are the first day of each month for monthly
distributions, the first day of each June and December for semi-annual
distributions and the first day of each December for annual distributions.
Payment Dates will be the fifteenth day of each month following the respective
Record Dates.
Certificateholders purchasing Units in the secondary market will
initially receive distributions in accordance with the election of the prior
owner. Every October each Certificateholder may change his distribution election
by notifying the Trustee in writing of such change between October 1 and
November 1 of each year. (Certificateholders deciding to change their election
should contact the Trustee by calling the number listed on the back cover hereof
for information regarding the procedures that must be followed in connection
with this written notification of the change of election.) Failure to notify the
Trustee on or before November 1 of each year will result in a continuation of
the plan for the following 12 months.
Records. The Trustee shall furnish Certificateholders, in
connection with each distribution, a statement of the amount of interest, if
any, and the amount of other receipts, if any, which are being distributed,
expressed in each case as a dollar amount per Unit. Within a reasonable time
after the end of each calendar year the Trustee will furnish to each person who
at any time during the calendar year was a Certificateholder of record, a
statement showing (i) as to
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the Interest Account: interest received (including amounts representing interest
received upon any disposition of Bonds and earned original issue discount, if
any), amounts paid for purchases of Replacement Bonds and redemptions of Units,
if any, deductions for applicable taxes and fees and expenses of the Trust, and
the balance remaining after such distributions and deductions, expressed both as
a total dollar amount and as a dollar amount representing the pro rata share of
each Unit outstanding on the last business day of such calendar year; (ii) as to
the Principal Account: the dates of disposition of any Bonds and the net
proceeds received therefrom (including any unearned original issue discount but
excluding any portion representing accrued interest), deductions for payments of
applicable taxes and fees and expenses of the Trust, amounts paid for purchases
of Replacement Bonds and redemptions of Units, if any, and the balance remaining
after such distributions and deductions, expressed both as a total dollar amount
and as a dollar amount representing the pro rata share of each Unit outstanding
on the last business day of such calendar year; (iii) a list of the Bonds held
and the number of Units outstanding on the last business day of such calendar
year; (iv) the Redemption Price per Unit based upon the last computation thereof
made such calendar year; and (v) amounts actually distributed to
Certificateholders during such calendar year from the Interest and Principal
Accounts, separately stated, expressed both as total dollar amounts representing
the pro rata share of each Unit outstanding on the last business day of such
calendar year.
The Trustee shall keep available for inspection by
Certificateholders at all reasonable times during usual business hours, books of
record and account of its transactions as Trustee, including records of the
names and addresses of Certificateholders, Certificates issued or held, a
current list of Bonds in the portfolio and a copy of the Trust Agreement.
TAX STATUS
----------
All Bonds acquired by each Trust were accompanied by copies of
opinions of bond counsel to the issuing governmental authorities given at the
time of original delivery of the Bonds to the effect that the interest thereon
is exempt from regular Federal income tax. Such interest may, however, be
subject to the federal corporate alternative minimum tax and to state and local
taxes. Neither the Sponsor nor the Trustee nor their respective counsel have
made any review of the proceedings relating to the issuance of the Bonds or the
bases for such opinion and express no opinion as to these matters, and neither
the Trustee nor the Sponsor nor their respective counsel has made an independent
examination or verification that the federal income tax status of the Bonds has
not been altered since the time of the original delivery of those opinions.
In rendering the opinion set forth below, counsel has examined the
Agreement, the final form of Prospectus dated the date hereof (the "Prospectus")
and the documents referred to therein, among others, and has relied on the
validity of said documents and the accuracy and completeness of the facts set
forth therein.
In the opinion of Battle Fowler LLP, counsel for the Sponsor,
under existing law:
The Trusts will be classified as grantor trusts and not as
associations taxable as corporations for federal income tax purposes under the
Internal Revenue Code of 1986 (the "Code"), and income received by the Trusts
that consists of interest excludable from federal gross income
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under the Code will be excludable from the federal gross income of the
Certificateholders of such Trusts.
Each Certificateholder will be considered the owner of a pro rata
portion of the assets of the Trust. Thus, each Certificateholder will be
considered to have received its pro rata share of Bond interest when it is
received by that Trust, and the net income distributable to Certificateholders
that is exempt from federal income tax when received by that Trust will
constitute tax-exempt income when received by the Certificateholders.
Gain realized on a sale or redemption of the Bonds or on a sale of
a Unit is, however, includable in gross income for federal income tax purposes,
generally as capital gain. Such gain does not include any amount received in
respect to accrued interest, earned original issue discount and accrued market
discount. Gain on the disposition of a Bond or a Unit purchased at a market
discount generally will be treated as ordinary income, rather than capital gain,
to the extent of accrued market discount. Such gain may be long- or short-term
depending on the holding period of the Bond or the Unit, assuming that the Bond
or the Unit is held as a capital asset. Capital losses are deductible to the
extent of capital gains; in addition, up to $3,000 of capital losses of
non-corporate Certificateholders ($1,500 for married persons filing separately)
may be deducted against ordinary income. Capital assets held by individuals will
qualify for long-term capital gain treatment if held for more than one year and
more than 18 months, respectively, and will be subject to a reduced tax rate of
20% rather than the regular maximum tax rate of 39.6%.
Each Certificateholder will realize taxable gain or loss when the
Trust disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity), as if the Certificateholder had directly disposed of its pro rata
share of such Bond. The gain or loss is measured by the difference between (i)
the tax cost of such pro rata share and (ii) the amount received therefor. For
this purpose, a Certificateholder's per Unit tax cost for each Bond is
determined by allocating the total tax cost of each Unit among all the Bonds
held in the Trust (in accordance with the portion of the Trust comprised by each
Bond). In order to determine the amount of taxable gain or loss, the
Certificateholder's amount received is similarly allocated at that time. The
Certificateholder may exclude from the amount received any amounts that
represent accrued interest or the earned portion of any original issue discount
but may not exclude amounts attributable to market discount. Thus, when a Bond
is disposed of by a Trust at a gain, taxable gain will equal the difference
between (i) the amount received and (ii) the amount paid plus any accrued
original issue discount. Gain on the disposition of a Bond purchased at a market
discount generally will be treated as ordinary income, rather than capital gain,
to the extent of accrued market discount. No deduction is allowed for the
amortization of bond premium on tax-exempt bonds, such as the Bonds, in
computing regular federal income tax.
Discount generally accrues based on the principle of compounding
of accrued interest, not on a straight-line or ratable method, with the result
that the amount of earned original issue discount is less in the earlier years
and more in the later years of a bond term. The tax basis of a discount bond is
increased by the amount of accrued, tax-exempt original issue discount thus
determined. This method of calculation will produce higher capital gains (or
lower losses) to a Certificateholder, as
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compared to the results produced by the straight-line method of accounting for
original issue discount, upon an early disposition of a Bond by the Trust or of
a Unit by a Certificateholder.
A Certificateholder may also realize taxable gain or loss when a
Unit is sold or redeemed. The amount received is allocated among all the Bonds
in a particular Trust in the same manner as when that Trust disposes of Bonds,
and the Certificateholder may exclude accrued interest and the earned portion of
any original issue discount (but not amounts attributable to market discount).
The return of a Certificateholder's tax cost is otherwise a tax-free return of
capital.
A portion of Social Security benefits is includable in gross
income for taxpayers whose modified adjusted gross income combined with a
portion of their Social Security benefits exceeds a base amount. The base amount
is $25,000 for an individual, $32,000 for a married couple filing a joint return
and zero for married persons filing separate returns. Interest on tax-exempt
bonds is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits that are includable in gross income and
determining whether an individual's income exceeds the base amount above which a
portion of the benefits would be subject to tax.
Corporate Certificateholders are required to include in federal
corporate alternative minimum taxable income 75% of the amount by which the
adjusted current earnings (which will include tax-exempt interest) of the
corporation exceeds alternative minimum taxable income (determined without
regard to this item). In addition, in certain cases, Subchapter S corporations
with accumulated earnings and profits from Subchapter C years will be subject to
a minimum tax on excess passive investment income which includes tax-exempt
interest.
Under federal law, interest on Navigator Trust-held Bonds issued
by authority of the Government of Puerto Rico is exempt from regular federal
income tax, and state and local income tax in the United States and Puerto Rico.
The New York Navigator Insured Trust is not subject to the New
York State Franchise Tax on Business Corporations or the New York City General
Corporation Tax. Under the personal income tax laws of the State and City of New
York, the income of the New York Navigator Insured Trust will be treated as the
income of the Certificateholders. Interest on the Bonds of the New York
Navigator Insured Trust that is exempt from tax under the laws of the State and
City of New York when received by the Trust will retain its status as tax-exempt
interest to its Certificateholders. In addition, non-residents of New York City
will not be subject to the New York City personal income tax on gains derived
with respect to their Units of the New York Navigator Insured Trust.
Non-residents of New York State will not be subject to New York State personal
income tax on such gains unless the Units are employed in a business, trade or
occupation carried on in New York State. A New York State or New York City
resident should determine its basis and holding periods for its Units in the
same manner for New York State and New York City tax purposes as for federal tax
purposes. For corporations doing business in New York State, interest earned on
state and municipal obligations that are exempt from federal income tax,
including obligations of New York State, its political subdivisions and
instrumentalities, must be included in calculating New York State and New York
City entire net income for purposes of calculating New York State and New York
City franchise (income) tax.
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The Insured Municipal Securities Trust is not subject to the New
York State Franchise Tax on Business Corporations or the New York City General
Corporation Tax. For a Certificateholder who is a New York resident, however, a
pro rata portion of all or part of the income of the Trust will be treated as
the income of the Certificateholder under the income tax laws of the State and
City of New York. Similar treatment may apply in other states.
The exemption of interest on municipal obligations for federal
income tax purposes does not necessarily result in exemption under the income
tax laws of any state or political subdivision. In general, municipal bond
interest exempt from federal income tax is taxable income to residents of the
State or City of New York under the tax laws of those jurisdictions unless the
bonds are issued by the State of New York or one of its political subdivisions
or by the Commonwealth of Puerto Rico or one of its political subdivisions. For
corporations doing business in New York State, interest earned on state and
municipal obligations that are exempt from federal income tax, including
obligations of New York State, its political subdivisions and instrumentalities,
must be included in calculating New York State and New York City entire net
income for purposes of calculating New York State and New York City franchise
(income) tax. The laws of the several states and local taxing authorities vary
with respect to the taxation of such obligations and each Certificateholder is
advised to consult his own tax advisor as to the tax consequences of his
Certificates under state and local tax laws.
Any proceeds received pursuant to the terms of the insurance on
the Bonds that represent maturing interest on defaulted obligations will be
excludable from federal gross income if, and to the same extent that, such
interest would have been so excludable if paid by the issuers of such defaulted
obligations.
In the opinion of Zeller and Bryant, special counsel to the
Sponsor on New Jersey tax matters, which opinion is made in reliance upon
certain information and based on certain assumptions respecting the New Jersey
Navigator Trust, under existing New Jersey law applicable to individuals who are
New Jersey residents and New Jersey estates and trusts:
(1) The New Jersey Navigator Trust will be
recognized as a trust and not as an association taxable as a
corporation. The New Jersey Navigator Trust will not be
subject to the New Jersey Corporation Business Tax or the
New Jersey Corporation Income Tax.
(2) The income of the New Jersey Navigator Trust
will be treated as income of the Certificateholders who are
individuals, estates or trusts under the New Jersey Gross
Income Tax Act, N.J.S.A. 54A: 1-1 et seq. (the "Act").
Interest on the Bonds that is exempt from tax under the Act
when received by the New Jersey Navigator Trust will retain
its status as tax-exempt interest under the Act when
distributed to Certificateholders who are individuals,
estates or trusts.
(3) Certificateholders, who are individuals,
estates, or trusts will not be subject to the Act on any
gain realized when the New Jersey Navigator Trust disposes
of a Bond (whether by sale, exchange, redemption, or payment
at maturity). Any loss realized on such disposition may not
be utilized to offset gains realized by such
Certificateholder on the disposition of
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assets the gain on which is subject to the New Jersey Gross
Income Tax.
(4) The sale, exchange or redemption of a Unit
by a Certificateholder shall be treated as a sale or
exchange of a Certificateholder's pro rata interest in the
assets in the New Jersey Navigator Trust at the time of the
transaction and any gain will be exempt from tax under the
Act to the extent that the price received by the selling
Certificateholder who is an individual, estate or trust
does not exceed the Redemption Price. To the extent that the
amount received by the Certificateholder exceeds the
Redemption Price, any such gain will not be exempt from tax
under the Act.
(5) All proceeds representing interest on
defaulted obligations derived by Certificateholders who are
individuals, estates or trusts from an insurance policy,
either paid directly to the Certificateholder or through the
New Jersey Navigator Trust, are exempt from tax under the
Act.
(6) The Units of the New Jersey Navigator Trust
may be taxable in the estates of New Jersey residents under
the New Jersey Transfer Inheritance Tax Law or the New
Jersey Estate Tax Laws.
(7) If a Certificateholder is a corporation
subject to the New Jersey Corporation Business Tax or New
Jersey Corporation Income Tax, interest from the Bonds in
the New Jersey Navigator Trust which is allocable to such
corporation will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New
Jersey Corporation Income Tax, less any interest expense
incurred to carry such investment to the extent such
interest expense has not been deducted in computing Federal
taxable income. Net gains derived by such corporation on the
disposition of the Bonds by the New Jersey Navigator Trust
or on the disposition of its Units will be included in its
entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax. Any
proceeds paid under the insurance policy issued to the
Trustee of the New Jersey Navigator 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.
(8) The Internal Revenue Service Restructuring
and Reform Act of 1998 (the "1998 Tax Act") provides that
for taxpayers other than corporations, net capital gain
(which is defined as net long-term capital gain over net
short-term capital loss for the taxable year) realized from
property (with certain exclusions) is subject to a maximum
marginal stated tax rate of 20% (10% in the case of certain
taxpayers in the lowest tax bracket). Capital gain or loss
is long-term if the holding period for the asset is more
than one year, and
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is short-term if the holding period of the asset is one year
or less. The date on which a Unit is acquired (i.e., the
"trade date") is excluded for purposes of determining the
holding period of the Unit. The legislation is generally
effective retroactively for amounts properly taken into
account on or after January 1, 1998. Capital gains realized
from assets held for one year or less are taxed at the same
rates as original income.
In the opinion of Saul, Ewing, Remick & Saul, special counsel to
the Sponsor on Pennsylvania tax matters, under existing law:
(1) Units evidencing fractional undivided interests in the Trust,
to the extent 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 Certificateholders that
would not be taxable if received directly by a Pennsylvania resident
are not subject to personal income tax under the Tax Reform Code of
1971; nor will such interest be taxable under Philadelphia School
District Investment Income Tax imposed on Philadelphia resident
individuals;
(3) A Certificateholder which is an individual, estate or trust
will have a taxable event under the Pennsylvania state and local
income tax referred to in the preceding paragraph upon the redemption
or sale of Units;
(4) A Certificateholder which is a corporation will have a taxable
event under the Pennsylvania Corporate Net Income Tax or, if
applicable, the Mutual Thrift Institutions Tax, upon the redemption or
sale of its Units. Interest income distributed to Certificateholders
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 Units into account in determining the taxable value of their
shares subject to Shares Tax;
(5) Under Act No. 68 of December 3, 1993, gains derived by the
Trust from the sale, exchange or other disposition of Pennsylvania
Bonds may be subject to Pennsylvania personal or corporate income
taxes. Those gains which are distributed by the Trust to
Certificateholders who are individuals will be subject to Pennsylvania
Personal Income Tax and, for residents of Philadelphia, to
Philadelphia School District Investment Income Tax. For
Certificateholders which are corporations, the distributed gains will
be subject to Corporate Net Income Tax or Mutual Thrift Institutions
Tax;
(6) For Pennsylvania Bonds, gains which are not distributed by the
Trust will nevertheless be taxable to Certificateholders if derived by
the Trust from the sale, exchange or other disposition of these Bonds
issued on or after February 1, 1994. Such gains which are not
distributed by the Trust will remain nontaxable to Certificateholders
if derived by the Trust from the sale, exchange or other disposition
of Bonds issued prior to February 1, 1994. However, for gains from the
sale, exchange or other disposition of these Bonds to be taxable under
the Philadelphia School
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District Investment Income Tax, the Bonds must be held for six months
or less;
(7) Units are subject to Pennsylvania inheritance and estate
taxes;
(8) Any proceeds paid under insurance policies issued to the
Trustee or obtained by issuers or the underwriters of the Bonds, the
Sponsor or others which represent 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 in the normal course by the issuer of the defaulted
obligations; and
(9) The Trust is not taxable as a corporation under Pennsylvania
tax laws applicable to corporations.
In the case of Bonds that are Industrial Revenue Bonds ("IRBs") or
certain types of private activity bonds, the opinions of bond counsel to the
respective issuing authorities indicate that interest on such Bonds is exempt
from regular federal income tax. However, interest on such Bonds will not be
exempt from regular federal income tax for any period during which such Bonds
are held by a substantial user of the facilities financed by the proceeds of
such Bonds or by a related person thereof within the meaning of the Code.
Therefore, interest on any such Bonds allocable to a Certificateholder who is
such a substantial user or related person thereof will not be tax-exempt.
Furthermore, in the case of IRBs that qualify for the small issue exemption, the
small issue exemption will not be available or will be lost if, at any time
during the three-year period beginning on the later of the date the facilities
are placed in service or the date of issue, all outstanding tax-exempt IRBs,
together with a proportionate share of any present issue, of an owner or
principal user (or related person) of the facilities exceeds $40,000,000. In the
case of IRBs issued under the $10,000,000 small issue exemption, interest on
such IRBs will become taxable if the face amount of the IRBs plus certain
capital expenditures exceeds $10,000,000.
In addition, a Bond can lose its tax-exempt status as a result of
other subsequent but unforeseeable events such as prohibited arbitrage
activities by the issuer of the Bond or the failure of the Bond to continue to
satisfy the conditions required for the exemption of interest thereon from
regular federal income tax. No investigation has been made as to the current or
future owners or users of the facilities financed by the Bonds, the amount of
such persons' outstanding tax-exempt IRBs, or the facilities themselves, and no
assurance can be given that future events will not affect the tax-exempt status
of the Bonds. Investors should consult their tax advisors for advice with
respect to the effect of these provisions on their particular tax situation.
Interest on indebtedness incurred or continued to purchase or
carry the Units is not deductible for regular federal income tax purposes.
However, such interest is deductible for New York State and New York City income
tax purposes by corporations that are required to include interest on the Bonds
in New York State and New York City entire net income for purposes of
calculating New York State and City franchise (income) taxes. In addition, under
rules used by the Internal Revenue Service for determining when borrowed funds
are considered used for the purpose of purchasing or carrying particular assets,
the purchase of Units may be considered to have been made with borrowed funds
even though the borrowed funds are not directly traceable to the purchase of
Units. Also, in the case of certain financial institutions that acquire Units,
in general no deduction is allowed for interest expense allocable to the Units.
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From time to time, proposals have been introduced before Congress
to restrict or eliminate the federal income tax exemption for interest on debt
obligations similar to the Bonds in the Trust, and it can be expected that
similar proposals may be introduced in the future. In particular, Congress may
consider the adoption of some form of flat tax, which could have an adverse
impact on the value of tax-exempt bonds.
In South Carolina v. Baker, the U.S. Supreme Court held that the
federal government may constitutionally require states to register bonds they
issue and subject the interest on such bonds to federal income tax if not
registered, and that there is no constitutional prohibition against the federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the federal government to
regulate and control bonds such as the Bonds in the Trust and to tax interest on
such bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Bonds in the Trust in
accordance with Section 103 of the Code.
The opinions of bond counsel or special tax counsel to the issuing
governmental authorities to the effect that interest on the Bonds is exempt from
regular federal income tax may be limited to law existing at the time the Bonds
were issued, and may not apply to the extent that future changes in law,
regulations or interpretations affect such Bonds. Investors are advised to
consult their own tax advisors for advice with respect to the effect of any
legislative changes.
LIQUIDITY
---------
Sponsor Repurchase. The Sponsor, although not obligated to do so,
intends to maintain a secondary market for the Units and continuously to offer
to repurchase the Units. The Sponsor's secondary market repurchase price, after
the initial public offering is completed, will be based on the aggregate bid
price of the Bonds in the Trust portfolio, determined by the Evaluator on a
daily basis, and will be the same as the redemption price. The aggregated bid
price, determined by the Evaluator on a daily basis, is computed on the basis
set forth under "Trustee Redemption". Certificateholders who wish to dispose of
their Units should inquire of the Sponsor as to current market prices prior to
making a tender for redemption. The Sponsor may discontinue repurchase of Units
if the supply of Units exceeds demand, or for other business reasons. The date
of repurchase is deemed to be the date on which Certificates representing Units
are physically received in proper form by Reich & Tang Distributors, Inc. 600
Fifth Avenue, New York, New York 10020 on behalf of the Sponsor. Units received
after 4 P.M., New York Time, will be deemed to have been repurchased on the next
business day. In the event a market is not maintained for the Units, a
Certificateholder may be able to dispose of Units only by tendering them to the
Trustee for redemption.
Prospectuses relating to certain other bond trusts indicate an
intention by the respective Sponsor, subject to change, to repurchase units on
the basis of a price higher than the bid prices of the bonds in the trusts.
Consequently, depending on the prices actually paid, the secondary market
repurchase price of other trusts may be computed on a somewhat more favorable
basis than the repurchase price offered by the Sponsor for units of this Trust,
although in all bond trusts, the purchase price of a unit depends primarily on
the value of the bonds in the trust portfolio.
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Units purchased by the Sponsor in the secondary market may be
re-offered for sale by the Sponsor at a price based on the aggregate bid price
of the Bonds in the Trust plus the applicable sales charge (see "Public Offering
Price" in Part A) plus net accrued interest. Any Units that are purchased by the
Sponsor in the secondary market also may be redeemed by the Sponsor if it
determines such redemption to be in its best interest.
The Sponsor may, under certain circumstances, as a service to
Certificateholders, elect to purchase any Units tendered to the Trustee for
redemption (see "Trustee Redemption"). Factors which the Sponsor will consider
in making a determination will include the number of Units of all Trusts which
it has in inventory, its estimate of the salability and the time required to
sell such Units and general market conditions. For example, if in order to meet
redemptions of Units the Trustee must dispose of Bonds, and if such disposition
cannot be made by the redemption date (seven calendar days after tender), the
Sponsor may elect to purchase such Units. Such purchase shall be made by payment
to the Certificateholder not later than the close of business on the redemption
date of an amount equal to the Redemption Price on the date of tender.
Trustee Redemption. Units may also be tendered to the Trustee for
redemption at its corporate trust office as set forth in Part A of this
Prospectus, upon proper delivery of Certificates representing such Units and
payment of any relevant tax. At the present time there are no specific taxes
related to the redemption of Units. No redemption fee will be charged by the
Sponsor or the Trustee. Units redeemed by the Trustee will be canceled.
Certificates representing Units to be redeemed must be delivered
to the Trustee and must be properly endorsed or accompanied by proper
instruments of transfer with signature guaranteed (or by providing satisfactory
indemnity, as in the case of lost, stolen or mutilated Certificates). Thus,
redemptions of Units cannot be effected until Certificates representing such
Units have been delivered by the person seeking redemption. (See
"Certificates".) Certificateholders must sign exactly as their names appear on
the faces of their Certificates. In certain instances the Trustee may require
additional documents such as, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator or certificates
of corporate authority.
Within three business days following a tender for redemption, the
Certificateholder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the Evaluation
Time set forth under "Summary of Essential Information" in Part A on the date of
tender. The "date of tender" is deemed to be the date on which Units are
received by the Trustee, except that with respect to Units received after the
close of trading on the New York Stock Exchange, the date of tender is the next
day on which such Exchange is open for trading, and such Units will be deemed to
have been tendered to the Trustee on such day for redemption at the Redemption
Price computed on that day.
Accrued interest paid on redemption shall be withdrawn from the
Interest Account, or, if the balance therein is insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn from the
Principal Account. The Trustee is empowered to sell Bonds in order to make funds
available for redemptions. Such sales, if required, could result in a sale of
Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of the Trust will be reduced.
The Redemption Price per Unit is the pro rata share of each Unit
in the Trust determined by the Trustee on the basis of (i) the cash on hand in
the
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Trust or moneys in the process of being collected, (ii) the value of the Bonds
in the Trust based on the bid prices of such Bonds and (iii) interest accrued
thereon, less (a) amounts representing taxes or other governmental charges
payable out of the Trust, (b) the accrued expenses of the Trust and (c) cash
allocated for the distribution to Certificateholders of record as of the
business day prior to the evaluation being made. The Evaluator may determine the
value of the Bonds in the Trust (i) on the basis of current bid prices of the
Bonds obtained from dealers or brokers who customarily deal in bonds comparable
to those held by the Trust, (ii) on the basis of bid prices for bonds comparable
to any Bonds for which bid prices are not available, (iii) by determining the
value of the Bonds by appraisal, or (iv) by any combination of the above. The
Evaluator will determine the aggregate current bid price evaluation of the Bonds
in the Trust, taking into account the market value of the Bonds insured under
the Bond Insurance Policy, in the manner described as set forth under "Public
Offering--Offering Price". Insurance does not guarantee the market value of the
Bonds or the Units, and while Bond insurance represents an element of market
value in regard to insured Bonds, its exact effect, if any, on market value
cannot be predicted.
The Trustee is irrevocably authorized in its discretion, if the
Sponsor does not elect to purchase a Unit tendered for redemption or if the
Sponsor tenders a Unit for redemption, in lieu of redeeming such Unit, to sell
such Unit in the over-the-counter market for the account of the tendering
Certificateholder at prices which will return to the Certificateholder an amount
in cash, net after deducting brokerage commissions, transfer taxes and other
charges, equal to or in excess of the Redemption Price for such Unit. The
Trustee will pay the net proceeds of any such sale to the Certificateholder on
the day he would otherwise be entitled to receive payment of the Redemption
Price.
The Trustee reserves the right to suspend the right of redemption
and to postpone the date of payment of the Redemption Price per Unit for any
period during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or trading on that Exchange is restricted or
during which (as determined by the Securities and Exchange Commission) an
emergency exists as a result of which disposal or evaluation of the Bonds is not
reasonably practicable, or for such other periods as the Securities and Exchange
Commission may by order permit. The Trustee and the Sponsor are not liable to
any person or in any way for any loss or damage which may result from any such
suspension or postponement.
A Certificateholder who wishes to dispose of his Units should
inquire of his bank or broker in order to determine if there is a current
secondary market price in excess of the Redemption Price.
TRUST ADMINISTRATION
--------------------
Portfolio Supervision. Except for the purchase of Replacement
Bonds or as discussed herein, the acquisition of any Bonds for the Trust other
than Bonds initially deposited by the Sponsor is prohibited. Although it is the
Sponsor's and Trustee's intention not to dispose of Bonds insured pursuant to
the Bond Insurance in the event of default, nevertheless, the Sponsor may direct
the Trustee to dispose of Bonds upon (i) default in payment of principal or
interest on such Bonds, (ii) institution of certain legal proceedings with
respect to the issuers of such Bonds, (iii) default under other documents
adversely affecting debt service on such Bonds, (iv) default in payment of
principal or interest on other obligations of the same issuer or guarantor, (v)
with respect to revenue
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Bonds, decline in revenues and income of any facility or project below the
estimated levels calculated by proper officials charged with the construction or
operation of such facility or project or (vi) decline in price or the occurrence
of other market or credit factors that in the opinion of the Sponsor would make
the retention of such Bonds in the Trust detrimental to the interests of the
Certificateholders. If a default in the payment of principal or interest on any
of the Bonds occurs and if the Sponsor fails to instruct the Trustee to sell or
hold such Bonds, the Trust Agreement provides that the Trustee may sell such
Bonds. The Trustee shall not be liable for any depreciation or loss by reason of
any sale of bonds or by reason of the failure of the Sponsor to give directions
to the Trustee.
The Sponsor is authorized by the Trust Agreement to direct the
Trustee to accept or reject certain plans for the refunding or refinancing of
any of the Bonds. Any bonds received in exchange or substitution will be held by
the Trustee subject to the terms and conditions of the Agreement to the same
extent as the Bonds originally deposited. Within five days after such deposit,
notice of such exchange and deposit shall be given by the Trustee to each
Certificateholder registered on the books of the Trustee, including an
identification of the Bonds eliminated and the Bonds substituted therefor.
Trust Agreement, Amendment And Termination. The Trust Agreement
may be amended by the Trustee, the Sponsor and the Evaluator without the consent
of any of the Certificateholders: (i) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent; (ii) to change
any provision thereof as may be required by the Securities and Exchange
Commission or any successor governmental agency; or (iii) to make such other
provisions in regard to matters arising thereunder as shall not adversely affect
the interests of the Certificateholders.
The Trust Agreement may also be amended in any respect, or
performance of any of the provisions thereof may be waived, with the consent of
the holders of Certificates evidencing 66-2/3% of the Units then outstanding for
the purpose of modifying the rights of Certificateholders; provided that no such
amendment or waiver shall reduce any Certificateholder's interest in the Trust
without his consent or reduce the percentage of Units required to consent to any
such amendment or waiver without the consent of the holders of all Certificates.
The Trust Agreement may not be amended, without the consent of the holders of
all Certificates then outstanding, to increase the number of Units issuable or
to permit the acquisition of any bonds in addition to or in substitution for
those initially deposited in the Trust, except in accordance with the provisions
of the Trust Agreement. The Trustee shall promptly notify Certificateholders, in
writing, of the substance of any such amendment.
The Trust Agreement provides that the Trust shall terminate upon
the maturity, redemption or other disposition, as the case may be, of the last
of the Bonds held in the Trust but in no event is it to continue beyond the end
of the calendar year preceding the fiftieth anniversary of the execution of the
Trust Agreement. If the value of the Trust shall be less than the minimum amount
set forth under "Summary of Essential Information" in Part A, the Trustee may,
in its discretion, and shall when so directed by the Sponsor, terminate the
Trust. The Trust may also be terminated at any time with the consent of the
holders of Certificates representing 100% of the Units then outstanding. In the
event of termination, written notice thereof will be sent by the Trustee to all
Certificateholders. Within a reasonable period after termination, the Trustee
must sell any Bond remaining in the Trust, and, after paying all expenses and
charges incurred by the Trust, distribute to each Certificateholder, upon
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surrender for cancellation of his Certificate for Units, his pro rata share of
the Interest and Principal Accounts.
The Sponsors. The Sponsor, Reich & Tang Distributors, Inc. ("Reich
& Tang") (successor to the Unit Investment Trust division of Bear, Stearns & Co.
Inc.), a Delaware limited partnership, is engaged in the brokerage business and
is a member of the National Association of Securities Dealers, Inc. Reich & Tang
is also a registered investment adviser. Reich & Tang maintains its principal
business offices at 600 Fifth Avenue, New York, New York 10020. The sole
shareholder of the Sponsor, Reich & Tang Asset Management, Inc. ("RTAM Inc.") is
wholly owned by NEIC Holdings, Inc. which, effective December 29, 1997, was
wholly owned by NEIC Operating Partnership, L.P. ("NEICOP"). Subsequently, on
March 31, 1998, NEICOP changed its name to Nvest Companies, L.P. ("Nvest"). The
general partners of Nvest are Nvest Corporation and Nvest, L.P. Nvest, L.P. is
owned approximately 99% by public unitholders and its general partner is Nvest
Corporation. Nvest, with a principal place of business at 399 Boylston Street,
Boston, MA 02116, is a holding company of firms engaged in the securities and
investment advisory business. These affiliates in the aggregate are investment
advisors or managers to over 80 registered investment companies. Reich & Tang is
Sponsor (and Co-Sponsor, as the case may be) for numerous series of unit
investment trusts, including New York Municipal Trust, Series 1 (and Subsequent
Series), Municipal Securities Trust, Series 1 (and Subsequent Series), 1st
Discount Series (and Subsequent Series), Multi-State Series 1 (and Subsequent
Series), Mortgage Securities Trust, Series 1 (and Subsequent Series), Insured
Municipal Securities Trust, Series 1 (and Subsequent Series), and 5th Discount
Series (and Subsequent Series), Equity Securities Trust, Series 1, Signature
Series, Gabelli Communications Income Trust (and Subsequent Series) and Schwab
Trusts.
For certain other Trusts as set forth in the "Summary of Essential
Information" in Part A, the Sponsors are Reich & Tang and Gruntal & Co., L.L.C.,
both of whom have entered into an Agreement Among Co-Sponsors pursuant to which
both parties have agreed to act as Co-Sponsors for the Trust. Reich & Tang has
been appointed by Gruntal & Co., L.L.C. as agent for purposes of taking any
action required or permitted to be taken by the Sponsor under the Trust
Agreement. If the Sponsors are unable to agree with respect to action to be
taken jointly by them under the Trust Agreement and they cannot agree as to
which Sponsor shall act as sole Sponsor, then Reich & Tang shall act as sole
Sponsor. If one of the Sponsors fails to perform its duties under the Trust
Agreement or becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, that Sponsor may be discharged under the Trust
Agreement and a new Sponsor may be appointed or the remaining Sponsor may
continue to act as Sponsor.
Gruntal & Co., L.L.C., a Delaware limited liability company,
operates a regional securities broker/dealer from its main office in New York
City and branch offices in nine states. The firm is very active in the marketing
of investment companies and has signed dealer agreements with many mutual fund
groups. Further, through its Syndicate Department, Gruntal & Co., L.L.C. has
underwritten a large number of Closed-End Funds and has been Co-Manager on the
following offerings: Cigna High Income Shares; Dreyfus New York Municipal
Income, Inc.; Franklin Principal Maturity Trust and Van Kampen Merritt Limited
Term High Income Trust. The Sponsor is liable for the performance of its
obligations arising from its responsibilities under the Trust Agreement, but
will be under no liability to Certificateholders for taking any action, or
refraining from taking any action, in good faith pursuant to the Trust
Agreement, or for errors in judgment except in cases of its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
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The information included herein is only for the purpose of
informing investors as to the financial responsibility of the Sponsor and its
ability to carry out its contractual obligations. The Sponsor will be under no
liability to Certificateholders for taking any action, or refraining from taking
any action, in good faith pursuant to the Trust Agreement, or for errors in
judgment except in cases of its own wilful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
Unless the Sponsor otherwise directs, the accounts of the Trust
shall be audited not less than annually by independent public accountants
selected by the Sponsor. The expenses of the audit shall be an expense of the
Trust. So long as the Sponsor maintains a secondary market, the Sponsor will
bear any audit expense which exceeds $.50 per 1,000 Units. Certificateholders
covered by the audit during the year may receive a copy of the audited
financials upon request.
The Sponsor may resign at any time by delivering to the Trustee an
instrument of resignation executed by the Sponsor.
If at any time the Sponsor shall resign or fail to perform any of
its duties under the Trust Agreement or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, then the Trustee
may either (i) appoint a successor Sponsor; (ii) terminate the Trust Agreement
and liquidate the Trust; or (iii) continue to act as Trustee without terminating
the Trust Agreement. Any successor Sponsor appointed by the Trustee shall be
satisfactory to the Trustee and, at the time of appointment, shall have a net
worth of at least $1,000,000.
The Trustee. For certain of the Trusts, as set forth in the
"Summary of Essential Information" in Part A, the Trustee is The Chase Manhattan
Bank with its principal executive office located at 270 Park Avenue, New York,
New York 10017 (800) 428-8890 and its unit investment trust office at 4 New York
Plaza, New York, New York 10004. The Trustee is subject to supervision by the
Superintendent of Banks of the State of New York, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System.
The Trustee must be a banking corporation organized under the laws
of the United States or any state which is authorized under such laws to
exercise corporate trust powers and must have at all times an aggregate capital,
surplus and undivided profits of not less than $5,000,000. The duties of the
Trustee are primarily ministerial in nature. The Trustee did not participate in
the selection of Securities for the portfolio of the Trust.
The Trustee shall not be liable or responsible in any way for
taking any action, or for refraining from taking any action, in good faith
pursuant to the Trust Agreement, or for errors in judgment; or for any
disposition of any moneys, bonds or Certificates in accordance with the Trust
Agreement, except in cases of its own willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties; provided,
however, that the Trustee shall not in any event be liable or responsible for
any evaluation made by the Evaluator. In addition, the Trustee shall not be
liable for any taxes or other governmental charges imposed upon or in respect of
the Bonds or the Trust which it may be required to pay under current or future
law of the United States or any other taxing authority having jurisdiction. The
Trustee shall not be liable for depreciation or loss incurred by reason of the
sale by the Trustee of any of the Bonds pursuant to the Trust Agreement.
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For further information relating to the responsibilities of the
Trustee under the Trust Agreement, reference is made to the material set forth
under "Rights of Certificateholders".
The Trustee may resign by executing an instrument in writing and
filing the same with the Sponsor, and mailing a copy of a notice of resignation
to all Certificateholders. In such an event, the Sponsor is obligated to appoint
a successor Trustee as soon as possible. In addition, if the Trustee becomes
incapable of acting or becomes bankrupt or its affairs are taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor as
provided in the Trust Agreement. Notice of such removal and appointment shall be
mailed to each Certificateholder by the Sponsor. If upon resignation of the
Trustee no successor 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 resignation or
removal of the Trustee becomes effective only when the successor Trustee accepts
its appointment as such or when a court of competent jurisdiction appoints a
successor Trustee. Upon execution of a written acceptance of such appointment by
such successor Trustee, all the rights, powers, duties and obligations of the
original Trustee shall vest in the successor.
Any corporation into which the Trustee may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Trustee shall be a party, shall be the successor
Trustee. The Trustee must always be a banking corporation organized under the
laws of the United States or any State and have at all times an aggregate
capital, surplus and undivided profits of not less than $2,500,000.
The Evaluator. The Evaluator is Kenny S&P Evaluation Services, a
division of a business unit of J.J. Kenny Company, Inc., a subsidiary of The
McGraw-Hill Companies, with main offices located at 65 Broadway, New York, New
York 10006. The Evaluator is a wholly-owned subsidiary of McGraw Hill, Inc. The
Evaluator is a registered investment advisor and also provides financial
information services.
The Trustee, the Sponsor and the Certificateholders may rely on
any evaluation furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. Determinations by the Evaluator under the Trust Agreement
shall be made in good faith upon the basis of the best information available to
it, provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsor or Certificateholders for errors in judgment, except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Evaluator may resign or may be removed by the Sponsor and
Trustee, and the Sponsor and the Trustee are to use their best efforts to
appoint a satisfactory successor. Such resignation or removal shall become
effective upon the acceptance of appointment by 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.
TRUST EXPENSES AND CHARGES
--------------------------
At no cost to the Trust, the Sponsor has borne the expenses of
creating and establishing the Trust, including the cost of initial preparation
and execution of the Trust Agreement, registration of the Trust and the Units
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under the Investment Company Act of 1940 and the Securities Act of 1933, the
premiums on the Sponsor-Insured Bonds, initial preparation and printing of the
Certificates, legal expenses, advertising and selling expenses, expenses of the
Trustee including, but not limited to, an amount equal to interest accrued on
certain "when issued" bonds since the date of settlement for the Units, initial
fees and other out-of-pocket expenses. The fees of the Evaluator, however,
incurred during the initial public offering, are paid directly by the Trust.
The Sponsor will not charge the Trust a fee for its services as
such. (See "Sponsor's Profits".)
The Sponsor will receive for portfolio supervisory services to the
Trust an Annual Fee in the amount set forth under "Summary of Essential
Information" in Part A of this Prospectus. The Sponsor's fee may exceed the
actual cost of providing portfolio supervisory services for this Trust, but at
no time will the total amount received for portfolio supervisory services
rendered to all series of the Municipal Securities Trust in any calendar year
exceed the aggregate cost to the Sponsor of supplying such services in such
year. (See "Portfolio Supervision".)
The Trustee will receive for its ordinary recurring services to
the Trust an annual fee in the amount set forth under "Summary of Essential
Information" in Part A of this Prospectus. For a discussion of the services
performed by the Trustee pursuant to its obligations under the Trust Agreement,
see "Trust Administration" and "Rights of Certificateholders".
The Evaluator will receive, for each daily evaluation of the Bonds
in the Trust after the initial public offering is completed, a fee in the amount
set forth under "Summary of Essential Information" in Part A of this Prospectus.
The Trustee's and Evaluator's fees are payable monthly as of the
Record Date from the Interest Account to the extent funds are available and then
from the Principal Account. Both fees may be increased without approval of the
Certificateholders by amounts not exceeding proportionate increases in consumer
prices for services as measured by the United States Department of Labor's
Consumer Price Index entitled "All Services Less Rent".
The following additional charges are or may be incurred by the
Trust: (i) all expenses (including counsel fees) of the Trustee incurred and
advances made in connection with its activities under the Trust Agreement,
including the expenses and costs of any action undertaken by the Trustee to
protect the Trust and the rights and interests of the Certificateholders; (ii)
fees of the Trustee for any extraordinary services performed under the Trust
Agreement; (iii) indemnification of the Trustee for any loss or liability
accruing to it without gross negligence, bad faith or willful misconduct on its
part, arising out of or in connection with its acceptance or administration of
the Trust; (iv) indemnification of the Sponsor for any losses, liabilities and
expenses incurred in acting as Sponsor of the Trust without gross negligence,
bad faith or willful misconduct on its part; and (v) all taxes and other
governmental charges imposed upon the Bonds or any part of the Trust (no such
taxes or charges are being levied, made or, to the knowledge of the Sponsor,
contemplated). The above expenses, including the Trustee's fees, when paid by or
owing to the Trustee, are secured by a first lien on the Trust. In addition, the
Trustee is empowered to sell Bonds in order to make funds available to pay all
expenses.
The accounts of the Trust shall be audited not less than annually
by independent public accountants selected by the Sponsor. So long as the
Sponsor maintains a secondary market, the Sponsor will bear any audit expense
which
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exceeds 50 cents per Unit. Certificateholders covered by the audit during the
year may receive a copy of the audited financial statements upon request.
EXCHANGE PRIVILEGE AND CONVERSION OFFER
---------------------------------------
Certificateholders will be able to elect to exchange any or all of
their Units of this Trust for Units of one or more of any available series of
Equity Securities Trust, Insured Municipal Securities Trust, Municipal
Securities Trust, New York Municipal Trust or Mortgage Securities Trust (the
"Exchange Trusts") subject to a reduced sales charge as set forth in the
prospectus of the Exchange Trust (the "Exchange Privilege"). Unit owners of any
registered unit investment trust for which there is no active secondary market
in the units of such trust (a "Redemption Trust") will be able to elect to
redeem such units and apply the proceeds of the redemption to the purchase of
available Units of one or more series of an Exchange Trust (the "Conversion
Trusts") at the Public Offering Price for units of the Conversion Trust subject
to a reduced sales charge as set forth in the prospectus of the Conversion Trust
(the "Conversion Offer"). Under the Exchange Privilege, the Sponsor's repurchase
price during the initial offering period of the Units being surrendered will be
based on the market value of the Securities in the Trust portfolio or on the
aggregate offer price of the Bonds in the other Trust Portfolios; and, after the
initial offering period has been completed, will be based on the aggregate bid
price of the securities in the particular Trust portfolio. Under the Conversion
Offer, units of the Redemption Trust must be tendered to the trustee of such
trust for redemption at the redemption price determined as set forth in the
relevant Redemption Trust's prospectus. Units in an Exchange or Conversion Trust
will be sold to the Certificateholder at a price based on the aggregate offer
price of the securities in the Exchange or Conversion trust portfolio (or for
units of Equity Securities Trust, based on the market value of the underlying
securities in the trust portfolio) during the initial public offering period of
the Exchange or Conversion Trust; and after the initial public offering period
has been completed, based on the aggregate bid price of the securities in the
Exchange or Conversion Trust Portfolio if its initial offering has been
completed plus accrued interest (or for units of Equity Securities Trust, based
on the market value of the underlying securities in the trust portfolio) and a
reduced sales charge.
Except for Certificateholders who wish to exercise the Exchange
Privilege or Conversion Offer within the first five months of their purchase of
Units of the Exchange or Redemption Trust, any purchaser who purchases Units
under the Exchange Privilege or Conversion Offer will pay a lower sales charge
than that which would be paid for the Units by a new investor. For
Certificateholders who wish to exercise the Exchange Privilege or Conversion
Offer within the first five months of their purchase of Units of the Exchange or
Redemption Trust, the sales charge applicable to the purchase of units of an
Exchange or Conversion Trust shall be the greater of (i) the reduced sales
charge or (ii) an amount which when coupled with the sales charge paid by the
Certificateholder upon his original purchase of Units of the Exchange or
Redemption Trust would equal the sales charge applicable in the direct purchase
of units of an Exchange Trust.
In order to exercise the Exchange Privilege the Sponsor must be
maintaining a secondary market in the units of the available Exchange Trust. The
Conversion Offer is limited only to unit owners of any Redemption Trust.
Exercise of the Exchange Privilege and the Conversion Offer by
Certificateholders is subject to the following additional conditions: (i) at the
time of the Certificateholder's election to participate in the Exchange
Privilege or
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Conversion Offer, there must be units of the Exchange or Conversion Trust
available for sale, either under the initial primary distribution or in the
Sponsor's secondary market, (ii) exchanges will be effected in whole units only,
(iii) Units of the Mortgage Securities Trust may only be acquired in blocks of
1,000 Units and (iv) Units of the Equity Securities Trust may only be acquired
in blocks of 100 Units. Certificateholders will not be permitted to advance any
funds in excess of their redemption in order to complete the exchange. Any
excess proceeds received from a Certificateholder for exchange or from units
being redeemed per conversion will be remitted to such Certificateholder.
The Sponsor reserves the right to suspend, modify or terminate the
Exchange Privilege and/or the Conversion Offer. The Sponsor will provide
Certificateholders of the Trust with 60 days' prior written notice of any
termination or material amendment to the Exchange Privilege and/or the
Conversion Offer, provided that no notice need be given if (i) the only material
effect of an amendment is to reduce or eliminate the sales charge payable at the
time of the exchange, to add one or more series of the Trust eligible for the
Exchange Privilege or the Conversion Offer, to add any new unit investment trust
sponsored by Reich & Tang or a sponsor controlled by or under common control
with Reich & Tang or to delete a series which has been terminated from
eligibility for the Exchange Privilege and/or the Conversion Offer, (ii) there
is a suspension of the redemption of units of an Exchange or Conversion Trust
under Section 22(e) of the Investment Company Act of 1940, or (iii) an Exchange
Trust temporarily delays or ceases the sale of its units because it is unable to
invest amounts effectively in accordance with its investment objectives,
policies and restrictions. During the 60-day notice period prior to the
termination or material amendment of the Exchange Privilege described above, the
Sponsor will continue to maintain a secondary market in the units of all
Exchange Trusts that could be acquired by the affected Certificateholders.
Certificateholders may, during this 60-day period, exercise the Exchange
Privilege in accordance with its terms then in effect.
To exercise the Exchange Privilege, a Certificateholder should
notify the Sponsor of his desire to exercise his Exchange Privilege. To exercise
the Conversion Offer, a unit owner of a Redemption Trust should notify his
retail broker of his desire to redeem his Redemption Trust Units and use the
proceeds from the redemption to purchase Units of one or more of the Conversion
Trusts. If Units of a designated, outstanding series of an Exchange or
Conversion Trust are at the time available for sale and such Units may lawfully
be sold in the state in which the Certificateholder is a resident, the
Certificateholder will be provided with a current prospectus or prospectuses
relating to each Exchange or Conversion Trust in which he indicates an interest.
He may then select the Trust or Trusts into which he desires to invest the
proceeds from his sale of Units. The exchange transaction will operate in a
manner essentially identical to a secondary market transaction except that units
may be purchased at a reduced sales charge. The conversion transaction will be
handled entirely through the unit owner's retail broker. The retail broker must
tender the units to the trustee of the Redemption Trust for redemption and then
apply the proceeds to the redemption toward the purchase of units of a
Conversion Trust at a price based on the aggregate offer or bid side evaluation
per Unit of the Conversion Trust, depending on which price is applicable, plus
accrued interest and the applicable sales charge. The certificates must be
surrendered to the broker at the time the redemption order is placed and the
broker must specify to the Sponsor that the purchase of Conversion Trust Units
is being made pursuant to the Conversion Offer. The unit owner's broker will be
entitled to retail a portion of the sales charge.
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Tax Consequences of the Exchange Privilege and the Conversion
Offer. A surrender of Units pursuant to the Exchange Privilege or the Conversion
Offer will constitute a "taxable event" to the Certificateholder under the
Internal Revenue Code. The Certificateholder will realize a tax gain or loss
that will be of a long- or short-term capital or ordinary income nature
dependent on the length of time the Units have been held and other factors. (See
"Tax Status".) A Certificateholder's tax basis in the Units acquired pursuant to
the Exchange Privilege or Conversion Offer will be equal to the purchase price
of such Units. Investors should consult their own tax advisors as to the tax
consequences to them of exchanging or redeeming units and participating in the
Exchange Privilege or Conversion Offer.
OTHER MATTERS
-------------
Legal Opinions. The legality of the Units offered hereby and
certain matters relating to federal tax law have been passed upon by Battle
Fowler LLP, 75 East 55th Street, New York, New York 10022, as counsel for the
Sponsor. Carter, Ledyard & Milburn, Two Wall Street, New York, New York 10005
have acted as counsel for The Chase Manhattan Bank. Certain matters relating to
New Jersey tax law have been passed upon by Zeller and Bryant, as special New
Jersey counsel to the Sponsor. Certain matters relating to Pennsylvania tax law
have been passed upon by Saul, Ewing, Remick & Saul, as special Pennsylvania
counsel to the Sponsor.
Independent Accountants. The financial statements of the Trusts
for the years ended June 30, 1997, 1998 and 1999 included in Part A of this
Prospectus have been examined by PricewaterhouseCoopers LLP, independent
accountants. The financial statements have been so included in reliance on their
report given upon the authority of said firm as experts in accounting and
auditing.
Performance Information. Total returns, average annualized returns
or cumulative returns for various periods of this Trust may be included from
time to time in advertisements, sales literature and reports to current or
prospective investors. Total return shows changes in Unit price during the
period plus reinvestment of dividends and capital gains, divided by the original
public offering price as of the date of calculation. Average annualized returns
show the average return for stated periods of longer than a year. Sales material
may also include an illustration of the cumulative results of like annual
investments during an accumulation period and like annual withdrawals during a
distribution period. Figures for actual portfolios will reflect all applicable
expenses and, unless otherwise stated, the maximum sales charge. No provision is
made for any income taxes payable. Returns may also be shown on a combined
basis. Trust performance may be compared to performance on a total return basis
of the Dow Jones Industrial Average, the S&P 500 Composite Price Stock Index, or
performance data from Lipper Analytical Services, Inc. and Morningstar
Publications, Inc. or from publications such as Money, The New York Times, U.S.
News and World Report, Business Week, Forbes or Fortune. As with other
performance data, performance comparisons should not be considered
representative of a Trust's relative performance for any future period.
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DESCRIPTION OF BOND RATINGS*
Standard & Poor's Ratings Services. A brief description of the
applicable Standard & Poor's rating symbols and their meanings is as 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 of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a
security, inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to Standard
& Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following
considerations:
(i) Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
(ii) Nature of and provisions of the obligation.
(iii) Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA -- This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA -- Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very strong, and they
differ from AAA issues only in small degrees.
A -- Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
Plus (+) or Minus (-): To provide more detailed indications
of credit quality, the ratings from "AA" to "BB" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
- ----------------
* As described by Standard & Poor's.
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NR: Indicates that no rating has been requested, that there
is insufficient information on which to base a rating or that S&P does not rate
a particular type of obligation as a matter of policy.
Provisional Ratings (Prov.) following a rating indicates
the rating is provisional, which assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to such
likelihood and risk.
DESCRIPTION OF RATING ON THE UNITS*
A Standard & Poor's rating on the units of an investment
trust (hereinafter referred to collectively as "units" and "fund") is a current
assessment of creditworthiness with respect to the investments held by such
fund. This assessment takes into consideration the financial capacity of the
issuers and of any guarantors, insurers, lessees, or mortgagors with respect to
such investments. The assessment, however, does not take into account the extent
to which fund expenses or portfolio asset sales for less than the fund's
purchase price will reduce payment to the unit holder of the interest and
principal required to be paid on the portfolio assets. In addition, the rating
is not a recommendation to purchase, sell, or hold units, inasmuch as the rating
does not comment as to market price of the units or suitability for a particular
investor.
Funds rated "AAA" are composed exclusively of assets that
are rated "AAA" by Standard & Poor's or have, in the opinion of Standard &
Poor's, credit characteristics comparable to assets that are rated "AAA", or
certain short-term investments. Standard & Poor's defines its AAA rating for
such assets as the highest rating assigned by Standard & Poor's to a debt
obligation. Capacity to pay interest and repay principal is very strong.
- -------------
* As described by Standard & Poor's Corporation.
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<TABLE>
<CAPTION>
INDEX INSURED
MUNICIPAL SECURITIES TRUST
Title Page (Unit Investment Trust)
Prospectus
<S> <C> <C>
Summary of Essential Information.......................................... A-5
Financial and Statistical Information..................................... A-6 Dated: October 28, 1999
Information Regarding the Trust........................................... A-7
Audit and Financial Information........................................... F-1 Sponsor:
Reich & Tang Distributors, Inc.
The Trust................................................................. 1 600 Fifth Avenue
Risk Considerations....................................................... 14 New York, New York 10020
Public Offering........................................................... 55 (212) 830-5200
Estimated Long Term Return and
Estimated Current Return................................................ 57
Rights of Certificateholders.............................................. 58 (and for certain Trusts:)
Tax Status................................................................ 60 Gruntal & Co., L.L.C.
Liquidity................................................................. 67 One Liberty Plaza
Trust Administration...................................................... 69 New York, New York 10005
Trust Expenses and Charges................................................ 73 212-267-8800
Exchange Privilege and Conversion
Offer................................................................... 75 Trustee:
Other Matters............................................................. 77
Description of Bond Ratings............................................... 78 The Chase Manhattan Bank
Description of Rating on the Units........................................ 79 4 New York Plaza
New York, New York 10004
Parts A and B of this Prospectus do not 800-882-9898
contain all of the information set forth in
the registration statement and exhibits Evaluator:
relating thereto, filed with the Securities
and Exchange Commission, Washington, D.C., Kenny S&P
under the Securities Act of 1933, and to Evaluation Services
which reference is made. 65 Broadway
New York, New York 10006
</TABLE>
* * *
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any person to whom
it is not lawful to make such offer in such state.
* * *
No person is authorized to give any information or to make any
representations not contained in Parts A and B of this Prospectus; and any
information or representation not contained herein must not be relied upon as
having been authorized by the Trust, the Trustee, the Evaluator, or the Sponsor.
The Trust is registered as a unit investment trust under the Investment Company
Act of 1940. Such registration does not imply that the Trust or any of its Units
have been guaranteed, sponsored, recommended or approved by the United States or
any state or any agency or officer thereof.
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