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NUVEEN TAX-FREE UNIT TRUST
PROSPECTUS
PART ONE
JUNE 17, 1997
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY
PART TWO.
SEE PART TWO FOR THE "SCHEDULES OF INVESTMENTS," ESSENTIAL
INFORMATION BASED THEREON, AND FINANCIAL STATEMENTS, INCLUDING
THE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS, RELATING TO THE
SERIES OF THE TRUST OFFERED HEREBY.
THE NUVEEN TAX-FREE UNIT TRUST consists of a number of
underlying separate unit investment trusts, each of which
contains a diversified portfolio of obligations issued by or on
behalf of states and territories of the United States and
authorities and political subdivisions thereof, the interest on
which is, in the opinion of bond counsel to each issuer, exempt
from all Federal income tax under existing law and, in the case
of a State Trust, from certain state income taxes in the state
for which such state Trust is named. All Bonds (as defined
herein) in each Traditional Trust (as defined herein) were rated
in the category "A" or better by Standard & Poor's, a division of
The McGraw Hill Companies ("STANDARD & POOR'S" or "S&P"), Moody's
Investors Service, Inc. ("MOODY'S") or Fitch Investors Service,
Inc. ("FITCH"), on the date each Series was established (BBB or
Baa or better by Standard & Poor's and Moody's, respectively, in
the case of National Trust 76 and earlier National Trusts and SP-
1, MIG 2 or F-2 or better, respectively, in the case of a Short
Term Trust). All Bonds in each Insured Trust (as defined herein)
are covered by policies of insurance obtained from the MBIA
Insurance Corporation ("MBIA") or the Municipal Bond Insurance
Association guaranteeing payment of principal and interest when
due. All such policies of insurance remain effective so long as
the obligations are outstanding. As a result of such insurance,
the Bonds in each portfolio of the Insured Trusts have received a
rating of "Aaa" by Moody's, "AAA" by Fitch and/or "AAA" by
Standard & Poor's. Insurance relates only to the Bonds in the
Insured Trusts and not to the Units offered or to their market
value.
THE OBJECTIVES of the Trusts are tax-exempt income and
conservation of capital through a diversified investment in tax-
exempt Bonds (discount Bonds in the case of the Discount Trusts).
(See "TAX STATUS OF UNITHOLDERS.") The payment of interest and
the preservation of capital are, of course, dependent upon the
continuing ability of the issuers or obligors, or both, of Bonds
and of any insurer thereof to meet their obligations thereunder.
There is no guarantee that the Trusts' objectives will be
achieved. The price received upon redemption may be more or less
than the amount paid by Unitholders, depending upon the market
value of the Bonds on the date of tender for redemption.
INTEREST INCOME to each Trust in a Series of the Nuveen Tax-
Free Unit Trust and to the Unitholders thereof, in the opinion of
counsel, under existing law, is exempt from Federal income tax,
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1449354/KAF
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and, in the case of a State Trust, from state income taxes in the
state for which such State Trust is named. Capital gains, if
any, are subject to tax per Unit for a particular Trust.
PUBLIC OFFERING PRICE. The Public Offering Price per Unit for
a particular Trust for "secondary market" sales is based on a pro
rata share of the sum of bid prices per Unit of the Bonds in such
Trust plus the sales charges for the Bonds determined in
accordance with the table set forth herein under the caption
"Public Offering Price" based on the number of years remaining to
the maturity of each such Bond and adjusted for cash, if any,
held or owed by the Trust. See the table in "Public Offering
Price" regarding reduced sales charges on large transactions.
Units are offered at the Public Offering Price plus interest
accrued to, but not including, the date of settlement. (See
"PUBLIC OFFERING PRICE.") The minimum purchase is either $5,000
or 50 Units, whichever is less. The bid prices of the Bonds in a
portfolio may represent a "market" discount from or premium over
the par value of the Bonds.
THE UNITS being offered by this Prospectus are issued and
outstanding Units that have either been reacquired by John Nuveen
& Co. Incorporated through the purchase of Units tendered to the
Trustee for redemption or by purchase by John Nuveen & Co.
Incorporated or dealers in the open market. The price paid in
each instance was not less than the Redemption Price determined
as provided herein under the caption "How Units May Be Redeemed
Without Charge." Any profit or loss resulting from the sale of
the Units will accrue to John Nuveen & Co. Incorporated or
dealers and no proceeds from the sale will be received by the
Trusts.
MARKET. A Unitholder may redeem Units at the office of the
Trustee, The Chase Manhattan Bank, at prices based upon the bid
prices of the Bonds in such Trust. The Sponsor, although not
required to do so, intends to make a secondary market for the
Units at prices based upon the bid prices of the Bonds in each
Trust.
BOTH PARTS OF THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE
REFERENCE.
UNITS OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED
OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND
INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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NUVEEN TAX-FREE UNIT TRUST
PROSPECTUS
PART ONE
JUNE 17, 1997
TABLE OF CONTENTS
THE NUVEEN TAX-FREE UNIT TRUST - DESCRIPTION...................... 1
INSURANCE ON BONDS IN INSURED TRUSTS .............................. 2
INSURANCE ON CERTAIN BONDS IN TRADITIONAL TRUSTS .................. 4
PUBLIC OFFERING PRICE ............................................. 4
ACCRUED INTEREST .................................................. 6
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN ........... 7
DETERMINATION OF THE PRICE OF BONDS AT DATE OF DEPOSIT ............ 7
SELECTION OF BONDS FOR DEPOSIT IN THE TRUSTS ...................... 8
ALABAMA TRUSTS - ECONOMIC FACTORS ................................. 13
ARIZONA TRUSTS - ECONOMIC FACTORS ................................. 15
CALIFORNIA TRUSTS - ECONOMIC FACTORS .............................. 17
COLORADO TRUSTS - ECONOMIC FACTORS ................................ 22
CONNECTICUT TRUSTS - ECONOMIC FACTORS ............................. 25
FLORIDA TRUSTS - ECONOMIC FACTORS ................................. 26
GEORGIA TRUSTS - ECONOMIC FACTORS ................................. 30
MARYLAND TRUSTS - ECONOMIC FACTORS ................................ 32
MASSACHUSETTS TRUSTS - ECONOMIC FACTORS ........................... 34
MICHIGAN TRUSTS - ECONOMIC FACTORS ................................ 40
MINNESOTA TRUSTS - ECONOMIC FACTORS ............................... 42
MISSOURI TRUSTS - ECONOMIC FACTORS ................................ 44
NEW JERSEY TRUSTS - ECONOMIC FACTORS .............................. 46
NEW YORK TRUSTS - ECONOMIC FACTORS ................................ 48
NORTH CAROLINA TRUSTS - ECONOMIC FACTORS .......................... 53
OHIO TRUST - ECONOMIC FACTORS ..................................... 55
OREGON TRUSTS - ECONOMIC FACTORS .................................. 57
PENNSYLVANIA TRUSTS - ECONOMIC FACTORS ............................ 60
TENNESSEE TRUSTS - ECONOMIC FACTORS ............................... 64
TEXAS TRUSTS - ECONOMIC FACTORS ................................... 66
VIRGINIA TRUSTS - ECONOMIC FACTORS ................................ 69
TAX STATUS OF UNITHOLDERS ......................................... 70
TAXABLE EQUIVALENT YIELDS ......................................... 73
ALABAMA TRUSTS - TAX MATTERS ...................................... 75
ARIZONA TRUSTS - TAX MATTERS ...................................... 76
CALIFORNIA TRUSTS - TAX MATTERS ................................... 76
COLORADO TRUSTS - TAX MATTERS ..................................... 77
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CONNECTICUT TRUSTS - TAX MATTERS .................................. 78
FLORIDA TRUSTS - TAX MATTERS ...................................... 79
GEORGIA TRUSTS - TAX MATTERS ...................................... 79
MARYLAND TRUSTS - TAX MATTERS ..................................... 80
MASSACHUSETTS TRUSTS - TAX MATTERS ................................ 80
MICHIGAN TRUSTS - TAX MATTERS ..................................... 81
MINNESOTA TRUSTS - TAX MATTERS .................................... 82
MISSOURI TRUSTS - TAX MATTERS ..................................... 83
NEW JERSEY - TAX MATTERS .......................................... 83
NEW YORK TRUSTS - TAX MATTERS ..................................... 84
NORTH CAROLINA - TAX MATTERS ...................................... 85
OHIO TRUSTS - TAX MATTERS ......................................... 85
OREGON TRUSTS - TAX MATTERS ....................................... 86
PENNSYLVANIA TRUSTS - TAX MATTERS ................................. 86
TENNESSEE TRUSTS - TAX MATTERS .................................... 87
TEXAS TRUSTS - TAX MATTERS ........................................ 88
VIRGINIA TRUSTS - TAX MATTERS ..................................... 89
COUNSEL FOR TRUSTEE ............................................... 89
OPERATING EXPENSES ................................................ 89
DISTRIBUTIONS TO UNITHOLDERS ...................................... 90
NATIONAL TRADITIONAL TRUSTS 4 THROUGH 39 - SEMI-ANNUAL
DISTRIBUTIONS ..................................................... 91
NATIONAL TRADITIONAL TRUST 40 AND SUBSEQUENT NATIONAL TRADITIONAL
TRUSTS; ALL OTHER TRUSTS - OPTIONAL DISTRIBUTIONS ................. 91
ACCUMULATION PLAN ................................................. 92
DETAILED REPORTS TO UNITHOLDERS ................................... 93
UNIT VALUE AND EVALUATION ......................................... 94
DISTRIBUTION OF UNITS TO THE PUBLIC ............................... 94
OWNERSHIP AND TRANSFER OF UNITS ................................... 95
REPLACEMENT OF LOST, STOLEN OR DESTROYED CERTIFICATES ............. 96
MARKET FOR UNITS .................................................. 96
HOW UNITS MAY BE REDEEMED WITHOUT CHARGE .......................... 96
HOW UNITS MAY BE PURCHASED BY THE SPONSOR ......................... 97
HOW BONDS MAY BE REMOVED FROM THE TRUSTS .......................... 98
INFORMATION ABOUT THE TRUSTEE ..................................... 98
LIMITATIONS ON LIABILITIES OF SPONSOR AND TRUSTEE ................. 98
SUCCESSOR TRUSTEES AND SPONSORS ................................... 98
INFORMATION ABOUT THE SPONSOR ..................................... 99
AMENDMENT AND TERMINATION OF INDENTURE ............................100
LEGAL OPINION .....................................................100
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AUDITORS ..........................................................100
DESCRIPTION OF RATINGS (AS PUBLISHED BY THE RATING COMPANIES) .....100
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THE NUVEEN TAX-FREE UNIT TRUST
THE NUVEEN TAX-FREE UNIT TRUST - DESCRIPTION
Each Series of the Nuveen Tax-Free Unit Trust (the "TRUST")
is one of a series of separate but similar investment companies
created by the Sponsor, each of which is designated by a
different Series number. Each Series includes one or more
underlying separate unit investment trusts; the trusts in which
few or none of the Bonds are insured are sometimes referred to as
the "Traditional Trusts," the trusts in which all of the Bonds
are insured as described herein are sometimes referred to as the
"Insured Trusts," and the state trusts (both Traditional and
Insured) are sometimes referred to as the "State Trusts." The
general term "Trust(s)" should be understood to refer
collectively to both Traditional and Insured Trusts. Each Trust
includes only Bonds that are, in the opinion of counsel, exempt
from Federal income tax and, in the case of a State Trust, from
certain taxation in the state for which such State Trust is
named. Each Series was created under the laws of the State of
New York pursuant to a Trust Indenture and Agreement (the
"INDENTURE") between John Nuveen & Co. Incorporated (the
"SPONSOR") and The Chase Manhattan Bank (the "TRUSTEE").
The objectives of the Trusts are income exempt from Federal
income tax and, in the case of a State Trust, where applicable,
from state income and intangibles taxes, and conservation of
capital, through an investment in obligations issued by or on
behalf of states and territories of the United States and
authorities and political subdivisions thereof, the interest on
which is, in the opinion of recognized bond counsel to the
issuing governmental authorities, exempt from Federal income tax
under existing law. Bonds in any State Trust have been issued
primarily by or on behalf of the state for which such Trust is
named and counties, municipalities, authorities and political
subdivisions thereof, the interest on which is, in the opinion of
bond counsel, exempt from Federal and (except for certain Bonds
in the Connecticut Trusts, which were issued prior to the
taxation by Connecticut of interest income of resident
individuals) certain state income tax and intangibles taxes, if
any, for purchasers who qualify as residents of that state.
Insurance guaranteeing the timely payment, when due, of all
principal and interest on the Bonds in each Insured Trust has
been obtained by the Sponsor or by the issuers of such Bonds from
the Municipal Bond Insurance Association or MBIA Insurance
Corporation, and as a result of such insurance the Bonds in the
Insured Trusts are rated "Aaa" by Moody's, "AAA" by Fitch and/or
"AAA" by Standard & Poor's. (See "INSURANCE ON BONDS IN INSURED
TRUSTS.") All obligations in each Traditional Trust were rated
at the date the Trust was established in the category "A" or
better (BBB or Baa or better by Standard & Poor's and Moody's,
respectively, in the case of National Trust 76 and earlier
National Trusts and SP-1, MIG 2 or F-2 or better, respectively,
in the case of short-term obligations included in a Short Term
Traditional Trust) by Standard & Poor's, Moody's and/or Fitch
(including provisional or conditional ratings). (See
"DESCRIPTION OF RATINGS.") In addition, certain Bonds in certain
Traditional Trusts may be covered by insurance guaranteeing the
timely payment, when due, of all principal and interest. There
is, of course, no guarantee that the Trusts' objectives will be
achieved. The bid prices of the Bonds in the portfolio of any
Trust may represent a deep "market" discount from the par value
of the Bonds. At the time each Discount Trust was established,
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the market value of the Bonds in the portfolio was significantly
below face value, and the current bid prices of the Bonds in such
Trusts may continue to represent a deep "market" discount from
the par value of the Bonds.
Gains realized on the sale, payment on maturity or
redemption of the Bonds by the Trustee or on the sale or
redemption of Units by a Unitholder are included in a
Unitholder's gross income for Federal income tax purposes. (See
"TAX STATUS OF UNITHOLDERS.") The Sponsor has deposited with the
Trustee the interest-bearing obligations listed in the Schedules
of Investments in Part Two (the "BONDS"), which constitute the
Trusts' underlying securities. The State of Florida imposes no
income tax on individuals, and exemption from that State's
intangibles tax provides only a slight tax advantage to
purchasers of a Florida Trust. The State of Texas currently
imposes no income tax on individuals; accordingly, there is no
State tax advantage to purchasers of a Texas Trust. (See "TAX
STATUS OF UNITHOLDERS" for a discussion of these matters.)
Payment of interest on the Bonds in each Insured Trust, and
of principal at maturity, is guaranteed under policies of
insurance obtained by the Sponsor or by the issuers of the Bonds.
(See "INSURANCE ON BONDS IN INSURED TRUSTS.")
At the Date of Deposit, each National Trust, State Trust and
Discount Trust consisted of long-term (approximately 15 to 40
year maturities) obligations; each Long Intermediate Trust
consisted of intermediate to long-term (approximately 11 to 19
year maturities) obligations; each Intermediate Trust and State
Intermediate Trust consisted of intermediate-term (approximately
5 to 15 year maturities) obligations; each Short Intermediate
Trust and State Short Intermediate Trust consisted of short to
intermediate-term (approximately 3 to 7 year maturities)
obligations; and each Short Term Trust consisted of short-term
(approximately 1 to 5 year maturities) obligations.
Each Trust consists of fixed-rate municipal debt
obligations. Because of this an investment in a Trust should be
made with an understanding of the risks which investment in debt
obligations may entail, including the risk that the value of the
debt obligations, and therefore of the Units, will decline with
increases in market interest rates. In general, the longer the
period until the maturity of a Bond, the more sensitive its value
will be to fluctuations in interest rates. During the past
decade there have been substantial fluctuations in interest rates
and, accordingly, in the value of long-term debt obligations.
The Sponsor cannot predict the extent or timing of such
fluctuations and, accordingly, their effect upon the value of the
Bonds. Other risks include the ability of the issuer, or, if
applicable, the insurer, to make payments of interest and
principal when due, "mandatory put" features, early call
provisions and the potential for changes in the tax status of the
Bonds.
Each Unit of a Trust represents a fractional undivided
interest in the principal and net income of such Trust in the
ratio set forth in "Essential Information" in Part Two for the
applicable Trust. To the extent that any Units are redeemed by
the Trustee, the aggregate value of the Trust's assets will
decrease by the amount paid to the redeeming Unitholder, but the
fractional undivided interest of each unredeemed Unit in such
Trust will increase proportionately. The Units offered hereby
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are issued and outstanding Units which have either been
reacquired by the Sponsor through the purchase of Units tendered
to the Trustee for redemption or by purchase by the Sponsor or
dealers in the open market. No offering is being made on behalf
of the Trusts and any profit or loss realized on the sale of
Units will accrue to the Sponsor.
INSURANCE ON BONDS IN INSURED TRUSTS
Insurance guaranteeing the timely payment, when due, of all
principal and interest on the Bonds in each Insured Trust has
been obtained by the Sponsor or by the issuers or underwriters of
Bonds from the Municipal Bond Insurance Association (the
"ASSOCIATION") (for Insured Series 1 through 107) or the MBIA
Insurance Corporation (the "CORPORATION") (for Insured Series 108
and all subsequent Series) (the Association and the Corporation
are referred to collectively as the "INSURERS"). Each insurance
policy is an obligation only of the Insurer that issued it and
not of the other. Policies issued by the Association are
obligations of the Association and not of the Corporation, and
policies issued by the Corporation are not obligations of the
Association or its members. Some of the Bonds in each Insured
Trust may be covered by a policy or policies of insurance
obtained by the issuers or underwriters of the Bonds. The
appropriate Insurer has issued a policy or policies of insurance
covering each of the Bonds in the Insured Trusts, each policy to
remain in force until the payment in full of such Bonds and
whether or not the Bonds continue to be held by an Insured Trust.
By the terms of each policy the appropriate Insurer will
unconditionally guarantee to the holders or owners of the Bonds
the payment, when due, required of the issuer of the Bonds of an
amount equal to the principal of and interest on the Bonds as
such payments shall become due but not be paid (except that in
the event of any acceleration of the due date of principal by
reason of mandatory or optional redemption, default or otherwise,
the payments guaranteed will be made in such amounts and at such
times as would have been due had there not been an acceleration).
The appropriate Insurer will be responsible for such payments,
less any amounts received by the holders or owners of the Bonds
from any trustee for the Bond issuers or from any other sources
other than the Insurer. Each Insurer has indicated that the
insurance policies do not insure the payment of principal or
interest on Bonds which are not required to be paid by the issuer
thereof because the Bonds were not validly issued; as indicated
under "Tax Status of Unitholders," the respective issuing
authorities have received opinions of bond counsel relating to
the valid issuance of each of the Bonds in the Insured Trusts.
The Insurers' policies also do not insure against nonpayment of
principal of or interest on the Bonds resulting from the
insolvency, negligence or any other act or omission of the paying
agent or any other paying agent for the Bonds. The policies are
not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law. The
policies are non-cancelable and the insurance premiums have been
fully paid on or prior to the Date of Deposit, either by the
Sponsor or, if a policy has been obtained by a Bond issuer, by
such issuer.
Upon notification from the trustee for any Bond issuer or
any holder or owner of the Bonds or coupons that such trustee or
paying agent has insufficient funds to pay any principal or
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interest in full when due, the appropriate Insurer will be
obligated to deposit funds promptly with State Street Bank and
Trust Company, N.A., New York, New York, as fiscal agent for the
Insurers, sufficient to fully cover the deficit. If notice of
nonpayment is received on or after the due date, the appropriate
Insurer will provide for payment within one business day
following receipt of the notice. Upon payment by an Insurer of
any Bonds, coupons, or interest payments, such Insurer shall
succeed to the rights of the owner of such Bonds, coupons or
interest payments with respect thereto.
THE ASSOCIATION. Each insurance company comprising the
Association is severally and not jointly obligated under each
policy issued by the Association in the following respective
percentages: The AEtna Casualty and Surety Company, 33%;
Fireman's Fund Insurance Company, 30%; The Travelers Indemnity
Company, 15%; CIGNA Property and Casualty Company (formerly AEtna
Insurance Company), 12%; and The Continental Insurance Company,
10%. As a several obligor, each such insurance company will be
obligated only to the extent of its percentage of any claim under
the policy and will not be obligated to pay any unpaid obligation
of any other member of the Association. Each insurance company's
participation is backed by all of its assets. However, each
insurance company is a multiline insurer involved in several
lines of insurance other than municipal bond insurance, and the
assets of each insurance company also secure all of its other
insurance policy and surety bond obligations.
The following table sets forth financial information with
respect to the five insurance companies comprising the
Association. The statistics have been furnished by the
Association and are as reported by the insurance companies to the
New York State Insurance Department and are determined in
accordance with statutory accounting principles. No
representation is made herein as to the accuracy or adequacy of
such information or as to the absence of material adverse changes
in such information subsequent to the date thereof. In addition,
these numbers are subject to revision by the New York State
Insurance Department which, if revised, could either increase or
decrease the amounts.
MUNICIPAL BOND INSURANCE ASSOCIATION
FIVE MEMBER COMPANIES, ASSETS AND POLICYHOLDERS' SURPLUS
(UNAUDITED) AS OF MARCH 31, 1995
(AMOUNTS IN THOUSANDS)
CIGNA
AETNA FIREMAN'S TRAVELERS PROPERTY CONTINENTAL
CASUALTY FUND INDEMNITY AND CASUALTY INSURANCE
Assets $10,225,604 $7,126,217 $10,461,356 $4,260,177 $3,060,583
Liabilities 8,312,158 5,116,059 8,654,130 3,637,513 2,380,723
Policyholder's
Surplus 1,913,446 2,010,158 1,807,226 622,664 679,860
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THE CORPORATION. The Corporation is the principal operating
subsidiary of MBIA, Inc., a New York Stock Exchange listed
company. MBIA, Inc. is not obligated to pay the debts of or
claims against the Corporation. The Corporation is a limited
liability corporation rather than a several liability
association. The Corporation 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. The Corporation has two European branches,
one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual
risks that may be insured, the payment of dividends by the
insurer, changes in control and transactions among affiliates.
Additionally, the Corporation is required to maintain contingency
reserves on its liabilities in certain amounts and for certain
periods of time.
As of December 31, 1995, the Corporation had admitted assets
of $3.8 billion (audited), total liabilities of $2.5 billion
(audited), and total capital and surplus of $1.3 billion
(audited) determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory
authorities. As of December 31, 1996, the Corporation had
admitted assets of $4.4 billion (audited), total liabilities of
$3.0 billion (audited), and total capital and surplus of $1.4
billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance
regulatory authorities. Copies of the Corporation's year-end
financial statements prepared in accordance with statutory
accounting practices are available from the Corporation. The
address of the Corporation is 113 King Street, Armonk, New York
10504.
Moody's rates all bond issues insured by the Insurers "Aaa"
and short-term loans "MIG 1", both designated to be of the
highest quality.
Standard & Poor's rates the claims-paying ability of both
the Insurers "AAA Prime Grade."
Fitch, upon request, rates all bond issues insured by the
Insurers "AAA" and short-terms loans "F-1."
Each rating of the Insurers should be evaluated
independently. No application has been made to any other rating
agency in order to obtain additional ratings on the Bonds. The
ratings reflect the respective rating agency's current assessment
of the creditworthiness of the Insurers and their ability to pay
claims on their policies of insurance. (See "DESCRIPTION OF
RATINGS.") Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating
agency.
The above ratings are not recommendations to buy, sell or
hold the Bonds, and such ratings may be subject to revision or
withdrawal at any time by the rating agencies. Any downward
revision or withdrawal of any of the above ratings may have an
adverse effect on the market price of the Bonds.
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Because the insurance on the Bonds will be effective so long
as the Bonds are outstanding, such insurance will be taken into
account in determining the market value of the Bonds and
therefore some value attributable to such insurance will be
included in the value of the Units of the Insured Trusts. The
insurance does not, however, guarantee the market value of the
Bonds or of the Units nor does it guaranty that the ratings on
the Bonds will not be revised or withdrawn.
INSURANCE ON CERTAIN BONDS IN TRADITIONAL TRUSTS
Insurance guaranteeing the timely payment, when due, of all
principal and interest on certain Bonds in a Traditional Trust
may have been obtained by the Sponsor, issuer, or underwriter of
the particular Bonds involved or by another party. Such
insurance, which provides coverage substantially the same as that
obtained with respect to Bonds in Insured Trusts as described
above, is effective so long as the insured Bond is outstanding
and the insurer remains in business. Insurance relates only to
the particular Bond and not to the Units offered hereby or to
their market value. Insured Bonds have received a rating of
"AAA" by Standard & Poor's, "AAA" by Fitch and/or "Aaa" by
Moody's, in recognition of such insurance.
If a Bond in a Traditional Trust is insured, the Schedule of
Investments will identify the insurer. Such insurance will be
provided by Financial Guaranty Insurance Company ("FGIC"), AMBAC
Indemnity Corporation ("AMBAC"), Bond Investors Guaranty
Insurance Company, now known as MBIA Corp. of Illinois ("BIG"),
Capital Guaranty Insurance Company ("CGIC"), Financial Security
Assurance, Inc. ("FSA"), Municipal Bond Insurance Association
(the "ASSOCIATION"), the MBIA Insurance Corporation
("CORPORATION") or Connie Lee Insurance Company ("CONNIE LEE").
The Sponsor to date has purchased and presently intends to
purchase insurance for Bonds in Traditional Trusts exclusively
from the Corporation (see the preceding disclosure regarding the
Corporation). There can be no assurance that any insurer listed
herein will be able to satisfy its commitments in the event
claims are made in the future. However, at the date hereof,
Standard & Poor's has rated the claims-paying ability of each
insurer "AAA," and Moody's has rated all bonds insured by each
such insurer, except Connie Lee, "Aaa." Moody's gives no ratings
for bonds insured by Connie Lee.
Because any such insurance will be effective so long as the
insured Bonds are outstanding, such insurance will be taken into
account in determining the market value of such Bonds and
therefore some value attributable to such insurance will be
included in the value of the Units of the Trust that includes
such Bonds. The insurance does not, however, guarantee the
market value of the Bonds or of the Units.
PUBLIC OFFERING PRICE
The Sponsor will appraise or cause to be appraised daily the
value of the underlying Bonds in each Trust (1) as of 4:00 p.m.
eastern time on each day on which the New York Stock Exchange
(the "Exchange") is normally open, or (2) as of such earlier
closing time on each day on which the Exchange is scheduled in
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advance to close at an earlier time, and will adjust the Public
Offering Price of the Units commensurate with such appraisal.
Such Public Offering Price will be effective for all orders
received by a dealer or the Sponsor at or prior to 4:00 p.m.
eastern time, or such earlier closing time, on each such day.
Orders received after that time, or on a day when the Exchange is
closed for a scheduled holiday or weekend, will be held until the
next determination of price.
The sales charge applicable to quantity purchases is reduced
on a graduated scale for sales to any purchaser of at least
$50,000 or 500 Units and will be applied on whichever basis is
more favorable to the purchaser. For purposes of calculating the
applicable sales charge, purchasers who have indicated their
intent to purchase a specified amount of Units of any Nuveen-
sponsored unit trusts in the primary or secondary offering period
by executing and delivering a letter of intent to the Sponsor,
which letter of intent must be in a form acceptable to the
Sponsor and shall have a maximum duration of thirteen months,
will be eligible to receive a reduced sales charge, according to
the table set forth below, based on the amount of intended
aggregate purchases (excluding purchases which are subject only
to a deferred sales charge) as expressed in the letter of intent.
For purposes of letter of intent calculations, units of equity
products are valued at $10 per unit. Due to administrative
limitations and in order to permit adequate tracking, the only
secondary market purchases that will be permitted to be applied
toward the intended specified amount and that will receive the
corresponding reduced sales charge are those Units that are
acquired through or from the Sponsor.
By establishing a letter of intent, a Unitholder agrees that
the first purchase of Units following the execution of such
letter of intent will be at least 5% of the total amount of the
intended aggregate purchases expressed in such Unitholder's
letter of intent. Further, through the establishment of the
letter of intent, such Unitholder agrees that Units representing
5% of the total amount of the intended purchases will be held in
escrow by The Chase Manhattan Bank, Trustee, pending completion
of these purchases. All distributions on Units held in escrow
will be credited to such Unitholder's account. If total
purchases prior to the expiration of the letter of intent period
equal or exceed the amount specified in a Unitholder's letter of
intent, the Units held in escrow will be transferred to such
Unitholder's account. A Unitholder who purchases Units during
the letter of intent period in excess of the number of Units
specified in a Unitholder's letter of intent, the amount of which
would cause the Unitholder to be eligible to receive an
additional sales charge reduction, will be allowed such
additional sales charge reduction on the purchase of Units which
caused the Unitholder to reach such new breakpoint level and on
all additional purchases of Units during the letter of intent
period. If the total purchases are less than the amount
specified, the Unitholder involved must pay the Sponsor an amount
equal to the difference between the amounts paid for those
purchases and the amounts which would have been paid if the
higher sales charge had been applied; the Unitholder will,
however, be entitled to any reduced sales charge qualified for by
reaching any lower breakpoint level. If such Unitholder does not
pay the additional amount within 20 days after written request by
the Sponsor or the Unitholder's securities representative, the
Sponsor will instruct the Trustee to redeem an appropriate number
of the escrowed Units to meet the required payment. By
establishing a letter of intent, a Unitholder irrevocably
appoints the Sponsor as attorney to give instructions to redeem
any or all of such Unitholder's escrowed Units, with full power
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of substitution in the premises. A Unitholder or his securities
representative must notify the Sponsor whenever such Unitholder
makes a purchase of Units that he wishes to be counted toward the
intended amount.
The Public Offering Price of the Units of each Trust for
secondary market purchases is determined by adding to the
Trustee's determination of the bid price of each Bond in the
Trust the appropriate sales charge determined in accordance with
the table set forth below based upon the number of years
remaining to the maturity of each such Bond, adjusting the total
to reflect the amount of any cash held in or advanced to the
principal account of the Trust, and dividing the result by the
number of Units of such Trust then outstanding. For purposes of
this calculation, Bonds will be deemed to mature on their stated
maturity dates unless: (a) the Bonds have been called for
redemption or funds or securities have been placed in escrow to
redeem them on an earlier call date, in which case such call date
shall be deemed to be the date upon which they mature; or (b)
such Bonds are subject to a "mandatory put," in which case such
mandatory put date shall be deemed to be the date upon which they
mature. Any assumptions regarding maturity made for purposes of
determining the appropriate sales charge in no way predict or
guarantee the actual remaining life of a given Trust.
The effect of this method of sales charge calculation will
be that different sales charge rates will be applied to each of
the various Bonds in a Trust portfolio based upon the maturities
of such Bonds, in accordance with the following schedule. As
shown, the sales charge on Bonds in each maturity range (and
therefore the aggregate sales charge on the purchase) is reduced
with respect to purchases of at least $50,000 or 500 Units:
AMOUNT OF PURCHASE*
YEARS TO
MATURITY
<TABLE>
<CAPTION>
$50,000 $100,000 $250,000 $500,000 $1,000,000 $2,500,000 $5,000,000
YEARS TO UNDER TO TO TO TO TO TO OR
MATURITY $50,000 $99,000 $249,999 $499,999 $999,999 $2,499,999 $4,999,999 MORE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 1 0 0 0 0 0 0 0 0
1 but less
than 2 1.523% 1.446% 1.369% 1.317% 1.215% 1.061% .900% .750%
2 but less
than 3 2.041 1.937 1.833 1.729 1.626 1.420 1.225 1.030
3 but less
than 4 2.564 2.433 2.302 2.175 2.041 1.781 1.546 1.310
4 but less
than 5 3.093 2.961 2.828 2.617 2.459 2.175 1.883 1.590
5 but less
than 7 3.627 3.433 3.239 3.093 2.881 2.460 2.165 1.870
7 but less
than 10 4.167 3.951 3.734 3.520 3.239 2.828 2.489 2.150
10 but less
than 13 4.712 4.467 4.221 4.004 3.788 3.253 2.842 2.430
13 but less
than 16 5.263 4.988 4.712 4.439 4.167 3.627 3.169 2.710
16 or more 5.820 5.542 5.263 4.987 4.603 4.004 3.500 3.000
</TABLE>
____________________
*Breakpoint sales charges are computed both on a dollar basis
and on the basis of the number of Units purchased, using the
equivalent of 500 Units to $50,000, 2,500 Units to $250,000,
etc., and will be applied on that basis which is more
favorable to the purchaser.
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<PAGE>
The secondary market sales charges above are expressed as a
percent of the net amount invested; expressed as a percent of the
Public Offering Price, the maximum sales charge on a Trust, for
instance one consisting entirely of Bonds with 16 years or more
to maturity, would be 5.50% (5.820% of the net amount invested).
For purposes of illustration, the sales charge on a Trust
consisting entirely of Bonds maturing in 13 to 16 years would be
5% (5.263% of the net amount invested); on a Trust consisting
entirely of Bonds maturing in 10 to 13 years, 4.5% (4.712% of the
net amount invested); on a Trust consisting entirely of Bonds
maturing in 5 to 7 years, 3.5% (3.627% of the net amount
invested); and on a Trust consisting entirely of Bonds maturing
in 3 to 4 years, 2.5% (2.564% of the net amount invested). The
actual secondary sales charge included in the Public Offering
Price of any particular Trust will depend on the maturities of
the Bonds in the portfolio of such Trust.
As more fully set forth under "Accrued Interest" below,
accrued interest from the preceding Record Date to, but not
including, the settlement date of the transaction (three business
days after purchase) will be added to the Public Offering Price
to determine the purchase price of Units.
The above graduated sales charge will apply on all
applicable purchases of Nuveen investment company securities on
any one day by the same purchaser in the amounts stated, and for
this purpose purchases of any Series will be aggregated with
concurrent purchases of Units of any other Series or of shares of
any open-end management investment company of which the Sponsor
is principal underwriter and with respect to the purchase of
which a sales charge is imposed.
Purchases by or for the account of individuals and their
spouses, parents, children, grandchildren, grandparents, parents-
in-law, sons- and daughters-in-law, siblings, a sibling's spouse
and a spouse's siblings ("IMMEDIATE FAMILY MEMBERS") will be
aggregated to determine the applicable sales charge. The
graduated sales charges are also applicable to a trustee or other
fiduciary purchasing securities for a single trust estate or
single fiduciary account.
Units may be purchased at the Public Offering Price without
a sales charge by officers or directors and by bona fide, full-
time employees of Nuveen, Nuveen Advisory Corp., Nuveen
Institutional Advisory Corp. and The John Nuveen Company,
including in each case these individuals and their immediate
family members (as defined above).
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<PAGE>
Units may be purchased in the secondary market at the Public
Offering Price for non-breakpoint purchases minus the concession
the Sponsor typically allows to brokers and dealers for non-
breakpoint purchases (see "DISTRIBUTION OF UNITS TO THE PUBLIC")
by (1) investors who purchase Units through registered investment
advisors, certified financial planners and registered broker-
dealers who in each case either charge periodic fees for
financial planning, investment advisory or asset management
services, or provide such services in connection with the
establishment of an investment account for which a comprehensive
"wrap fee" charge is imposed, (2) bank trust departments
investing funds over which they exercise exclusive discretionary
investment authority and that are held in a fiduciary, agency,
custodial or similar capacity, (3) any person who for at least 90
days, has been an officer, director or bona fide employee of any
firm offering Units for sale to investors or their immediate
family members (as defined above) and (4) officers and directors
of bank holding companies that make Units available directly or
through subsidiaries or bank affiliates. Notwithstanding
anything to the contrary in this Prospectus, such investors, bank
trust departments, firm employees and bank holding company
officers and directors who purchase Units through this program
will not receive sales charge reductions for quantity purchases.
Cash, if any, made available to the Sponsor prior to the
settlement date for a purchase of Units may be available for use
in the Sponsor's business, and may be of benefit to the Sponsor.
Whether or not Units are being offered for sale, the Sponsor
shall also determine the aggregate value of each Trust as of 4:00
p.m. eastern time: (i) on each June 30 or December 31 (or, if
such date is not a business day, the last business day prior
thereto), (ii) on each day on which any Unit is tendered for
redemption (or the next succeeding business day if the date of
tender is a non-business day), and (iii) at such other times as
may be necessary. For this purpose, a "BUSINESS DAY" shall be
any day on which the Exchange is normally open. (See "UNIT VALUE
AND EVALUATION.")
Pursuant to the terms of the Indenture, the Trustee may
terminate a Trust if the net asset value of such Trust, as shown
by any evaluation, is less than 20% of the original principal
amount of the Trust. In the course of regularly appraising the
value of Bonds in each Trust, the Sponsor will attempt to
estimate the date on which a Trust's value will fall below the
20% level based on anticipated bond events over a five-year
period, including maturities, escrow calls and current calls or
refundings, assuming certain market rates. The Sponsor intends
from time to time to recommend that certain Trusts whose values
have fallen or are anticipated to fall below the 20% level be
terminated based on certain criteria which could adversely affect
the Trust's diversification. Once the Sponsor has determined
that a Trust's value has fallen or may fall below the 20% level
within a five-year period, for purposes of computing the sales
charge, the maturity of each bond in such Trust will be deemed to
be the earlier of the estimated termination date of the Trust or
the actual date used when pricing the bond under Municipal
Securities Rulemaking Board rules and interpretations issued
thereunder.
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<PAGE>
ACCRUED INTEREST
Accrued interest is the accumulation of unpaid interest on a
Bond from the last day on which interest thereon was paid.
Interest on Bonds in each Trust is accounted for daily on an
accrual basis. For this reason, the purchase price of Units of
each Trust will include not only the Public Offering Price but
also the proportionate share of accrued interest to the date of
settlement. Accrued interest does not include accrual of
original issue discount on zero coupon bonds, stripped
obligations or other original issue discount bonds. (See
"SELECTION OF BONDS FOR DEPOSIT IN THE TRUSTS" and "TAX STATUS OF
UNITHOLDERS.") Interest accrues to the benefit of Unitholders
commencing with the settlement date of their purchase
transaction.
The Trustee has no cash for distribution to Unitholders
until it receives interest payments on the Bonds in the Trust.
Since municipal bond interest is accrued daily but generally paid
only semi-annually, during the initial months of each Trust, the
Interest Account, consisting of accrued but uncollected interest
and collected interest (cash), will be predominantly the
uncollected accrued interest that is not available for
distribution. However, due to advances by the Trustee, the
Trustee will provide a first distribution between approximately
30 and 60 days after the Date of Deposit. Assuming each Trust
retains the size and composition shown in the accompanying Part
Two and expenses and fees remain the same, annual interest
collected and distributed in future periods will approximate the
estimated Net Annual Interest Income stated therein. However,
the amount of accrued interest at any point in time will be
greater than the amount that the Trustee will have actually
received and distributed to Unitholders. Therefore, there will
always remain an item of accrued interest that is included in the
purchase price and the redemption price of the Units.
Interest is accounted for daily, and a proportionate share
of accrued and undistributed interest computed from the preceding
Record Date is added to the daily valuation of each Unit of each
Trust. (See "DISTRIBUTIONS TO UNITHOLDERS.") As Bonds mature, or
are redeemed or sold, the accrued interest applicable to such
Bonds is collected and subsequently distributed to Unitholders.
Unitholders who sell or redeem all or a portion of their Units
will be paid their proportionate share of the remaining accrued
interest to, but not including, the third business day following
the date of sale or tender.
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN
The Estimated Long Term Return for each Trust is a measure
of the return to the investor expected to be earned over the
estimated life of the Trust. The Estimated Long Term Return
represents an average of the yields to maturity (or call) of the
Bonds in the Trust's portfolio calculated in accordance with
accepted bond practice and adjusted to reflect expenses and sales
charges. Under accepted bond practice, tax-exempt bonds are
customarily offered to investors on a "yield price" basis, which
involves computation of yield to maturity or to an earlier call
date (whichever produces the lower yield), and which takes into
account not only the interest payable on the bonds but also the
amortization or accretion of any premium over, or discount from,
the par (maturity) value inherent in the bond's purchase price.
In the calculation of Estimated Long Term Return, the average
yield for the Trust's portfolio is derived by weighting 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. This
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<PAGE>
weighted average yield is then adjusted to reflect estimated
expenses, is compounded, and is reduced by a factor which
represents the amortization of the sales charge over the expected
average life of the Trust. The Estimated Long Term Return
calculation does not take into account the effect of a first
distribution which may be less than a regular distribution or may
be paid at some point after 30 days (or a second distribution
which may be less than a normal distribution for Unitholders who
choose quarterly or semi-annual plans of distribution), and it
also does not take into account the difference in timing of
payments to Unitholders who choose quarterly or semi-annual plans
of distribution, each of which will reduce the return.
Estimated Current Return is computed by dividing the Net
Annual Interest Income per Unit by the Public Offering Price. In
contrast to Estimated Long Term Return, Estimated Current Return
does not reflect the amortization of premium or accretion of
discount, if any, on the Bonds in the Trust's portfolio. Net
Annual Interest Income per Unit is calculated by dividing the
annual interest income to the Trust, less estimated expenses, by
the number of Units outstanding.
Net Annual Interest Income per Unit, used to calculate
Estimated Current Return, will vary with changes in fees and
expenses of the Trustee and the Evaluator and with the
redemption, maturity, exchange or sale of Bonds. A Trust may
experience expenses and portfolio changes different from those
assumed in the calculation of estimated Long Term Return. There
can be no assurance that the Estimated Current Returns or
Estimated Long Term Returns quoted to a Trust will be realized in
the future. A Unitholder's actual return may vary significantly
from the Estimated Long Term Return based on their holding
period, market interest rate changes, other factors affecting the
prices of individual bonds in the portfolio, and differences
between the expected remaining life of portfolio bonds and the
actual length of time that they remain in the Trust; such actual
holding periods may be reduced by termination of the Trust, as
described in "Amendment and Termination of Indenture". Since
both the Estimated Current Return and the Estimated Long Term
Return quoted on a given business day are based on the market
value of the underlying Bonds on that day, subsequent
calculations of these performance measures will reflect the then
current market value of the underlying Bonds and may be higher or
lower. The Sponsor will provide estimated cash flow information
relating to a Trust without charge to each potential investor in
a Trust who receives this prospectus and makes an oral or written
request to the Sponsor for such information.
A comparison of tax-free and equivalent taxable estimated
current returns with the returns on various taxable investments
is one element to consider in making an investment decision. The
Sponsor may from time to time in its advertising and sales
materials compare the then current estimated returns on a Trust
and returns over specified periods on other similar Nuveen Trusts
with returns on taxable investments such as corporate or U.S.
Government bonds, bank CD's and money market accounts or money
market funds, each of which has investment characteristics that
may differ from those of a Trust. U.S. Government bonds, for
example, are backed by the full faith and credit of the U.S.
Government and bank CD's and money market accounts are insured by
an agency of the federal government. Money market accounts and
money market funds provide stability of principal, but pay
interest at rates that vary with the condition of the short-term
debt market. The investment characteristics of the Trusts are
described more fully elsewhere in the Prospectus.
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<PAGE>
DETERMINATION OF THE PRICE OF BONDS AT DATE OF DEPOSIT
Except as indicated below, for Series 590 and all prior
Trusts, the prices at which the Bonds deposited in each Trust
would have been offered to the public on the business day prior
to the Date of Deposit were determined by the Trustee on the
basis of an evaluation of the Bonds prepared by Standard &
Poor's, a firm regularly engaged in the business of evaluating,
quoting and appraising comparable bonds. For Series 591 and all
subsequent Series, the prices at which the bonds deposited in
each Trust would have been offered to the public on the business
day prior to the Date of Deposit were determined on the basis of
an evaluation of the Bonds by Kenny S&P Evaluation Services, a
division of J.J. Kenny Co., Inc. ("KENNY S&P"), a firm regularly
engaged in the business of evaluating, quoting and appraising
comparable bonds. With respect to Bonds in Insured Trusts and
insured Bonds in Traditional Trusts, either Standard & Poor's or
Kenny S&P, as applicable, evaluated the Bonds as so insured. For
National Trust 4 through 22, such prices were determined by the
Trustee on the basis of consultation with dealers in public bonds
other than the Sponsor, by reference to the Blue List of Current
Municipal Offerings (a daily publication containing the current
public offering prices of public bonds of all grades currently
being offered by dealers and banks).
SELECTION OF BONDS FOR DEPOSIT IN THE TRUSTS
In selecting Bonds for the Trusts, the following factors,
among others, were considered: (i) the Standard & Poor's,
Moody's and/or Fitch ratings of the Bonds (see page 1 for a
description of minimum rating standards), (ii) the prices of the
Bonds relative to other bonds of comparable quality and maturity
(in addition, in the case of Discount Trusts, the prices relative
to newly issued bonds of comparable quality, coupon, and
maturity, I.E., the existence of "MARKET" discount), (iii) the
diversification of Bonds as to purpose of issue and location of
issuer, (iv) the maturity dates of the Bonds, and (v) in the case
of Insured Trusts only, the availability of insurance on such
Bonds.
In order for Bonds to be eligible for insurance by the
Association or the Corporation, they must have credit
characteristics which, in the opinion of the applicable Insurer,
would qualify them as "investment grade" obligations. Insurance
is not a substitute for the basic credit of an issuer, but rather
supplements the existing credit and provides additional security
therefor. All Bonds insured by either of the Insurers receive a
rating of "AAA" by Standard & Poor's, "AAA" by Fitch, or "Aaa" by
Moody's, as the case may be. (See "INSURANCE ON BONDS IN INSURED
TRUSTS.")
Each Trust consists of such Bonds listed in the Schedules of
Investments in Part Two as may continue to be held from time to
time (including certain securities deposited in the Trust in
exchange or substitution for Bonds upon certain refundings),
together with accrued and undistributed interest thereon and
undistributed cash realized from the disposition of Bonds.
Neither the Sponsor nor the Trustee shall be liable in any way
for any default, failure or defect in any Bond. Because certain
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<PAGE>
of the Bonds may from time to time under certain circumstances be
sold or redeemed or will mature in accordance with their terms
and the proceeds from such events will be used to pay for Units
redeemed or distributed to Unitholders, and not reinvested, no
assurance can be given that a Trust will retain for any length of
time its present size and composition.
A Trust portfolio may consist of Bonds priced at a deep
"market" discount from par value at maturity. A primary reason
for the market values of the Bonds being less than their par
values is that the coupon interest rates on the Bonds are lower
than the current market interest rates for newly issued bonds of
comparable rating and type. At the time of issuance the 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 are 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. 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. (See "TAX STATUS OF UNITHOLDERS.") Discount bonds with a
longer 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 market
discount of discount bonds will increase and the value of such
bonds will decrease; and if interest rates decline, the market
discount of discount bonds will decrease and the value of the
bonds will increase. Market discount attributable to interest
rate changes does not necessarily indicate a lack of market
confidence in the issuer. Investors should also be aware that
many of the Bonds in each Trust portfolio are subject to special
or extraordinary redemption at par (in the case of original issue
discount bonds, such redemption is generally to be made at the
issue price plus the amount of original issue discount accreted
to redemption; such price is hereafter referred to as "Accreted
Value") under certain circumstances, including economic and other
defaults. Under such circumstances the redemption price for such
Bonds would not include any premium over par or Accreted Value
which the investor may have paid for such Bonds.
As a number of the Trusts contain Bonds issued by school
districts, investors should be aware that litigation challenging
the validity, under state constitutions, of present systems of
financing public education has been initiated in a number of
states. Decisions have been reached in some states 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, however, does not believe that such efforts, even if
successful, will have a material adverse effect on the ability of
any of the issuers of Bonds contained in the Trusts' portfolios
to make principal and interest payments when due.
The Sponsor participated as either the sole underwriter or
manager or as a member of the syndicates which were the original
underwriters of a number of the Bonds in certain Trusts. An
underwriter or underwriting syndicate purchases bonds from the
issuer on a negotiated or competitive bid basis as principal with
the intention of marketing such bonds to investors at a profit.
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<PAGE>
All of the Bonds in each Trust are subject to being called
or redeemed in whole or in part prior to their stated maturities
pursuant to the optional redemption provisions described in the
"Schedules of Investments" in Part Two and in most cases pursuant
to a sinking fund or special or extraordinary redemption
provisions. A bond subject to optional call 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
issue is redeemed, at or before maturity, by the proceeds of a
new bond issue. A bond subject to sinking fund redemption is one
which is subject to partial call from time to time from a fund
accumulated for the scheduled retirement of a portion of an issue
prior to maturity. Special or extraordinary redemption
provisions may provide for redemption of all or a portion of an
issue upon the occurrence of certain circumstances usually
related to defaults or unanticipated changes in circumstances.
Events that may permit or require the special or extraordinary
redemption of bonds include, among others: substantial damage to
or destruction of the project for which the proceeds of the bonds
were used; exercise by a local, state or Federal governmental
unit of its power of eminent domain to take all or substantially
all of the project for which the proceeds of the bonds were used;
a final determination that the interest on the bonds is taxable;
changes in the economic availability of raw materials, operating
supplies or facilities or technological or other changes which
render the operation of the project for which the proceeds of the
bonds were used uneconomical; changes in law or an administrative
or judicial decree which render the performance of the agreement
under which the proceeds of the bonds were made available to
finance the project impossible or which create unreasonable
burdens or which impose excessive liabilities, such as taxes, not
imposed on the date the bonds were issued, on the issuer of the
bonds or the user of the proceeds of the bonds; an administrative
or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds
of the bonds; an overestimate of the costs of the project to be
financed with the proceeds of the bonds resulting in excess
proceeds which may be applied to redeem bonds; an underestimate
of a source of funds securing the bonds resulting in excess funds
which may be applied to redeem bonds; or a default in payment or
failure to comply with the restrictions created as part of the
bond financing on the part of the operator or principal user of a
project financed by the bonds. The Sponsor is unable to predict
all of the circumstances which may result in such redemption of
an issue of Bonds. See the discussion of the various types of
bond issues, below, for certain information on the call
provisions of such bonds, particularly single family mortgage
revenue bonds.
The exercise of redemption or call provisions will (except
to the extent the proceeds of the called Bonds are used to pay
for Unit redemptions) result in the distribution of principal and
may result in a reduction in the amount of subsequent interest
distributions; it may also affect the current return on Units of
the Trust involved. Redemption pursuant to optional call
provisions is more likely to occur, and redemption pursuant to
sinking fund or special or extraordinary redemption provisions
may occur, when the Bonds have an offering side evaluation which
represents a premium over par (as opposed to a discount from
par). Redemption pursuant to optional call provisions may be,
and redemption pursuant to sinking fund or special or
extraordinary redemption provisions is likely to be, at a price
equal to the par value of the bonds without any premium (in the
case of original issue discount bonds, such redemption is
generally to be made at the issue price plus the amount of
original issue discount accreted to the date of redemption; such
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price is referred to as "ACCRETED VALUE"). Because Bonds may
have been valued at prices above or below par value or the then-
current Accreted Value at the time Units were purchased,
Unitholders may realize gain or loss upon the redemption of
portfolio Bonds. (See "ESTIMATED LONG-TERM RETURN AND ESTIMATED
CURRENT RETURN" and the "SCHEDULES OF INVESTMENTS" in Part Two.)
Certain of the Bonds in each Trust's portfolio may be
subject to continuing requirements regarding the actual use of
Bond proceeds, the manner of operation of the project financed
from Bond proceeds or the rebate of excess earnings on Bond
proceeds, any of which may affect the exemption of interest on
such Bonds from Federal income taxation. Although at the time of
issuance of each of the Bonds in each Trust an opinion of bond
counsel was rendered as to the exemption of interest on such
obligations from Federal income taxation, and the issuers
covenanted to comply with all requirements necessary to retain
the tax-exempt status of the Bonds, there can be no assurance
that the respective issuers or other obligors on such obligations
will fulfill the various continuing requirements established upon
issuance of the Bonds. A failure to comply with such
requirements may cause a determination that interest on such
obligations is subject to Federal income taxation, perhaps even
retroactively from the date of issuance of such Bonds, thereby
reducing the value of the Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Certain Bonds may carry a "mandatory put" (also referred to
as a "MANDATORY TENDER" or "MANDATORY REPURCHASE") feature
pursuant to which the holder of such a Bond will receive payment
of the full principal amount thereof on a stated date prior to
the maturity date unless such holder affirmatively acts to retain
the Bond. Under the Indenture, the Trustee does not have the
authority to act to retain any Bonds with such features;
accordingly, it will receive payment of the full principal amount
of any such Bonds on the stated put date and such date is
therefore treated as the maturity date of such Bonds in selecting
Bonds for the respective Trust and for purposes of calculating
the average maturity of the Bonds in any Trust.
Except as otherwise indicated herein or in Part Two of the
Prospectus, to the best knowledge of the Sponsor, there was no
litigation pending as of the date of this Prospectus in respect
of any Bonds which might reasonably be expected to have a
material adverse effect on any of the Trusts. It is possible
that after the date of this Prospectus, litigation may be
initiated with respect to Bonds in any Trust. Any such
litigation may affect the validity of such Bonds or the tax-
exempt nature of the interest thereon, but while the outcome of
litigation of such nature can never be entirely predicted, the
opinions of bond counsel to the issuer of each Bond on the date
of issuance state that such Bonds were validly issued and that
the interest thereon is, to the extent indicated, exempt from
Federal income tax.
An investment in Units of any Trust should be made with an
understanding of the risks that such an investment may entail.
These include but are not limited to the ability of the issuer,
or, if applicable, the insurer, to make payments of interest and
principal when due, the effects of changes in interest rates
generally, early call provisions and the potential for changes in
the tax status of the Bonds. The following paragraphs discuss
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certain characteristics of the Bonds in the Trusts and of certain
types of issuers in whose securities a Trust portfolio may be
deemed to be "concentrated." These paragraphs discuss, among
other things, certain circumstances which may adversely affect
the ability of such issuers to make payment of principal and
interest on Bonds held in the portfolio of a Trust or which may
adversely affect the ratings of such Bonds; with respect to the
Insured Trusts, however, because of the insurance obtained by the
Sponsor or by the Bond issuers, such changes should not adversely
affect any Insured Trust's receipt of principal and interest, the
Standard & Poor's AAA, Fitch's AAA or Moody's Aaa ratings of the
Bonds in an Insured Trust's portfolio.
ESCROW SECURED OBLIGATIONS. Some of the Bonds in a Trust
may be obligations of issuers which are typically secured by
direct obligations of the U.S. Government or in some cases
obligations guaranteed by the U.S. Government placed in an escrow
account maintained by an independent trustee until maturity or a
predetermined redemption date. These obligations are generally
noncallable prior to maturity or the predetermined redemption
date. In a few isolated instances, however, bonds which were
thought to be escrowed to maturity have been called for
redemption prior to maturity.
HEALTH CARE FACILITY OBLIGATIONS. Some of the Bonds in a
Trust may be obligations of issuers whose revenues are derived
from services provided by hospitals or other health care
facilities, including nursing homes. Ratings of bonds issued for
health care facilities are sometimes based on feasibility studies
that contain projections of occupancy levels, revenues and
expenses. A facility's gross receipts and net income available
for debt service may be affected by future events and conditions
including, among other things, demand for services, the ability
of the facility to provide the services required, an increasing
shortage of qualified nurses or a dramatic rise in nursing
salaries, physicians' confidence in the facility, management
capabilities, economic developments in the service area,
competition from other similar providers, efforts by insurers and
governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, government regulation, the
cost and possible unavailability of malpractice insurance, and
the termination or restriction of governmental financial
assistance, including that associated with Medicare, Medicaid and
other similar third party payor programs. Medicare
reimbursements are currently calculated on a prospective basis
and are not based on a provider's actual costs. Such method of
reimbursement may adversely affect reimbursements to hospitals
and other facilities for services provided under the Medicare
program and thereby may have an adverse effect on the ability of
such institutions to satisfy debt service requirements. In the
event of a default upon a bond secured by hospital facilities,
the limited alternative uses for such facilities may result in
the recovery upon such collateral not providing sufficient funds
to fully repay the bonds.
Certain hospital bonds provide for redemption at par upon
the damage, destruction or condemnation of the hospital
facilities or in other special circumstances.
HOUSING OBLIGATIONS. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are primarily derived from
mortgage loans to housing projects for low to moderate income
families. Such issues are generally characterized by mandatory
redemption at par, or in the case of original issue discount
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bonds, accreted value in the event of economic defaults and in
the event of a failure of the operator of a project to comply
with certain covenants as to the operation of the project. The
failure of such operator to comply with certain covenants related
to the tax-exempt status of interest on the Bonds, such as
provisions requiring that a specified percentage of units be
rented or available for rental to low or moderate income
families, potentially could cause interest on such Bonds to be
subject to Federal income taxation from the date of issuance of
the Bonds. The ability of such issuers to make debt service
payments will be affected by events and conditions affecting
financed projects, including, among other things, the achievement
and maintenance of sufficient occupancy levels and adequate
rental income, employment and income conditions prevailing in
local labor markets, increases in taxes, utility costs and other
operating expenses, the managerial ability of project managers,
changes in laws and governmental regulations, the appropriation
of subsidies and social and economic trends affecting the
localities in which the projects are located. Occupancy of such
housing projects may be adversely affected by rent levels and
income limitations imposed under Federal and state programs.
SINGLE FAMILY MORTGAGE REVENUE BONDS. Some of the Bonds in
a Trust may be single family mortgage revenue bonds, which are
issued for the purpose of acquiring from originating financial
institutions notes secured by mortgages on residences located
within the issuer's boundaries and owned by persons of low or
moderate income. Mortgage loans are generally partially or
completely prepaid prior to their final maturities as a result of
events such as sale of the mortgaged premises, default,
condemnation or casualty loss. Because these bonds are subject
to extraordinary mandatory redemption in whole or in part from
such prepayments of mortgage loans, a substantial portion of such
bonds will probably be redeemed prior to their scheduled
maturities or even prior to their ordinary call dates.
Extraordinary mandatory redemption without premium could also
result from the failure of the originating financial institutions
to make mortgage loans in sufficient amounts within a specified
time period. The redemption price of such issues may be more or
less than the offering price of such bonds. Additionally,
unusually high rates of default on the underlying mortgage loans
may reduce revenues available for the payment of principal of or
interest on such mortgage revenue bonds. Single family mortgage
revenue bonds issued after December 31, 1980 were issued under
Section 103A of the Internal Revenue Code of 1954, as amended, or
Section 143 of the Internal Revenue Code of 1986, which Sections
contain certain requirements relating to the use of the proceeds
of such bonds in order for the interest on such bonds to retain
its tax-exempt status. In each case, the issuer of the bonds has
covenanted to comply with applicable requirements and bond
counsel to such issuer has issued an opinion that the interest on
the bonds is exempt from Federal income tax under existing laws
and regulations. There can be no assurance that such continuing
requirements will be satisfied; the failure to meet such
requirements could cause interest on the Bonds to be subject to
Federal income taxation, possibly from the date of issuance of
the Bonds.
FEDERALLY ENHANCED OBLIGATIONS. Some of the mortgages which
secure the various health care or housing projects which underlie
the previously discussed Health Facility, Housing and Single
Family Mortgage Revenue Obligations (the "OBLIGATIONS") in a
Trust may be insured by the Federal Housing Administration
("FHA"). Under FHA regulations, the maximum insurable mortgage
amount cannot exceed 90% of the FHA's estimated value of the
project. The FHA mortgage insurance does not constitute a
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guarantee of timely payment of the principal of and interest on
the Obligations. Payment of mortgage insurance benefits may be
(1) less than the principal amount of Obligations outstanding or
(2) delayed if disputes arise as to the amount of the payment or
if certain notices are not given to the FHA within prescribed
time periods. In addition, some of the previously discussed
Obligations may be secured by mortgage-backed certificates
guaranteed by the Government National Mortgage Association
("GNMA"), a wholly owned corporate instrumentality of the United
States, and/or the Federal National Mortgage Association ("FANNIE
MAE"), a federally chartered and stockholder-owned corporation.
GNMA and Fannie Mae guarantee timely payment of principal and
interest on the mortgage-backed certificates, even where the
underlying mortgage payments are not made. While such mortgage-
backed certificates are often pledged to secure payment of
principal and interest on the Obligations, timely payment of
interest and principal on the Obligations is not insured or
guaranteed by the United States, GNMA, Fannie Mae or any other
governmental agency or instrumentality. The GNMA mortgage-backed
certificates constitute a general obligation of the United States
backed by its full faith and credit. The obligations of Fannie
Mae, including its obligations under the Fannie Mae mortgage-
backed securities, are obligations solely of Fannie Mae and are
not backed by, or entitled to, the full faith and credit of the
United States.
INDUSTRIAL REVENUE OBLIGATIONS. Certain of the Bonds in a
Trust may be industrial revenue bonds ("IRBs"), including
pollution control revenue bonds, which are tax-exempt securities
issued by states, municipalities, public authorities or similar
entities to finance the cost of acquiring, constructing or
improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated
only to pay amounts due on the IRBs to the extent that funds are
available from the unexpended proceeds of the IRBs or receipts or
revenues of the issuer under an arrangement between the issuer
and the corporate operator of a project. The arrangement may be
in the form of a lease, installment sale agreement, conditional
sale agreement or loan agreement, but in each case the payments
to the issuer are designed to be sufficient to meet the payments
of amounts due on the IRBs. Regardless of the structure, payment
of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project and, if applicable, corporate
guarantor. Corporate operators or guarantors may be affected by
many factors which may have an adverse impact on the credit
quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents
or environmentally-caused illnesses, extensive competition and
financial deterioration resulting from a corporate restructuring
pursuant to a leveraged buy-out, takeover or otherwise. Such a
restructuring may result in the operator of a project becoming
highly leveraged which may have an impact on such operator's
creditworthiness which in turn would have an adverse impact on
the rating and/or market value of such Bonds. Further, the
possibility of such a restructuring may have an adverse impact on
the market for and consequently the value of such Bonds, even
though no actual takeover or other action is ever contemplated or
effected. The IRBs in a Trust may be subject to special or
extraordinary redemption provisions which may provide for
redemption at par or, in the case of original issue discount
bonds, Accreted Value. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs in a Trust prior to the
stated maturity of such Bonds.
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UTILITY OBLIGATIONS. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are primarily derived from
the sale of several types of energy, including electric and
natural gas. The problems faced by such issuers include the
difficulty in obtaining approval for timely and adequate rate
increases from the applicable public utility commissions, the
difficulty of financing large construction programs, increased
competition, reductions in estimates of future demand for
electricity in certain areas of the country, the limitations on
operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital
market in absorbing utility debt, the difficulty in obtaining
fuel at reasonable prices and the effect of energy conservation.
All of such issuers have been experiencing certain of these
problems in varying degrees. In addition, Federal, state and
municipal governmental authorities may from time to time review
existing, and impose additional, regulations governing the
licensing, construction and operation of nuclear power plants,
which may adversely affect the ability of the issuers of certain
of the Bonds in a Trust to make payments of principal and/or
interest on such Bonds. Finally, utilities may be subject to
deregulation and competitive pressure from alternative providers.
TRANSPORTATION FACILITY REVENUE BONDS. Some of the Bonds in
a Trust may be obligations of issuers which are payable from and
secured by revenues derived from the ownership and operation of
airports, public transit systems and ports. The major portion of
an airport's gross operating income is generally derived from
fees received from airlines pursuant to use agreements which
consist of annual payments for airport use, occupancy of certain
terminal space, service fees and leases. Airport operating
income may therefore be affected by the ability of the airlines
to meet their obligations under the use agreements. The air
transport industry is experiencing significant variations in
earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and
other factors, and several airlines are experiencing severe
financial difficulties. In particular, facilities with use
agreements involving airlines experiencing financial difficulty
may experience a reduction in revenue due to the possible
inability of these airlines to meet their use agreement
obligations because of such financial difficulties and possible
bankruptcy. The Sponsor cannot predict what effect these
industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines
and their usage of the particular airport facility. Bonds that
are secured primarily by the revenue collected by a public
transit system typically are additionally secured by a pledge of
sales tax receipts collected at the state or local level, or
other governmental financial assistance. Transit system net
revenues will be affected by variations in utilization, which in
turn may be affected by the degree of local governmental
subsidization, demographic and population shifts, and competition
from other forms of transportation; and by increased costs,
including costs resulting from previous deferrals of maintenance.
Port authorities derive their revenues primarily from fees
imposed on ships using the facilities. The rate of utilization
of such facilities may fluctuate depending on the local economy
and on competition from competing forms of transportation such as
air, rail and trucks.
WATER AND/OR SEWERAGE OBLIGATIONS. Some of the Bonds in a
Trust may be obligations of issuers whose revenues are derived
from the sale of water and/or sewerage services. Such Bonds are
generally payable from user fees. The problems of such issuers
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include the ability to obtain timely and adequate rate increases,
population decline resulting in decreased user fees, the
difficulty of financing large construction programs, the
limitations on operations and increased costs and delays
attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh
water, the effect of conservation programs and the impact of "no-
growth" zoning ordinances. All of such issuers have been
experiencing certain of these problems in varying degrees.
UNIVERSITY AND COLLEGE REVENUE OBLIGATIONS. Some of the
Bonds in a Trust may be obligations of issuers which are, or
which govern the operation of, colleges and universities and
whose revenues are derived mainly from tuition, dormitory
revenues, grants and endowments. General problems of such
issuers include the prospect of a declining percentage of the
population consisting of "college" age individuals, possible
inability to raise tuitions and fees sufficiently to cover
increased operating costs, the uncertainty of continued receipt
of Federal grants and state funding, and government legislation
or regulations which may adversely affect the revenues or costs
of such issuers. All of such issuers have been experiencing
certain of these problems in varying degrees.
BRIDGE AUTHORITY AND TOLLROAD OBLIGATIONS. Some of the
Bonds in a Trust may be obligations of issuers which derive their
payments from bridge, road or tunnel toll revenues. The revenues
of such an issuer could be adversely affected by competition from
toll-free vehicular bridges and roads and alternative modes of
transportation. Such revenues could also be adversely affected
by a reduction in the availability of fuel to motorists or
significant increases in the costs thereof. Specifically,
governmental regulations restricting the use of vehicles in the
New York City metropolitan area may adversely affect revenues of
the Triborough Bridge and Tunnel Authority.
DEDICATED-TAX SUPPORTED BONDS. Some of the Bonds in a Trust
may be obligations of issuers which are payable from and secured
by tax revenues from a designated source, which revenues are
pledged to secure the bonds. The various types of Bonds
described below differ in structure and with respect to the
rights of the bondholders to the underlying property. Each type
of dedicated-tax supported Bond has distinct risks, only some of
which are set forth below. One type of dedicated-tax supported
Bond is secured by the incremental tax received on either real
property or on sales within a specifically defined geographical
area; such tax generally will not provide bondholders with a lien
on the underlying property or revenues. Another type of
dedicated-tax supported Bond is secured by a special tax levied
on real property within a defined geographical area in such a
manner that the tax is levied on those who benefit from the
project; such bonds typically provide for a statutory lien on the
underlying property for unpaid taxes. A third type of dedicated-
tax supported Bond may be secured by a tax levied upon the
manufacture, sale or consumption of commodities or upon the
license to pursue certain occupations or upon corporate
privileges within a taxing jurisdiction. As to any of these
types of Bonds, the ability of the designated revenues to satisfy
the interest and principal payments on such Bonds may be affected
by changes in the local economy, the financial success of the
enterprise responsible for the payment of the taxes, the value of
any property on which taxes may be assessed and the ability to
collect such taxes in a timely fashion. Each of these factors
will have a different affect on each distinct type of dedicated-
tax supported bonds.
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MUNICIPAL LEASE BONDS. Some of the Bonds in a Trust may be
obligations that are secured by lease payments of a governmental
entity. Such payments are normally subject to annual budget
appropriations of the leasing governmental entity. A
governmental entity that enters into such a lease agreement
cannot obligate future governments to appropriate for and make
lease payments but covenants to take such action as is necessary
to include any lease payments due in its budgets and to make the
appropriations therefor. A governmental entity's failure to
appropriate for and to make payments under its lease obligation
could result in insufficient funds available for payment of the
obligations secured thereby.
ORIGINAL ISSUE DISCOUNT BONDS AND STRIPPED OBLIGATIONS.
Certain of the Bonds in a Trust may be original issue discount
bonds. These Bonds were issued with nominal interest rates less
than the rates then offered by comparable securities and as a
consequence were originally sold at a discount from their face,
or par, values. This original issue discount, the difference
between the initial purchase price and face value, is deemed
under current law to accrue on a daily basis and the accrued
portion is treated as tax-exempt interest income for Federal
income tax purposes. On sale or redemption, gain, if any,
realized in excess of the earned portion of original issue
discount will be taxable as capital gain. (See "TAX STATUS OF
UNITHOLDERS.") The current value of an original issue discount
bond reflects the present value of its face amount at maturity.
In a stable interest rate environment, the market value of an
original issue discount bond would tend to increase more slowly
in early years and in greater increments as the bond approached
maturity.
Certain of the original issue discount bonds in a Trust may
be zero coupon bonds. Zero coupon bonds do not provide for the
payment of any current interest; the buyer receives only the
right to receive a final payment of the face amount of the bond
at its maturity. The effect of owning a zero coupon bond is that
a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of the
obligation. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to reinvest the income
on such obligation at a rate as high as the implicit yield, but
at the same time also eliminates the holder's ability to reinvest
at higher rates in the future. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations
during periods of changing market interest rates than are
securities of comparable quality that pay interest currently.
Original issue discount bonds, including zero coupon bonds,
may be subject to redemption at the Accreted Value plus, if
applicable, some premium. Pursuant to such call provisions an
original issue discount bond may be called prior to its maturity
date at a price less than its face value. See the "Schedules of
Investments" in Part Two for call provisions of portfolio Bonds.
Certain of the Bonds in a Trust may be Stripped Obligations,
which represent evidences of ownership with respect to either the
principal amount of or a payment of interest on a tax-exempt
obligation. An obligation is "stripped" by depositing it with a
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custodian, which then effects a separation in ownership between
the bond and any interest payment which has not yet become
payable, and issues evidences of ownership with respect to such
constituent parts. A Stripped Obligation therefore has economic
characteristics similar to zero coupon bonds, as described above.
Each Stripped Obligation has been purchased at a discount
from the amount payable at maturity. With respect to each
Unitholder, the Internal Revenue Code treats as "original issue
discount" that portion of the discount which produces a yield to
maturity (as of the date of purchase of the Unitholder's Units)
equal to the lower of the coupon rate of interest on the
underlying obligation or the yield to maturity on the basis of
the purchase price of the Unitholder's Units which is allocable
to each Stripped Obligation. Original issue discount which
accrues with respect to a Stripped Obligation will be exempt from
Federal income taxation to the same extent as interest on the
underlying obligations. (See "TAX STATUS OF UNITHOLDERS.")
Unitholders should consult their own tax advisers with
respect to the state and local tax consequences of owning
original issue discount bonds or Stripped Obligations. Under
applicable provisions governing determination of state and local
taxes, interest on original issue discount bonds or Stripped
Obligations may be deemed to be received in the year of accrual
even though there is no corresponding cash payment.
The Sponsor believes the information summarized below
describes some of the more significant events relating to the
various State Trusts. The sources of such information are
official statements of issuers in each state and other publicly
available information, generally as of the date on or before the
date of this Part One Prospectus, unless otherwise indicated.
The Sponsor has not independently verified this information and
makes no representation regarding the accuracy or completeness of
the sources of information which have been available to it, but
believes them to be complete and has itself relied upon them.
ALABAMA TRUSTS - ECONOMIC FACTORS
The portfolio of each Alabama Trust consists primarily of
obligations issued by entities located in Alabama.
GENERAL. Alabama's economy has experienced a major trend
toward industrialization over the last two decades. By 1990,
manufacturing accounted for 26.7% of Alabama's Real Gross State
Product (the total value of goods and services produced in
Alabama). During the 1960s and 1970s, the State's industrial
base became more diversified and balanced, moving away from
primary metals into pulp and paper, lumber, furniture, electrical
machinery, transportation equipment, textiles (including
apparel), chemicals, rubber and plastics. Since the early 1980s,
modernization of existing facilities and an increase in direct
foreign investments in the State has made the manufacturing
sector more competitive in domestic and international markets.
Among several leading manufacturing industries have been
pulp and paper and chemicals. In recent years, Alabama has
ranked as the fifth largest producer of timber in the nation.
Alabama has fresh water availability of twenty times present
usage. The State's growing chemical industry has been the
natural complement of production of wood pulp and paper.
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Mining, oil and gas production and service industries are
also important to Alabama's economy. Coal mining is by far the
most important mining activity.
From 1995-96, total farm and forestry receipts were over
$4.1 billion. Cash receipts from farm commodities totaled $2.91
billion, a slight decrease from $2.95 billion in 1994-95. The
top five commodities for cash receipts were (1) poultry,
(2) cattle and calves, (3) cotton, (4) nursery, sod, and
greenhouse products, and (5) peanuts. Combined, they accounted
for approximately 85% of the total receipts. Poultry made up
almost 60% of the total cash receipts.
Principal crops in Alabama during 1995-96 were cotton, corn,
soybeans, peanuts, and wheat. Alabama ranked third in broiler
production, third in peanuts, and 11th in cotton production.
EMPLOYMENT. Preliminary data show total nonagricultural
employment as of January 1997 was 1.823 million (all data not
seasonally adjusted). This is an increase of 28,900 from January
1996. The unemployment rate as of January 1997 was 4.4%, much
lower than its 5.8% rate in January 1996. The national
unemployment rate was 5.9% and 6.3% in January of 1997 and
January 1996, respectively.
The Alabama economy created almost 27,000 new jobs in 1996,
with the trade and services sector contributing almost 57% of
these. In contrast, the manufacturing sector lost approximately
5,000 jobs, with all of the losses occurring in nondurable goods
production. Slower job growth in 1997 is consistent with
national trends. Nevertheless, the Alabama economy should still
add about 20,500 new jobs in 1997. Although overall
manufacturing jobs losses will continue, jobs should be added in
nonelectrical and electrical machinery manufacturing.
Business services and health care services will contribute
the largest share of new jobs in 1997. The state should also
gain some employment from the Mercedes-Benz plant and its related
industries. However, job losses in defense-related industries
may offset some of this growth. Some construction-related
industries (lumber; stone, clay, and glass; and fabricated
metals) are expected to add jobs in 1997. These new jobs will be
indirect effects of the opening of the Mercedes-Benz plant and
its suppliers.
The service-producing industry is the largest industry,
consisting of 73.6% of total nonagricultural employment in 1996.
The manufacturing industry, the largest goods-producing industry,
made up 21% of total wage and salary employment in 1996.
Manufacturing accounts for 23% of the total output created in the
state. Remaining total nonagricultural employment in 1996
consisted of service 22.4%, trade 23.1%, government 18.9%,
transportation, communications, and public utilities 4.9%,
construction 4.8%, finance, insurance and real estate 4.3%, and
mining 0.6%.
Real wage and salary income in the state will grow only 1.2%
in 1997, down significantly from the 1996 real growth rate of
1.8%. During the last two years, Alabama has been one of the ten
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slowest growing states in terms of income. One of the major
reasons for this slow growth has been the continuing changes in
the state's economic structure; Alabama has created more jobs in
trade and services than in manufacturing. Average wages are
higher in manufacturing than in trade and services.
TRANSPORTATION. Alabama contains one of the largest
networks of inland river systems in the nation. Across the
northern section of the State, through the heartland and down to
the Gulf of Mexico flow the waters of four major rivers offering
barge transportation to industries and businesses that depend on
the movement of large, heavy or bulky cargoes.
The Port of Mobile is one of the nation's busiest ports in
tons of cargo handled. It has been the largest port of entry in
the United States for bauxite, a basic ingredient in aluminum.
Other important imports handled at the Port of Mobile are
manganese, iron ore, chrome ore, newsprint, wire and nails. In
addition to coal, the State's most important export, the other
significant exports passing through the Port of Mobile are
soybeans, corn, flour, wheat, rice, lumber, scrap iron, paper and
paper products, creosoted timber, dry milk, iron, steel and iron
and steel products.
Political subdivisions of the State have limited taxing
authority. In addition, the Alabama Supreme Court has held that
a governmental unit may first use its taxes and other revenues to
pay the expenses of providing necessary governmental services
before paying debt service on its bonds, warrants or other
indebtedness. The State has statutory budget provisions which
result in a proration procedure in the event estimated budget
resources in a fiscal year are insufficient to pay in full all
appropriations for that year. Proration has a materially adverse
effect on public entities that are dependent upon State funds
subject to proration.
Deterioration of economic conditions could adversely affect
both tax and other governmental revenues, as well as revenues to
be used to service various revenue obligations, such as
industrial development obligations. Such difficulties could
adversely affect the market value of the bonds held by the
Alabama Trusts and thereby adversely affect Unitholders.
In the fiscal year ended September 30, 1996, total tax
revenues in the state grew by 2.7%, an increase of $129.8
million. Total tax collections from all sources equaled $4.997
billion. Income taxes accounted for approximately 41% of total
revenues. Sales taxes were the second largest source of revenue,
contributing about 26% of the total.
For fiscal year 1996-97, total tax revenues are forecasted to increase by
2.3%. Revenues are expected to increase $114 million, down from $129.8
million in fiscal year 1996. A nominal growth rate of 2.3% translates into a
real decrease of 0.5% based upon projected inflation rates. Income taxes
(individual and corporate combined) are expected to grow by 5%, down slightly
from the 5.3% rate of fiscal year 1995-96. Sales taxes are expected to
increase 3.5% in fiscal year 1997, down from the 5.5% growth of the previous
fiscal year.
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Most income and sales tax revenues in Alabama are "earmarked" for the
Education Trust Fund. The Education Trust Fund in fiscal year 1995-96
increased by 5% and net receipts totaled $3,346.5 million. Expenditures and
encumbrances in the Education Trust Fund were $3,345.6 million. The balance
in the Education Trust Fund at the end of fiscal year 1995-96 was $24.61
million.
Estimated net receipts in the Education Trust Fund for fiscal years 1996-97
and 1997-98 are $3,530 million and $3,680 million, respectively. Estimated
expenditures and encumbrances are $3,552.2 million for fiscal year 1996-97
and $3,682.4 million for fiscal year 1997-98. The ending balance for the
Education Trust Fund for fiscal year 1996-97 is estimated at $2.375 million.
Projections for fiscal year 1997-98 show a zero ending balance in the
Education Trust Fund.
The State's General Fund grew 3% for fiscal year 1995-96 with General Fund
receipts at $896.91 million. Expenditures and encumbrances in the General
Fund were $893.92 million. The balance in the General Fund at the end of
fiscal year 1995-96 was $33.4 million.
Estimated receipts in the General Fund for fiscal years 1996-97 and 1997-98
are $920 million and $927.5 million, respectively, with expenditures and
encumbrances estimated at $905.28 million and $950.45 million, respectively.
The balance at the end of fiscal year 1996-97 is projected at $44.73 million
and for fiscal year 1997-98, $21.77 million.
Total annual payments for the state's general obligation bonds for the period
1996-2015 are $596,177,372.50. Total annual payments for revenue obligation
bonds for the same period are $1,498,437,489.69. The majority of the limited
obligation bonds payable from state revenues which have been authorized but
are unissued are from the Alabama Incentives Financing Authority and the
State Industrial Development Authority. Total bonded indebtedness during
1996-2015 amounts to $2,094,614,862.19.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in an Alabama Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by an Alabama Trust to pay interest on or principal of the
Bonds.
ARIZONA TRUSTS - ECONOMIC FACTORS
The portfolio of each Arizona Trust consists primarily of obligations issued
by entities located in Arizona.
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GENERAL ECONOMIC CONDITIONS. The following brief summary regarding the
economy of Arizona is based upon information drawn from publicly available
sources and is included for the purpose of providing the information about
general economic conditions that may or may not affect issuers of the Arizona
Bonds. The Sponsor has not independently verified any of the information
contained in such publicly available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic/employment sectors include services, trade, tourism and
manufacturing. Mining and agriculture are also significant, although they
tend to be more capital than labor intensive. Services is the single largest
economic sector. Many of these jobs are directly related to tourism.
Employment in the services sector increased 7.3% during 1995 and is projected
to increase 6.2% for 1996 and 6.0% for 1997. Construction employment showed
an 8.3% job growth in 1995 with projections in job growth for 1996 and 1997
declining to 6.5% and 4.4%, respectively. Trade employment also had a high
increase in job growth in 1995 at 7.7%, with 1996 and 1997 estimates at 4.4%,
and 4.2%, respectively. Overall, Arizona's wage and salary employment grew
5.4% in 1995 and is expected to increase 4.3% in 1996, 3.7% in 1997, and 3.0%
in 1998-1999. This translates into an increase of over 153,000 new jobs
through 1997. Total employment growth for Arizona from 1995-96 was 4.2%,
which compares favorably with the national figure of 2.3% during 1995-96.
Arizona's economy is expected to continue to show moderate growth, albeit at
slower rates over the next few years.
The unemployment rate in Arizona as of January 1997 was 5.4%. This is lower
than the national rate of 5.9% in January 1997 and an increase from the
Arizona unemployment rate of 5.1% in 1995. The annual unemployment rate for
the U.S. in 1995 and 1996 was 5.6% and 5.4% (not seasonally adjusted)
respectively. Part of Arizona's increase in unemployment is attributed to
structural changes in industries resulting from new technologies and methods.
In 1986, the value of Arizona real estate began a steady decline, reflecting
a market which had been overbuilt in the previous decade with a resulting
surplus of completed inventory. This decline adversely affected both the
construction industry and those Arizona financial institutions which had
aggressively pursued many facets of real estate lending. In the near future,
Arizona's financial institutions are likely to continue to experience
problems until the excess inventories of commercial and residential
properties are absorbed. The problems of the financial institutions have
adversely affected employment and economic activity. Longer-term prospects
are brighter. Arizona has been, and is projected to continue to be, one of
the fastest growing areas in the United States. Over the last several
decades the State has outpaced most other regions of the country in virtually
every major category of growth, including population, personal income, gross
state product and job creation.
Arizona's per capita personal income in 1994 and 1995 was $19,389 and
$20,489, respectively, a 5.7% increase. The national increase for the same
period was 5.3%. Arizona ranked third in the nation in personal income
growth during 1990-95. Personal income growth for Arizona is estimated at 8%
in 1996, 6.7% in 1997, 6.1% in 1998, and 5.5% in 1999.
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BUDGETARY PROCESS. Arizona operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 1996 refers to the year ending June 30, 1996.
Arizona began fiscal year 1996 with a $269.5 million cash surplus. Total
sources of funds in the general fund for fiscal year 1996 were $4,933.0
million. Total expenditures were $4,533.1 million, leaving a cash surplus
for fiscal year 1997 of $399.9 million. This was 50% higher than projected
and set a record for the State. That record balance did not include $235
million in the Budget Stabilization Fund and $14.1 million in the Medical
Services Stabilization Fund.
Total revenue for the General Fund in fiscal year 1996 was $4.663 billion.
Approximately 45% of this budgeted revenue came from sales and use taxes, 42%
from income taxes (individual and corporate), and 4% from property taxes.
All taxes totaled approximately $4.408 billion, or 94.5% of General Fund
revenues. Non-tax revenue includes items such as income from state lottery,
licenses, fees and permits, and interest.
For fiscal year 1996, General Fund expenditures totaled $4.378 billion.
These expenditures fell into the following major categories: education 58%
($2.527 billion), health and welfare 23% ($1.032 billion), protection and
safety 10% ($469.6 million), general government 6% ($273.1 million), and
inspection and regulation, transportation, and natural resources 3% ($149.6
million).
Fiscal year 1997 revenues will most likely be impacted by a $200 million
property tax reduction in 1996. This reduction has reduced Fiscal year 1997
revenues by almost 3.2%; yet, General Fund revenues are expected to increase
2.4% from fiscal year 1996. Total revenues in the General Fund for fiscal
year 1997 are forecast at $4.776 billion. General Fund expenditures are
estimated at $4.771 billion. Total sources of funds for fiscal year 1997 are
estimated at $5,176.0 million with expenditures at $4,921.1 million, leaving
a projected $254.9 million cash surplus for fiscal year 1998. However,
fiscal year 1998 ending balance is projected at only $11.2 million. The
Budget Stabilization Fund is expected to grow to $246.7 million at the end of
fiscal year 1998. The Medical Services Stabilization Fund is estimated at
$74.2 million for fiscal year 1998 and $17.2 million is projected for the
Temporary Assistance Stabilization Fund. General Fund revenues for fiscal
year 1998 are forecast to increase 3.4% to $4.939 billion, with expenditures
at $4.94 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the
State of Arizona, and are not supported by the State's taxing powers. The
particular source of payment and security for each of the Bonds is detailed
in the instruments themselves and in related offering materials. There can
be no assurances, however, with respect to whether the market value or
marketability of any of the Bonds issued by an entity other than the State of
Arizona will be affected by the financial or other condition of the State or
of any entity located within the State. In addition, it should be noted that
the State of Arizona, as well as counties, municipalities, political
subdivisions and other public authorities of the state, are subject to
limitations imposed by Arizona's constitution with respect to ad VALOREM
TAXATION, bonded indebtedness and other matters. For example, the state
legislature cannot appropriate revenues in excess of 7% of the total personal
income of the state in any fiscal year. These limitations may affect the
ability of the issuers to generate revenues to satisfy their debt obligations.
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Although most of the Bonds in the Arizona Trust are revenue obligations
of local governments or authorities in the State, there can be no assurance
that the fiscal and economic conditions referred to above will not affect the
market value or marketability of the Bonds or the ability of the respective
obligors to pay principal of and interest on the Bonds when due.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in Roosevelt
Elementary School District Number 66 ET AL. V.C. Dianne Bishop, ET AL. (the
"ROOSEVELT OPINION"). In this opinion, the Arizona Supreme Court held that
the present statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution. Subsequently, the
Arizona School Boards Association, with the approval of the appellants and
the appellees to the Roosevelt Opinion, and certain Arizona school districts,
filed with the Arizona Supreme Court motions for clarification of the
Roosevelt Opinion, specifically with respect to seeking prospective
application of the Roosevelt Opinion. On July 29, 1994, the Arizona Supreme
Court clarified the Roosevelt Opinion to hold that such opinion will have
prospective effect only.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona
Trust. The Arizona Legislature has in the past sought to enact health care
cost control legislation. Certain other health care regulatory laws have
expired. It is expected that the Arizona legislature will at future sessions
continue to attempt to adopt legislation concerning health care cost control
and related regulatory matters. The effect of any such legislation or of the
continued absence of any legislation restricting hospital bed increases and
limiting new hospital construction on the ability of Arizona hospitals and
other health care providers to pay debt service on their revenue bonds cannot
be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the State administers an alternative program, Arizona Health Care
Cost Containment System ("AHCCCS"), which provides health care to indigent
persons meeting certain financial eligibility requirements, through managed
care programs. In fiscal year 1996, AHCCCS was financed approximately 55% by
federal funds, and 45% by state funds.
In 1996, voters in Arizona passed an initiative (Proposition 203) which
provides for an expansion of eligibility for AHCCCS. For 1997, the Executive
recommended an $8.3 million supplemental to the AHCCCS for disproportionate
share hospital payments. Actual expenditures for the program in fiscal year
1996 were $128.9 million, and are projected at $135.3 million in fiscal year
1997.
Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems along
with those in other states. At least two Phoenix-based hospitals have
defaulted on or reported difficulties in meeting their bond obligations
during the past three or four years.
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Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases
needed to cover operating costs and debt service are subject to regulation by
the Arizona Corporation Commission, the only significant exception being the
Salt River Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July 15, 1991,
several creditors of Tucson Electric Power Company ("TUCSON ELECTRIC") filed
involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Power to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to
dismiss the July petition after five months of negotiations between Tucson
Electric and its creditors to restructure the utility's debts and other
obligations. In December 1992, Tucson Electric announced that it had
completed its financial restructuring. In January 1993, Tucson Electric
asked the Arizona Corporation Commission for a 9.3% average rate increase.
Tucson Electric serves approximately 270,000 customers, primarily in the
Tucson area. Inability of any regulated public utility to secure necessary
rate increases could adversely affect, to an indeterminable extent, its
ability to pay debt service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment
will be made over a four-year period beginning with approximately $14.6
million in tax refunds in fiscal year 1993-94. A combination of tax refunds
and tax credits will be used to satisfy this liability.
CALIFORNIA TRUSTS - ECONOMIC FACTORS
As described above, except to the extent the California Trusts invest in
temporary investments, the California Trusts will invest substantially all of
their assets in California municipal obligations. The California Trusts are
therefore susceptible to political, economic or regulatory factors affecting
issuers of California municipal obligations. These include the possible
adverse effects of certain California constitutional amendments, legislative
measures, voter initiatives and other matters that are described below. The
following information provides only a brief summary of the complex factors
affecting the financial situation in California and is derived from sources
that are generally available to investors and are believed to be accurate.
No independent verification has been made of the accuracy or completeness of
any of the following information. It is based in part on information
obtained from various State and local agencies in California or contained in
Official Statements for various California municipal obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of California
municipal obligations held in the portfolios of the California Trusts or the
ability of particular obligors to make timely payments of debt service on (or
relating to) those obligations.
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ECONOMIC OVERVIEW. California's economy is the largest among the 50 states
and one of the largest in the world. The State's population of over 32
million represents 12.3% of the total United States population and grew by
27% in the 1980s. The June 1996 population projection forecasts 33.9 million
California residents in July 1998. The diversified economy has major
components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total state gross
domestic product of $1 trillion in 1997 will be larger than all but seven
nations in the world and California will become the first state to produce
over one trillion dollars worth of goods and services in a single year.
After suffering through a severe recession, California's economy has been on
a steady recovery since the start of 1994. In 1996, California had eight
consecutive months of record high employment levels. Employment grew over
330,000 jobs in 1996 or 2.7%, and is expected to add another 330,000 in 1997.
California employment is expanding more rapidly than the nation as a whole,
which saw 2% job gains in 1995. The strongest growth has been in high
technology and export-related industries, including computer software,
business services, electronics, entertainment and tourism, all of which have
offset the recession-related losses which were heaviest in aerospace and
defense-related industries (which accounted for two-thirds of the job
losses), and finance and insurance. Residential housing construction, with
new permits rising from 94,000 units in 1996 to 110,000 in 1997, is weaker
than in previous recoveries, but has been growing slowly since 1993.
California enjoys a large and diverse labor force. For 1996, the total
civilian labor force was 15,496,000 with 14,372,000 individuals employed and
1,124,000, or 7.3%, unemployed. In comparison, the unemployment rate for the
United States during the same time was 5.4%. Yet, with several major
industries undergoing restructuring, job losses are occurring in industries
which, in the past, have been a stable source of growth to California's
economy. Energy and telephone companies are deregulating while banking and
insurance are streamlining and consolidating. Deregulation is expected to
make California more competitive by lowering electric rates by at least 20%
over the next five years.
Personal income rose to $815 billion in 1996, a 7.2% increase over 1995,
outpacing gains nationwide. Wages and salaries grew 6.9% during 1996. This
is over 2.5 times the increase in employment. Solid gains in employment and
income are expected to continue for the next several years with growth above
the national average.
CONSTITUTIONAL LIMITATION ON TAXES AND APPROPRIATIONS. Certain California
municipal obligations may be obligations of issuers which rely in whole or in
part, directly or indirectly, on ad valorem property taxes as a source of
revenue. The taxing powers of California local governments and districts are
limited by Article XIIIA of the California Constitution, enacted by the
voters in 1978 and commonly known as "Proposition 13." Briefly, Article
XIIIA limits to 1% of full cash value the rate of AD VALOREM property taxes
on real property and generally restricts the reassessment of property to the
rate of inflation, not to exceed 2% per year, or decline in value, or in the
case of new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise AD VALOREM taxes above the
1% limit to pay debt service on voter-approved bonded indebtedness.
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Under Article XIIIA, the basic 1% AD VALOREM tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the
acquisition-based assessment system of Proposition 13 and on June 18, 1992
the U.S. Supreme Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through AD
VALOREM property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax."
Court decisions, however, allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions,
the voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval.
Significant elements of this initiative, "Proposition 62," have been
overturned in recent court cases. An initiative proposed to re-enact the
provisions of Proposition 62 as a constitutional amendment was defeated by
the voters in November 1990, but such a proposal may be renewed in the
future.
APPROPRIATIONS LIMITS. California and its local governments are
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly
amended by Propositions 98 and 111 in 1988 and 1990, respectively. Article
XIIIB prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consists of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to
the extent that such proceeds exceed the cost of providing the product or
service, but "proceeds of taxes" excludes most State subventions to local
governments. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees, and certain
other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January
1, 1979, or subsequently authorized by the voters, (2) appropriations arising
from certain emergencies declared by the Governor, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to more closely
follow growth in California's economy.
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"Excess" revenues are measured over a two-year cycle. With respect to local
governments, excess revenues must be returned by a revision of tax rates or
fee schedules within the two subsequent fiscal years. The appropriations
limit for a local government may be overridden by referendum under certain
conditions for up to four years at a time. With respect to the State, 50% of
any excess revenues is to be distributed to K-12 school districts and
community colleges districts (collectively, "K-14 DISTRICTS") and the other
50% is to be refunded to taxpayers. With more liberal annual adjustment
factors since 1988, and depressed revenues since 1990 because of the
recession, few governments, including the State, are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms,
and the impossibility of predicting future appropriations or changes in
population and cost of living, and the probability of continuing legal
challenges, it is not currently possible to determine fully the impact of
Article XIIIA or Article XIIIB on California municipal obligations or on the
ability of California or local governments to pay debt service on such
California municipal obligations. It is not presently possible to predict
the outcome of any pending litigation with respect to the ultimate scope,
impact or constitutionality of either Article XIIIA or Article XIIIB, or the
impact of any such determinations upon State agencies or local governments,
or upon their ability to pay debt service on their obligations. Future
initiative or legislative changes in laws or the California Constitution may
also affect the ability of the State or local issuers to repay their
obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA. Under the California Constitution,
debt service on outstanding general obligation bonds is the second charge to
the General Fund after support of the public school system and public
institutions of higher education. The State had $17,913,271,000 aggregate
principal amount of general obligation bonds outstanding, and $8,383,864,000
authorized and unissued, as of December 31, 1996. Outstanding lease revenue
bonds totaled $5.845 billion as of June 30, 1996, and are estimated to total
$6.398 billion as of June 30, 1997.
General Fund general obligation debt service expenditures for fiscal year
1995-96 were $1.911 billion, and are estimated at $1.953 billion and $1.979
billion for fiscal years 1996-97 and 1997-98, respectively.
RECENT FINANCIAL RESULTS. The principal sources of General Fund revenues in
1995-96 were the California personal income tax (45% of total revenues), the
sales tax (34%), bank and corporation taxes (12.6%), and the gross premium
tax on insurance (2.6%). California maintains a Special Fund for Economic
Uncertainties (the "ECONOMIC UNCERTAINTIES FUND"), derived from General Fund
revenues, as a reserve to meet cash needs of the General Fund.
GENERAL. Throughout the 1980s, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about
33%).
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Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal, and budget conditions. The economic recession seriously affected
State tax revenues. It also caused increased expenditures for health and
welfare programs. The State has also faced a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates higher than the growth
rates for the principal revenue sources of the General Fund.
CURRENT BUDGET. On January 10, 1996, the Governor released his proposed
budget for the fiscal year 1996-97. The Governor requested total General
Fund appropriations of about $45.2 billion, based on projected revenues and
transfers of about $45.6 billion, which would leave a budget reserve in the
Economic Uncertainties Fund at June 30, 1997 of about $400 million. The
Governor renewed a proposal, which had been rejected by the Legislature in
1995, for a 15% phased cut in individual and corporate tax rates over three
years (the budget proposal assumed this would be enacted, reducing revenues
in 1996-97 by about $600 million). There was also a proposal to restructure
trial court funding in a way which would result in a $300 million decrease in
General Fund revenues. The Governor requested legislation to make permanent
a moratorium on cost of living increases for welfare payments, and suspension
of a renters tax credit, which otherwise would go back into effect in the
1996-97 fiscal year. The Governor further proposed additional cuts in
certain health and welfare programs, and assumed that cuts previously
approved by the Legislature would receive federal approval. Other proposals
included an increase in funding for K-12 schools under Proposition 98, for
state higher education systems (with a second year of no student fee
increases), and for corrections. The Governor's budget projected external
cash flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
Revised estimates were published in the Governor's Budget Summary for fiscal
year 1997-98. These estimates and projections are based upon various
assumptions which may be affected by numerous factors, including future
economic conditions in the State and the nation, and there can be no
assurance that the estimates will be achieved.
Preliminary General Fund revenues and transfers for fiscal year 1996-97 are
$48.4 billion, a 4.56% increase from the prior year. Expenditures are
estimated at $48.4 billion, a 6.6% increase. The Governor's Budget Summary
for fiscal year 1997-98 projects a positive balance of $197 million in the
budget reserve at June 30, 1997. Special Fund revenues are estimated at
$13.54 billion and appropriated Special Fund expenditures at $13.59 billion.
As of June 30, 1996, the General Fund balance was $685.4 million. The
estimate for June 30, 1997 is $648 million.
Overall, General Fund revenues and transfers represent about 78% of total
revenues. The remaining 22% are special funds, dedicated to specific
programs. The three largest revenue sources (personal income, sales, and
bank and corporation) account for about 73% of total revenues.
Several important tax changes were enacted in 1996. The bank and corporation
tax was reduced by 5%, and a number of targeted business tax incentives were
put into place.
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PROPOSED 1997-98 BUDGET. The Governor's proposed budget for fiscal year
1997-98 keeps General Fund spending below revenues. The budget provides for
General Fund revenues and transfers of $50.7 billion, a 4.65% increase from
1996-97, and expenditures of $50.3 billion, a 4% increase. The budget
provides for a General Fund Reserve for Economic Uncertainties of $553
million. The balance in the General Fund at the end of fiscal year 1998 is
forecast at $1,004 million. Special Fund revenues are estimated to be $14
billion and appropriated Special Fund expenditures are projected at $14.3
billion.
K-12 education remains the state's top funding priority -- nearly 42 cents of
every General Fund dollar is spent on K-12 education. Education, public
safety, and health and welfare expenditures constitute nearly 93% of all
state General Fund expenditures. General Fund expenditures for 1997-98 are
proposed in the following amounts and programs: $20.9 billion or 41.6% for
K-12 education, $14.6 billion or 28.9% for health and welfare, $6.5 billion
or 12.9% for higher education, and $4.3 billion, or 8.5% for youth and
correctional programs. The remaining expenditures are in areas such as
business, transportation, housing, and environmental protection.
The following are principal features of the Governor's 1997-98 budget
proposal:
For fiscal year 1997-98, the Governor's budget proposes a further 10%
reduction in the bank and corporation tax rate phased in over a two-year
period beginning with the 1998 tax year. This would implement the balance
of the Governor's proposal last year for a 15% bank and corporation tax
reduction. In addition, the Governor's Budget proposes that the State
conform with recent federal changes in the allowable number of Subchapter S
shareholders. Combined, these tax reduction proposals are estimated to
reduce taxes by $93 million during 1997-98, and $336 million during
1998-1999.
The Governor has proposed a $200 million bond to capitalize an
Infrastructure Bank to help finance infrastructure projects related to
business development. The budget also proposes $939,000 to create three
new offices -- two in Asia and one in South America -- to provide
California companies with representation and assistance in these emerging
markets.
Building on the 1996 class-size reduction initiative, the Budget proposes
$304 million to reduce class size in an additional grade, and funding is
provided to meet facilities-related costs of class size reduction in
1996-97. An additional $57 million is proposed for improved reading
instruction in grades four through eight.
The Budget includes the second year of the Citizens' Option for Public
Safety Program, through which $100 million will be provided to local
governments to increase frontline law enforcement.
The Budget provides a $35 million Infant Health Protection Initiative,
designed to protect children from abuse or neglect from substance-abusing
parents. The budget also provides $15.3 million to increase immunizations
for low-income children.
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BOND RATING. State general obligation bonds ratings were reduced in July,
1994 to "A1" by Moody's and "A" by S&P. Both of these ratings were reduced
from "AAA" levels which the State held until late 1991. There can be no
assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of the State
to make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS. The State is involved in certain legal proceedings
(described in the State's recent financial statements) that, if decided
against the State, may require the State to make significant future
expenditures or may substantially impair revenues. In the consolidated case
of MALIBU VIDEO SYSTEMS, ET AL. V. KATHLEEN BROWN AND ABRAMOVITZ, ET AL., a
stipulated judgment was entered requiring return of $119 million plus
interest to specified special funds over a period of up to five years
beginning in fiscal year 1996-97. The lawsuit challenges the transfer of
monies from special fund accounts within the State Treasury to the State's
General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number of
state agencies, instrumentalities and political subdivisions of the State
that issue municipal obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality
of the securities issued by them may vary considerably from the credit
quality of the obligations backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently,
the California Legislature enacted measures to provide for the redistribution
of the State's General Fund surplus to local agencies, the reallocation of
certain State revenues to local agencies and the assumption of certain
governmental functions by the State to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for approximately 75% of General Fund spending. To reduce State
General Fund support for school districts, the 1992-93 and 1993-94 Budget
Acts caused local governments to transfer $3.9 billion of property tax
revenues to school districts, representing loss of all of the
post-Proposition 13 "bailout" aid. The largest share of these transfers came
from counties, and the balance from cities, special districts and
redevelopment agencies. In order to make up this shortfall, the Legislature
proposed and voters approved in 1993 dedicating 0.5% of the sales tax to
counties and cities for public safety purposes. In addition, the Legislature
has changed laws to relieve local governments of certain mandates, allowing
them to reduce costs.
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To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of
State assistance to local governments may be reduced. Any such reductions in
State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in
August 1990, although such plans were put off after the Governor approved
legislation to provide additional funds for the county. Other counties have
also indicated that their budgetary condition is extremely grave. The
Richmond Unified School District (Contra Costa County) entered bankruptcy
proceedings in May 1991 but the proceedings have been dismissed. Los Angeles
County, the largest in the State, has reported severe fiscal problems,
leading to a nominal $1.2 billion deficit in its $11 billion budget for the
1995-96 fiscal year. To balance the budget, the county imposed severe cuts
in services, particularly for health care. The Legislature is considering
actions to help alleviate the County's fiscal problems, but none were
completed before August 15, 1995. As a result of its bankruptcy proceedings
(discussed further below) Orange County also implemented stringent cuts in
services and has laid off workers.
ASSESSMENT BONDS. California municipal obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or
a slowdown in real estate sales activity. In many cases, such bonds are
secured by land which is undeveloped at the time of issuance but anticipated
to be developed within a few years after issuance. In the event of such
reduction or slowdown, such development may not occur or may be delayed,
thereby increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal liability of
the owners of the property assessed, the lien on the property is the only
security for the bonds. Moreover, in most cases the issuer of these bonds is
not required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve
fund established for the bonds.
CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain California long-term lease
obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being
leased is unavailable for beneficial use and occupancy by the municipality
during the term of the lease. Abatement is not a default, and there may be
no remedies available to the holders of the certificates evidencing the lease
obligation in the event abatement occurs. The most common causes of
abatement are failure to complete construction of the facility before the end
of the period during which lease payments have been capitalized and uninsured
casualty losses to the facility (E.G., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease payments may be
interrupted (if all available insurance proceeds and reserves are exhausted)
and the certificates may not be paid when due.
Several years ago the Richmond Unified School District (the "DISTRICT")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover
operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a State receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State was named a defendant (on the
grounds that it controlled the District's finances). One of the defenses
raised in answer to this lawsuit was the invalidity of the District's lease.
The trial court has upheld the validity of the lease and the case has been
settled. Any ultimate judgment in any future case against the position
asserted by the Trustee in the Richmond case may have adverse implications
for lease transactions of a similar nature by other California entities.
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OTHER CONSIDERATIONS. The repayment of industrial development securities
secured by real property may be affected by California laws limiting
foreclosure rights of creditors. Securities backed by health care and
hospital revenues may be affected by changes in State regulations governing
cost reimbursements to health care providers under Medi-Cal (the State's
Medicaid program), including risks related to the policy of awarding
exclusive contracts to certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds
are secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (E.G., because of a
major natural disaster such as an earthquake), the tax increment revenue may
be insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been
or may be introduced which would modify existing taxes or other
revenue-raising measures or which either would further limit or,
alternatively, would increase the abilities of state and local governments to
impose new taxes or increase existing taxes. It is not presently possible to
predict the extent to which any such legislation will be enacted. Nor is it
presently possible to determine the impact of any such legislation on
California municipal obligations in which the California Trusts may invest,
future allocations of state revenues to local governments or the abilities of
state or local governments to pay the interest on, or repay the principal of,
such California municipal obligations.
Substantially all of California is within a active geologic region subject to
major seismic activity. Northern California in 1989 and southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $1.8 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California municipal obligations in the California
Trusts could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could
be constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the
Federal or State government to appropriate sufficient funds within their
respective budget limitations.
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On December 7, 1994, Orange County, California (the "COUNTY"), together with
its pooled investment fund (the "POOLED FUND") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Pooled Fund
had suffered significant market losses in its investments, causing a
liquidity crisis for the Pooled Fund and the County. More than 180 other
public entities, most but not all located in the County, were also depositors
in the Pooled Fund. The County estimated the Pooled Fund's loss at about
$1.64 billion, or 23%, of its initial deposits of around $7.5 billion. Many
of the entities which kept moneys in the Pooled Fund, including the County,
faced cash flow difficulties because of the bankruptcy filing and may be
required to reduce programs or capital projects. Moody's and Standard &
Poor's have suspended, reduced to below investment grade levels, or placed on
"Credit Watch" various securities of the County and the entities
participating in the Pooled Fund.
On May 2, 1995, the Bankruptcy Court approved a settlement agreement covering
claims of the other participating entities against the County and the Pooled
Funds. Most participants have received in cash 80% (90% for school
districts) of their Pooled Fund investments; the balance is to be paid in the
future. The County succeeded in deferring, by consent, until June 30, 1996,
the repayment of $800 million of short-term obligations due in July and
August, 1995; these notes, are, however, considered to be in default by
Moody's and S&P. On June 27, 1995, County voters turned down a proposal for
a temporary 0.5% increase in the local sales tax, making the County's fiscal
recovery much harder.
The State of California has no obligation with respect to any obligations or
securities of the County or any of the other participating entities, although
under existing legal precedents, the State may be obligated to ensure that
school districts have sufficient funds to operate. All school districts were
able to meet their obligations in the 1994-95 fiscal year.
COLORADO TRUSTS - ECONOMIC FACTORS
The portfolio of each Colorado Trust consists primarily of obligations issued
by entities located in Colorado.
RESTRICTIONS ON APPROPRIATIONS AND REVENUES. The State Constitution requires
that expenditures for any fiscal year not exceed revenues for such fiscal
year. By statute, the amount of General Fund revenues available for
appropriation is based upon revenue estimates which, together with other
available resources, must exceed annual appropriations by the amount of the
unappropriated reserve (the "UNAPPROPRIATED RESERVE"). The Unappropriated
Reserve requirement for fiscal years 1991, 1992 and 1993 was set at 3% of
total appropriations from the General Fund. For fiscal years 1994 and
thereafter, the Unappropriated Reserve requirement is set at 4%. In addition
to the Unappropriated Reserve, a constitutional amendment approved by
Colorado voters in 1992 requires the State and each local government to
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reserve a certain percentage of its fiscal year spending (excluding bonded
debt service) for emergency use (the "EMERGENCY RESERVE"). The minimum
Emergency Reserve was set at 2% for 1994 and 3% for 1995 and later years.
For fiscal year 1992 and thereafter, General Fund appropriations are also
limited by statute to an amount equal to the cost of performing certain
required reappraisals of taxable property plus an amount equal to the lesser
of (i) 5% of Colorado personal income or (ii) 106% of the total General Fund
appropriations for the previous fiscal year. This restriction does not apply
to any General Fund appropriations which are required as a result of a new
federal law, a final state or federal court order or moneys derived from the
increase in the rate or amount of any tax or fee approved by a majority of
the registered electors of the State voting at any general election. In
addition, the statutory limit on the level of General Fund appropriations may
be exceeded for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1995 fiscal year ending General Fund balance was $486.7 million, which
was $260.7 million over the combined Unappropriated Reserve and Emergency
Reserve requirement. The 1996 fiscal year ending General Fund balance was
$368.5 million, or $211.8 million over the required Unappropriated Reserve
and Emergency Reserve. Based on December 20, 1996 estimates, the 1997 fiscal
year ending General Fund balance is expected to be $396.3 million, or $230.2
million over the required Unappropriated Reserve and Emergency Reserve. The
Governor's proposed fiscal year 1998 budget shows total revenues at $4,772.2
million and total expenditures at $4,502.8 million, with an ending balance of
$336.4 million, or $159.7 million over the required Unappropriated Reserve
and Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "AMENDMENT") which, in general, became effective December 31, 1992, and
could restrict the ability of the State and local governments to increase
revenues and impose taxes. The Amendment applies to the State and all local
governments, including home rule entities ("DISTRICTS"). Enterprises,
defined as government-owned businesses authorized to issue revenue bonds and
receiving under 10% of annual revenue in grants from all Colorado state and
local governments combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt,
or mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to
specified percentages. The Amendment requires that District property tax
revenues yield no more than the prior year's revenues adjusted for inflation,
voter approved changes and (except with regard to school districts) local
growth in property values according to a formula set forth in the Amendment.
School districts are allowed to adjust tax levies for changes in student
enrollment. Pursuant to the Amendment, local government spending is to be
limited by the same formula as the limitation for property tax revenues. The
Amendment limits increases in expenditures from the State General Fund and
program revenues (cash funds) to the growth in inflation plus the percentage
change in State population in the prior calendar year. The bases for initial
spending and revenue limits are fiscal year 1992 spending and 1991 property
taxes collected in 1992. The bases for spending and revenue limits for
fiscal year 1994 and later years will be the prior fiscal year's spending and
property taxes collected in the prior calendar year. Debt service changes,
reductions and voter-approved revenue changes are excluded from the
calculation bases. The Amendment also prohibits new or increased real
property transfer tax rates, new State real property taxes and local District
income taxes.
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Litigation concerning several issues relating to the Amendment was filed in
the Colorado courts. The litigation dealt with three principal issues: (i)
whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease-purchase agreement subject to annual appropriations is an obligation
which requires voter approval prior to execution of the agreement; and (iii)
what constitutes an "enterprise" which is excluded from the provisions of the
Amendment. In September, 1994, the Colorado Supreme Court held that
Districts can increase mill levies to pay debt service on general obligation
bonds issued after the effective date of the Amendment; in June, 1995, the
Colorado Supreme Court validated mill levy increases to pay general
obligation bonds issued prior to the Amendment. In late 1994, the Colorado
Court of Appeals held that multi-year lease-purchase agreements subject to
annual appropriation do not require voter approval. The time to file an
appeal in that case has expired. Finally, in May, 1995, the Colorado Supreme
Court ruled that entities with the power to levy taxes may not themselves be
"enterprises" for purposes of the Amendment; however, the Court did not
address the issue of how valid enterprises may be created. Future litigation
in the "enterprise" arena may be filed to clarify these issues.
According to the COLORADO ECONOMIC PERSPECTIVE, SECOND QUARTER, FY 1996-97,
DECEMBER 20, 1996 (THE "ECONOMIC REPORT"), inflation for 1995 was 4.3% and
population grew at the rate of 2.3% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1997 fiscal year will
be limited to 6.6% over expenditures during the 1996 fiscal year. The
limitation for the 1998 fiscal year is projected to be 5.9%, based on
projected inflation of 3.9% for 1996 and projected population growth of 2.0%
during 1996. The 1996 fiscal year is the base year for calculating the
limitation for the 1997 fiscal year. For the 1996 fiscal year, General Fund
revenues totaled $4,230.8 million and program revenues (cash funds) totaled
$1,893.5 million, resulting in total estimated base revenues of $6,124.3
million. Expenditures for the 1997 fiscal year, therefore, cannot exceed
$6,528.5 million. However, the 1997 fiscal year General Fund and program
revenues (cash funds) are projected to be only $6,499.1 million, or $29.4
million less than expenditures allowed under the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
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STATE FINANCES. As the State experienced revenue shortfalls in the
mid-1980s, it adopted various measures, including impoundment of funds by the
Governor, reduction of appropriations by the General Assembly, a temporary
increase in the sales tax, deferral of certain tax reductions and inter-fund
borrowings. On a GAAP basis, the State had unrestricted General Fund
balances at June 30 of approximately $133.3 million in fiscal year 1992,
$326.6 million in fiscal year 1993, $405.1 million in fiscal year 1994 and
$486.7 million in fiscal year 1995. The fiscal year 1996 unrestricted
General Fund ending balance was $368.5 million with projections for fiscal
year 1997 at $396.3 million.
Revenues for the fiscal year ending June 30, 1996, showed Colorado's general
fund continuing to slow. Revenues grew by $272.3 million, to $4,268.7
million, a 6.8% increase from 1995. However, this figure was down from the
fiscal year 1995 pace of 7.3%. General Fund expenditures rose substantially
and exceeded revenues by $142.5 million. Reasons for this consist of a
change in how the state manages its emergency reserve, and a significant
increase in the transfer of reserves to the Capital Construction Fund, and
the Police and Fire Pension Association (increases of $29 million and $32
million, respectively).
For fiscal year 1996, the following tax categories generated the following
percentages of the State's $4,268.7 million total gross receipts: individual
income taxes represented 54.4% of gross fiscal year 1996 receipts; sales, use
and other excise taxes represented 33.2% of gross fiscal year 1996 receipts;
and corporate income taxes represented 4.8% of gross fiscal year 1996
receipts. The final budget for fiscal year 1997 projects General Fund
revenues of approximately $4,565.0 million and appropriations (at the 6%
expenditure limit) of approximately $4,151.9 million. The percentages of
General Fund revenue generated by type of tax for fiscal year 1997 are not
expected to be significantly different from fiscal year 1996 percentages.
For fiscal year 1997, General Fund revenues are projected at $4,565.0
million. Revenue growth is expected to increase 6.9% over fiscal year 1996
actual revenues. Total general fund expenditures are estimated at $4,422.2
million. The ending general fund balance, after reserve set-asides, is
$230.2 million.
STATE DEBT. Under its constitution, the State of Colorado is not permitted
to issue general obligation bonds secured by the full faith and credit of the
State. However, certain agencies and instrumentalities of the State are
authorized to issue bonds secured by revenues from specific projects and
activities. The State enters into certain lease transactions which are
subject to annual renewal at the option of the State. In addition, the State
is authorized to issue short-term revenue anticipation notes. Local
governmental units in the State are also authorized to incur indebtedness.
The major source of financing for such local government indebtedness is an AD
VALOREM property tax. In addition, in order to finance public projects,
local governments in the State can issue revenue bonds payable from the
revenues of a utility or enterprise or from the proceeds of an excise tax, or
assessment bonds payable from special assessments. Colorado local
governments can also finance public projects through leases which are subject
to annual appropriation at the option of the local government. Local
governments in Colorado also issue tax anticipation notes. The Amendment
requires prior voter approval for the creation of any multiple fiscal year
debt or other financial obligation whatsoever, except for refundings at a
lower rate or obligations of an enterprise.
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STATE ECONOMY. Based on data published by the State of Colorado, Office of
State Planning and Budgeting as presented in the Economic Report, Colorado
gained 74,966 employees in 1995. The 1995 increase was down about 10,000
from the 1994 gain, but mirrored the 1993 employment increase. Services and
retail trade were the number one and two largest growing industries in
Colorado in 1995, adding 28,766 (6.0% increase) and 20,905 (6.2% increase)
employees, respectively. Transportation, communications and public utilities
reported the largest percentage gain from 1994 to 1995, at 8.8%.
Construction reported the fourth largest employment gain over the year, at
5.2%, with increases about half of what they had been in 1994 and 1993 due to
the completion of the Denver International airport. Mining continued to be
the weakest industry sector, with only a 0.5% increase.
The unemployment rate in Colorado remained stable at 4.2% during both 1994
and 1995. In 1996, the Colorado unemployment rate increased to 4.5%, yet
still lower than the 5.4% unemployment rate for the nation. Colorado's job
growth rate increased 2.5% in 1996, a decrease from the 4.7% growth rate in
1995. In comparison, the job growth rate for the United States in 1995 and
1996 was 2.7% and 2.0%, respectively. The services sector comprised 28% of
Colorado's 1995 employment and generated 38% of the State's growth.
Personal income rose 8.0% in Colorado during 1995 as compared with 6.3% for
the nation as a whole. In 1996, Colorado's personal income dropped to 6.3%,
while still higher than the nation's 1996 rate of 5.6%.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Colorado Bonds
in the Colorado Trust), which, to varying degrees, have also experienced
reduced revenues as a result of recessionary conditions and other factors.
CONNECTICUT TRUSTS - ECONOMIC FACTORS
The portfolio of each Connecticut Trust primarily consists of obligations
issued by entities located in Connecticut.
The following information is only a summary of risk factors associated with
Connecticut. It has been compiled from official government statements and
other publicly available documents. Although the Sponsors have not
independently verified the information, they have no reason to believe that
it is not correct in all material respects.
Connecticut's manufacturing industry, which has historically been of prime
economic importance to the State, its municipalities and its residents has
been in decline for several years. Although Connecticut's manufacturing
industry is diversified between transportation equipment (primarily aircraft
engines, helicopters and submarines), non-electrical machinery, fabricated
metal products and electrical machinery, defense-related business represents
a relatively high proportion of manufacturing receipts. As a result,
reductions in defense spending have had a substantial adverse effect on
Connecticut's manufacturing industry.
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Connecticut's manufacturing employment peaked in 1985 at over 441,000 workers
but had declined 35.5% by 1995. Although the loss of manufacturing jobs was
partially offset by a 69.7% rise in other non-agricultural employment during
the same period, Connecticut's growth in non-manufacturing employment has
lagged behind the New England region and the nation as a whole. Moreover,
Connecticut's largest defense contractors have announced plans to reduce
their labor forces substantially over the next four years.
From 1986 through 1995, Connecticut's unemployment rate was generally lower
than the unemployment rate for the U.S. as a whole, and average per capita
personal income of Connecticut residents was higher than that of residents of
other states. The average unemployment rate (seasonally adjusted) of
Connecticut increased from a low of 3.0% in 1988 to 7.5% in 1992 and, after a
number of important changes in the method of calculation, was reported to be
5.0% in 1996. Average per capita personal income of Connecticut residents
increased in every year from 1986 to 1995, rising from $19,872 to $31,776.
However, pockets of significant unemployment and poverty exist in some
Connecticut cities and towns, and Connecticut is now in a recession, the
depth and duration of which are uncertain.
For the four fiscal years ended June 30, 1991, the General Fund ran operating
deficits of approximately $115,600,000, $28,000,000, $259,000,000 and
$808,500,000, respectively. At the end of the 1990-1991 fiscal year, the
General Fund had an accumulated unappropriated deficit of $965,712,000. For
the five fiscal years ended June 30, 1996, the General Fund ran operating
surpluses of approximately $110,200,000, $113,500,000, $19,700,000,
$80,500,000 and $250,000,000, respectively. General Fund budgets for the
biennium ending June 30, 1997 were adopted in 1995. General Fund
expenditures and revenues are budgeted to be approximately $9,200,000,000,
for the 1996-1997 fiscal year.
In 1991, to address the General Fund's growing deficit, legislation was
enacted by which the State imposed an income tax on individuals, trusts and
estates for taxable years generally commencing in 1992. For each fiscal year
starting with the 1991-1992 fiscal year, the General Fund has operated at a
surplus with over 60% of the State's tax revenues being generated by the
income tax and the sales and use tax. However, the State's budgeted
expenditures have more than doubled from approximately $4,300,000,000 for the
1986-1987 fiscal year to approximately $9,200,000,000 for the 1996-1997
fiscal year.
The 1991 legislation also authorized the State Treasurer to issue Economic
Recovery Notes to fund the General Fund's accumulated deficit of $965,712,000
as of June 30, 1991, and during 1991 the state issued a total of $965,710,000
Economic Recovery Notes, of which $196,555,000 were outstanding as of
February 28, 1997. The notes were to be payable no later than June 30, 1996,
but as part of the budget adopted for the biennium ending June 30, 1997,
payment of the remaining notes scheduled to be paid during the 1995-96 fiscal
year was rescheduled to be paid over the four fiscal years ending June 30,
1999.
The State's primary method for financing capital projects is through the sale
of general obligation bonds. As of February 28, 1997, the State had
authorized general obligation bonds totaling $11,192,198,000, of which
$9,578,911,000 had been approved for issuance by the State Bond Commission,
$8,529,149,000 had been issued, and $6,335,206,857 were still outstanding.
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In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The improvements are to be financed by $18 million of general
obligation bonds of the State and $962 million bonds of the University. The
University's bonds will be secured by a state debt service commitment, the
aggregate amount of which is limited to $382 million for the three fiscal
years ending June 30, 1999, and $580 million for the four fiscal years ending
June 30, 2005.
In addition to the bonds described above, the State also has limited or
contingent liability on a significant amount of other bonds. Such bonds have
been issued by the following quasi-public agencies: the Connecticut Housing
Finance Authority, the Connecticut Development Authority, the Connecticut
Higher Education Supplemental Loan Authority, the Connecticut Resources
Recovery Authority and the Connecticut Health and Educational Facilities
Authority. Such bonds have also been issued by the cities of Bridgeport and
West Haven and the Southeastern Connecticut Water Authority. As of October
15, 1996, the State has limited or contingent liability of $3,985,400,000.
In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport).
The total cost of the program through June 30, 2000, is currently estimated
to be $11.2 billion, to be met from federal, state, and local funds. The
State expected as of October 2, 1995, to finance most of its $4.7 billion
share of such cost by issuing $4.2 billion of special tax obligation ("STO")
bonds. The STO bonds are payable solely from specified motor fuel taxes,
motor vehicle receipts, and license, permit and fee revenues pledged therefor
and credited to the Special Transportation Fund, which was established to
budget and account for such revenues.
As of October 15, 1996, the General Assembly had authorized $4,157,900,000 of
such STO bonds, of which $3,594,700,000 of new money borrowings had been
issued. It is anticipated that additional STO bonds will be authorized
annually in amounts necessary to finance and to complete the infrastructure
program. Such additional bonds may have equal rank with the outstanding
bonds PROVIDED certain pledged revenue coverage requirements are met. The
State expects to continue to offer bonds for this program.
On March 29, 1990, Standard and Poor's reduced its ratings of the State's
general obligation bonds from AA+ to AA, and on April 9, 1990, Moody's
reduced its ratings from Aal to Aa. On September 13, 1991, Standard & Poor's
further reduced its ratings of the State's general obligation bonds and
certain obligations that depend in part on the creditworthiness of the State
to AA-. On March 17, 1995, Fitch reduced its ratings of the State's general
obligation bonds from AA+ to AA.
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The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of
the following cases might have a significant impact on the State's financial
position: (i) litigation involving claims by Indian tribes to a portion of
the State's land area; (ii) an action on behalf of all persons with traumatic
brain injury, claiming that their constitutional rights are violated by
placement in State hospitals alleged not to provide adequate treatment and
training, and seeking placement in community residential settings with
appropriate support services; and (iii) a class action by the Connecticut
Criminal Defense Lawyers Association claiming a campaign of illegal
surveillance activity and seeking damages and injunctive relief.
As a result of litigation on behalf of black and Hispanic school children in
the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and
ethnic segregation in the Hartford public schools. The fiscal impact of this
decision might be significant but is not determinable at this time.
General obligation bonds issued by municipalities are payable primarily from
AD VALOREM taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities finance projects by
issuing bonds that are not considered to be debts of the municipality. Such
bonds may be repaid only from revenues of the financed project, the revenues
from which may be insufficient to service the related debt obligations.
In recent years, certain Connecticut municipalities have experienced severe
fiscal difficulties and have reported operating and accumulated deficits.
The most notable of these is the City of Bridgeport, which filed a bankruptcy
petition on June 7, 1991. The State opposed the petition. The United States
Bankruptcy Court for the District of Connecticut held that Bridgeport has
authority to file such a petition but that its petition should be dismissed
on the grounds that Bridgeport was not insolvent when the petition was filed.
Regional economic difficulties, reductions in revenues and increases in
expenses could lead to further fiscal problems for the State and its
political subdivisions, authorities and agencies. Difficulties in payment of
debt service on borrowings could result in declines, possibly severe, in the
value of their outstanding obligations, increases in their future borrowing
costs, and impairment of their ability to pay debt service on their
obligations.
FLORIDA TRUSTS - ECONOMIC FACTORS
The portfolio of each Florida Trust consists primarily of obligations issued
by entities located in Florida.
POPULATION. In 1980, Florida was the seventh most populous state in the U.S.
The State has grown dramatically since then and as of April 1, 1995, ranks
fourth with an estimated population of 14.1 million. Florida's attraction,
as both a growth and retirement state, has kept net migration at an average
of 227,000 new residents a year from 1985 through 1995. The U.S. average
population increase since 1984 is about 1% annually, while Florida's average
annual rate of increase is about 2.3%. Florida continues to be the fastest
growing of the eleven largest states. This strong population growth is one
reason the State's economy is performing better than the nation as a whole.
In addition to attracting senior citizens to Florida as a place for
retirement, the State is also recognized as attracting a significant number
of working age individuals. Since 1985, the prime working age population
(18-44) has grown at an average annual rate of 2.2%. The share of Florida's
total working age population (18-59) to total State population is
approximately 54%. This share is not expected to change appreciably into the
twenty-first century.
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INCOME. The State's personal income has been growing strongly the last
several years and has generally outperformed both the U.S. as a whole and the
southeast in particular, according to the U.S. Department of Commerce and the
Florida Consensus Economic Estimating Conference. This is because Florida's
population has been growing at a very strong pace and, since the early 1970s,
the State's economy has diversified so as to provide a broader economic base.
As a result, Florida's real per capita personal income has tracked closely
with the national average and has tracked above the southeast. From 1985
through 1995, the State's real per capita income rose an average 5.0% per
year, while the national real per capita income increased at an average of
4.9% per year.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest, and rent) and transfer payments (Social
Security and pension benefits, among other sources of income) are relatively
more important sources of income. For example, Florida's total wages and
salaries and other labor income in 1994 was 60.6% of total personal income,
while a similar figure for the nation was 70.8%. Transfer payments are
typically less sensitive to the business cycle than employment income and,
therefore, act as stabilizing forces in weak economic periods.
The State's per capita personal income in 1995 of $22,916 was slightly above
the national average of $22,788 and significantly ahead of that for the
southeast United States, which was $20,645. Real personal income in the
State is estimated to increase 4.2% in 1996-97 and 4.4% in 1997-98. Real
personal income per capita in the State is projected to grow at 2.3% in
1996-97 and 2.6% in 1997-98. The Florida economy appears to be performing in
line with the U.S. economy and is expected to experience steady, if
unspectacular, growth over the next couple years.
EMPLOYMENT. Since 1985, the State's population has increased an estimated
26.1%. In the same period, Florida's total non-farm employment has grown by
over 36%. Since 1985, the job creation rate in the State is more than twice
that of the nation as a whole. Contributing to this is the State's rapid
rate of growth in employment and income from international trade. Changes to
its economy have also contributed to the State's strong performance. The
State is now less dependent on employment from construction, construction
related manufacturing, and resource based manufacturing, which have declined
as a proportion of total State employment. The State's service sector
employment is nearly 87% of total non-farm employment. While the southeast
and the nation have a greater proportion of manufacturing jobs, which tend to
pay higher wages, service jobs tend to be less sensitive to swings in the
business cycle. The State has a concentration of manufacturing jobs in
high-tech and high value-added sectors, such as electrical and electronic
equipment, as well as printing and publishing. These types of manufacturing
jobs tend to be less cyclical. The State's unemployment rate throughout the
1980s tracked below the nation's. As the State's economic growth has slowed,
its unemployment rate has tracked above the national average. The average
rate in the State since 1986 is 6.2%. The national average also is 6.2%.
According to the U.S. Department of Commerce, the Florida Department of Labor
and Employment Security, and the Florida Consensus Economic Estimating
Conference (together the "ORGANIZATION") the State's unemployment rate was
5.5% during 1995. As of November 1996, the Organization estimates that the
unemployment rate will be 5.3% for 1996 and 5.3% in 1997.
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The State's economy is expected to decelerate along with the nation, but is
expected to out perform the nation as a whole. Total non-farm employment in
Florida is expected to increase 2.9% in 1996-97 and 2.9% in 1997-98. Trade
and services, the two largest, account for more than half of the total
non-farm employment. Employment in the service sectors should experience an
increase of 4.3% in 1996-97, and again growing 4.3% in 1997-98. Trade is
expected to expand 3.1% in 1997 and 2.9% in 1998. The service sector is now
the State's largest employment category.
CONSTRUCTION. The State's economy has in the past been highly dependent on
the construction industry and construction related manufacturing. This
dependency has declined in recent years and continues to do so as a result of
continued diversification of the State's economy. For example, in 1980,
total contract construction employment as a share of total non-farm
employment was about 7.5%, and in 1995, the share had edged downward to 5%.
This trend is expected to continue as the State's economy continues to
diversify. Florida, nevertheless, has a dynamic construction industry, with
single and multi-family housing starts accounting for about 8.5% of total
U.S. housing starts in 1995, while the State's population is 5.4% of the U.S.
total population. Florida's housing starts in 1995 were 115,000 and since
1985 have averaged 148,500 a year.
A driving force behind the State's construction industry has been the State's
rapid rate of population growth. Although the State currently is the fourth
most populous state, its annual population growth is now projected to slow
somewhat as the number of people moving into the State is expected to grow
close to 230,000 a year throughout the 1990s. This population trend should
provide fuel for business and home builders to keep construction activity
lively in Florida for some time to come. However, other factors do influence
the level of construction in the State. For example, federal tax reform in
1986 and other changes to the federal income tax code have eliminated tax
deductions for owners of more than two residential real estate properties and
have lengthened depreciation schedules on investment and commercial
properties. Economic growth and existing supplies of homes and buildings
also contribute to the level of construction in the State.
Single and multi-family housing starts in 1996-97 are projected to reach a
combined level of 113,200 while increasing to 116,000 next year. Lingering
recessionary effects on consumers and tight credit are some of the reasons
for relatively slow core construction activity, as well as lingering effects
from the 1986 tax reform legislation discussed above. Total construction
expenditures are forecasted to increase 5.9% this year and increase 2.7% next
year.
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The State has continuously been dependent on the highly cyclical construction
and construction related manufacturing industries. While that dependency has
decreased, the State is still somewhat at the mercy of the construction and
construction related manufacturing industries. The construction industry is
driven to a great extent by the State's rapid growth in population. There
can be no assurance that population growth will continue throughout the 1990s
in which case there would be an adverse impact on the State's economy through
the loss of construction and construction related manufacturing jobs. Also,
increases in interest rates could significantly adversely impact the
financing of new construction within the State, thereby adversely impacting
unemployment and other economic factors within the State. In addition,
available commercial office space has tended to remain high over the past few
years. So long as this glut of commercial rental space continues,
construction of this type of space will likely continue to remain slow.
TOURISM. Tourism is one of the State's most important industries.
Approximately 40.7 million tourists visited the State in 1995, as reported by
the Florida Department of Commerce. In terms of business activities and
State tax revenues, tourists in Florida in 1995 represented an estimated 4.5
million additional residents. Visitors to the State tend to arrive slightly
more by air than by car. The State's tourist industry over the years has
become more sophisticated, attracting visitors year-round and, to a degree,
reducing its seasonality. Tourist arrivals are expected to increase by 2.7%
this fiscal year, and 3.2% next fiscal year. Tourist arrivals to Florida by
air are expected to decrease by 5.2% this year and increase by 3.1% next
year, while arrivals by car are expected to fall by 0.3% in 1996-97 but
increase 3.2% in 1997-98. By the end of the State's current fiscal year,
42.6 million domestic and international tourists are expected to have visited
the State. In 1996-97, tourist arrivals should approximate 43.9 million.
REVENUES AND EXPENSES. Estimated fiscal year 1995-96 General Revenue plus
Working Capital and Budget Stabilization funds available to the State total
$15,419.3 million, a 4.0% increase over 1994-95. Of the total General
Revenue plus Working Capital and Budget Stabilization funds available to the
State, $14,651.7 million of that is Estimated Revenues, which represents an
increase of 7.4% over the previous year's Estimated Revenues. With effective
General Revenues plus Working Capital Fund and Budget Stabilization
appropriations at $14,710.4 million, unencumbered reserves at the end of
1995-96 are estimated at $697.8 million. Estimated fiscal year 1996-97
General Revenue plus Working Capital and Budget Stabilization funds available
total $16,601.7 million, a 7.7% increase over 1995-96. The $15,566.9 million
in Estimated Revenues (including recent Measures Affecting Revenues)
represents an increase of 6.2% over the previous year's Estimated Revenues.
With combined General Revenues, Working Capital Fund, and Budget
Stabilization Fund appropriations at $15,582.2 million, unencumbered reserves
as of the end of 1996-97 are estimated at $1,019.5 million.
In fiscal year 1994-95, approximately 66% of the State's total direct revenue
to its three operating funds was derived from State taxes and fees, with
Federal grants and other special revenue accounting for the balance. State
sales and use tax, corporate income tax, intangible personal property tax,
and beverage tax amounted to 69%, 7%, 4% and 4%, respectively, of total
General Revenue Funds available during fiscal 1994-95. In that same year,
expenditures for education, health and welfare, and public safety amounted to
approximately 51%, 31% and 14%, respectively, of total expenditures from the
General Revenue Fund.
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The State's sales and use tax (6%) currently accounts for the State's single
largest source of tax receipts. Slightly less than 10% of the State's sales
and use tax is designated for local governments and is distributed to the
respective counties in which collected for such use by the counties, and the
municipalities therein. In addition to this distribution, local governments
may assess (by referendum) a 0.5% or a 1.0% discretionary sales surtax within
their county. Proceeds from this local option sales tax are earmarked for
funding local infrastructure programs and acquiring land for public
recreation or conservation or protection of natural resources as provided
under applicable Florida law. Certain charter counties have other additional
taxing powers, and non-consolidated counties with a population in excess of
800,000 may levy a local option sales tax to fund indigent health care. It
alone cannot exceed 0.5% and when combined with the infrastructure surtax
cannot exceed 1.0%. For the fiscal year ended June 30, 1996, sales and use
tax receipts (exclusive of the tax on gasoline and special fuels) totaled
$11,461 million, an increase of 7.4% over fiscal year 1994-95.
The second largest source of State tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for
specific purposes and are not included in the State's General Revenue Fund.
The State imposes an alcoholic beverage wholesale tax (excise tax) on beer,
wine, and liquor. This tax is one of the State's major tax sources, with
revenues totaling $441.5 million in fiscal year ending June 30, 1996.
Alcoholic beverage tax receipts increased about 1.0% from the previous year's
total. Ninety-eight percent of the revenues collected from this tax are
deposited into the State's General Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year
ended June 30, 1996, receipts from this source were $1,162.7 million, an
increase of 9.3% from fiscal year 1994-95.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The
documentary stamp tax collections totaled $775.2 million during fiscal year
1995-96, an 11.5% increase from the previous fiscal year. For fiscal year
1994-95, 62.63% of these taxes were deposited to the General Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipts utilities tax collections
are credited to the State's Public Education Capital Outlay and Debt Service
Trust Fund. In fiscal year 1994-95, this amounted to $543.3 million, an
increase of 6.9% over the previous fiscal year.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes,
governmental leaseholds, and certain other intangibles not secured by a lien
on Florida real property. The annual rate of tax is 2 mils. Second, the
State imposes a non-recurring 2 mil tax on mortgages and other obligations
secured by liens on Florida real property. In fiscal year 1995-96, total
intangible personal property tax collections were $895.9 million, a 9.5%
decrease from the prior year. Of the net tax proceeds, 66.5% are distributed
to the General Revenue Fund.
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The State's severance tax taxes oil, gas and sulphur production, as well as
the severance of phosphate rock and other solid minerals. Total collections
from severance taxes total $77.2 million during fiscal year 1995-96, up 26.1%
from the previous year. Currently, 58% of this amount is transferred to the
General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50.0% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0%, for costs of administering the
lottery. Fiscal year 1995-96 lottery ticket sales totaled $2.07 billion,
providing education with approximately $788.1 million.
DEBT-BALANCED BUDGET REQUIREMENT. At the end of fiscal 1995, approximately
$6.83 billion in principal amount of debt secured by the full faith and
credit of the State was outstanding. In addition, since July 1, 1995, the
State issued about $1.3 billion in principal amount of full faith and credit
bonds.
The State Constitution and statutes mandate that the State budget, as a
whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each fiscal year. If the Governor or
Comptroller believes a deficit will occur in any State fund, by statute, he
must certify his opinion to the Administrative Commission, which then is
authorized to reduce all State agency budgets and releases by a sufficient
amount to prevent a deficit in any fund. Additionally, the State
Constitution prohibits issuance of State obligations to fund State operations.
LITIGATION. Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that any of such
matters, individually or in the aggregate, will not have a material adverse
affect on the State's financial position.
Florida law provides preferential tax treatment to insurers who maintain a
home office in the State. Certain insurers challenged the constitutionality
of this tax preference and sought a refund of taxes paid. Recently, the
Florida Supreme Court ruled in favor of the State. This case and others,
along with pending refund claims, total about $150 million.
Previously the State imposed a $295 fee on the issuance of certificates of
title for motor vehicles previously titled outside the State. Plaintiffs
sued the State alleging that this fee violated the Commerce Clause of the
U.S. Constitution. The Circuit Court in which the case was filed granted
summary judgment for the plaintiffs, enjoined further collection of the
impact fee and ordered refunds to all those who have paid the fee since the
collection of the fee went into effect. In the State's appeal of the lower
Court's decision, the Florida Supreme Court ruled that this fee was
unconstitutional under the Commerce Clause. Thus, the Supreme Court approved
the lower court's order enjoining further collection of the fee and requiring
refund of the previously collected fees. The refund exposure of the State
has been estimated to be in excess of $188 million.
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The State maintains a bond rating of Aa, AA, and AA from Moody's, Standard &
Poor's, and Fitch, respectively, on the majority of its general obligation
bonds, although the rating of a particular series of revenue bonds relates
primarily to the project, facility, or other revenue source from which such
series derives funds for repayment. While these ratings and some of the
information presented above indicate that the State is in satisfactory
economic health, there can be no assurance that there will not be a decline
in economic conditions or that particular Florida Municipal Obligations
purchased by the Trust will not be adversely affected by any such changes.
The sources for the information presented above include official statements
and financial statements of the State of Florida. While the Sponsor has not
independently verified this information, it has no reason to believe that the
information is not correct in all material respects.
GEORGIA TRUSTS - ECONOMIC FACTORS
The portfolio of each Georgia Trust consists primarily of obligations issued
by entities located in Georgia.
The following brief summary regarding the economy of Georgia is based upon
information drawn from publicly available sources and is included for
purposes of providing information about general economic conditions that may
or may not affect issuers of the Georgia obligations. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
CONSTITUTIONAL CONSIDERATIONS. The Georgia Constitution permits the issuance
by the State of general obligation debt and of certain guaranteed revenue
debt. The State may incur guaranteed revenue debt by guaranteeing the
payment of certain revenue obligations issued by an instrumentality of the
State. The Georgia Constitution prohibits the incurring of any general
obligation debt or guaranteed revenue debt if the highest aggregate annual
debt service requirement for the then current year or any subsequent fiscal
year for outstanding general obligation debt and guaranteed revenue debt,
including the proposed debt, exceed 10% of the total revenue receipts, less
refunds, of the State treasury in the fiscal year immediately preceding the
year in which any such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to
supply a temporary deficit in the State treasury in any fiscal year created
by a delay in collecting the taxes of that year. Such debt must not exceed,
in the aggregate, 5% of the total revenue receipts, less refunds, of the
State treasury in the fiscal year immediately preceding the year in which
such debt is incurred. The debt incurred must be repaid on or before the
last day of the fiscal year in which it is to be incurred out of the taxes
levied for that fiscal year. No such debt may be incurred in any fiscal year
if there is then outstanding unpaid debt from any previous fiscal year which
was incurred to supply a temporary deficit in the State treasury. No such
short-term debt has been incurred under this provision since the inception of
the constitutional authority referred to in this paragraph.
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Virtually all of the issues of long-term debt obligations issued by or on
behalf of the State of Georgia and counties, municipalities and other
political subdivisions and public authorities thereof are required by law to
be validated and confirmed in a judicial proceeding prior to issuance. The
legal effect of an approved validation in Georgia is to render incontestable
the validity of the pertinent bond issue and the security therefor.
THE STATE AND ITS ECONOMY. The State operates on a fiscal year beginning
July 1 and ending June 30. The state's recovery from the economic recession
of the early 1990's has been steady and is better than regional trends,
albeit half the rate of earlier recoveries. While this recovery does not
meet the explosive patterns set in past cycles, recent state data reveals
that Georgia ranks among the top five states in the nation in employment and
total population growth. The top three industries of the 3.417 million
non-agricultural workers employed in Georgia in 1995 were in trade (25.3%),
services (24.5%) and manufacturing (17.2%). The 1996 annual average
unemployment rate for Georgia was 4.5% as compared to the 1995 annual average
unemployment rate of 4.9%. The national unemployment rate in 1995 and 1996
was 5.6% and 5.4%, respectively. Georgia's unemployment rate has decreased
every year since 1992.
In 1994 and 1995, Georgia's per capita personal income increased 5.5%, from
$20,612 to $21,741, respectively. The national per capita personal income
for 1994 and 1995 was $22,047 and $23,208, respectively, an increase of 5.3%.
Recently, the rates of growth in the public and private sectors have dropped.
Revenues (adjusted for inflation) are advancing at around a 4% annual rate.
Income growth during 1996 and 1997 is increasing between 3% and 4% and
employment gains are between 2% and 3%. In Georgia, growth in employment in
trade and services leads the nation, at 5% to 6%; however, this high
percentage does not coincide with the general economic advance.
For fiscal years 1997 and 1998, real growth in income, employment, and
revenues is expected to be about 3% to 4%, 1.5% to 2.5%, and 3.5% to 4.5%,
respectively. It is predicted that the growth rate for Georgia's economy
will slow for the remainder of the decade.
Three legislative measures were of significance in 1996. First, Georgia's
four cent sales tax on eligible food and beverage was reduced by half
beginning October 1, 1996 and will be reduced by an additional one cent on
October 1, 1997, with the final one cent eliminated on October 1, 1998.
Second, in 1995, the Georgia Department of Revenue issued the first of four,
equal yearly refund checks to eligible federal and military retirees pursuant
to House Bill 90. House Bill 3 required the Department of Revenue, in
October 1996, to issue refunds to a second category of eligible retirees.
Last, the Georgia Intangible Tax was formally abolished by voter referendum
in November of 1996.
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Net collections in fiscal year 1996 totaled $9.928 billion, an increase of
$813.26 million or 8.9% over fiscal year 1995. The top revenue producer was
personal income tax at $4.233 billion or 42.64% of total revenue. This tax
revenue increased 10.3% from fiscal year 1995. The second leader in revenue
was sales and use tax at $3.951 billion, or 39.8% of total revenue. Sales
and use tax revenue increased 8.4% from fiscal year 1995. Income and sales
taxes together have accounted for roughly 85% of total revenues since 1989.
Corporate income tax was the third largest revenue at $696.6 million, or
7.02% of total fiscal year 1996 revenue. This was an 8.9% increase from
fiscal year 1995. The fourth and fifth revenue producers for fiscal year
1996 were motor fuel taxes at 4% or $396.9 million, and motor vehicle taxes
at 2.15% or $213.5 million.
Actual total revenue in fiscal years 1995 and 1996 was $10.304 billion and
$11.167 billion, respectively. Actual expenditures and appropriations for
state funds for fiscal years 1995 and 1996 were $10.03 billion, and $10.68
billion, respectively. Total surplus for fiscal years 1995 and 1996 was
$104.3 million, and $91.45 million, respectively. The Revenue Shortfall
Reserve Fund (3% of revenues) for fiscal years 1995 and 1996 was $288.8
million and $313.4 million, respectively, marking the third consecutive year
of buildup in that reserve.
The first four months of fiscal year 1997 have produced revenue of $3.3057
billion. Estimated total revenue for fiscal years 1997 and 1998 is $11.324
billion, and $11.777 billion, respectively. Budgeted expenditures and
appropriations for fiscal year 1997 are $11.341 billion. The first and
second highest expenditures out of the state's operating budget for fiscal
year 1997 are education, at 54.2%, and human resources, at 24%, respectively.
Total surplus for fiscal year 1997 is estimated at $476.3 million.
Appropriations totaling $11.777 billion are recommended by the Governor for
expenditure by state agencies during fiscal year 1998. The appropriations
would be funded from the following four sources: $11.12 billion from taxes
and fees, $510 million in lottery proceeds, $148.8 million from the Indigent
Care Trust Fund, and $750,000 from anti-fraud levies.
Georgia's total assets at the end of fiscal years 1995 and 1996 were $9.336
billion and $10.722 billion, respectively. Total liabilities for fiscal year
1995 were $8.577 billion, and for fiscal year 1996 were $9.656 billion.
Total fund equity for fiscal year 1995 was $759 million and for fiscal year
1996, $1.066 billion.
As of October 31, 1996, Georgia had authorized total aggregate general
obligation debt of $7,995,920,000. In the amended fiscal year 1996 and 1997
appropriations, $495,450,000 in general obligation debt was authorized. For
fiscal year 1998, Governor Miller recommended $508,800,000 in bonds, the
proceeds of which are to be used for various planned capital projects of the
State, its department and agencies. Total direct obligations issued for
fiscal years ended June 30, 1975 through June 30, 1997 is $8,189,495,000.
Georgia has no direct obligations authorized but unissued during that period.
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Georgia's total outstanding debt as of October 31, 1996 is
$4,727,630,000. Georgia's aggregate fiscal year debt service on
all outstanding bonds as of October 31, 1996 is approximately
$7.15 billion.
BOND RATINGS. Currently, Moody's Investors Service, Inc.
rates Georgia general obligation bonds Aaa, Standard & Poor's
Corporation rates such bonds AA+ and Fitch rates such bonds AAA.
LEGAL PROCEEDINGS. Georgia is involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues.
Three suits have been filed against the State of Georgia
seeking refunds of liquor taxes under O.C.G.A. Section 48-2-35, in light
of BACCHUS IMPORTS, LTD. V. DIAS, 468 U.S. 263 (1984) under
Georgia's pre-BACCHUS statute. In JAMES B. BEAM DISTILLING CO.
V. STATE, 501 U.S. 529 (decided June 20, 1991) the Supreme Court
indicated that Bacchus was retroactive, but only within the
bounds of State statutes of limitations and procedural bars, and
left State courts to determine any remedy in light of reliance
interests, equitable considerations, and other defenses.
Georgia's statute of limitations in O.C.G.A. Section 48-2-35 has run on
all Pre-BACCHUS claims for refund except five pending claims
seeking $31.7 million in tax plus interest. On remand, the
Fulton County Superior Court has ruled that procedural bars and
other defenses bar any recovery by taxpayers on Beam's claims for
refund. The Georgia Supreme Court has affirmed, and Beam's
petition to the United States Supreme Court for a rehearing was
denied on February 21, 1995. Thus, the BEAM case is now
concluded. The State has filed a Motion for Summary Judgment,
based upon BEAM, in the remaining two suits for refund, I.E.,
JOSEPH E. SEAGRAM & SONS, INC. V. STATE AND HEUBLEIN, INC. V.
STATE in DeKalb County Superior Court.
AGE INTERNATIONAL, INC. V. STATE (two cases) and AGE
INTERNATIONAL, INC. V. MILLER. Three suits (two for refund and
one for declaratory and injunctive relief) have been filed
against the State of Georgia by out-of-state producers of
alcoholic beverages. The first suit for refund seeks $96 million
in refunds of alcohol taxes imposed under Georgia's post-BACCHUS
(see previous note) statute, O.C.G.A. Section 3-4-60. These claims
constitute 99% of all such taxes paid during the three years
preceding these claims. In addition, the claimants have filed a
second suit for refund for an additional $23 million for later
time periods. These two cases encompass all known or anticipated
claims for refund of such type within the apparently applicable
statutes of limitations. The two AGE refund cases are still
pending in the trial court. The AGE declaratory/injunctive
relief case was dismissed by the federal District Court. That
dismissal was affirmed by the Eleventh Circuit Court of Appeals,
and plaintiffs petition for rehearing was denied August 24, 1995.
IN BOARD OF PUBLIC EDUCATION FOR SAVANNAH/CHATHAM COUNTY V.
STATE OF GEORGIA, the local school board claimed that the State
should finance the major portion of the costs of its
desegregation program. The Savannah Board originally requested
restitution in the amount of $30 million, but the Federal
District Court set forth a formula which would require a State
payment in the amount of approximately $8.9 million computed
through June 30, 1994. Subsequently the parties agreed to a
settlement. In March 1995, the State paid $8.925 million to the
plaintiffs, in partial satisfaction of the settlement agreement.
A similar complaint has been filed by DeKalb County and there are
approximately five other school districts which potentially might
attempt to file similar claims. In the DeKalb County case alone,
the plaintiffs appear to be seeking approximately $67.5 million
of restitution, however, the State's motion to reconsider was
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granted, reducing the required State payment to approximately $28
million. The DeKalb case has been appealed and is awaiting final
argument and decision in the Eleventh Circuit Court of Appeals.
IN EDGAR MUELLAR V. COLLINS, plaintiff filed suit in
Superior Court of Fulton County, Georgia. Plaintiff challenges
the constitutionality of Georgia's transfer fee provided by
O.C.G.A. Section 40-3-21.1 (often referred to as "impact fee") by
asserting that the fee violates the Commerce, Due Process, Equal
Protection, and Privileges and Immunities Clause of the United
States Constitution. Plaintiff seeks to prohibit the State from
further collections and to require the State to return to her and
those similarly situated all fees previously collected. A
similar lawsuit previously filed in the Superior Court of Chatham
County, Georgia, JOHNSEN V. COLLINS, has been voluntarily
dismissed and will likely be joined with the action currently
pending in Fulton County. From May of 1992 to June 7, 1995, the
State collected $24,168,202.72 under the transfer fee provision.
All amounts collected after June 7, 1995, are being paid into an
escrow account. As of July 25, 1995, the escrow account contains
$46,070.00. The State continues to collect approximately
$500,000 to $600,000 per month.
In BUSKIRK AND ESTILL V. STATE OF GEORGIA, ET AL.,
plaintiffs in this case filed a civil action in the Superior
Court of Fulton County, Georgia (No. E-31547), on behalf of all
"classified employees of the State of Georgia or its agencies and
departments during all or part of fiscal years 1992 through 1995
who were eligible to receive within grade pay increases and who
would have received same were it not for a freeze of within grade
pay increases." Presently, pending before the court is the
plaintiffs' motion for class certification, which is not opposed
by the State. Discovery as to liability issues has been
completed, and once the class has been certified and various
local defendants have been added, the parties will likely file
cross motions for summary judgment on liability issues. If the
plaintiffs prevail, the parties will conduct separate discovery
on the issue of damages. The State believes that it has good and
adequate defenses to the claims made, but, should the plaintiffs
prevail in every aspect of their claims, the liability of the
State in this matter could be as much as $295,000,000, based on
best estimates currently available.
The foregoing information constitutes only a brief summary
of some of the general factors which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Georgia Trusts are subject. Additionally, many
factors including national economic, social and environmental
policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other
factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Georgia Trusts to pay
interest on or principal of the Bonds.
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MARYLAND TRUSTS - ECONOMIC FACTORS
The portfolio of each Maryland Trust consists primarily of
obligations issued by entities located in Maryland.
Some of the significant financial considerations relating to
the investments of the Maryland Trusts are summarized below.
This information is derived principally from official statements
and preliminary official statements released on or before May 13,
1992, relating to issues of Maryland obligations and does not
purport to be a complete description.
In recent years, Maryland has consistently ranked among the
bottom states in job creation. While Maryland's overall tax
burden is below the national average, the State and local
personal income tax is among the highest in the nation. Economic
data indicate that most jobs are created by small businesses, and
nearly 80% of Maryland's companies are small businesses. Since
many small businesses pay the personal income tax, higher State
taxes directly reduce their profitability and negatively affect
business decisions about location, expansion and creation of new
jobs.
During 1995 and 1996, Maryland implemented substantial
regulatory reform, eliminated or reduced ten business taxes, and
significantly increased funding for the Sunny Day Fund and other
business incentive programs to improve the State's business
climate and increase competitiveness. As a result of these
actions, the total number of jobs in Maryland is at an all time
high and unemployment remains below the national average.
Income and sales taxes comprise 80% of the State's general
fund revenue. These taxes and transportation revenues make up
over 55% of the State's total revenue. All these revenue sources
are highly sensitive to economic conditions. For this reason,
the State's budget is dependent on the health of Maryland's
economy. The State's economy has registered a steady recovery
since the federal budget crisis in the winter of 1995, and the
stronger economy shows consumer sales tax collections up more
than 5% since the spring of 1996.
According to the Board of Revenue Estimates, Maryland's
economy will grow at a steady pace with ongoing gains in the
transportation, trade, and service industries. From 1994 to
1995, labor force and employment continued to advance at the same
rate of 1.1% while unemployment remained stable at 5.1%. This
general trend upward with a corresponding reduction in
unemployment since the early 1990's reinforced Maryland's gradual
economic recovery. The Board expects job growth to be 1.35% in
1997 and 1998, with 4.8% gains in total personal income per year.
In total, the Board expects general fund revenues of $7,456
million during fiscal year 1997, an increase of 3.4%. This is
$47.5 million over the amount estimated when the current year's
budget was enacted. Fiscal year 1998 revenues are projected to
increase by 3.2%.
The Administration is proposing legislation to reduce the
State's top income tax rate by 10%. The rate is currently at 5%.
The cut is phased-in over three years with the top tax rate cut
at 2% in 1998, 3% in 1999 and 5% in 2000. The first phase of the
proposed income tax cut will reduce general fund revenues by $39
million. The first year of the proposed cigarette tax increase
will add $99 million, which will be allocated to the reserve fund
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to help pay for future years of the tax reduction. Miscellaneous
revenue proposals add another $6 million in general funds. This
brings estimated general fund revenues to $7,762 million in
fiscal year 1998.
The State Reserve Fund acts as a savings account for the
State. Funds are set aside to protect against unexpected revenue
declines and finance future expenses. State law establishes a
target of 5% of general fund revenues to protect against revenue
downturns and maintain the State's triple-A bond rating. On
June 30, 1997, the State Reserve Fund is estimated to be $526.4
million, more than 7% of general fund revenues.
The fiscal year 1998 budget adds another $163 million to the
Reserve Fund. This includes $122 million to help offset the
future cost of the income tax cut, a $21 million mandated payment
to the Transportation Trust Fund and $20 million of savings from
Maryland's welfare reform initiative that will be designated for
future job development, support services and child care. At the
end of fiscal year 1998, the reserve fund (including interest
earnings) will total $705.3 million, more than 9% of general fund
revenues.
Total revenue at the end of fiscal year 1996 was $14,004
million. Total revenue in fiscal years 1997 and 1998 is
projected to be $15,201 million and $15,423 million,
respectively.
The State's total expenditure for the fiscal year ending
June 30, 1996 was $14.182 billion. As of January 15, 1997, it
was estimated that total expenditures for fiscal 1997 and fiscal
1998 would be $15.106 billion and $15.532 billion, respectively.
The State's General Fund, representing approximately 55%-60% of
each year's total budget, is expected to have a surplus on a
budgetary basis of $103 million in fiscal year 1997 and $8
million in fiscal year 1998. The State Constitution mandates a
balanced budget.
The State budget for fiscal year 1998 totals $15.5 billion,
a 2.8% increase over fiscal year 1997. This increase includes
$163 million of reserve funding. Excluding payments to reserves,
the increase equals 1.7%. The principal increases are in the
areas of education and public safety. State agency operations
have been generally held to fiscal year 1997 levels or reduced.
The public indebtedness of Maryland and its instrumentalities is divided
into three basic types. The State issues general obligation bonds, to the
payment of which the State ad valorem property tax is exclusively pledged, for
capital improvements and for various State-sponsored projects. The
Department of Transportation of Maryland issues limited, special obligation
bonds for transportation purposes payable primarily from specific, fixed-rate
excise taxes and other revenues related mainly to highway use. Certain
authorities issue obligations payable solely from specific non-tax enterprise
fund revenues and for which the State has no liability and has given no moral
obligation assurance.
General obligation bonds total $415 million in fiscal year
1998, consistent with the State's Capital Debt Affordability
Committee. The Committee recommends a debt level that is
fiscally manageable in order to retain the State's triple-A bond
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rating. General funds in the capital budget total $78.2 million
for fiscal year 1998. The use of general funds to supplement the
capital budget is generally limited to certain programs which
cannot be prudently funded with tax-exempt bonds. Federal funds
in the capital budget total $17.6 million. In fiscal year 1998,
these monies will be used primarily for prison construction,
developing Canal Place in Cumberland and construction of military
facilities for National Guard units. Special funds in the
capital budget total $184.6 million and consist of dedicated
revenues for improvements such as open space, agricultural land
preservation and law enforcement training facilities. Revenue
bonds total $45 million in fiscal year 1998 and are designated
for capital improvements to academic facilities at the University
of Maryland System and to local governments to fund
infrastructure and environmental improvements.
According to the most recent available ratings, general
obligation bonds of the State are rated "Aaa" by Moody's, "AAA"
by Standard & Poor's and by Fitch as "AAA," as are those of
Baltimore County, a separate political entity surrounding
Baltimore City. General obligation bonds of Montgomery County
located in the suburbs of Washington, D.C., are rated "Aaa" by
Moody's and "AAA" by Standard & Poor's. General obligation bonds
of Prince George's County, the second largest metropolitan
county, which is also in the suburbs of Washington, D.C., are
rated "A1" by Moody's and "AA-" by Standard & Poor's. The
general obligation bonds of those other counties of the State
that are rated by Moody's, carry an "A" rating or better, except
for those of Allegheny County, which are rated "Baa." The most
populous municipality in the State is Baltimore City, the general
obligation bonds of which are rated "A1" by Moody's and "A" by
Standard & Poor's. The majority of Maryland Health and Higher
Education Authority and State Department of Transportation
revenue bond issues have received an "A" rating or better from
Moody's.
While these ratings and the other factors mentioned above
indicate that Maryland and its principal subdivisions and
agencies are addressing the effects of the economic recession
and, overall, are in satisfactory economic health, there can, of
course, be no assurance that this will continue or that
particular bond issues may not be adversely affected by changes
in State or local economic or political conditions.
MASSACHUSETTS TRUSTS - ECONOMIC FACTORS
The portfolio of each Massachusetts Trust consists primarily
of obligations issued by entities located in Massachusetts.
Except to the extent the Massachusetts Trust invests in
temporary investments, the Massachusetts Trust will invest
substantially all of its net assets in Massachusetts Municipal
Obligations. The Massachusetts Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of
Massachusetts Municipal Obligations. Without intending to be
complete, the following briefly summarizes the current financial
situation, as well as some of the complex factors affecting the
financial situation, in the Commonwealth of Massachusetts (the
"COMMONWEALTH"). It is derived from sources that are generally
available to investors and is based in part on information
obtained from various agencies in Massachusetts. No independent
verification has been made of the accuracy or completeness of the
following information.
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There can be no assurance that current or future statewide
or regional economic difficulties, and the resulting impact on
Commonwealth or local governmental finances generally, will not
adversely affect the market value of Massachusetts Obligations in
the Trusts or the ability of particular obligors to make timely
payments of debt service on (or relating to) those obligations.
Since 1988, there has been a significant slowdown in the
Commonwealth's economy, as indicated by a rise in unemployment, a
slowing of its per capita income growth and declining state
revenues. Since fiscal 1991, the Commonwealth's revenues for
state government programs have exceeded expenditures; however, no
assurance can be given that lower than expected tax revenues will
not resume and continue.
1996 FISCAL YEAR BUDGET. On June 21, 1995, the Governor
signed the Commonwealth's budget for fiscal 1996. The fiscal
1996 budget is based on estimated budgeted revenues and other
sources of approximately $16.778 billion, which includes fiscal
1996 tax revenues of $11.653 billion. Estimated fiscal 1996 tax
revenues are approximately $490 million, or 4.3% higher than
estimated fiscal 1995 tax revenues.
Fiscal 1996 non-tax revenues are projected to total $5.158
billion, approximately $66 million, or 1.3% less than fiscal 1995
non-tax revenues of approximately $5.224 billion. Federal
reimbursements are projected to decrease by approximately $1
million from approximately $2.970 billion in fiscal 1995 to
approximately $2.969 billion in fiscal 1996, primarily as a
result of increased reimbursements for Medicare spending, offset
by a reduction in reimbursements received in 1995 for one-time
Medicare expenses incurred in fiscal 1994 and fiscal 1995.
Fiscal 1996 departmental revenues are projected to decline by
approximately $94 million, or 7.4%, from approximately $1.273
billion in fiscal 1995 to approximately $1.179 billion in fiscal
1996. Major changes in projected non-tax received for fiscal
1996 include a decline in motor vehicle license and registration
fees, reduction of abandoned property revenues and a decrease due
to non-recurring revenues received in fiscal 1995 from hospitals
and nursing homes as part of Medicare fiscal rate settlements and
other reimbursements by municipal hospitals to the state.
Fiscal 1996 appropriations in the Annual Appropriations Act
total approximately $16.847 billion, including approximately $25
million in gubernatorial vetoes overridden by the legislature.
In the final supplemental budget for fiscal 1995, approved on
August 24, 1995, another $71.1 million of appropriations were
continued for use in 1996.
As of February 1, 1996, the Governor had signed into law
fiscal 1996 supplemental appropriations totalling approximately
$23.5 million, including approximately $12.6 million to fund
higher education collective bargaining contracts and $5.6 million
for the Department of Social Services. These appropriations were
offset by approximately $10.4 million in line item reductions,
including a reduction of $9.8 million for the state's debt
service contract assistance to the MBTA. Both the House and
Senate have passed supplemental appropriation bills totalling
$64.8 million primarily relating to snow and ice removal costs
incurred by both the Commonwealth and cities and towns. The
bills are currently awaiting resolution by a conference committee
of the House and Senate. On January 26, 1996 and February 9,
1996, the Governor filed additional supplemental appropriation
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bills totalling approximately $7.3 million for costs relating to
prison overcrowding relief as well as reimbursement costs
associated with a court settlement. No action has been taken on
these bills by either branch of the Legislature.
As of May 28, 1996, fiscal 1996 projected spending is
approximately $16.963 billion, including approximately $153.2
million reserved for contingencies. Projected revenues are
approximately $16.851 billion. The fiscal 1996 tax revenue
projection is $11.684 billion, which represents an increase of
approximately $80 million from the earlier estimate, based upon
tax revenue collections through April 1996.
The fiscal 1996 budget is based on numerous spending and
revenue estimates the achievement of which cannot be assured.
1995 FISCAL YEAR. Budgeted revenues and other sources,
including non-tax revenues, collected in fiscal 1995 were
approximately $16.387 billion, approximately $837 million, or
5.4% above fiscal 1994 revenues of $15.550 billion. Fiscal 1995
tax revenues collections were approximately $11.163 billion,
approximately $12 million above the Department of Revenue's
revised fiscal year 1995 tax revenue estimate of $10.151 billion
and $556 million, or 5.2% above fiscal year tax revenues of
$10.607 billion.
Budgeted expenditures and other uses of funds in fiscal 1995
were approximately $16.251 billion, approximately $728 million,
or 4.7% above fiscal 1994 budgeted expenditures and uses of
$15.523 billion.
The Commonwealth ended fiscal 1995 with an operating gain of
$137 million and an ending fund balance of $726 million.
On February 10, 1995, the Governor signed into law certain
reforms to the Commonwealth's program for Aid to Families with
Dependent Children ("AFDC") which will take effect on July 1,
1995, subject to federal approval of certain waivers. The
revised program reduces AFDC benefits to able-bodied recipients
by 2.75%, while allowing them to keep a larger portion of their
earned wages, requires approximately 22,000 able-bodied parents
of school-aged children to work or perform community service for
20 hours per week and requires approximately 16,000 recipients
who have children between the ages of two and six to participate
in an education or training program or perform community service.
The plan also establishes a pilot program for up to 2,000
participants that offers tax credits and wage subsidies to
employers who hire welfare recipients. Parents who find
employment will be provided with extended medical benefits and
day care benefits for up to one year. The plan mandates paternal
identification, expands funding for anti-fraud initiatives, and
requires parents on AFDC to immunize their children. Parents who
are disabled, caring for a disabled child, have a child under the
age of two, or are teen-agers living at home and attending high
school, will continue to receive cash assistance. Since most
provisions of the new law do not take effect until July 1, 1995,
the Executive Office for Administration projects that the reforms
will not materially affect fiscal 1995 public assistance
spending. The fiscal 1995 expenditure estimate of $16.449
billion includes $247.8 million appropriated to fund the
Commonwealth's public assistance programs for the last four
months of fiscal 1995. The Commonwealth is currently evaluating
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the new law's impact on fiscal 1996 projected spending for public
assistance programs.
On November 8, 1994, the voters in the statewide general
election approved an initiative petition that would slightly
increase the portion of the gasoline tax revenue credited to the
Highway Fund, one of the Commonwealth's three major budgetary
funds, prohibit the transfer of money from the Highway Fund to
other funds for non-highway purposes and not permit including the
Highway Fund balance in the computation "consolidated net
surplus" for purposes of state finance laws. The initiative
petition also provides that no more than 15% of gasoline tax
revenue may be used for mass transportation purposes, such as
expenditures related to the Massachusetts Bay Transit Authority.
The Executive Office of Administration and Finance is analyzing
the effect, if any, this initiative petition, which became law on
December 8, 1994, may have on the fiscal 1995 budget and it
currently does not expect it to have any materially adverse
impact. This is not a constitutional amendment and is subject to
amendment or repeal by the Legislature, which may also,
notwithstanding the terms of the petition, appropriate moneys
from the Highway Fund in such amounts and for such purposes as it
determines, subject only to a constitutional restriction that
such moneys be used for highways or mass transit purposes.
1994 FISCAL YEAR. Fiscal 1994 tax revenue collections were
approximately $10.607 billion, $87 million below the Department
of Revenue's fiscal year 1994 tax revenue estimate of $10.694
billion and $677 million above fiscal 1993 tax revenues of $9.930
billion. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1994 were approximately $15.550
billion. Total revenues and other sources increased by
approximately 5.7% from fiscal 1993 to fiscal 1994 while tax
revenues increased by 6.8% for the same period. Budgeted
expenditures and other uses of funds in fiscal 1994 were
approximately $15.523 billion, which is $826.5 million or
approximately 5.6% higher than fiscal 1993 budgeted expenditures
and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash
position of approximately $757 million, as compared to a
projected position of $599 million.
In June, 1993, the Legislature adopted, and the Governor
signed into law, comprehensive education reform legislation.
This legislation required an increase in expenditures for
education purposes above fiscal 1993 base spending of $1.288
billion of approximately $175 million in fiscal 1994. The
Executive Office for Administration and Finance expects the
annual increases in expenditures above the fiscal 1993 base
spending of $1.288 billion to be approximately $396 million in
fiscal 1995, $625 million in fiscal 1996 and $868 million in
fiscal 1997. Additional annual increases are also expected in
later fiscal years. The fiscal 1995 budget as signed by the
Governor includes $896 million in appropriations to satisfy this
legislation.
1993 FISCAL YEAR. The Commonwealth's budgeted expenditures
and other uses were approximately $14.696 billion in fiscal 1993,
which is approximately $1.280 billion or 9.6% higher than fiscal
1992 expenditures and other uses. Final fiscal 1993 budgeted
expenditures were $23 million lower than the initial July 1992
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estimates of fiscal 1993 budgeted expenditures. Budgeted
revenues and other sources for fiscal 1993 totaled approximately
$14.710 billion, including tax revenues of $9.930 billion. Total
revenues and other sources increased by approximately 6.9% from
fiscal 1992 to fiscal 1993, while tax revenues increased by 4.7%
for the same period. Overall, fiscal 1993 ended with a surplus
of revenues and other sources over expenditures and other uses of
$13.1 million and aggregate ending fund balances in the budgeted
operating funds of the Commonwealth of approximately $562.5
million. After payment in full of the distribution of local aid
to the Commonwealth's cities and towns ("LOCAL AID") and the
retirement of short term debt, the Commonwealth showed a year end
cash position of approximately $622.2 million, as compared to a
projected position of $485.1 million.
1992 FISCAL YEAR. The Commonwealth's budgeted expenditures
and other uses were approximately $13.4 billion in fiscal 1992,
which is $238.7 million or 1.7% lower than fiscal 1991 budgeted
expenditures. Final fiscal 1992 budgeted expenditures were $300
million more than the initial July 1991 estimates of budgetary
expenditures, due in part to increases in certain human services
programs, including an increase of $268.7 million for the
Medicaid program and $50.0 million for mental retardation consent
decree requirements. Budgeted revenues and other sources for
fiscal 1992 totalled approximately $13.7 billion (including tax
revenues of approximately $9.5 billion), reflecting an increase
of approximately 0.7% from fiscal 1991 to 1992 and an increase of
5.4% in tax revenues for the same period. Overall, fiscal 1992
is estimated to have ended with an excess of revenues and other
sources over expenditures and other uses of $312.3 million.
After payment in full of the Local Aid in the amount of $514.0
million due on June 30, 1992, retirement of the Commonwealth's
outstanding commercial paper (except for approximately $50
million of bond anticipation notes) and certain other short term
borrowings, as of June 30, 1992, the end of fiscal 1992, the
Commonwealth showed a year-end position of approximately $731
million, as compared with the Commonwealth's cash balance of
$182.3 million at the end of fiscal 1991.
1991 FISCAL YEAR. Budgeted expenditures for fiscal 1991
totalled approximately $13.659 billion, as against budgeted
revenues and other sources of approximately $13.634 billion. The
Commonwealth suffered an operating loss of approximately $21.2
million. Application of the adjusted fiscal 1990 fund balances
of $258.3 million resulted in a fiscal 1991 budgetary surplus of
$237.1 million. State law requires that approximately $59.2
million of the fiscal year ending balances of $237.1 million be
placed in the Stabilization Fund, a reserve from which funds can
be appropriated (i) to make up any difference between actual
state revenues in any fiscal year in which actual revenues fall
below the allowable amount, (ii) to replace state and local
losses by federal funds or (iii) for any event, as determined by
the legislature, which threatens the health, safety or welfare of
the people or the fiscal stability of the Commonwealth or any of
its political subdivisions.
Upon taking office in January 1991, the new Governor
proposed a series of legislative and administrative actions,
including withholding of allotments under Section 9C of Chapter
29 of the General Laws, intended to eliminate the projected
deficits. The new Governor's review of the Commonwealth's budget
indicated projected spending of approximately $14.1 billion with
an estimated $850 million in budget balancing measures that would
be needed prior to the close of fiscal 1991. At that time,
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estimated tax revenues were revised to approximately $8.8
billion, $903 million less than was estimated at the time the
fiscal 1991 budget was adopted. The Legislature adopted a number
of the Governor's recommendations and the Governor took certain
administrative actions not requiring legislative approval,
including the adoption of a state employee furlough program. It
is estimated by the Commonwealth that spending reductions
achieved through savings initiatives and withholding of
allotments total approximately $484.3 million in aggregate for
fiscal 1991. However, these savings and reductions may be
impacted negatively by litigation pursued by third parties
concerning the Governor's actions under Section 9C of Chapter 29
of the General Laws and with regard to the state employee
furlough program.
In addition, the new administration in May 1991 filed an
amendment to its Medicaid state plan that enables it to claim 50%
federal reimbursement on uncompensated care payments for certain
hospitals in the Commonwealth. As a result, in fiscal 1991, the
Commonwealth obtained additional non-tax revenues in the form of
federal reimbursements equal to approximately $513 million on
account of uncompensated care payments. This reimbursement claim
was based upon recent amendments of federal law contained in the
Omnibus Budget Reconciliation Act of 1990 and, consequently, on
relatively undeveloped federal laws, regulations and guidelines.
At the request of the federal Health Care Financing
Administration, the Office of Inspector General of the United
States Department of Health and Human Services has commenced an
audit of the reimbursement. The administration, which had
reviewed the matter with the Health Care Financing Administration
prior to claiming the reimbursement, believes that the
Commonwealth will prevail in the audit. If the Commonwealth does
not prevail, the Commonwealth would have the right to contest an
appeal, but could be required to pay all or part of Medicaid
reimbursements with interest and to have such amount deducted
from future reimbursement payments.
EMPLOYMENT. Reversing a trend of relatively low
unemployment during the early and mid 1980s, the Massachusetts
unemployment rate beginning in 1990 increased significantly to
where the Commonwealth's unemployment rate exceeded the national
unemployment rate. During 1990, the Massachusetts unemployment
rate increased from 4.5% in January to 6.1% in July to 6.7% in
August. During 1991, the Massachusetts unemployment rate
averaged 9.0% while the average United States unemployment rate
was 6.7%. The Massachusetts unemployment rate during 1992
averaged 8.5% while the average United States unemployment rate
was 7.4%. Since 1993, the average monthly unemployment rate has
declined steadily. The Massachusetts unemployment rate in
February 1996 was 5.0%, as compared with the United States
unemployment rate of 5.5% for the same period. Other factors
which may significantly and adversely affect the employment rate
in the Commonwealth include reductions in federal government
spending on defense-related industries. Due to this and other
considerations, there can be no assurances that unemployment in
the Commonwealth will not increase in the future.
DEBT RATINGS. S&P currently rates the Commonwealth's
uninsured general obligation bonds at A+. At the same time, S&P
currently rates state and agency notes at SP-1. From 1989
through 1992, the Commonwealth had experienced a steady decline
in its S&P rating, with its decline beginning in May 1989, when
S&P lowered its rating on the Commonwealth's general obligation
bonds and other Commonwealth obligations from AA+ to AA and
continuing a series of further reductions until March 1992, when
the rating was affirmed at BBB.
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Moody's currently rates the Commonwealth's uninsured general
obligation bonds at A1. From 1989 through 1992, the Commonwealth
had experienced a steady decline in its rating by Moody's since
May 1989. In May 1989, Moody's lowered its rating on the
Commonwealth's notes from MIG-1 to MIG-2, and its rating on the
Commonwealth's commercial paper from P-1 to P-2. On June 21,
1989 Moody's reduced the Commonwealth's general obligation rating
from Aa to A. On November 15, 1989, Moody's reduced the rating
on the Commonwealth's general obligations from A to Baa1, and on
March 9, 1990, Moody's reduced the rating of the Commonwealth's
general obligation bonds from Baa1 to Baa. There can be no
assurance that these ratings will continue.
In recent years, the Commonwealth and certain of its public
bodies and municipalities have faced serious financial
difficulties which have affected the credit standing and
borrowing abilities of Massachusetts and its respective entities
and may have contributed to higher interest rates on debt
obligations. The continuation of, or an increase in, such
financial difficulties could result in declines in the market
values of, or default on, existing obligations including
Massachusetts Obligations in the Massachusetts Trusts. Should
there be during the term of a Massachusetts Trust a financial
crisis relating to Massachusetts, its public bodies or
municipalities, the market value and marketability of all
outstanding bonds issued by the Commonwealth and its public
authorities or municipalities, including the Massachusetts
Obligations in such Trust, and interest income to such Trust
could be adversely affected.
TOTAL BONDS AND NOTE LIABILITIES. The total general
obligation bonded indebtedness of the Commonwealth (including
Dedicated Income Tax Debt and Special Obligation Debt) as of
April 1, 1996, was approximately $10.093 billion. There were
also outstanding approximately $240 million in general obligation
notes and other short term general obligation debt. The total
bond and note liabilities of the Commonwealth as of April 1,
1996, including guaranteed bond and contingent liabilities, was
approximately $13.818 billion.
DEBT SERVICE. During the 1980s, capital expenditures were
increased substantially, which has had a short term impact on the
cash needs of the Commonwealth and also accounts for a
significant rise in debt service during that period. In
November, 1988, the Executive Office for Administration and
Finance established an administrative limit on state-financed
capital spending in the Capital Projects Fund of $925 million per
fiscal year. Capital expenditures were $847.0 million, $694.1
million, $575.9 million, $760.6 million and $902.2 million in
fiscal 1991, fiscal 1992, fiscal 1993, fiscal 1994 and fiscal
1995, respectively. Commonwealth-financed capital expenditures
are projected to be approximately $898.0 million in fiscal 1996.
Debt Service expenditures for fiscal 1991, fiscal 1992, fiscal
1993, fiscal 1994 and fiscal 1995 were $942.3 million, $898.3
million, $1.140 billion, $1.149 billion and $1.231 billion,
respectively, and are projected to be approximately $1.199
billion for fiscal 1996. The amounts represented do not include
debt service on notes issued to finance certain Medicaid related
liabilities, certain debt service contract assistance payment to
the Massachusetts Bay Transportation Authority ($205.5 million
projected in fiscal 1996), the Massachusetts Convention Center
($24.6 million projected in fiscal 1996), the Massachusetts
Government Land Bank ($6.0 million projected in fiscal 1996), the
Massachusetts Water Pollution Abatement Trust ($16.6 million
projected in fiscal 1996), and grants to municipalities under the
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school building assistance program to defray a portion of the
debt service costs on local school bonds ($174.5 million
projected in fiscal 1996).
In January 1990, legislation was passed to impose a limit on
debt service beginning in fiscal 1991, providing that no more
than 10% of the total appropriations in any fiscal year may be
expended for payment of interest and principal on general
obligation debt (excluding the Fiscal Recovery Bonds). The
percentage of total appropriations expended from the budgeted
operating funds for debt service (excluding debt service on
Fiscal Recovery Bonds) for fiscal 1994 is 5.6% which is projected
to increase to 5.9% in fiscal 1995.
CERTAIN LIABILITIES. Among the material future liabilities
of the Commonwealth are significant unfunded general liabilities
of its retirement systems and a program to fund such liabilities;
a program whereby, starting in 1978, the Commonwealth began
assuming full financial responsibility for all costs of the
administration of justice within the Commonwealth; continuing
demands to raise aggregate aid to cities, towns, schools and
other districts and transit authorities above current levels; and
Medicaid expenditures which have increased each year since the
program was initiated. The Commonwealth has signed consent
decrees to continue improving mental health care and programs for
the mentally retarded in order to meet federal standards,
including those governing receipt of federal reimbursements under
various programs, and the parties in those cases have worked
cooperatively to resolve the disputed issues.
As a result of comprehensive legislation approved in January
1988, the Commonwealth is required, beginning in fiscal 1989 to
fund future pension liabilities currently and to amortize the
Commonwealth's unfunded liabilities over 40 years. The funding
schedule must provide for annual payments in each of the ten
years ending fiscal 1998 which are at least equal to the total
estimated pay-as-you-go pension costs in each year. As a result
of this requirement, the funding requirements for fiscal 1996,
1997, and 1998 are estimates to be increased to approximately
$1.007 billion, $1.061 billion and $1.128 billion, respectively.
LITIGATION. The Commonwealth is engaged in various lawsuits
involving environmental and related laws, including an action
brought on behalf of the U.S. Environmental Protection Agency
alleging violations of the Clean Water Act and seeking to enforce
the clean-up of Boston Harbor. The MWRA, successor in liability
to the Metropolitan District Commission, has assumed primary
responsibility for developing and implementing a court-approved
plan for the construction of the treatment facilities necessary
to achieve compliance with federal requirements. Under the Clean
Water Act, the Commonwealth may be liable for costs of compliance
in these or any other Clean Water cases if the MWRA or a
municipality is prevented from raising revenues necessary to
comply with a judgment. The MWRA currently projects that the
total cost of construction of the treatment facilities required
under the court's order is approximately $3.557 billion in
current dollars, with approximately $1.046 billion to be spent on
or after June 30, 1995. On October 18, 1995, the court entered
an order which reduced the MWRA's obligation to build certain
additional secondary treatment facilities, which is estimated by
the MWRA will save ratepayers approximately $165 million.
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The Department of Public Welfare has been sued for the
alleged unlawful denial of personal care attendant services to
certain disabled Medicaid recipients. The Superior Court has
denied the plaintiff's motion for preliminary injunction and has
also denied the plaintiff's motion for class certification. If
the plaintiffs were to prevail on their claims and the
Commonwealth were required to provide all of the services sought
by the plaintiffs to all similarly situated persons, it would
substantially increase the annual cost to the Commonwealth if
these services are eventually required. The Department of Public
Welfare currently estimates this increase to be as much as $200
million per year.
There are also actions pending in which recipients of human
services benefits, such as welfare recipients, the mentally
retarded, the elderly, the handicapped, children, residents of
state hospitals and inmates of corrections institutions, seek
expanded levels of services and benefits and in which providers
of services to such recipients challenge the rates at which they
are reimbursed by the Commonwealth. To the extent that such
actions result in judgments requiring the Commonwealth to provide
expanded services or benefits or pay increased rates, additional
operating and capital expenditures might be needed to implement
such judgments.
In 1995, the Spaulding Rehabilitation Hospital ("SPAULDING")
filed an action to enforce an agreement to acquire its property
by eminent domain in connection with the Central Artery/Third
Harbor Tunnel Project. If successful, Spaulding could recover
the fair market value of its property in addition to its
relocation costs with respect to its personal property. The
Commonwealth estimates its potential liability at approximately
$50 million.
The Commonwealth faces an additional potential liability of
approximately $40 million in connection with a taking by the
Massachusetts Highway Department related to the relocation of
Northern Avenue in Boston.
In addition, there are several tax matters in litigation
which could result in significant refunds to taxpayers if
decisions unfavorable to the Commonwealth are rendered. In
BAYBANK, ET AL. V. COMMISSIONER OF REVENUE, the banks challenge
the inclusion of income from tax exempt obligations in the
measure of the bank excise tax. The Appellate Tax Board issued
findings of fact and a report in favor of the Commissioner of
Revenue on September 30, 1993. The Supreme Judicial Court heard
the appeal on March 7, 1995. Taking into account all banks and
all years at issue (1974 through 1986), there are 142 appeals
consolidated in this case. The amount at issue is currently
estimated to be approximately $1.4 billion, which amount includes
interest of approximately $1.1 billion and amounts involved in
other related applications for abatement pending with the
Commissioner of Revenue or with the Appellate Tax Board.
On March 30, 1995, the parties reported to the Supreme
Judicial Court that they had agreed in principle to settle the
case and related litigation. The agreement in principle includes
an agreement that the Commonwealth will pay to the banks $25
million, payable in installments of $10 million on August 1, 1996
and August 1, 1997, and $5 million and all accrued interest on
the settlement amount on August 1, 1998, with an option for the
Commonwealth to prepay such amounts.
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On March 22, 1995, the Supreme Judicial Court held in PERINI
CORPORATION ET AL. V. COMMISSIONER OF REVENUE that certain
deductions from the net worth measure of the Massachusetts
corporate excise tax violate the Commerce Clause of the United
States Constitution. On October 2, 1995, the United States
Supreme Court denied the Commonwealth's petition for writ of
certiorari. The Department of Revenue estimates that tax
revenues in the amount of $40 to $55 million may be abated as a
result of the Supreme Judicial Court's decision.
In NATIONAL ASSOCIATION OF GOVERNMENT EMPLOYEES V.
COMMONWEALTH, the Superior Court declared that a line item in the
Commonwealth's general appropriations act for fiscal 1994 that
increased the state employees' percentage share of their group
health insurance premiums from 10% to 15% violated the terms of
several collective bargaining agreements, and therefore was
invalid under the United States Constitution as regards employees
covered by the agreements. On February 9, 1995, the Supreme
Judicial Court vacated the Superior Court's decisions and
declared that the fiscal 1994 line item did not violate the
contracts clause. In June, 1995, the United States Supreme Court
denied the plaintiff's writ of certiorari. Several other unions
have filed a companion suit asserting that the premium increase
similarly violated other collective bargaining agreements. The
latter suit is in its initial stages. Prior to the Supreme
Judicial Court's decision, the Commonwealth's aggregate liability
is estimated to be approximately $32 million.
A variety of other civil suits pending against the
Commonwealth may also affect its future liabilities. These
include challenges to the Commonwealth's allocation of school aid
under Section 9C of Chapter 29 of the General Laws and to adopt a
state employee furlough program. No prediction is possible as to
the ultimate outcomes of these proceedings.
Many factors, in addition to those cited above, have or may
have a bearing upon the financial condition of the Commonwealth,
including social and economic conditions, many of which are not
within the control of the Commonwealth.
EXPENDITURE AND TAX LIMITATION MEASURES. Limits have been
established on state tax revenues by legislation approved by the
Governor on October 25, 1986 and by an initiative petition
approved by the voters on November 4, 1986. The Executive Office
for Administration and Finance currently estimates that state tax
revenues will not reach the limit imposed by either the
initiative petition or the legislative enactment in fiscal 1992.
Proposition 2-1/2, passed by the voters in 1980, led to
large reductions in property taxes, the major source of income
for cities and towns, and large increases in state aid to offset
such revenue losses. According to the Executive Office for
Administration and Finance, all of the 351 cities and towns have
now achieved a property tax level of no more than 2.5% of full
property values. Under the terms of Proposition 2-1/2, the
property tax levy can now be increased annually for all cities
and towns, almost all by 2.5% of the prior fiscal year's tax levy
plus 2.5% of the value of new properties and of significant
improvements to property. Legislation has also been enacted
providing for certain local option taxes. A voter initiative
petition approved at the statewide general election in November,
1990 further regulates the distribution of Local Aid of no less
than 40% of collections from individual income taxes, sales and
use taxes, corporate excise taxes, and the balance of the state
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lottery fund. If implemented in accordance with its terms
(including appropriation of the necessary funds), the petition as
approved would shift several hundred million dollars to direct
Local Aid.
OTHER TAX MATTERS. To provide revenue to pay debt service
on both the deficit and Medicaid-related borrowings and to fund
certain direct Medicaid expenditures, legislation was enacted
imposing an additional tax on certain types of personal income
for 1989 and 1990 taxable years at rates of 0.375% and 0.75%
respectively, effectively raising the tax rate of 1989 from 5% to
5.375% and for 1990 to 5.75%. Recent legislation has effectively
further increased tax rates to 5.95% for tax year 1990 to 6.25%
for tax year 1991 and returning to 5.95% for tax year 1992 and
subsequent tax years. The tax is applicable to all personal
income except income derived from dividends, capital gains,
unemployment compensation, alimony, rent, interest, pensions,
annuities and IRA/Keogh distributions. The income tax rate on
other interest (excluding interest on obligations of the United
States and of the Commonwealth and its subdivisions), dividends
and net capital gains (after a 50% reduction) was increased from
10% to 12% for tax year 1990 and subsequent years, by recently
enacted legislation.
ESTATE TAX REVISIONS. The fiscal 1993 budget included
legislation which gradually phases out the current Massachusetts
estate tax and replaces it with a "sponge tax" in 1997. The
"sponge tax" is based on the maximum amount of the credit for
state taxes allowed for federal estate tax purposes. The estate
tax is phased out by means of annual increases in the basic
exemption from the current $200,000 level. The exemption is
increased to $300,000 for 1993, $400,000 for 1994, $500,000 for
1995 and $600,000 for 1996. In addition, the legislation
includes a full marital deduction starting July 1, 1994.
Currently the marital deduction is limited to 50% of the
Massachusetts adjusted gross estate. The static fiscal impact of
the phase out of the estate tax was estimated to be approximately
$24.8 million in fiscal 1994 and is estimated to be approximately
$72.5 million in fiscal 1995.
OTHER ISSUERS OF MASSACHUSETTS OBLIGATIONS. There are a
number of state agencies, instrumentalities and political
subdivisions of the Commonwealth that issue Municipal
Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary
considerably from the credit quality of obligations backed by the
full faith and credit of the Commonwealth. The brief summary
above does not address, nor does it attempt to address, any
difficulties and the financial situations of those other issuers
of Massachusetts Obligations.
MICHIGAN TRUSTS - ECONOMIC FACTORS
As described above, except to the extent a Michigan Trust
invests in temporary investments, each Michigan Trust will invest
substantially all of its net assets in Michigan Bonds. Each
Michigan Trust is therefore susceptible to political, economic or
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regulatory factors affecting issuers of Michigan Bonds. The
information set forth below is derived from official statements
prepared in connection with the issuance of Michigan Bonds and
other sources that are generally available to investors. The
information is provided as general information intended to give a
recent historical description and is not intended to indicate
future or continuing trends in the financial or other positions
of the State of Michigan (the "STATE"). This information has not
been independently verified.
There can be no assurance that current or future statewide
or regional economic difficulties, and the resulting impact on
issuers and other obligors with respect to the Michigan Trusts
generally will not adversely affect the market value of Michigan
Bonds held in the portfolio of the Michigan Trusts or the ability
of particular obligors to make timely payments of debt service on
(or relating to) those obligations.
The principal sectors of the State's economy are
manufacturing of durable goods (including automobile and office
equipment manufacturing), tourism and agriculture. As reflected
in historical employment figures, the State's economy has
lessened its dependence upon durable goods manufacturing. In
1960, employment in such industry accounted for 33% of the
State's workforce. This figure fell to 15.4% by 1995.
Nevertheless, this was an increase from the level of 14.9% in
1994. Moreover, manufacturing (including auto-related
manufacturing) continues to be an important part of the State's
economy. These industries are highly cyclical. This factor
could adversely affect the revenue streams of the State and its
political subdivisions because of its impact on tax sources,
particularly sales taxes, income taxes and single business taxes.
Historically, the average monthly unemployment rate in the
State has been higher than the average figures for the United
States. Contrary to that prior historical trend, however, for
each of the last three years, the average monthly unemployment
rates in the State were less than the national averages. For
1994, 1995 and 1996, the average monthly unemployment rates in
the State were 5.9%, 5.3% and 4.7%, respectively, as compared to
national averages of 6.1%, 6.1% and 5.4%, respectively.
BUDGET. The budget of the State is a complete financial
plan and encompasses the revenues and expenditures, both
operating and capital outlay, of the General Fund and special
revenue funds. The budget is prepared on a basis consistent with
generally accepted accounting principles (GAAP). The State's
Fiscal Year begins on October 1 and ends September 30 of the
following year. Under State law, the executive budget
recommendations for any fund may not exceed the estimated revenue
thereof, and an itemized statement of estimated revenues in each
operating fund must be contained in an appropriation bill as
passed by the Legislature, the total of which may not be less
than the total of all appropriations made from the fund for that
fiscal year. The State Constitution provides that proposed
expenditures from and revenues of any fund must be in balance and
that any prior year's surplus or deficit in any fund must be
included in the succeeding year's budget for that fund.
The State's Constitution limits the amount of total State
revenues that may be raised from taxes and other sources. State
revenues (excluding federal aid and revenues used for payment of
principal of and interest on general obligation bonds) in any
fiscal year are limited to a specified percentage of State
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personal income in the prior calendar year or the average thereof
in the prior three calendar years, whichever is greater. The
State may raise taxes in excess of the limit in emergency
situations.
The State finances its operations through the State's
General Fund and special revenue funds. The General Fund
receives revenues that are not specifically required to be
included in the special revenue funds. Approximately 59% of
General Fund revenues are obtained from the payment of State
taxes and approximately 41% from federal and non-tax revenue
sources. Tax revenues credited to the General Fund include the
State's personal income tax, single business tax, use tax and
sales tax. In addition, the State levies various other taxes.
Over two-thirds of total General Fund expenditures are made for
education and the State's Family Independence Agency and
Department of Community Health.
Despite modest surpluses in the four preceding fiscal years,
the State ended fiscal years 1989-90 and 1990-91 with negative
balances of $310.3 million and $169.4 million, respectively.
This negative balance had been eliminated as of the end of fiscal
year 1991-92, which ended September 30, 1992. The State ended
fiscal year 1992-93 with a projected balance of $26 million after
the transfer of $282.6 million to the Counter-Cyclical Budget and
Economic Stabilization Fund ("BSF") described below. The state
ended fiscal year 1993-94 with a $460.2 million General Fund
surplus, all of which was transferred to the BSF. The State
ended fiscal year 1994-95 with a $377.3 million General Fund
surplus, $349.6 million of which was transferred to the BSF. The
State's preliminary results for fiscal year 1995-96 indicate an
$88.1 million surplus, $58.1 million of which will be transferred
to the BSF.
The State budget for the 1996-97 fiscal year, which began on
October 1, 1996, has been adopted by the Legislature. This
budget projects General Fund/general purpose revenues of
approximately $8.354 billion, a decline of approximately $168
million from the prior fiscal year.
The State also maintains the BSF which accumulates balances
during the years of significant economic growth and which may be
utilized during periods of budgetary shortfalls. The unreserved
balances for the BSF as of the end of fiscal years 1990-91, 1991-
92, 1992-93, 1993-94 and 1994-95, reported on a cash basis, were
$182.2 million, $188.6 million, $20.7 million, $311.7 million and
$1,083.4 million, respectively. The accrued balance of the BSF
as of September 30, 1996 is estimated to be in excess of $1.1
billion.
DEBT. The State Constitution limits State general
obligation debt to (i) short-term debt for State operating
purposes which must be repaid in the same fiscal year in which it
is issued and which cannot exceed 15% of the undedicated revenues
received by the State during the preceding fiscal year, (ii)
short and long-term debt unlimited in amount for the purpose of
making loans to school districts and (iii) long-term debt for
voter-approved purposes.
The State has issued and has outstanding general obligation
full faith and credit bonds for water resources, environmental
protection program, recreation program and school loan purposes
totalling as of September 30, 1996, approximately $685 million.
In November 1988, the State's voters approved the issuance of
$800 million of general obligation bonds for environmental
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protection and recreational purposes; of this amount
approximately $265 million remains to be issued as of
September 30, 1996. The State issued $900 million in general
obligation notes in February, 1997 which will mature September
30, 1997.
OTHER ISSUERS OF MICHIGAN MUNICIPAL OBLIGATIONS. There are
a number of state agencies, instrumentalities and political
subdivisions of the State that issue bonds, some of which may be
conduit revenue obligations payable from payments from private
borrowers. These entities are subject to various economic risks
and uncertainties, and the credit quality of the securities
issued by them may vary considerably from obligations backed by
the full faith and credit of the State.
RATINGS. As of February 3, 1997, the State's general
obligation bonds were rated "Aa" by Moody's, "AA" by S&P and "AA"
by Fitch Investors Service.
LITIGATION. The State is a party to various legal
proceedings seeking damages or injunctive or other relief. In
addition to routine litigation, certain of these proceedings
could, if unfavorably resolved from the point of view of the
State, substantially affect State programs or finances. As of
January 27, 1997, these lawsuits involved programs generally in
the areas of corrections, tax collection, commerce and budgetary
reductions to school districts and governmental units and court
funding. The ultimate disposition of these proceedings not
determinable as of January 27, 1997.
PROPERTY TAX AND SCHOOL FINANCE REFORM. The State
Constitution limits the extent to which municipalities or
political subdivisions may levy taxes upon real and personal
property through a process that regulates assessments.
On March 15, 1994, Michigan voters approved a property tax
and school finance reform measure known as Proposal A. Under
Proposal A, as approved, effective May 1, 1994, the State sales
and use tax increased from 4% to 6%, the State income tax
decreased from 4.6% to 4.4%, the cigarette tax increased from
$.25 to $.75 per pack and an additional tax of 16% of the
wholesale price was imposed on certain other tobacco products. A
.75% real estate transfer tax became effective January 1, 1995.
Beginning in 1994, a state property tax of 6 mills began to be
imposed on all real and personal property currently subject to
the general property tax. All local school boards are
authorized, with voter approval, to levy up to the lesser of 18
mills or the number of mills levied in 1993 for school operating
purposes on non-homestead property and nonqualified agricultural
property. Proposal A contains additional provisions regarding
the ability of local school districts to levy taxes, as well as a
limit on assessment increases for each parcel of property,
beginning in 1995. Such increases for each parcel of property
are limited to the lesser of 5% or the rate of inflation. When
property is subsequently sold, its assessed value will revert to
the current assessment level of 50% of true cash value. Under
Proposal A, much of the additional revenue generated by the new
taxes will be dedicated to the State School Aid Fund.
Proposal A and its implementing legislation provides for a
system of financing local school operating costs which relies
upon a foundation allowance amount which may vary by district
based upon historical spending levels. State funding will
provide each school district an amount equal to the difference
between their foundation allowance and the revenues generated by
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their local property tax levy. Local school districts would also
be entitled to levy supplemental property taxes to generate
additional revenue if their foundation allowance is less than
their historical per pupil expenditures. Proposal A and its
implementing legislation also provide for the levy of a limited
number of enhancement mills on regional and local school district
bases.
Proposal A shifted significant portions of the cost of local
school operations from local school districts to the State and
raised additional State revenues to fund these additional State
expenses. These additional revenues will be included within the
State's constitutional revenue limitations and may impact the
State's ability to raise additional revenues in the future.
MINNESOTA TRUSTS - ECONOMIC FACTORS
The portfolio of each Minnesota Trust consists primarily of
obligations issued by entities located in Minnesota.
In the early 1980s the State of Minnesota experienced
financial difficulties due to a downturn in the State's economy
resulting from the national recession. In recent years,
Minnesota has ranked as one of the top five states in production
for dairy products, soy beans, hogs, corn, turkeys, sugar beets,
barley, hay, sweet corn, oats, green peas, and sunflowers. In
1994, Minnesota ranked first in the nation in cash receipts for
sugar beets. Total cash receipts in 1994 were $6.522 billion,
with dairy products and soy beans contributing 18.3% and 15.6%,
respectively.
Between 1985 and 1994, more than 435,000 jobs were added in
Minnesota, resulting in employment growth of 24.1% compared to
the national average of 16.9%. The four fastest growing
industries in Minnesota were: services; manufacturing; finance,
insurance and real estate (FIRE); and transportation,
communications and public utilities (TCPU).
Employment growth in Minnesota continues to outpace the U.S.
economy in fiscal year 1996. Payroll employment grew by 2.3%,
significantly above the U.S. growth of 2.0%. Between November
1995 and November 1996, Minnesota added 54,800 jobs, growing at a
rate of 2.3% for total nonfarm wage and salary employment. This
brings the total number of nonfarm jobs in the state to
2,470,800. In the last year, the services division accounted for
almost 38% of the growth and trade made up another 25%. From
November 1995 to November 1996, the services sector grew 3.2%, or
20,700 jobs, the largest percentage increase of any industry
division in the state. Manufacturing added 2,700 jobs, a .6%
increase. FIRE gained 2,900 jobs for a growth rate of 2.1%.
TCPU increased by 2.7%, or 3,200 jobs.
The annual unemployment rate in Minnesota has been below the
U.S. and Midwest rates every year since 1985. In 1995 and 1996,
the Minnesota unemployment rate was 3.7% and 3.6%, respectively,
compared to rates of 5.6% and 5.4%, respectively, for the nation.
In 1995, per capita personal income in Minnesota was
$23,271, exceeding the national average by 3%. In 1996,
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Minnesota's per capita personal income rose to $24,498, an
increase of 5.3% from 1995. The U.S. increase for 1996 is
predicted at 4.7%.
Total personal income in the state, however, grew more
slowly than in the rest of the nation. Total wage and salary
disbursements in the state, which account for about two-thirds of
personal income, grew at a 4.9% rate in fiscal year 1996,
noticeably slower than the U.S. wide growth rate of 6.2%. Much
of this difference is attributed to increases in the number of
hours worked by part time employees. During the past year,
economic conditions in Minnesota have been such that part time
workers are already working all of the hours they desire.
The Minnesota economy is expected to track the national
economy during fiscal year 1997. Growth rates for personal
income in Minnesota and nationally are projected to be identical.
Job growth in Minnesota is forecast to be only slightly stronger
than that for the entire U.S., while total wage and salary
disbursements are expected to lag slightly, reflecting the belief
that part time workers elsewhere in the nation will continue to
add hours at a faster rate than those in Minnesota. The 1996
farm bill will add to farm income in the state in both 1996 and
1997.
Minnesota's fiscal period is a biennium. General Fund
revenues and transfers-in totaled $9.619 billion for fiscal year
1996, up 9% from those for fiscal year 1995. Actual total
resources were $10.421 billion. General Fund expenditures and
transfers-out for the year totaled $9.638 billion, an increase of
11.7% from the previous year. Of this amount, $6.749 billion
(70%) is in the form of grants and subsidies to local
governments, individuals and non-profit organizations.
Total net revenue for the General Fund for the fiscal year
ending June 30, 1996 was $9.617 billion. Of this amount,
approximately 43% or $4.135 billion was from individual income
taxes, 30.1% or $2.897 billion was from sales tax, and 7.3% or
$702 million was from corporate income tax. Total General Fund
expenditures for fiscal year 1996 were $8.554 billion.
The budgetary fund balance for the General Fund at the end
of fiscal year 1996 was $1.357 billion, and the undesignated fund
balance was $506 million, a $47.9 million increase from fiscal
year 1995. A budgetary reserve of $570 million was provided for
in fiscal year 1996, compared to $500 million in 1995.
Total net revenue for the Special Revenue Fund for the
fiscal year ending June 30, 1996 was $1.553 billion. Total
expenditures for this fund were $1.026 billion. The budgetary
fund balance for the Special Revenue Fund at the end of fiscal
year 1996 was $379.2 million, with the undesignated fund balance
at $298.7 million.
Estimated General Fund revenues for the 1996-97 fiscal year
are $19,089 million. Total resources are forecast at $20.110
billion. General Fund expenditures and transfers for fiscal year
1996-97 are predicted at $18,811 million, leaving an estimated
budgetary balance of $502 million.
Total expenditures for the 1996-97 biennium are predicted at
$29,801 million. Of this amount, $18,080 million is from the
general fund, $10,127 are from the special revenue funds, and
$563 million is from the Debt Service Fund.
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National economic growth for the remainder of the decade is
predicted to generate a corresponding growth in state revenues
without increasing tax rates. Minnesota's revenues are expected
to grow by $1.4 billion, 7.4% in the 1998-99 biennium, and 8.1%
in the following biennium. Since the state forecast is based on
a strong 2.4% annual growth rate, a return to a more moderate
rate of growth, similar to the 2.0% growth rate in 1995, would
materially reduce forecast revenues.
Spending for fiscal years 1998 and 1999 is estimated at 3.3%
and 2.3%, respectively, both below Minnesota's projected personal
income growth rates of 4.9% and 4.7% for the same periods.
The 1998-99 General Fund beginning balance is estimated at
$1.299 billion. The Governor recommended General Fund revenues
for the 1998-99 biennium of $19.99 billion, a 4.7% increase from
the previous biennium. The Governor also recommended total
expenditures and transfers for the 1998-99 biennium of $20.344
billion, an 8.2% increase from the 1996-97 biennium. The
budgetary balance of $3 million at the end of the 1998-99
biennium is $499 million less than the previous biennium.
The State's budget reserve for the 1998-99 biennium is
doubled to $522 million (an increase from $261 million in fiscal
year 1997) or 5% of fiscal year 1999 spending to protect against
economic uncertainty.
The November 1996 forecast shows total resources for the
1998-99 biennium at $21.804 billion, total expenditures and
transfers at $19.568 billion, and a budgetary balance of $1.439
billion.
The state issued $439.6 million of new general obligation
bonds, and $170.6 million of general obligation bonds were
redeemed during 1996, leaving an outstanding balance of $2.2
billion. General obligation bonds authorized but unissued as of
June 30, 1996 were $1.101 billion.
Minnesota Statutes, Section 16A.641 provides for an annual
appropriation for transfer to the Debt Service Fund. The amount
of the appropriation is to be such that, when combined with the
balance on hand in the Debt Service Fund on December 1 of each
year for state bonds, it will be sufficient to pay all general
obligation bond principal and interest due and to become due
through July 1 in the second ensuing year. If the amount
appropriated is insufficient when combined with the balance on
hand in the Debt Service Fund, the state constitution requires
the state auditor to levy a statewide property tax to cover the
deficiency. No such property tax has been levied since 1969 when
the law was enacted requiring the appropriation. In fiscal year
1996, total operating transfers to the Debt Service Fund were
$277.522 million.
The Governor's budget recommends a General Fund
appropriation of $545.6 million for fiscal year 1998-99 for debt
service on bonds sold for existing authorizations, bonds
authorized but unissued, and new bonds anticipated to be
authorized in the 1998 legislative session. This amount
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represents 2.8% of total general fund spending. The Governor
also proposed $16.6 million be appropriated to pay remaining
state claims from the Cambridge Bank Litigation judgment, rather
than issuing additional revenue bonds for this purpose.
In May 1996, Moody's Investor Services upgraded Minnesota's
general obligation bond rating to Aaa. S&P's current rating is
AA+, and Fitch's rates Minnesota bonds at AAA.
LITIGATION. In September 1995, in MINNEAPOLIS BRANCH OF THE
NAACP V. STATE OF MINNESOTA, plaintiffs filed suit claiming that
the segregation of minority and poor students in the Minneapolis
public schools has deprived the students of an adequate education
in violations of the Minnesota Constitution. It is impossible at
this point to estimate the State's exposure in this case
especially since the plaintiffs have not articulated what relief
they are seeking. While the complaint does not request monetary
damages, it does request injunctive relief that could force the
State to spend over $10 million for additional funding of various
items for the Minneapolis schools, and increased busing expenses.
District court proceedings continue.
In MINNESOTA HOME HEALTH CARE ASSOCIATION V. GOMEZ,
plaintiffs have sued the Department of Human Services ("DHS") for
declaratory and injunctive relief claiming that DHS violated
federal law by failing to determine payment rates for home health
care service providers which are consistent with efficiency,
economy, and quality of care, and which provide adequate patient
access. The potential loss to the State is estimated at $20
million and may impact the Accounting General Fund. The State
prevailed in District Court. The case is on appeal to the Eighth
Circuit Court of Appeals.
In PEPSICO, ET AL. V. COMMISSIONER OF REVENUE, twelve
corporate taxpayers claim unconstitutional treatment under
certain provisions of Minnesota tax law. The Department of
Revenue has not determined the potential refund liability should
the plaintiffs prevail; however, the aggregate refunds to all
similarly-situated taxpayers could exceed $10 million.
In RURAL AMERICAN BANK - ADA F/K/A FIRST BANK OF ADA, ET
AL. V. COMMISSIONER OF REVENUE, filed in Ramsey County District
Court, taxpayers claim they are entitled to refunds pursuant to
the Court's decision in CAMBRIDGE STATE BANK, in which the Court
struck down a provision of the franchise tax law which taxed
interest income from federal obligations. The complaint and
alternative writ of mandamus seek to require the Commissioner to
pay refunds to 130 banks who were not parties to the CAMBRIDGE
and CAMBRIDGE-related cases. The Commissioner denies any
liability, but it is possible that the State could be ordered to
pay in excess of $10 million dollars.
MISSOURI TRUSTS - ECONOMIC FACTORS
The portfolio of each Missouri Trust consists primarily of
obligations issued by entities located in Missouri (the "STATE").
Bonds in a Missouri Trust may include obligations issued by or
obligations not issued by the State of Missouri.
The following discussion regarding constitutional limitations and the economy
of the State of Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Missouri.
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Missouri's population was 5,117,000 according to the 1990
census of the United States Bureau of the Census, which
represented an increase of 200,000 or 4.1% from the 1980 census
of 4,917,000 inhabitants. Based on the 1990 population, Missouri
was the 15th largest state in the nation and the third most
populous state west of the Mississippi River, ranking behind
California and Texas. In 1994, the State's population was
estimated to be 5,278,000 by the United States Bureau of the
Census.
Agriculture is a significant component of Missouri's
economy. According to data of the United States Department of
Agriculture, Missouri ranked 16th in the nation in 1993 in the
value of cash receipts from farm marketing, with over $4.1
billion. Missouri is one of the nation's leading purebred
livestock producers. In 1993, sales of livestock and livestock
products constituted nearly 56% of the State's total agricultural
receipts.
Missouri is one of the leading mineral producers in the
Midwest, and ranked 15th nationally in 1993 in the production of
nonfuel minerals. Total preliminary value of mineral production
in 1993 was approximately $832 million. The State continues to
rank first in the nation in the production of lead. Lead
production in 1993 was valued at over $193 million. Missouri
also ranks first in the production of refractory clay, third in
barite, fourth in production of zinc and is a leading producer of
lime, cement and stone.
The Missouri economy has produced exceptional job growth
over the past three years. Missouri total employment in November
1996 reached 2,768,620 jobs. This is an increase of 13% or over
300,000 jobs since January of 1993. Missouri personal income
grew by 7.1% in Fiscal Year 1995 and by 5.4% in Fiscal Year 1996.
The Missouri economy is expected to show solid growth in Fiscal
Year 1997. Missouri personal income is predicted to grow
approximately 4.25% with unemployment remaining low.
According to data obtained by the Missouri Division of
Employment Security, in 1996, over 2.5 million workers had
nonagricultural jobs in Missouri. Over 27% of these workers were
employed in services, approximately 24% were employed in
wholesale and retail trade, and 16.7% were employed in
manufacturing. By October 1996, Missouri had added the most new
jobs in non-farm employment of all the mountain-plains states,
with employment growth of 16,400. In the last ten years,
Missouri has experienced a significant increase in employment in
the service sector and in wholesale and retail trade. Missouri
led the ten mountain-plains states in adding the most service
jobs between October 1995 and October 1996, at 23,400. From the
third quarter of 1995 to the third quarter of 1996, Missouri
experienced total employment increase of 1.4%, or 36,400 new
jobs.
According to the United States Bureau of Labor Statistics,
the 1995 unemployment rate in Missouri was 4.8% and the 1996 rate
was 4.1%. This compares favorably with a nationwide unemployment
rate of 5.6% for 1995 and 5.4% for 1996.
In 1995, per capita personal income in Missouri was $21,819,
a 5.7% increase over the 1994 figure of $20,644. For the United
States as a whole, per capita income in 1995 was $23,208, a 5.3%
increase over the 1994 per capita income of $22,047. In 1995,
Missouri had the largest pay gain for the mountain-plains region,
at 4.2%, outpacing the percentage gain for the nation.
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Fiscal Year 1996 began with a beginning balance in the
General Revenue Fund of $383.38 million. Total resources
available at the end of Fiscal Year 1996 were $6,286.2 million.
Total obligations were $5,946.9 million. The Budget
Stabilization Fund transfer to the General Revenue in Fiscal Year
1996 was $3.865 million, leaving an ending balance in the General
Revenue of $335.413 million.
Final calculations made pursuant to Article X of the
Missouri Constitution show that total state revenues for Fiscal
Year 1996 exceeded the total state revenue limit by $229.1
million. Therefore, in accordance with Article X, the entire
amount of excess revenues will be refunded to Missouri income
taxpayers in calendar year 1998. Litigation has delayed the
refund of $147.2 million triggered in Fiscal Year 1995.
Total General Revenue receipts with collections and
transfers for fiscal years 1995 and 1996 were $5,443.4 million
and $5,813.2 million, respectively. The total General Revenue
expenditures in Fiscal Year 1996 for the operating budget were
$5,287.5 million.
Estimated total resources available in the General Revenue
Fund at the end of Fiscal Year 1997 are $6,645.4 million. Total
obligations in the General Revenue for Fiscal Year 1997 are
estimated at $6,426.1 million. The Budget Stabilization Fund
Transfer to the General Revenue for Fiscal Year 1997 is estimated
at $86.55 million, leaving an ending balance in the General
Revenue of $132.78 million. Total General Revenue resources for
Fiscal Year 1998 are projected at $6,500.8 million. Total
obligations for Fiscal year 1998 are forecast at $6,500.8
million, leaving a $0 ending balance.
The Office of Administration projects that total state
revenues will exceed the total state revenue limit by
approximately $155 million in Fiscal Year 1997, with a net
revenue increase of 5.6%. The Office of Administration projects
that revenues will not exceed the revenue limit in Fiscal Year
1998 if the Governor's recommended tax reductions are enacted,
although net revenue growth is predicted at 5.0%. It is
projected that total state revenues will be approximately $140
million below the Article X revenue limit refund threshold in
Fiscal Year 2002.
Total General Revenue receipts with collections and
transfers for fiscal year 1997 is estimated at $6,181.6 million.
Fiscal year 1997 appropriations are estimated at $5,941.3
million. For fiscal year 1998, before tax cuts, General Revenue
receipts are estimated at $6,498.9 million, and after proposed
tax cuts, the estimate is $6,281.1 million. The Governor has
recommended appropriations for the operating budget for Fiscal
Year 1998 of $6,202.2 million.
For fiscal year 1998, the majority of revenues for the State
of Missouri will be obtained from individual income taxes
(56.2%), sales and use taxes (25.1%), corporate income taxes
(8.1%), and corporate franchise taxes (1.2%). Major expenditures
for fiscal year 1998 include elementary and secondary education
(33.5%), human services (25.7%), higher education (13.7%),
corrections and public safety (7.9%) and desegregation (4.7%).
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The fiscal year 1998 budget balances resources and
obligations based on the consensus revenue and refund estimate
and an opening balance resulting from revenue variance and
anticipated spending in Fiscal Year 1996 as well as various
capital improvements in Fiscal Year 1997. The total general
revenue operating budget for fiscal year 1998 exclusive of
desegregation is $5,026.8 million.
Missouri will continue to see a decline in the ongoing costs
of desegregation in Fiscal Year 1997. Beginning with a
negotiated joint stipulation reached on February 22, 1995,
Governor Carnahan has attempted to reduce these annual costs and
end court supervision in the Kansas City case. This negotiation
yielded $22.5 million in total savings that were used for state
aid to all Missouri schools beginning in Fiscal Year 1996.
Following the U.S. Supreme Court decision on June 12, 1995,
further negotiations reduced costs an additional $57.9 million,
bringing the total savings allocated to the school foundation
formula to $80.4 million. In addition, one-time savings of $66.6
million have been redirected to Missouri schools through the
formula. State law requires that desegregation savings go toward
the foundation formula for all Missouri schools.
As of December 31, 1996, the state has spent $2.8 billion on
the desegregation cases in St. Louis and Kansas City. At the end
of fiscal year 1997, that total will rise to an estimated $2.9
billion. The appropriation for Fiscal Year 1997 was $262 million.
The revised estimate for fiscal year 1997 is $257.9 million,
excluding carryover amounts for capital improvements, and the
projection for fiscal year 1998 is $264 million. The state's
obligation for desegregation capital improvement was paid for
with one-time revenue sources set aside in previous fiscal years.
Ongoing costs are primarily from the St. Louis magnet schools,
general salary increases ordered by the federal district court in
Kansas City and the costs of voluntary interdistrict transfers in
both cases. These estimates are subject to variables including
actions of the school districts and participating students,
future court orders and the expenditure rates of the school
districts. If the court approves a settlement agreement in the
Kansas City case, State desegregation payments would phase out
and end by Fiscal Year 2000.
Currently, each of the general obligation bonds issued by
the State of Missouri is rated "Triple A" by Moody's Investors
Service, Inc., Standard and Poor's Corporation, and Fitch's
Investors Services. Missouri is one of only six states that have
this rating from all three rating organizations. Although these
ratings indicate that the State of Missouri is in relatively good
economic health, there can be, of course, no assurance that this
will continue or that particular bond issues may not be adversely
affected by changes in the State or local economic or political
conditions.
Through voter-approved amendments to the state constitution,
the people of Missouri have authorized the issuance of state
general obligation bonds for three purposes: fourth state
building bonds (approved in August 1994), water pollution control
bonds, and third state building bonds. As of January 1, 1997,
$198,620,000 principal remains outstanding of the $200,000,000
issued fourth state building bonds; and $137,315,000 principal
remains outstanding of the $439,494,240 issued water pollution
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control bonds (both amounts excluding refunding issuances). With
the final $75 million issuance on December 1, 1987, all $600
million in third state building bonds authorized by Missouri
voters in 1982 were issued.
The foregoing information constitutes only a brief summary
of some of the general factors which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Missouri Insured Trust are subject.
Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within
the control of the issuers of the Bonds, could affect or could
have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
the Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by a
Missouri Trust to pay interest on or principal of the Bonds.
NEW JERSEY TRUSTS - ECONOMIC FACTORS
Each New Jersey Trust consists primarily of obligations of
issuers located in New Jersey. Each Trust is therefore
susceptible to political, economic or regulatory factors
affecting issuers of the New Jersey Bonds. The following
information provides only a brief summary of some of the complex
factors affecting the financial situation in New Jersey (the
"STATE") and is derived from sources that are generally available
to investors and is believed to be accurate. It is based in part
on information obtained from various State and local agencies in
New Jersey. No independent verification has been made of any of
the following information.
New Jersey is the ninth largest state in population and the
fifth smallest in land area. With an average of 1,062 people per
square mile, it is the most densely populated of all the states.
The State's economic base is diversified, consisting of a variety
of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita
income has been well above the national average, and in 1994 the
State ranked second among the states in per capita personal
income ($27,742).
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.
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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 5.9% in January
1997, which is higher than the national average of 5.4% in
February 1997. Economic recovery is likely to be slow and uneven
in New Jersey, with unemployment receding at a correspondingly
slow pace, due to the fact that some sectors may lag due to
continued excess capacity. In addition, employers even in
rebounding sectors can be expected to remain cautious about
hiring until they become convinced that improved business will be
sustained. Also, certain firms will continue to merge or
downsize to increase profitability.
DEBT SERVICE. The primary method for State financing of
capital projects is through the sale of the general obligation
bonds of the State. These bonds are backed by the full faith and
credit of the State tax revenues and certain other fees are
pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay
the bonds. As of June 30, 1995, there was a total authorized
bond indebtedness of approximately $9.48 billion, of which $3.65
billion was issued and outstanding, $4.0 billion was retired
(including bonds for which provision for payment has been made
through the sale and issuance of refunding bonds) and $1.83
billion was unissued. The appropriation for the debt service
obligation on such outstanding indebtedness is $466.3 million for
Fiscal Year 1996.
NEW JERSEY'S BUDGET AND APPROPRIATION SYSTEM. The State
operates on a fiscal year beginning July 1 and ending June 30.
At the end of Fiscal Year 1989, there was a surplus in the
State's general fund (the fund into which all State revenues not
otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of Fiscal
Year 1990, there was a surplus in the general fund of $1 million.
At the end of Fiscal Year 1991, there was a surplus in the
general fund of $1.4 million. New Jersey closed its Fiscal Year
1992 with a surplus of $760.8 million, Fiscal Year 1993 with a
surplus of $937.4 million and Fiscal Year 1994 with a surplus of
$926.0 million. It is estimated that New Jersey closed its
Fiscal Year 1995 with a surplus of $569.0 million.
In order to provide additional revenues to balance future
budgets, to redistribute school aid and to contain real property
taxes, on June 27, 1990, and July 12, 1990, Governor Florio
signed into law legislation which was estimated to raise
approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income
taxes), the biggest tax hike in New Jersey history. There can be
no assurance that receipts and collections of such taxes will
meet such estimates.
The first part of the tax hike took effect on July 1, 1990,
with the increase in the State's sales and use tax rate from 6%
to 7% and the elimination of exemptions for certain products and
services not previously subject to the tax, such as telephone
calls, paper products (which has since been reinstated), soaps
and detergents, janitorial services, alcoholic beverages and
cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately $1.5 billion in additional
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revenue. Projections and estimates of receipts from sales and
use taxes, however, have been subject to variance in recent
fiscal years.
The second part of the tax hike took effect on January 1,
1991, in the form of an increased state income tax on
individuals. At the time of enactment, it was projected that
this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new
homestead rebate program and state assumption of welfare and
social services costs. Projections and estimates of receipts
from income taxes, however, have also been subject to variance in
recent fiscal years. Under the legislation, income tax rates
increased from their previous range of 2% to 3.5% to a new range
of 2% to 7%, with the higher rates applying to married couples
with incomes exceeding $70,000 who file joint returns, and to
individuals filing single returns with incomes of more than
$35,000.
The Florio administration had contended that the income tax
package will help reduce local property tax increases by
providing more state aid to municipalities. Under the income tax
legislation, the State will assume approximately $289 million in
social services costs that previously were paid by counties and
municipalities and funded by property taxes. In addition, under
the new formula for funding school aid, an extra $1.1 billion is
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 range from 1% up to
10% in income tax rates took effect. Governor Whitman recently
signed into law further reductions up to 15% for some taxpayers
effective January 1, 1996, completing her campaign promise to
reduce income taxes by up to 30% within three years for most
taxpayers.
On June 30, 1995, Governor Whitman signed the New Jersey
Legislature's $16.0 billion budget for Fiscal Year 1996. The
balanced budget, which includes $541 million in surplus, is $300
million more than the 1995 budget. Whether the State can achieve
a balanced budget depends on its ability to enact and implement
expenditure reductions and to collect estimated tax revenues.
LITIGATION. The State is a party in numerous legal
proceedings pertaining to matters incidental to the performance
of routine governmental operations. Such litigation includes,
but is not limited to, claims asserted against the State arising
from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal
laws. Included in the State's outstanding litigation are cases
challenging the following: the funding of teachers' pension
funds, the adequacy of Medicaid reimbursement for hospital
services, the hospital assessment authorized by the Health Care
Reform Act of 1992, various provisions, and the
constitutionality, of the Fair Automobile Insurance Reform Act of
1990, the State's role in a consent order concerning the
construction of a resource facility in Passaic County, actions
taken by the New Jersey Bureau of Securities against an
individual, the State's actions regarding alleged chromium
contamination of State-owned property in Hudson County, the
issuance of emergency redirection orders and a draft permit by
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the Department of Environmental Protection and Energy, refusal of
the State to share with Camden County federal funding the State
recently received for disproportionate share hospital payments
made to county psychiatric facilities, and the constitutionality
of annual A-901 hazardous and solid waste licensure renewal fees
collected by the Department of Environmental Protection and
Energy. Adverse judgments in these and other matters could have
the potential for either a significant loss of revenue or a
significant unanticipated expenditure by the State.
At any given time, there are various numbers of claims and
cases pending against the State, State agencies and employees
seeking recovery of monetary damages that are primarily paid out
of the fund created pursuant to the New Jersey Tort Claims Act.
In addition, at any given time, there are various numbers of
contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate
its exposure for these claims.
DEBT RATINGS. For many years prior to 1991, both Moody's
Investors Service, Inc. and Standard and Poor's Corporation had
rated New Jersey general obligation bonds "Aaa" and "AAA,"
respectively. On July 3, 1991, however, Standard and Poor's
Corporation downgraded New Jersey general obligation bonds to
AA+. On June 4, 1992, Standard and Poor's Corporation placed New
Jersey general obligation bonds on Credit Watch with negative
implications, citing as its principal reason for its caution the
unexpected denial by the Federal Government of New Jersey's
request for $450 million in retroactive Medicaid payments for
psychiatric hospitals. These funds were critical to closing a $1
billion gap in the State's $15 billion budget for fiscal year
1992 which ended on June 30, 1992. Under New Jersey state law,
the gap in the current budget must be closed before the new
budget year began on July 1, 1992. Standard and 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 and 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 was
negative. Standard and 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, S&P 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. S&P reaffirmed its
"AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc.
downgraded New Jersey general obligation bonds to "Aa1," stating
that the reduction reflected a developing pattern of reliance on
nonrecurring measures to achieve budgetary balance, four years of
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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 (albeit rising) debt ratios, and,
on the negative side, a continued reliance on one-time revenues
and a dependence on pension-related savings to achieve budgetary
balance.
NEW YORK TRUSTS - ECONOMIC FACTORS
The Portfolio of each New York Trust includes obligations
issued by New York State (the "STATE"), by it various public
bodies (the "AGENCIES"), and/or by other entities located within
the State, including the City of New York (the "CITY").
Some of the more significant events and conditions relating
to the financial situation in New York are summarized below.
This section provides only a brief summary of the complex factors
affecting the financial situation in New York and is derived from
sources that are generally available to investors and is believed
to be accurate. It is based in part on Official Statements and
prospectuses issued by, and on other information reported by the
State, the City and the Agencies in connection with the issuance
of their respective securities.
There can be no assurance that current or future statewide
or regional economic difficulties, and the resulting impact on
State or local government finances generally, will not adversely
affect the market value of New York Municipal Obligations held in
the portfolio of the Trusts or the ability of particular obligors
to make timely payments of debt service on (or relating to) those
obligations.
(1)THE STATE: The State has historically been one of the
wealthiest states in the nation. For decades, however, the State
economy has grown more slowly than that of the nation as a
whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes
involving migration of the more affluent to the suburbs and an
influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people
and business. The City has also had to face greater competition
as other major cities have developed financial and business
capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high state and local
tax burden relative to other states. The burden of State and
local taxation, in combination with the many other causes of
regional economic dislocation, has contributed to the decisions
of some businesses and individuals to relocate outside, or not
locate within, the State. However, the State's 1995-96 budget
reflected significant actions to reduce the burden of State
taxation, including adoption of a three-year, 20% reduction in
the State's personal income tax. During 1996-97, New York led
the nation in tax cuts, at 54.1%, bringing the total value of tax
reductions in effect for the 1997 year to over $6 billion. When
measured as a percentage of personal income, state-imposed taxes
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in New York should be below the national median in 1997. The
budget for fiscal year 1997-98 reflects an additional $170
million in tax reductions.
SLOWDOWN OF REGIONAL ECONOMY. A national recession
commenced in mid-1990. The downturn continued throughout the
State's 1990-91 fiscal year and was followed by a period of weak
economic growth during the 1991 calendar year. Economic recovery
started considerably later in the State than in the nation as a
whole due in part to the significant retrenchment in the banking
and financial services industries, downsizing by several major
corporations, cutbacks in defense spending, and an oversupply of
office buildings. In the last few years, New York has shown
signs of economic resurgence. Since 1994, New York has jumped
from 15th to 6th in terms of total private sector employment
growth compared to other states, gaining 140,000 private sector
jobs since December 1994, despite banking layoffs and closure of
a major automotive plant. Overall employment growth was close to
0.7%, almost 60,000 jobs, for 1996. National employment growth
in 1996 was 2.0%. The New York economy in 1997 is expected to
grow at about the same rate as in 1996. Many uncertainties exist
in forecasts of both the national and State economies and there
can be no assurance that the State economy will perform at a
level sufficient to meet the State's projections of receipts and
disbursements.
1997-98 FISCAL YEAR. The Governor presented the recommended
Executive Budget for the 1997-98 fiscal year in January 1997.
The 1997-98 budget gap is smaller than the previous two fiscal
year projections. The baseline budget forecast produced an
estimated $2.3 billion budget imbalance, before reflecting any
actions taken by the Governor to produce a balanced 1997-98
Financial Plan. Projections of baseline revenue growth showed a
decline of almost $2 billion, reflecting the loss of non-
recurring receipts used in 1996-97 and implementation of
previously enacted tax reduction programs.
The 1996-97 surplus of $943 million reduced the 1997-98
budget gap to $1.3 billion. Proposals included in the Executive
Budget for 1997-98 close this remaining gap, reducing State
spending for the third straight year, and permitting three new
tax reduction proposals: the $1.7 billion, multi-year property
tax reduction portion of STAR (School Tax Relief initiative); a
three-year phased reduction in the estate and gift tax; and a $50
million reserve for additional targeted job-creating tax
reductions. The budget also makes a significant investment in
school aid -- a proposed increase of $302 million on a school year
basis as the first step toward implementing the $1.7 billion
school aid portion of STAR.
The 1997-98 Financial Plan includes approximately $66
million in non-recurring resources, or only 0.2% of the General
Fund budget -- the lowest level in more than a decade. As
compared to 1996-97, non-recurring resources are a much smaller
component of the budget: down over $1 billion from last year's
adopted budget. The loss of these resources in future years is
more than offset by recommendations which provide higher
annualized savings in 1998-99 and beyond.
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Assuming these gap-closing actions, the Financial Plan projects receipts of
$32.9 billion and spending of $32.8 billion in fiscal year 1997-98, with a
required deposit of $15 million to the Tax Stabilization Reserve Fund (TSRF)
and an increase of $24 million in the Contingency Reserve Fund (CRF). The
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closing fund balance in the General Fund is projected to be $332 million, the
largest amount ever on deposit.
1996-1997 FISCAL YEAR. The 1996-97 State Financial Plan projected total
general fund receipts and transfers from other funds at $32.966 billion and
disbursements and transfers to other funds at $32.895 billion. The 1996-97
General Fund Financial Plan continues to be balanced, with a projected
surplus of $1.3 billion. This will be the second consecutive material budget
surplus generated by the Governor's administration. Of this amount, $250
million is being used to accelerate the last portion of the Governor's
personal income tax cut through changes to the 1997 withholding tables. This
raises taxpayers' current take-home pay rather than issuing larger refunds in
1998. Of the remainder, $943 million is being used to help close the
projected 1997-98 budget gap, and $65 million is being deposited into the Tax
Stabilization Reserve Fund (the State's "rainy day" fund) as provided by the
Constitution. This is the maximum amount that can be deposited, and
increases the size of that fund to $332 million by the end of 1997-98, the
highest balance ever achieved.
The surplus results primarily from growth in projected receipts. As compared
to the enacted budget, revenues increased by more than $1 billion, while
disbursements fell by $228 million. These changes from original Financial
Plan projections reflect actual results through December 1996 as well as
modified economic and caseload projections for the balance of the fiscal year.
The General Fund closing balance is expected to be $358 million at the end of
1996-97. Of this amount, $317 million will be on deposit in the TSRF, while
another $41 million will remain on deposit in the CRF. The TSRF has an
opening balance of $287 million, supplemented by a required payment of $15
million and an extraordinary deposit of $65 million from surplus 1996-97
monies. The $9 million on deposit in the Revenue Accumulation Fund will be
drawn down as planned. The previously planned deposit of $85 million to the
CRF, projected earlier to be received from contractual efforts to maximize
Federal revenue, is not expected to materialize this year.
On January 21, 1994, the State entered into a settlement with Delaware with
respect to STATE OF DELAWARE V. STATE OF NEW YORK, which is discussed below
at STATE LITIGATION. The State made an immediate $35 million payment and
agreed to make a $33 million annual payment in each of the next five fiscal
years. The State has not settled with other parties to the litigation and
will continue to incur litigation expenses as to those claims.
On November 16, 1993, the Court of Appeals, the State's highest court,
affirmed the decision of a lower court in three actions, which declared
unconstitutional State actuarial funding methods for determining State and
local contributions to the State employee retirement system. Following the
decision, the State Comptroller developed a plan to phase in a constitutional
funding method and to restore prior funding levels of the retirement systems
over a four-year period. The plan is not expected to require the State to
make additional contributions with respect to the 1993-94 fiscal year nor to
materially and adversely affect the State's financial condition thereafter.
Through fiscal year 1998-99, the State expects to contribute $643 million
more to the retirement plans than would have been required under the prior
funding method.
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FUTURE FISCAL YEARS. There can be no assurance that the State will not face
substantial potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the spending required to maintain State programs at current levels. To
address any potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements.
INDEBTEDNESS. As of March 31, 1995, the total amount of long-term State
general obligation debt authorized but unissued stood at $1.789 billion. As
of the same date, the State had approximately $5.181 billion in general
obligation debt and $149.3 million of Bond Anticipation Notes ("BANS")
outstanding.
As of March 31, 1995, $17.980 billion of bonds, issued in connection with
lease-purchase and contractual obligation financings of State capital
programs, were outstanding. The total amount of outstanding State-supported
debt as of March 31, 1995 was $27.913 billion. Total State-related debt
(which includes the State-supported debt, moral obligation and certain other
financings and State-guaranteed debt) was $36.1 billion.
The State anticipates that its borrowings for capital purposes during the
State's 1995-96 fiscal year will consist of $248 million in general
obligation bonds and BANS and $186 million in general obligation commercial
paper. The State's commercial paper program is expected to have an average
of $287 million outstanding during 1997-98. The projection of the State
regarding its borrowings for the 1995-96 fiscal year are subject to change if
actual receipts fall short of State projections or if other circumstances
require.
In June 1990, legislation was enacted creating the "New York Local Government
Assistance Corporation" ("LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrow ing. As of
June 1995, LGAC had issued its bonds and notes to provid e net proceeds of
$4.7 billion. The LGAC was authorized to issue its bonds to provide net
proceeds of up to $529 million during the State's 1995-96 fiscal year to
redeem notes sold in June 1995. The LGAC program was completed in 1995-96
with the issuance of the last installment of authorized bond sales.
The Legislature passed a proposed constitutional amendment which would permit
the State subject to certain restrictions to issue revenue bonds without
voter referendum. Among the restrictions proposed is that such bonds would
be backed by the full faith and credit of the State. The Governor intends to
submit changes to the proposed amendment, which before becoming effective
must be passed again by the next separately-elected Legislature and approved
by voter referendum at a general election. The earliest such an amendment
could take effect would be in November 1995.
RATINGS. Moody's rating of the State's general obligation bonds stood at A
as of September 1995, and S&P's rating stood at A-. Previously, Moody's
lowered its rating to A on June 6, 1990, its rating having been A1 since May
27, 1986. S&P lowered its rating from A to A- on January 13, 1992. S&P's
previous ratings were A from March 1990 to January 1992, AA- from August 1987
to March 1990 and A+ from November 1982 to August 1987.
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(2)THE CITY AND THE MUNICIPAL ASSISTANCE CORPORATION ("MAC"): The City
accounts for approximately 41% of the State's population and personal income,
and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other
actions, the State Legislature (i) created MAC to assist with long-term
financing for the City's short-term debt and other cash requirements and (ii)
created the State Financial Control Board (the "CONTROL BOARD") to review and
approve the City's budgets and City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "COVERED
ORGANIZATIONS")).
In recent years, the rate of economic growth in the City has slowed
substantially as the City's economy entered a recession. The Mayor is
responsible for preparing the City's four-year financial plan, including the
City's current financial plan. The City Comptroller has issued reports
concluding that projected revenues may be less and future expenditures may be
greater than those forecast in the financial plan.
Pursuant to State Law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances,
including the occurrence or the substantial likelihood and imminence of the
occurrence of an annual operating deficit of more than $100 million or the
loss of access to the public credit markets to satisfy the City's capital and
seasonal financial requirements, the Control Board would be required by State
law to exercise certain powers, including prior approval of City financial
plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State
experiences revenue shortfalls or spending increases beyond its projections
during its 1995-96 fiscal year or subsequent years, such developments could
result in reductions in projected State aid to the City. In addition, there
can be no assurance that State budgets in future fiscal years will be adopted
by the April 1 statutory deadline and that there will not be adverse effects
on the City's cash flow and additional City expenditures as a result of such
delays.
The City projections set forth in its financial plan are based on various
assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
City budgets by the New York City Council, and approval by the Governor or
the State Legislature and the cooperation of MAC with respect to various
other actions proposed in the financial plan.
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The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1996 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in
recent years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1996 through 1999 contemplates the
issuance of $9.7 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
terms and success of projected public sales of City general obligation bonds
and notes will be subject to prevailing market conditions at the time of the
sale, and no assurance can be given that the credit markets will absorb the
projected amounts of public bond and note sales. Future developments
concerning the City and public discussion of such developments, the City's
future financial needs and other issues may affect the market for outstanding
City general obligation bonds and notes. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned operating and capital expenditures.
1996-99 FINANCIAL PLAN. On July 11, 1995, the City submitted to the Control
Board the 1996-99 Financial Plan, which relates to the City, the Board of
Education and the City University of New York. The 1996-99 Financial Plan is
based on the City's expense and capital budgets for the City's 1996 fiscal
year, which were adopted on June 14, 1995, and sets forth proposed actions by
the City for the 1996 fiscal year to close substantial projected budget gaps
resulting from lower than projected tax receipts and other revenues and
greater than projected expenditures. In addition to substantial proposed
agency expenditure reductions and productivity, efficiency and labor
initiatives negotiated with the City's labor unions, the 1996-99 Financial
Plan reflects a strategy to substantially reduce spending for entitlements
for the 1996 and subsequent fiscal years.
The 1996-99 Financial Plan also sets forth projections for the 1997 through
1999 fiscal years and outlines a proposed gap-closing program to close
projected budget gaps of $888 million, $1.5 billion and $1.4 billion for the
1997, 1998 and 1999 fiscal years, respectively, after successful
implementation of the $3.1 billion gap-closing program for the 1996 fiscal
year. The proposed gap-closing actions, a substantial number of which are
not specified in detail, include various actions which may be subject to
State or Federal approval.
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On July 24, 1995, the City Comptroller issued a report on the 1996-99
Financial Plan. The report concluded that the 1996-99 Financial Plan
includes total risks of $749 million to $1.034 billion for the 1996 fiscal
year. With respect to the 1997-99 fiscal years, the report noted that the
gap-closing program in the 1996-99 Financial Plan does not include
information about how the City will implement the various gap-closing
programs, and that the entitlement cost containment and revenue initiatives
will require approval of the State legislature. The report estimated that
the 1996-99 Financial Plan includes total risks of $2.0 billion to $2.5
billion in the 1997 fiscal year, $2.8 billion to $3.3 billion in the 1998
fiscal year, and $2.9 billion to $3.4 billion in the 1999 fiscal year.
On December 16, 1994, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be greatly
reduced in future years due to the decline in value of taxable real property.
The report concluded that the debt incurring power of the City would likely
be curtailed substantially in the 1997 and 1998 fiscal years.
On July 21, 1995, the staff of the Control Board issued a report on the
1996-99 Financial Plan which identified risks of $873 million, $2.1 billion,
$2.8 billion and $2.8 billion for the 1996 through 1999 fiscal years,
respectively.
On July 24, 1995, the staff of the OSDC issued a report on the 1996-99
Financial Plan. The report concluded that there remains a budget gap for the
1996 fiscal year of $392 million, largely because the City and its unions
have yet to reach an agreement on how to achieve $160 million in unspecified
labor savings and the remaining $100 million in recurring health insurance
savings from last year's agreement. The report further noted that growth in
City revenues is being constrained by the weak economy in the City, which is
likely to be compounded by the slowing national economy, and that there is a
likelihood of a national recession during the course of the 1996-99 Financial
Plan. Moreover, the report noted that State and Federal budgets are
undergoing tumultuous changes, and that the potential for far-reaching
reductions in intergovernmental assistance is clearly on the horizon, with
greater uncertainty about the impact on City finances and services.
Given the foregoing factors, there can be no assurance that the City will
continue to maintain a balanced budget, or that it can maintain a balanced
budget without additional tax or other revenue increases or reductions in
City services, which could adversely affect the City's economic base.
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to, actions commenced and claims asserted
against the City arising out of alleged constitutional violations, torts,
breaches of contracts, and other violations of law and condemnation
proceedings. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determinations
in certain of them might have a material adverse effect upon the City's
ability to carry out its financial plan. As of June 30, 1994, the City
estimated its potential future liability in respect of outstanding claims to
be approximately $2.6 billion. The 1996-99 Financial Plan includes
provisions for judgments and claims of $279 million, $236 million, $251
million and $264 million for the 1996 through 1999 fiscal years, respectively.
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RATINGS. As of March 1996, Moody's rating of the City's general obligation
bonds stood at Baa1 and S&P's rating stood at A-.
On July 10, 1995, S&P revised downward its rating on City general obligation
bonds from A- to BBB+ and removed City bonds from CreditWatch. S&P stated
that "structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector." Other
factors identified by S&P in lowering its rating on City bonds included a
trend of using one-time measures, including debt refinancings, to close
projected budget gaps, dependence on unratified labor savings to help balance
financial plans, optimistic projections of additional Federal and State aid
or mandate relief, a history of cash flow difficulties caused by State budget
delays and continued high debt levels. Fitch Investors Service, Inc.
continues to rate the City general obligations bond A-. Moody's rating for
City general obligation bonds is Baa1.
On February 11, 1991, Moody's had lowered its rating from A. Previously,
Moody's had raised its rating to A in May 1988, to Baa1 in December 1986, to
Baa in November 1983 and to Ba1 in November 1981. S&P had raised its rating
to A- in November 1987, to BBB+ in July 1985 and to BBB in March 1981.
As of June 30, 1995, the City and MAC had, respectively, $23.258 billion and
$4.033 billion of outstanding net long-term indebtedness.
(3)THE STATE AGENCIES: Certain Agencies of the State have faced
substantial financial difficulties which could adversely affect the ability
of such Agencies to make payments of interest on, and principal amounts of,
their respective bonds. The difficulties have in certain instances caused
the State (under so-called "moral obligation" provisions which are
non-binding statutory provisions for State appropriations to maintain various
debt service reserve funds) to appropriate funds on behalf of the Agencies.
Moreover, it is expected that the problems faced by these Agencies will
continue and will require increasing amounts of State assistance in future
years. Failure of the State to appropriate necessary amounts or to take
other action to permit those Agencies having financial difficulties to meet
their obligations could result in a default by one or more of the Agencies.
Such default, if it were to occur, would be likely to have a significant
adverse effect on investor confidence in, and therefore the market price of,
obligations of the defaulting Agencies. In addition, any default in payment
on any general obligation of any Agency whose bonds contain a moral
obligation provision could constitute a failure of certain conditions that
must be satisfied in connection with Federal guarantees of City and MAC
obligations and could thus jeopardize the City's long-term financing plans.
As of September 30, 1993, the State reported that there were eighteen
Agencies that each had outstanding debt of $100 million or more. These
eighteen Agencies had an aggregate of $63.5 billion of outstanding debt,
including refunding bonds, of which $7.7 billion was moral obligation debt of
the State and $19.3 billion was financed under lease-purchase or contractual
obligation financing arrangements.
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(4)STATE LITIGATION: The State is a defendant in numerous legal
proceedings pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited to,
claims asserted against the State arising from alleged torts, alleged
breaches of contracts, condemnation proceedings and other alleged violations
of State and Federal laws. Included in the State's outstanding litigation
are a number of cases challenging the constitutionality or the adequacy and
effectiveness of a variety of significant social welfare programs primarily
involving the State's mental hygiene programs. Adverse judgments in these
matters generally could result in injunctive relief coupled with prospective
changes in patient care which could require substantial increased financing
of the litigated programs in the future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six
million acres of land as well as compensatory and punitive damages.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
(5)OTHER MUNICIPALITIES: Certain localities in addition to New York City
could have financial problems leading to requests for additional State
assistance. The potential impact on the State of such actions by localities
is not included in projections of State receipts and expenditures in the
State's 1996-97 and 1997-98 fiscal years.
Fiscal difficulties experienced by the City of Yonkers ("YONKERS") resulted
in the creation of the Financial Control Board for the City of Yonkers (the
"YONKERS BOARD") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1993, the total indebtedness of all localities
in the State was approximately $17.7 billion. State law requires the
Comptroller to review and make recommendations concerning the budgets of
those local government units other than New York City authorized by State law
to issue debt to finance deficits during the period that such deficit
financing is outstanding. Fifteen localities had outstanding indebtedness
for state financing at the close of their fiscal year ending in 1993.
Certain proposed Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, New York City or any of the Agencies were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State, including notes or bonds in the New York Insured Trust,
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions, and
long-range economic trends. The longer-range potential problems of declining
urban population, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
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(6)OTHER ISSUERS OF NEW YORK MUNICIPAL OBLIGATIONS. There are a number of
other agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality
of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State.
NORTH CAROLINA TRUSTS - ECONOMIC FACTORS
The population of the State has increased 13% from 1980, from 5,880,095 to
6,657,106 as reported by the 1990 federal census and the State rose from
twelfth to tenth in population. The State's estimate of population as of
July 1996 is 7,322,317. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only six municipalities with
populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
State has moved from an agricultural to a service and goods producing
economy. Those persons displaced by farm mechanization and farm
consolidations have, in large measure, sought and found employment in other
pursuits. Due to the wide dispersion of non-agricultural employment, the
people have been able to maintain, to a large extent, their rural habitation
practices. During the period 1980 to 1996, the State labor force grew about
30% (from 2,855,200 to 3,718,000). Per capita income during the period 1985
to 1995 grew from $11,870 to $21,103, an increase of 77.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of June 1996, the State was reported
to rank eleventh among the states in non-agricultural employment and eighth
in manufacturing employment. Employment indicators have varied somewhat in
the annual periods since June 1990, but have demonstrated an upward trend
since 1991.
The seasonally adjusted unemployment rate in December 1996 was estimated to
be 4.2% of the labor force, as compared with 5.3% nationwide.
In 1995, the State was eighth in the nation in gross agricultural income
which was approximately $7.0 billion. According to the State Commissioner of
Agriculture, in 1995, the State ranked first in the nation in the production
of flue-cured tobacco, total tobacco, turkeys and sweet potatoes; second in
hog production, trout, the production of cucumbers for pickles and net farm
income; third in the value of poultry and egg products, and greenhouse and
nursery income; fourth in commercial broilers, peanuts, blueberries and
strawberries; and sixth in burley tobacco.
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The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production, which has been the leading source of agricultural income
in the State, declined in 1995. The poultry industry is now the leading
source of gross agricultural income, at 29%, and the pork industry provides
over 18% of the total agricultural income. Tobacco farming in North Carolina
has been and is expected to continue to be affected by major Federal
legislation and regulatory measures regarding tobacco production and
marketing and by international competition. Measures adverse to tobacco
farming could have negative effects on farm income and the North Carolina
economy generally.
The number of farms has been decreasing; in 1995 there were approximately
58,000 farms in the State (down from approximately 72,000 in 1987, a decrease
of about 19% in eight years). However, a strong agribusiness sector supports
farmers with farm inputs (fertilizer, insecticide, pesticide and farm
machinery) and processing of commodities produced by farmers (vegetable
canning and cigarette manufacturing). North Carolina's agriculture industry,
including food, fiber and forest products, contributes over $45 billion
annually to the State's economy.
The State Department of Commerce, Travel and Tourism Division reports that in
1995 more than $9 billion was spent on tourism in the State. The Department
estimates that two-thirds of total expenditures came from out-of-state
travelers and that approximately 161,000 people were employed in
tourism-related jobs. The effects of two severe hurricanes in 1996 may have
an adverse effect on tourism in certain areas of the State.
The North Carolina State Constitution requires that total expenditures of
the State for the fiscal period covered by each budget not exceed the total
of receipts during the fiscal period and the surplus remaining in the State
Treasury at the beginning of the period. The State's fiscal year runs from
July 1st through June 30th. In November 1996, the voters of the State
approved a constitutional amendment giving the Governor the power to veto
certain legislative matters, including budgetary matters.
The state began fiscal year 1995-96 with an unreserved beginning balance in
the General Fund of $320.7 million. Total revenue in the General Fund during
the fiscal year was $10.1 billion and total budget recommendations were
$9.684 billion. Of the total revenue, $9.46 billion or 93.7% was generated
from taxes. Fiscal year 1995-96 ended with an unreserved balance of $290.5
million in the General Fund.
Total revenue available in the General Fund for fiscal year 1996-97 is
estimated at $10.86 billion. Approximately 91.3% or $9.9 billion is
generated from taxes. Budget recommendations for fiscal year 1996-97 are
expected to total $10.45 billion. The unreserved ending balance at the end
of fiscal year 1997 is estimated at $147.4 million.
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Consistent with the expected growth in the state economy, baseline tax
revenue is projected to increase by 6.1% during 1997-98 and 6.4% in 1998-99.
This is a modest improvement from the 6.0% increase projected for 1996-97.
The key elements of the 1995 tax package were: (1) the increase in
individual income tax personal exemption from $2,000 per person to $2,250 for
1995 and further to $2,500 in 1996; (2) the enactment of a $60 child tax
credit; and (3) the complete elimination of the state intangibles tax. Major
reduction items in the 1996 package included: (1) a reduction in the state
sales tax on food from 4% to 3% beginning in 1997; (2) a phased reduction in
the corporate income tax from 7.75% to 6.90% by 2000; and (3) a complete
elimination in the soft drink tax over a three year period. The combined
impact of the 1995 and 1996 package is a reduction in state taxes of $616
million in 1997-98 and $686 million in 1998-99.
It is unclear what effect these developments at the State level may have on
the value of the Debt Obligations in the North Carolina Trusts.
The total recommended 1997-99 biennial state budget is $40.2 billion and is
comprised of four major categories of funds including general funds, highway
funds, federal funds, and other receipts generated by departments. In terms
of composition, the total state budget consists of 56.7% general funds, 8.7%
highway funds, 26.4% federal funds, and 8.2% other receipts.
Of the total recommended state budget, approximately 99.8% provides for the
operations of the state programs and services including the continuation and
expansion of existing programs and the implementation of new programs
proposed by the Governor. The remaining .2% of the recommended budget
provides for capital improvement projects, repairs and renovations to
existing state-owned facilities and acquisition of real property.
General obligations of the State are currently rated "AAA" and "Aaa" by
Standard & Poor's and Moody's, respectively. Standard & Poor's also
reaffirmed its stable outlook for the State in June 1995. Standard & Poor's
reports that North Carolina's rating reflects the State's strong economic
characteristics, sound financial performance and low debt levels. There can
be no assurance that the economic condition on which these ratings, or the
ratings of the other bonds in the Portfolio, are based will continue or that
particular bond issues may not be adversely affected by changes in economic
or political conditions, by uncertainties peculiar to the issuers thereof or
the revenue sources from which they are to be paid. The factual information
provided above was derived from publications of various North Carolina
departments or agencies and has not been independently verified. Investors
are encouraged to consult the Schedule of Investments at the Date of Deposit
for a North Carolina Trust and their own investment advisors regarding the
merits of particular Bonds in the Portfolio.
OHIO TRUST - ECONOMIC FACTORS
As described above, the Trusts will invest most of its net assets in
securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of
the State, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Trusts are therefore susceptible to
general or particular economic, political, or regulatory factors that may
affect issuers of Ohio Obligations. The following information constitutes
only a brief summary of some of the many complex factors that may have an
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effect. The information does not apply to "conduit" obligations for which
the public issuer itself has no financial responsibility. This information
is derived from official statements of certain Ohio issuers published in
connection with their issuance of securities and from other publicly
available information, and is believed to be accurate. No independent
verification has been made of any of the following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary,
and is not intended as a discussion of any specific factors that may affect
any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has been
guaranteed by bond insurance purchased by the issuers, the Ohio Trusts or
other parties. Those Ohio Obligations may not be subject to the factors
referred to in this section of the Prospectus.
Ohio is the seventh most populous state; the 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1995
is 11,157,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing,
largely concentrated in motor vehicles and equipment, steel, rubber products
and household appliances. As a result, general economic activity, as in many
other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important
segment of the economy, with over half the State's area devoted to farming
and approximately 16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However,
for the last five years the State rates were below the national rates (4.8%
versus 5.6% in 1995). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Trust or the ability of particular obligors to
make timely payments of debt service on (or lease payments relating to) those
Obligations.
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The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY") or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which
personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State
has well-established procedures for, and has timely taken, necessary actions
to ensure resource/expenditure balances during less favorable economic
periods. Those procedures included general and selected reductions in
appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million in
the GRF and $353 million in the Budget Stabilization Fund ("BSF," a cash and
budgetary management fund). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1,
1991; it included GRF debt service and lease rental appropriations for the
entire biennium, while continuing most other appropriations for a month.
Pursuant to the general appropriations act for the entire biennium, passed on
July 11, 1991, $200 million was transferred from the BSF to the GRF in FY
1992.
Based on the updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed, an FY 1992 imbalance in GRF resources
and expenditures. In response, the Governor ordered most State agencies to
reduce GRF spending in the last six months of FY 1992 by a total of
approximately $184 million; the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the FY to the GRF;
and adjustments were made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor ordering $300 million in selected GRF
spending reductions and subsequent executive and legislative action (a
combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as
a first step to BSF replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million was transferred into the BSF (which had an
October 7, 1996 balance of over $828 million).
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The GRF appropriations act for the 1996-97 biennium was passed on June 28,
1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. In accordance
with the appropriations act, the significant June 30, 1995 GRF balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, was
transferred to the BSF and other funds, including school assistance funds
and, in anticipation of possible federal program changes, a human services
stabilization fund.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000 to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming
the debts of any local government or corporation. (An exception is made in
both cases for any debt incurred to repel invasion, suppress insurrection, or
defend the State in war.)
By 14 constitutional amendments, approved from 1921 to date (the latest
adopted in 1995), Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At March 7, 1997, $955 million
(excluding certain highway bonds payable primarily from highway use receipts)
of this debt was outstanding. The only such State debt at that date still
authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($32.3 million outstanding);
(b) $240 million of obligations previously authorized for local
infrastructure improvements, no more than $120 million of which may be issued
in any calendar year ($879 million outstanding); and (c) up to $200 million
in general obligation bonds for parks, recreation and natural resource
purposes which may be outstanding at any one time ($44.2 million outstanding,
with no more than $50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the local
infrastructure bond program (authorizing an additional $1.2 billion of State
full faith and credit obligations to be issued over 10 years for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding authorization, and authorizes not more than $1.2 billion
to be outstanding at any time and not more than $220 million to be issued in
a fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises
or taxes levied to pay debt service. Those special obligations include
obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority, and certain obligations issued by the State Treasurer,
over $4.6 billion of which were outstanding at March 7, 1997.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
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A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for the purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when
applied to the cost of higher education tuition. (A 1965 constitutional
provision that authorized student loan guarantees payable from available
State moneys has never been implemented, apart from a "guarantee fund"
approach funded essentially from program revenues.)
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements
of Ohio public agencies (in which certificates of participation may be
issued) are limited in duration to the agency's fiscal period, and are
renewable only upon appropriations being made available for the subsequent
fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
approximately 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 117 districts
from voter-authorized income taxes, for significant portions of their
budgets. Litigation, similar to that in other states, is pending questioning
the constitutionality of Ohio's system of school funding. The trial court
concluded that aspects of the system (including basic operating assistance)
are unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State appealed and a court of
appeals reversed the trial court's findings for plaintiff districts. The
case is now pending on appeal in the Ohio Supreme Court. A small number of
the State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders, with diversion
of State subsidy distributions to repayment if needed. Recent borrowings
under this program totalled $94.5 million for 27 districts (including $75
million for one) in FY 1993, $41.1 million for 28 districts in FY 1994, $71.1
million for 29 districts in FY 1995 (including $29.5 million for one), and
$87.2 million for 20 districts in FY 1996 (including $42.1 million for one).
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the fiscal affairs, and for
development of a financial plan to eliminate deficits and cure any defaults.
Since inception for municipalities in 1979, these procedures have been
applied to 23 cities and villages; for 18 of them the fiscal situation was
resolved and the procedures terminated. As of March 7, 1997, the 1996 school
district "fiscal emergency" provision has been applied to two districts, and
10 districts have been placed on preliminary "fiscal watch" status.
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At present the State itself does not levy any AD VALOREM taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited to
1% of true value in money the amount of the aggregate levy (including a levy
for unvoted general obligations) of property taxes by all overlapping
subdivisions, without a vote of the electors or a municipal charter
provision, and statutes limit the amount of the aggregate levy to 10 mills
per $1 of assessed valuation (commonly referred to as the "TEN-MILL
LIMITATION"). Voted general obligations of subdivisions are payable from
property taxes that are unlimited as to amount or rate.
OREGON TRUSTS - ECONOMIC FACTORS
The portfolio of each Oregon Trust consists primarily of obligations issued
by entities located in Oregon.
Similar to the nation as a whole, economic growth in Oregon is likely to be
restricted to its long-term trend rate by near capacity labor markets and
rising costs. Oregon's jobless rate is unlikely to fall below its current
5.0% for any sustained period. This will have the effect of limiting job
growth to the rate of increase in the state's labor force. The labor force
is expected to increase sufficiently to keep Oregon's employment growth well
above the national average but not enough to match the job growth rates of
the 1994 to 1996 period. The state's tight labor markets and expanding high
technology industries should continue to push Oregon's wages and per capita
income up toward the national average.
Oregon's unemployment rate increased from 4.8% in 1995 to 5.2% in 1996. This
compares favorably with the national unemployment rates of 5.6% in 1995 and
5.4% in 1996. Per capita personal income in Oregon increased 6.0% in 1995,
to $21,611, which is 93% of the national per capita personal income of
$23,208.
Oregon's personal income is forecast to increase 6.3% in 1997 and 5.9% in
1998, down from an estimated 7.9% in 1996 but still well above the national
forecast of 5.0% growth in 1997 and 4.9% in 1998. Non-farm payroll
employment is expected to increase 2.9% in 1997, more than double the
projected national rate of job growth.
With the state's overall labor market near full capacity, job expansion will
become increasingly dependent on labor force growth. While the 18 to 24 year
old segment of the population is expected to grow over the next five years,
the key to labor force expansion is the rate of net migration. Oregon
experienced rapid net in-migration over the 1990 to 1995 period averaging
40,700 per year. The state continues to be attractive to in-migrants,
offering low unemployment and rising relative wages. Moreover, California's
unemployment rate remains 2% above Oregon's rate. These factors should keep
Oregon's population growth well above the national average.
Despite the attraction of Oregon's strong economy, the rate of net
in-migration is likely to slow for two reasons. First, California is well
into an economic recovery with job growth above the national average. This
has already slowed movement into Oregon. This trend can be expected to
continue. A second factor is Oregon's rising home prices. Oregon's
conventional home repeat price index increased 9.3% per year over the 1990 to
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1995 period, the second fastest growth rate among the states. Home prices
are estimated to increase 8.9% in 1996, followed by a 7.9% projected increase
in 1997. These increases are making Oregon a relatively more expensive place
to live. This will have the effect of reducing the state's attractiveness to
some potential in-migrants.
The state's tight labor markets are expected to continue pushing Oregon's
wages toward the national average. Manufacturing wages grew an estimated
6.3% in 1996 while private service wages increased 5.6%. In 1997,
manufacturing wages are projected to increase another 4.3% while private
service wages rise 4.4%. Oregon's annual wages have increased from 89.8% of
the national average in 1993 to 92.9% in 1995. They are forecast to rise to
94.5% in 1997. Wage growth is a key factor stimulating demand and retail
sales in Oregon but it also is a growing concern among Oregon businesses
because higher wages mean higher costs.
It is the expanding high technology manufacturing sector that has been the
catalyst for the state's rapid growth over the 1994 to 1996 period. Though
slowing, high tech should continue to be the driving force behind growth in
the region stretching from the Portland Metropolitan area through Salem and
Corvallis to Eugene. High tech manufactures are expected to add 2,300 jobs
in 1997 with the overwhelming majority of them occurring in this region.
The rest of the state will benefit from a generally healthy agriculture
section (with the exception of the cattle industry), a stabilizing timber
harvest and increasing cost advantages relative to the Willamette Valley and
Portland metropolitan area. The statewide timber harvest is expected to be
4.2 billion board feet in 1997, matching the estimate for 1996. Although the
harvest is not expected to show further significant declines, it is forecast
to remain at extremely low levels relative to the post World War II norm.
Lumber and wood products jobs are forecast to decline only 1.4% in 1997 after
decreasing an estimated 3.1% in 1996.
The major components of personal income are expected to grow more slowly in
1997 with the exception of dividend, interest and rent income and transfer
payments. Non-farm proprietor income is forecast to increase 4.3% in 1997,
down from an estimated 6.2% in 1996. Farm proprietor income is projected to
drop 12% in 1997 after jumping 29.8% in 1995 and 41% in 1996. Wage and
salary income is expected to increase 6.9% in 1997, after growing more than
9% in both 1995 and 1996.
The forecast of rising short-term interest rates pushes up dividend, interest
and rent income 7.6% in 1997, compared to an estimated 5.2% growth rate in
1996. Transfer payments are projected to increase 5.7% in 1997, up 0.2% from
the 1996 estimate.
Preliminary data shows that non-farm payroll employment increased by more
than 60,000 or 4.2% between 1995 and 1996, the second-highest increase
achieved in at least 25 years. The goods-producing sector increased 4.1% or
12,200 jobs from 1995-96 and the service-producing sector increased 4.3% or
47,900 jobs. Continued employment growth is expected in 1997, although
perhaps not at the pace of 1996.
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Construction employment, which increased by 7,700 jobs or 11.4% from 1995 to
1996, is expected to show less growth in 1997 though it is likely to remain
at a high level of activity. After adding jobs at a double digit rate each
year from 1994 to 1996, construction industry employers are forecast to
expand payroll jobs only 4.1% in 1997. Housing starts are forecast to drop
13.6%. While the forecast of 22,100 is below the housing start level for
1994 through 1996, it is above every year between 1979 and 1994.
Overall manufacturing employment is forecast to increase 0.3% in 1997 after
averaging 3.0% growth for the 1994 to 1996 period. The expanding high tech
sector is likely to make it increasingly difficult for other manufacturers to
find skilled labor at wages consistent with their competitive position.
Metals employment is expected to decline 0.7% while transportation equipment
manufacturing job growth drops from 4.0% in 1996 to 1.1% in 1997.
Non-durable goods manufacturers are projected to reduce employment 1.3% in
1997, in line with the estimated 1996 decrease. Mining employment is
forecast to inch up 0.8% after jumping 10.2% in 1996.
The state's service-producing sectors are expected to continue growing but
they too are likely to be constrained by labor availability. Services added
30,800 jobs in 1996, an 8.5% increase. Jobs in the state's largest sector,
non-health services, are expected to grow 5.7%, down from 8.1% in 1996. A
similar slowing trend is also expected for retail and wholesale trade which
are projected to increase 2.6% and 3.8% in 1997, respectively. Health
service employment is forecast to rise 3.4% while financial service jobs are
projected to expand 2.3%. Job growth rates of 2.1% in transportation
services and 1.4% in communications and utilities are anticipated in 1997.
The government sector in Oregon is forecast to continue shrinking relative to
the overall economy. Overall government jobs are projected to increase 1.7%
in 1997, marking the sixth consecutive year in which public sector jobs have
grown more slowly than private sector jobs. Federal government employment is
expected to decline for the fifth year in a row, dipping 1.7%. State
government jobs are projected to increase 2.8% while local government jobs
(which include tribal employment) increase 1.9%.
Impact of recent initiatives has put pressure on the General Fund for revenue
for certain purposes. The "kicker law" says if biennial General Fund
revenues exceed estimated revenues by 2% or more, the entire excess must be
refunded. In 1990, Ballot Measure 5 diverted General Fund money to replace
reduced property taxes for local schools and community colleges. Since then,
$3.27 billion has been transferred to local schools. This money was
previously allocated to human resources, natural resources, and higher
education programs. In 1994, Ballot Measure 11 increased criminal sentences,
ultimately requiring more than $1 billion from the General Fund to build
prisons, requiring still more to operate them. In November of 1996, voters
approved Ballot Measure 47, the property tax cut and cap. It will reduce
revenues to schools, cities and counties by as much as $1 billion and put
pressure on the General Fund to make up some or all of the difference.
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Actual General Fund revenue for the 1993-95 biennium was $6,536.1 million.
The December forecast for the 1995-97 General Fund revenue is $7,399.3
million, a 13.2% increase from the 1993-95 biennium. The 1995-97 estimate is
also an increase of $106.3 million from the September 1996 estimate and
$437.8 million or 6.3% from the 1995 Close of Legislative Session (COS)
forecast. The beginning balance is estimated to be $496.3 million, leaving
total General Fund resources available for the 1995-97 biennium of $7,895.6
million. The General Fund resources estimate is $450.9 million higher than
the COS estimate.
General Fund revenue is projected to be $8,145.7 million for the 1997-99
biennium. The beginning balance is estimated to be $536.3 million for a
total General Fund resource estimate of $8,682 million. The December 1997-99
General Fund revenue estimate is $115.1 million higher than the September
forecast despite the anticipation of a larger 2% surplus kicker refund. The
overall General Fund resource projection is $243.8 million more than the
September forecast.
The largest percentage of the $9.43 billion 1997-99 biennial budget
(including kicker) goes to education. Approximately 43% or $3.95 billion
goes to K-12 schools, $701 million or 7% goes to higher education, $427
million or 5% goes to community colleges, and $255 million or 3% goes to all
other education. The second largest share of General Fund revenues for the
1997-99 biennium goes to human resources programs, which is $2.02 billion or
21%. Public safety is now the third largest user of state tax revenues, at
$1.37 billion, or 14%. The budget leaves less than 2% as a General Fund
ending balance on reserve.
General Fund revenue growth is expected to slow to 10.1% in the 1997-99
biennium, down from an estimated 13.2% in 1995-97. Removing the effects of
the 2% surplus kicker refunds from both biennia shows General Fund revenue
growth of 10.3% in 1997-99 compared to 18.3% in 1995-97. The expectation of
slower economic growth and changes in tax law are the primary reasons for the
declining rate of increase.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Oregon Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Oregon Trust to pay interest on or principal of the
Bonds.
PENNSYLVANIA TRUSTS - ECONOMIC FACTORS
RISK FACTORS. Prospective investors should consider the financial
difficulties and pressures that the Commonwealth of Pennsylvania (the
"COMMONWEALTH" OR "PENNSYLVANIA") and certain of its municipal subdivisions
have undergone. Both the Commonwealth and the City of Philadelphia have
historically experienced significant revenue shortfalls. There can be no
assurance that the Commonwealth will not experience further declines in
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economic conditions or that portions of the municipal obligations purchased
by the Fund will not be affected by such declines. Without intending to be
complete, the following briefly summarizes some of these difficulties and the
current financial situation, as well as some of the complex factors affecting
the financial situation in the Commonwealth. It is derived from sources that
are generally available to investors and is based in part on information
obtained from various agencies in the Commonwealth. No independent
verification has been made of the following information.
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 58 major corporations. Pennsylvania had been
historically identified as a heavy-industry state. That reputation has
changed over the last thirty years as the coal, steel and railroad industries
declined and the Commonwealth's business environment readjusted to reflect a
more diversified industrial base. This economic readjustment was a result of
a long-term shift in jobs, investment and workers away from the northeast
part of the nation. Currently, 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 remain an important component of the
Commonwealth's economic structure, accounting for more than $3.6 billion in
crop and livestock products annually. Agribusiness and food-related
industries support $39 billion in economic activity annually. Over 51,000
farms form the backbone of the State's agricultural economy. Farmland in
Pennsylvania includes over four million acres of harvested cropland and four
million acres of pasture and farm woodlands -- nearly one-third of the
Commonwealth's total land area. Agricultural diversity in the Commonwealth
is demonstrated by the fact that Pennsylvania ranks among the top ten states
in the production of a number of agricultural products.
Non-agricultural employment in Pennsylvania over the ten years ending in 1995
increased at an annual rate of 1.02%. This rate compares to a 0.36% rate for
the Middle Atlantic region and a 1.8% rate for the United States during the
period from 1986 through 1995. For the last three years, employment in the
Commonwealth has increased 3.4%. The growth in employment experienced in
Pennsylvania during this period is higher than the 2.9% growth in the Middle
Atlantic region.
Non-manufacturing employment in Pennsylvania has increased in recent years to
82.1% of total employment in 1995 and to 82.5% as of December 1996.
Consequently, manufacturing employment constitutes a diminished share of
total employment within the Commonwealth. Manufacturing, contributing 17.9%
of 1995 non-agricultural employment and 17.5% as of December 1996, has fallen
behind both the services sector and the trade sector as the largest single
source of employment within the Commonwealth. In 1995, the services sector
accounted for 30.4% of all non-agricultural employment while the trade sector
accounted for 22.8%.
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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 6.9% in 1991 and 7.5% in 1992. The
resumption of faster economic growth resulted in a decrease in the
Commonwealth's unemployment rate to 7.1% in 1993. In 1994 and 1995,
Pennsylvania's annual average unemployment rate was below the Middle Atlantic
Region's average, but slightly higher than that of the United States. For
January 1997 the unadjusted unemployment rate was 5.3% in the Commonwealth
and 5.9% in the United States, while the seasonally adjusted unemployment
rate for the Commonwealth was 4.7% compared to 5.4% for the United States.
STATE BUDGET. The Commonwealth operates under an annual budget that 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 proposed expenditures to be
financed from the proceeds of obligations of the Commonwealth or its agencies
or from operating funds; and (iii) a financial plan for not less than the
succeeding five fiscal years, that 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. The Commonwealth's
fiscal year begins on July 1 and ends on June 30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by the
Governor. Total appropriations enacted by the General Assembly may not
exceed the ensuing year's estimated revenues, plus (less) the unappropriated
fund balance (deficit) of the preceding year, except for constitutionally
authorized debt service payments. 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 if not spent or encumbered
by the end of the fiscal year. The Constitution specifies that a surplus of
operating funds at the end of a fiscal year must be appropriated for the
ensuing year.
Pennsylvania uses the "fund" method of accounting. For purposes of
government accounting, a "fund" is an independent fiscal and accounting
entity with a self-balancing set of accounts, recording cash and/or other
resources together with all related liabilities and equities that are
segregated for the purpose of carrying on specific activities or attaining
certain objectives in accordance with the fund's special regulations,
restrictions or limitations. In the Commonwealth, funds are established by
legislative enactment or in certain cases by administrative action. Over 150
funds have been established 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 only be made pursuant to appropriation
measures enacted by the General Assembly and approved by the Governor. The
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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
are maintained on a budgetary basis of accounting, which is used for the
purpose of ensuring compliance with the enacted operating budget. Since
1984, the Commonwealth has also prepared annual financial statements in
accordance with generally accepted accounting principles ("GAAP"). 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 is adjusted at fiscal year-end to
reflect appropriate accruals for financial reporting in conformity with GAAP.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The fiscal years 1992 through
1996 were years of recovery for Pennsylvania from the recession in 1990 and
1991. The recovery fiscal years were characterized by modest economic growth
and low inflation rates in the Commonwealth. These economic conditions,
combined with several years of tax reductions following the various tax rate
increases and tax base expansions enacted in fiscal 1991 for the General
Fund, produced modest increases in Pennsylvania's tax revenues during the
period. Tax revenues from fiscal 1992 through fiscal 1996 rose at an annual
average rate of 2.8%. Total revenues and other income sources increased
during this period by an average annual rate of 3.3%. Expenditures and other
uses during the fiscal 1992 through fiscal 1996 period rose at a 4.4% annual
rate, led by annual average increases of 14.2% for protection of persons and
property program costs and 11.4% for capital outlay costs. Expenditure
reductions for fiscal 1996 from the previous fiscal year for operating
transfers out and for conservation of natural resources program costs were
the result of accounting changes affecting the General Fund and the Motor
License Fund and a recategorization of expenditures due to a departmental
restructuring in the General Fund. At the close of fiscal 1996, the fund
balance for the governmental fund types totaled $1,986.3 million, an increase
of $58.7 million over fiscal 1995 and $758.5 million over fiscal 1992.
FINANCIAL RESULTS FOR RECENT FISCAL YEARS (GAAP BASIS). The five-year period
from fiscal 1992 through fiscal 1996 recorded a 4.6% average annual increase
in revenues and other sources, led by an average annual increase of 13.2% for
intergovernmental revenues. The increase for intergovernmental revenues in
fiscal 1996 is partly due to an accounting change. Tax revenues during the
five-year period increased an average of 2.5% as modest economic growth, low
inflation rates and several tax rate reductions and other tax reduction
measures constrained the growth of tax revenues. The tax reduction measures
followed a $2.7 billion tax increase measure adopted for the 1992 fiscal year.
Expenditures and other uses during the fiscal 1992 through fiscal 1996 period
rose at an average annual rate of 6.0% led by increases of 14.2% for
protection of persons and property program costs. The costs of a prison
expansion program and other correctional program expenses are responsible for
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the large percentage increase. A reduction in debt service costs at an
average annual rate of 29.1% over the five-year period is a result of reduced
short-term borrowing for cash flow purposes. Improved financial results and
structural cash flow modifications contributed to the lower borrowing.
Efforts to control costs for various social welfare programs and the presence
of favorable economic conditions have led to a modest 5.6% increase for
public health and welfare costs for the five-year period.
The fund balance at June 30, 1996 total $635.2 million, a $547.7 million
increase from a balance of $87.5 million at June 30, 1992.
FISCAL 1994 FINANCIAL RESULTS (BUDGETING BASIS) -- Commonwealth revenues
during the 1994 fiscal year totaled $15,210.7 million, $38.6 million above
the fiscal year estimate, and 3.9% over commonwealth revenues during the 1993
fiscal year. The sales tax was an important contributor to the higher than
estimated revenues. The strength of collections from the sales tax offset
the lower than budgeted performance of the personal income tax that ended the
1994 fiscal year $74.4 million below estimate. The shortfall in the personal
income tax was largely due to shortfalls in income not subject to withholding
such as interest, dividends and other income. Expenditures, excluding pooled
financing expenditures and net of all fiscal 1994 appropriation lapses,
totaled $14,934.4 million, representing a 7.2% increase over fiscal 1993
expenditures. Medical assistance and prisons spending contributed to the
rate of spending growth for the 1994 fiscal year. The Commonwealth
maintained an operating balance on a budgetary basis for fiscal 1994
producing a fiscal year ending unappropriated surplus of $335.8 million.
FISCAL 1995 FINANCIAL RESULTS (BUDGETARY BASIS) -- Commonwealth revenues for
the 1995 fiscal year were above estimate and exceeded fiscal year
expenditures and encumbrances. Fiscal 1995 was the fourth consecutive fiscal
year the Commonwealth reported an increase in the fiscal year-end
unappropriated balance. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1995 closing unappropriated surplus
was $540.0 million, an increase of $204.2 million over the fiscal 1994
closing unappropriated surplus prior to transfers.
Commonwealth revenues during the 1995 fiscal year were $459.4 million, 2.9%,
above the estimate of revenues used at the time the 1995 fiscal year budget
was enacted. Corporation taxes contributed $329.4 million of the additional
receipts largely due to higher receipts from the corporate net income tax.
Fiscal 1995 revenues from the corporate net income tax were 22.6% over
collections in fiscal 1994 and include the effects of the reduction of the
tax rate from 12.25% to 11.99% that became effective with tax years beginning
on and after January 1, 1994. The sales and use tax and miscellaneous
revenues also showed strong year-over-year growth that produced
above-estimate revenue collections. Sales and use tax revenues were $5,526.9
million, $128.8 million above the enacted budget estimate and 7.9% over
fiscal 1994 collections. Tax receipts from both motor vehicle and non-motor
vehicle sales contributed to the higher collections. Miscellaneous revenue
collections for fiscal 1995 were $183.5 million, $44.9 million above estimate
and were largely due to additional investment earnings, escheat revenues and
other miscellaneous revenues.
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FISCAL 1996 FINANCIAL RESULTS (BUDGETARY BASIS) -- Commonwealth revenues
(prior to tax refunds) for the 1996 fiscal year increased by $113.9 million
over the prior fiscal year to $16,338.5 million representing a growth rate of
0.7%. Tax rate reductions and other tax law changes substantially reduced
the amount and rate of revenue growth for the fiscal year. The Commonwealth
has estimated that tax changes enacted for the 1996 fiscal year reduced
Commonwealth revenues by $283.4 million representing 1.7 percentage points of
fiscal 1996 growth in Commonwealth revenues. The most significant tax
changes enacted for the 1996 fiscal year were (i) the reduction of the
corporate net income tax rate to 9.99%; (ii) double weighing of the sales
factor of the corporate net income apportionment calculation; (iii) an
increase in the maximum annual allowance for a net operating loss deduction
from $0.5 million to $1.0 million; (iv) an increase in the basic exemption
amount for the capital stock and franchise tax; (v) the repeal of the tax on
annuities; and (vi) the elimination of inheritance tax on transfers of
certain property to surviving spouses.
Among the major sources of Commonwealth revenues for the 1996 fiscal year,
corporate tax receipts declined $338.4 million from receipts in the prior
fiscal year, largely due to the various tax changes enacted for these taxes.
Corporate tax changes were enacted to reduce the cost of doing business in
Pennsylvania for the purpose of encouraging business to remain in
Pennsylvania and to expand employment opportunities within the state. Sales
and use tax receipts for the fiscal year increased $155.5 million, or 2.8%,
over receipts during fiscal 1995. All of the increase was produced by the
non-motor vehicle portion of the tax as receipts from the sale of motor
vehicles declined slightly for fiscal 1996. Personal income tax receipts for
the fiscal year increased $291.1 million, or 5.7%, over receipts during
fiscal 1995. Personal income tax receipts were aided by a 10.2% increase in
nonwithholding tax payments which generally are comprised of quarterly
estimated and annual final return tax payments. Non-tax receipts for the
fiscal year increased $23.7 million for the fiscal year. Included in that
increase was $67 million in net receipts from a tax amnesty program that was
available for a portion of the 1996 fiscal year. Some portion of the tax
amnesty receipts represent normal collections of delinquent taxes. The tax
amnesty program is not expected to be repeated.
The unappropriated surplus (prior to transfers to Tax Stabilization Reserve
Fund) at the close of the fiscal year for the General Fund was $183.8
million, $65.5 million above estimate. Transfers to the Tax Stabilization
Reserve Fund from fiscal 1996 operations will be $27.6 million. This amount
represents the 15% of the fiscal year ending unappropriated surplus transfer
provided under current law. With the addition of this transfer and
anticipated interest earnings, the Tax Stabilization Reserve Fund balance
will be $211 million.
FISCAL 1997 BUDGET -- The enacted fiscal 1997 budget provides for expenditures
from Commonwealth revenues of $16,375.8 million, an increase of 0.6% over
appropriated amounts from Commonwealth revenues for fiscal 1996. The fiscal
1997 budget is based on anticipated Commonwealth revenues before refunds of
$16,744.5 million, an increase over actual fiscal 1996 revenues of 2.5%.
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Increased authorized spending for fiscal 1997 is driven largely by increased
costs of the corrections and the probation and parole programs. Continuation
of the trend of rapidly rising inmate populations increases operating costs
for correctional facilities and requires the opening of new facilities. The
fiscal 1997 budget contains an appropriation increase in excess of $110
million for these programs. The approved budget also contains some
departmental restructurings. The Department of Community Affairs was
eliminated with certain of its programs transferred to the Department of
Commerce that has been renamed the Department of Community and Economic
Development. In addition to assuming some of the community programs, a
significant restructuring of the economic development programs was completed
with the establishment of the new Department of Community and Economic
Development. Although the departmental restructurings are estimated to save
approximately $8 million, a $25 million increase in funds was committed to
economic and community development programs for fiscal 1997.
Providing funding for these program increases in a fiscal year budget where
appropriations increased by only $96.7 million, or 0.6%, required reductions
and savings in other programs funded from the General Fund. A major reform
of the current welfare system was enacted in May 1996 to encourage recipients
toward self-sufficiency through work requirements, to provide temporary
support for families showing personal responsibility and to maintain
safeguards for those who cannot help themselves. Net savings to the fiscal
1997 budget of $176.5 million is anticipated. Many of these savings are
redirected in the fiscal 1997 budget toward providing additional support
services to those working and seeking work. Of the net savings, $21 million
is committed to job training opportunities and an additional $69 million
towards making day care services available to welfare recipients for work
opportunities. The fiscal 1997 budget also provides additional funding
without requiring additional appropriations. An actuarial reduction of 112
basis points in the employer contribution rate is estimated to save school
districts approximately $21 million for the fiscal year. Additional savings
can be expected to be realized by school districts from legislated changes to
teacher sabbatical leaves and worker's compensation insurance.
PROPOSED FISCAL 1998 BUDGET -- On February 4, 1997, the Governor presented his
proposed General Fund budget for fiscal 1998 to the General Assembly.
Revenue estimates in the proposed budget were developed using a national
economic forecast with projected annual growth rates below 2%. Total
Commonwealth revenues before reductions for refunds and proposed tax changes
are estimated to be $17,339.2 billion, 2.4% above revised estimates for
fiscal 1997. Proposed appropriations against those revenues total $16,915.7
million, a 2.7% increase over currently estimated fiscal 1997 appropriations.
As proposed, the fiscal 1998 budget assumes the draw down of the currently
estimated $177.6 million unappropriated surplus at June 30, 1997; however, no
appropriation lapses are included in this projection. Four tax law proposals
and a proposed increase transfer of taxes to a special purpose are included
in the proposed budget. Together these items are estimated to reduce fiscal
1998 Commonwealth revenues by $66.9 million. All require legislative
enactment. The General Assembly is reviewing the proposed budget in hearings
before its committees. The General Assembly may change, eliminate or add
amounts and items to the Governor's proposed budget and there can be no
assurance that the budget, as prepared by the Governor, will be enacted into
law.
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DEBT LIMITS AND OUTSTANDING DEBT. The Pennsylvania Constitution permits the
issuance of 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 outstanding 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.
Under the Pennsylvania Fiscal Code, the Auditor General is required to
certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness. According to the February 28,
1997 Auditor General certificate, the average annual tax revenues deposited
in all funds in the five fiscal years ended June 30, 1996 was approximately
$18.9 billion, and therefore, the net debt limitation for the 1997 fiscal
year is $33.1 billion. Outstanding net debt totaled $3.9 billion at June 30,
1996, approximately equal to the net debt at June 30, 1995. At February 28,
1997, the amount of debt authorized by law to be issued, but not yet
incurred, was $17.3 billion.
Outstanding general obligation debt totaled $5,054.5 million at June 30,
1996, an increase of $9.1 million from June 30, 1995. Over the ten-year
period ending June 30, 1996, total outstanding general obligation debt
increased at an annual rate of 1.1%. Within the most recent five-year
period, outstanding general obligation debt has grown at an annual rate of
1.1%.
DEBT RATINGS. All outstanding general obligation bonds of the Commonwealth
are rated AA- by S&P and A1 by Moody's.
CITY OF PHILADELPHIA. The City of Philadelphia (the "CITY" or
"PHILADELPHIA") is the largest city in the Commonwealth, with an estimated
population of 1,585,577 according to the 1990 census. Philadelphia
experienced a series of general fund deficits for fiscal years 1988 through
1992, which culminated in serious financial difficulties for the City. In
its 1992 Comprehensive Annual Financial Report, Philadelphia reported a
cumulative general fund deficit of $71.4 million for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to
assist Philadelphia in remedying fiscal emergencies. PICA is designed to
provide assistance through the issuance of funding debt and to make factual
findings and recommendations to Philadelphia concerning its budgetary and
fiscal affairs. The legislation empowered PICA to issue notes and bonds on
behalf of Philadelphia, and also authorized Philadelphia to levy a 1% sales
tax the proceeds of which would be used to pay off the bonds. In return for
PICA's fiscal assistance, Philadelphia is required, among other things, to
establish five-year financial plans that include balanced annual budgets.
Under the legislation, if Philadelphia does not comply with such
requirements, PICA may withhold bond revenues and certain state funding. At
this time, the City is operating under a five-year fiscal plan approved by
PICA on April 30, 1996. As of February 28, 1997, PICA has issued
approximately $1,761.7 million of its Special Tax Revenue Bonds. The
financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
City's Cumulative General Fund balance deficit as of June 30, 1992 of $224.9
million.
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No further PICA 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 on
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 $1,146.2 million
in Special Tax Revenue Bonds outstanding as of June 30, 1996.
The audited General Fund balance of the City as of June 30, 1994, 1995 and
1996 showed a surplus of approximately $15.4 million, $80.5 million and
$118.5 million, respectively.
The Standard & Poor's rating on Philadelphia general obligation bonds is
"BBB-." Moody's rating is currently "Baa."
LITIGATION. The Commonwealth is a party to numerous lawsuits in which an
adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service on
its obligations. The Commonwealth also faces tort claims made possible by
the limited waiver of sovereign immunity effected by Act 152, approved
September 28, 1978, as amended. Under the Act, damages for any loss are
limited to $250,000 per person and $1 million for each accident.
TENNESSEE TRUSTS - ECONOMIC FACTORS
The following brief summary regarding the economy of Tennessee is based upon
information drawn from publicly available sources and is included for the
purpose of providing the information about general economic conditions that
may or may not affect issuers of the Tennessee obligations. The Sponsor has
not independently verified any of the information contained in such publicly
available documents.
CONSTITUTIONAL CONSIDERATIONS. The State Constitution of Tennessee requires
a balanced budget. No legal authority exists for deficit spending for
operating purposes beyond the end of a fiscal year. Tennessee law permits
tax anticipation borrowing but any amount borrowed must be repaid during the
fiscal year for which the borrowing was done. Tennessee has not issued any
debt for operating purposes during recent years with the exception of some
advances which were made from the Federal Unemployment Trust Fund in 1984.
No such advances are now outstanding nor is borrowing of any type for
operating purposes contemplated.
The State Constitution of Tennessee forbids the expenditure of the proceeds
of any debt obligation for a purpose other than the purpose for which it was
authorized by statute. Under State law, the term of bonds authorized and
issued cannot exceed the expected life of the projects being financed.
Furthermore, the amount of a debt obligation cannot exceed the amount
authorized by the General Assembly.
THE STATE AND ITS ECONOMY. Tennessee has a diverse agricultural sector.
Both corn and nursery operations have ranked fourth and fifth (often
switching places) in terms of cash receipts for Tennessee farmers since 1990.
Other important crops include wheat, floriculture, hay, and vegetables.
Moreover, cattle operations generate more income in the aggregate than any
other single commodity in Tennessee. In all, production agriculture
generates more than $2 billion in annual cash receipts for Tennessee farmers.
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Farm profit in recent years, however, has fluctuated sharply from a $799
million peak in net cash income for 1992's record production year to $614.7
million in 1995. Net cash income for 1996 was expected to be substantially
higher than 1995 due to the second consecutive year of high prices for many
crops.
The 1997 year is the first full year under the 1996 farm bill, which
radically changed the character of federal income support for agriculture.
Overall, Tennessee will benefit from the bill, especially in the next few
years when federal payments are substantially higher than what farmers would
have received under the old policy regime. Yet, production shifting (i.e.,
cotton to corn and wheat) is expected to cost the state $29.1 million in
total income and output, as well as a loss of an estimated 231 jobs. These
changes may result in significant economic impacts for the regions and
industries in which they are centralized.
Tennessee has experienced a slowdown in the economy during the last several
years. The most prominent is the loss of over 14,000 jobs in the state's
nondurable goods manufacturing sector between the third quarter of 1995 and
the third quarter of 1996. According to the University of Tennessee's Center
for Business and Economic Research, job growth between the third period of
1995 and 1996, at 2.3%, fell a full percentage point below the growth
registered in the prior three years. Also, state sales tax collections grew
only 5.9% in 1995-96 and are growing at a similar rate in 1997, versus 9.7%
in 1994-95. Despite these trouble spots, the state's unemployment rate in
1995 and 1996 was 5.2% and 4.9%, respectively, compared to the national
unemployment rates of 5.6% and 5.4%, respectively. Also, there is strong job
growth outside of the manufacturing sector and significant population growth
of 7.8% between 1990 and 1995 versus 5.6% for the U.S.
Overall, employment growth has slipped by a full percentage point, with few
sectors avoiding the slowdown. Only the government and construction sectors
show stronger growth than in earlier years. At the end of 1996,
non-agricultural employment is expected to grow 2.5% and nominal personal
income is expected to have increased 4.6%. Thus, Tennessee will have
outperformed the U.S. job growth rate of 2.0%, but trail in personal growth
of 5.4%.
The short-term economic outlook calls for stable and moderate economic growth
for Tennessee through 1998, similar to projections for the national economy.
Nonagricultural employment is expected to grow 2.0% in 1997 and 2.1% in 1998,
considerably lower than the 3.4% average gain registered between 1993 and
1996. Job growth is expected to be somewhat slower for the national economy,
climbing 1.7% in 1997 and 1.4% in 1998.
Tennessee's construction sector is expected to lead all sectors in job
growth, predicted at over 4% in the next two years. The trade sector will
grow 3.2% in 1997 and 3.0% in 1998. The services sector, the largest
employment sector of the state economy (accounting for one of four
nonagricultural jobs in 1996) will expand at a 3.4% pace in 1997 and will
grow 3.2% in 1998. Job growth in finance, insurance and real estate will be
in the 2.0-2.3% range, while employment in transportation, communication and
public utilities will be 1.0% in 1997 and 1998.
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The state's manufacturing sector, contributing one out of every five state
jobs, will fall 0.1% in 1997 and rebound 0.5% in 1998. Unfortunately,
nondurable goods employment is expected to decrease over the next few years,
with job losses totaling 3,300 in 1997 and 1,500 in 1998. The textile,
apparel and leather sectors have borne most of the recent job losses. The
job losses in 1995-96 came as a surprise and further unanticipated losses may
arise in the future. The state's durable goods manufacturing sector,
however, is forecast to increase 1.0% in 1997 and 1.4% in 1998.
Tennessee's unemployment rate is predicted at 5.1% in both 1997 and 1998.
The U.S. unemployment rate is projected to be 5.5% in 1997, rising to 5.8% in
1998.
The state economy has enjoyed strong growth in personal income in the last
several years. In particular, total personal income growth and per capita
personal income growth between 1993 and 1995 have surpassed growth for the
U.S. economy. However, the margin narrowed in 1995 as U.S. economic growth
accelerated and Tennessee's strong growth slowed.
Tennessee led all of the southeastern states in per capita personal income
growth between 1985 and 1993 and surpassed U.S. growth by a full percentage
point. From 1994-95, Tennessee's per capita personal income increased 5.3%
to $21,038, which was slightly higher than the southeast's average of
$20,970. In 1995-96, Tennessee's per capita personal income increased 3.16%
to $21,705. In both 1995 and 1996, Tennessee's per capita personal income
was 91% of the national average.
Growth in nominal Tennessee personal income is projected at 5.5% and 5.4% in
1997 and 1998, respectively. This is much slower than the 7% rate in both
1994 and 1995, but an improvement over the 4.5% rate in 1996. Nominal per
capita personal income is forecast to be up 4.2% and 4.1% in 1997 and 1998,
respectively, comparing well to the 3.5% and 3.8% growth rates projected for
the national economy.
Wage and salary income will advance 5.6% in 1997 and 5.3% in 1998. Roughly
comparable growth will be recorded by other labor income. Proprietor's
income is expected to increase 5.7% and 7.1% in the following two years,
while rent, interest and dividend income will grow 5.5% and 4.8% in 1997 and
1998, respectively.
Sales tax revenue grew nearly 14% in 1992-93. This figure sharply declined
for fiscal year 1995-96 when the growth rate was only 5.9%. Taxable sales
are forecast to increase 4.5% in 1997 and 4.6% in 1998.
The actual state budget for fiscal year 1995-96 was $13.331 billion and the
estimated state budget for 1996-97 is $14.529 billion. Actual General Fund
revenue for fiscal year 1995-96 was $11,343.9 million. Actual General Fund
appropriations were $5,311.5 million. Estimated revenue for the General Fund
for fiscal year 1996-97 is $12,061.0 million, an increase of $717.1 million
or 6.3%. Estimated appropriations in the General Fund for 1996-97 are $5,735
million, an increase of $423.5 million or 8%.
Total state revenue for fiscal year 1996-97 is estimated at $6,887.5 million,
an increase of 4.7% from 1995-96. Of this amount, approximately 91.8% or
$6,323.1 million is scheduled to be obtained from taxes, each of which will
generate a certain percentage of the total revenues as follows: sales and
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use (56.2%); franchise and excise (12.7%); gasoline and gasoline inspection
(8.8%); gross receipts and privilege (4.2%); motor vehicle (3%); income and
inheritance (2.5%); motor fuel (1.9%); tobacco, beer, and alcoholic beverages
(1.9%) and all other taxes (.6%). Of the total state revenue, approximately
41.5% or $2,854.7 is estimated from the general fund.
The recommended state budget for fiscal year 1997-98 is $14.420 billion which
is $109.6 million less than 1996-97. Recommended General Fund revenues for
fiscal year 1997-98 are $12,329.2 million and appropriations are $5,993.3
million. The revenue increase from the prior fiscal year is $268.2 million
or 2.2% and the increase in appropriations is $258.4 million, or 4.5%.
Total state revenue for fiscal year 1997-98 is estimated at $7,156 million.
Approximately 92% or $6,588.8 million of this amount is projected to be from
taxes. The top three state tax revenue producers are expected to be sales
and use tax at 56.7% or $4,057.1 million of total state revenue, franchise
and excise tax at 12.8% or $913.2 million, and gasoline/gasoline inspection
tax at 8.6% or $615.7 million. Approximately 41.5% or $2,966.4 million of
the total state revenue is expected to be in the General Fund.
For Fiscal Year 1997-98, State revenues are scheduled to be allocated in the
following percentages: education (45%); health and social services (23.5%);
transportation, business and economic development (10.4%); law, safety and
correction (9.2%); general governmental (2.6%); and resources and regulation
(2.5%).
BOND RATINGS. Tennessee's general obligation bonds are rated Aaa by Moody's,
AA+ by Standard & Poor's and AAA by Fitch Investors Service. There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular obligations contained in the Portfolio of a
Tennessee Trust may not be adversely affected by changes in economic or
political conditions.
The state sold general obligation bonds in the amount of $113.2 million in
fiscal year 1995-96. This issue increased Tennessee's total general
obligation bond debt at June 30, 1996 to $767,971,000. Approximately 99.9%
of this debt was issued to provide funding for institutional and building
construction with the remaining .1% for highways. Total authorized but
unissued bonds for fiscal year 1996-97 is $1,413,755,000. The 1997-98
proposed fiscal year budget recommends the authorization of an additional $75
million in highway bonds, and $60.8 million in institutional and building
bonds to finance capital projects.
LEGAL PROCEEDINGS. Tennessee is involved in certain legal proceedings, that,
if decided against the State, may require the State to make significant
future expenditures or may substantially impair revenues. The Tennessee
Supreme Court affirmed a case in which the lower court found the Tennessee
Department of Revenue improperly defined non-business earnings for tax
purposes. Although this case involved only $925,000, its outcome could
affect future cases and could have a detrimental impact to Tennessee's
revenue base. The Tennessee Supreme Court also reversed a similar case in
which the lower court found the taxpayer's partial sale of business holdings
resulted in
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taxable business income. Although the Tennessee Supreme Court
differentiated this case from the previous one, these cases may
create future litigation challenging Tennessee's corporate tax and
impacting revenue.
The foregoing information does not purport to be a complete
or exhaustive description of all conditions to which the issuers
of Bonds in a Tennessee Trust are subject. Many factors,
including national economic, social and environmental policies
and conditions, which are not within the control of the issuers
of Bonds, could affect or could have an adverse impact on the
financial condition of the issuers. Since certain Bonds in the
Tennessee Trusts (other than general obligation bonds issued by
the state) are payable from revenue derived from a specific
source or authority, the impact of a pronounced decline in the
national economy or difficulties in significant industries within
the state could result in a decrease in the amount of revenues
realized from such source or by such authority and thus adversely
affect the ability of the respective issuers of the Bonds in a
Tennessee Trust to pay the debt service requirements on the
Bonds. Similarly, such adverse economic developments could
result in a decrease in tax revenues realized by the state and
thus could adversely affect the ability of the state to pay the
debt service requirements of any Tennessee general obligation
bonds in a Tennessee Trust. The Sponsor is unable to predict
whether or to what extent such factors or other factors may
affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds
acquired by a Tennessee Trust to pay interest on or principal of
the Bonds.
TEXAS TRUSTS - ECONOMIC FACTORS
This summary 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 Texas, including information provided in
official statements of recent Texas State issues. Historical
data on economic conditions in Texas is presented for background
information only, and should not be relied on to suggest future
economic conditions in the State.
Historically, the primary sources of the State's revenues
have been sales taxes, mineral severance taxes and federal
grants. Due to the collapse of oil and gas prices in 1986 and a
resulting enactment by recent legislatures of new tax measures,
including those increasing the rates of existing taxes and
expanding the tax base for certain taxes, there has been a
reordering in the relative importance of the State's taxes in
terms of their contribution to the State's revenue in any year.
Due to the State's expansion in Medicaid spending and other
Health and Human Services programs requiring federal matching
revenues, federal receipts was the State's number one source of
income in fiscal 1995. Sales tax, which had been the main source
of revenue for the previous 12 years prior to fiscal 1993, was
second, accounting for 26.5% of total revenues in fiscal 1995.
Licenses, fees and permits is the third largest revenue source,
contributing 9.7% of total revenues in fiscal 1995. The motor
fuels tax is the State's fourth largest revenue source and second
largest tax, accounting for approximately 5.8% of total revenue
in fiscal year 1995. Motor vehicle sales/rental taxes, the
State's fifth largest revenue source, accounted for 4.6% of the
total revenue in fiscal year 1995.
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The remainder of the State's revenues are derived primarily from interest
and investment income and other excise taxes. The State currently has no
personal or corporate income tax. The State does, however, impose a
corporate franchise tax based in certain circumstances in part on a
corporation's profit.
The Comptroller's estimate of total available General
Revenues for 1996-97 is $48.65 billion. Of this amount, 76.2% or
$37.05 billion comes from taxes, with sales tax of $21.9 billion
or 59% of total taxes, motor vehicle sales and rent taxes at $4
billion or 10.8%, and the corporation franchise tax at $3.34
billion or 9%. Licenses, fees, and permits is expected to
contribute $3.51 billion or 7.2% to the total General Revenue.
Total available General Revenues are expected to grow to $49.97
billion in fiscal year 1998-99, a 2.7% increase. Total tax
revenue is expected to increase 4.9% in the same period.
Heavy reliance on the energy and agricultural sectors for
jobs and income resulted in a general downturn in the Texas
economy beginning in 1982 as those industries suffered
significantly. The effects of this downturn continued to
adversely affect the State's real estate industry and its
financial institutions for several years. As a result of these
problems, the general revenue fund had a $231 million cash
deficit at the beginning of the 1987 fiscal year and ended the
1987 fiscal year with a $745 million cash deficit. In 1987, the
Texas economy began to move toward a period of recovery. The
expansion continued in 1988 and 1989. In fiscal year 1995, the
State ended the year with a general revenue fund cash balance of
$2.110 billion. This was the eighth consecutive year that Texas
ended a fiscal year with a positive balance.
The 73rd Legislature meeting in 1993 passed the 1994-1995
biennial "all funds budget" of $70.1 billion without increasing
state taxes. This was accomplished by cutting spending in
certain areas and increasing federal funding. The State
Comptroller has estimated that total state revenues from all
sources would total $74.1 billion for the 1994-1995 biennium.
Actual total net revenue for fiscal year 1995 was $38.68 billion,
compared to $36.7 billion for fiscal year 1994. Total
expenditures for fiscal year 1995 were $39.34 billion, compared
to $35.64 billion for fiscal year 1994. At the end of fiscal
year 1995, the General Revenue Fund had a balance of $2.11
billion.
The 74th Legislature, which convened in 1995, passed the
1996-97 biennial budget, totaling $79.9 billion, also without
raising additional taxes. The 74th Legislature relied, in part,
on the State Comptroller's 1996-97 biennial estimate of a $3.0
billion balance from the 1994-95 biennium. The Comptroller has
estimated that total revenues for fiscal 1996 and 1997 will be
$39.2 billion and $40.6 billion, respectively. The revenue
estimate for the 1996-1997 biennium is based on an assumption
that the Texas economy will show a steady growth.
The Biennial Revenue Estimate for 1996-97 includes a
projected ending balance of $1.7 billion which is based, in part,
on an assumption that all fiscal year 1997 general revenue
appropriations will be spent. Thus, no estimate of unexpended
balances from fiscal year 1997 general revenue appropriations is
included in the forecast of revenues available for the 1998-99
biennium. Analysis of current spending needs at major state
agencies revealed that a significant amount of fiscal year 1997
general revenue
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appropriations are not required to meet current-year needs. The Governor's
Budget proposes the carry-forward of fiscal year 1997 general revenue
appropriations to fiscal year 1998 in the following agencies and amounts:
Department of Health $150 million, Department of Human Services $50 million,
and Department of Criminal Justice $100 million, giving a total of $300
million.
The Governor's proposed budget for the 1998-99 biennium
provides $84.7 billion from all funds, a $4.0 billion, or 4.9%
increase from 1996-97. Spending from general revenue for the
1997-98 biennium is expected to total $47.4 billion, a 6.3% or
$2,830.7 million increase from 1996-97. Without the $1 billion
in state funds for school property tax relief in 1997-98, the
spending increase from the current biennium would only be 3.7%
for all funds and 4.1% for the general revenue. Both percentage
increases are below the Comptroller's projection of 11.1% growth
in state personal income over the same period.
The Governor's proposed 1998-99 budget leaves $237.2 million
unspent and available. This amount would be higher if there were
no court actions affecting the sales tax. The revenue impact of
two court challenges relating to the sales tax exemption for
manufacturing equipment and machinery result in the potential
loss of $500 million, which has been removed from the estimated
revenue amounts. Should the state amend statutory tax law to
reflect the historical state application of the exemption, this
could restore in excess of $150 million to the revenue stream.
Because of the $1 billion provided for property tax relief
and due to enhanced use of federal block grant funds, the
proposed 1998-99 budget exceeds the all funds recommendations of
the Legislative Budget Board, introduced in the 75th Legislature.
As for the general revenue, the Governor's budget proposal is
almost $530 million below the recommendations of the Legislative
Budget Board, adjusting for the property tax relief. Yet, the
proposed budget for 1998-99 is within the estimate of available
revenues prepared by the Comptroller of Public Accounts, even
while reserving $1 billion for the Governor's property tax relief
initiative.
Currently, the service-producing sectors (i.e.,
transportation and public utilities, insurance and real estate,
government, trade) are the major sources of job growth in Texas,
accounting for 80% of total non-farm employment and over 90% of
employment growth since 1990. Also, the number of manufacturing
jobs has increased 7% since 1992. This job growth is expected to
be significant to future growth in Texas.
Total nonagricultural wage and salary employment (seasonally
adjusted) grew 2.44% from December 1995 to December 1996. During
this period, the goods-producing industry showed job growth of
1.52% and the service-producing industry showed job growth of
2.67%. Of the goods-producing industries, construction grew 3.9%
and manufacturing showed 1.01% growth. Only mining showed a
decrease in employment of 1.55%. Of the service-producing
industries, services showed the most growth, at 3.9%.
Transportation, communications and utilities grew 2.77%, trade
grew 2.16%, and finance, insurance and real estate showed 1.32%
job growth. Texas is predicted to create an average of 180,000
jobs per year until 2000. Most of this growth is expected to
occur in service-producing industries.
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Texas's unemployment rate in 1995 of 6.0% was its lowest
rate in ten years. The unemployment rate for the United States
in 1995 was 5.6%. Texas's unemployment rate has dropped from
5.7% in December of 1995 to 5.0% in December 1996. The
unemployment rates for the U.S. in December 1995 and December
1996 were 5.2% and 5.0% respectively.
The Texas Constitution prohibits the State from levying ad
valorem taxes on property for general revenue purposes and limits
the rate of such taxes for other purposes to $.35 per $100 of
valuation. The Constitution also permits counties to levy, in
addition to all other ad valorem taxes permitted by the
Constitution, ad valorem taxes on property within the county for
flood control and road purposes in an amount not to exceed $.30
per $100 of valuation. The Constitution prohibits counties,
cities and towns from levying a tax rate exceeding $.80 per $100
of valuation for general fund and other specified purposes.
With certain specific exceptions, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the
State unless the voters of the State, by constitutional
amendment, authorize the issuance of debt (including general
obligation indebtedness backed by the State's taxing power and
full faith and credit). In excess of $9.0 billion of general
obligation bonds have been authorized in Texas and almost $5.4
billion of such bonds, including revenue bonds, are currently
outstanding. Many of these were issued by the Veterans' Land
Board and the Texas Public Finance Authority.
Though the full faith and credit of the State are pledged
for the payment of all general obligations issued by the State,
much of that indebtedness is designed to be eventually self-
supporting from fees, payments, and other sources of revenues; in
some instances, the receipt of such revenues by certain issuing
agencies has been in sufficient amounts to pay the principal of
and interest on the issuer's outstanding bonds without requiring
the use of appropriated funds.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as
presently amended, the net effective interest rate for any issue
or series of Bonds in the Texas Trust is limited to 15%.
From the time Standard & Poor's began rating Texas general
obligation bonds in 1956 until early 1986, that firm gave such
bonds its highest rating, "AAA." In April 1986, in response to
the State economic problems, Standard & Poor's downgraded its
rating of Texas general obligation bonds to "AA+." Such rating
was further downgraded in July 1987 to "AA." Moody's Investors
Service, Inc. has rated Texas bonds since prior to the Great
Depression. Moody's upgraded its rating of Texas general
obligation bonds in 1962 from "Aa" to "Aaa", its highest rating,
following the imposition of a statewide sales tax by the
Legislature. Moody's downgraded such rating to "Aa" in March
1987. No prediction can be made concerning future changes in
ratings by national rating agencies of Texas general obligation
bonds or concerning the effect of such ratings changes on the
market for such issues.
The same economic and other factors affecting the State of
Texas and its agencies also have affected cities, counties,
school districts and other issuers of bonds located throughout
the State. Declining revenues caused by the downturn in the
Texas economy in the mid-1980s forced these various other
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issuers to raise taxes and cut services to achieve the balanced budget
mandated by their respective charters or applicable State law requirements.
Standard & Poor's and Moody's assign separate ratings to each issue of bonds
sold by these other issuers. Such ratings may be significantly lower than
the ratings assigned by such rating agencies to Texas general obligation
bonds.
In March 1993, the legislature passed a proposed
constitutional amendment which would allow a limited amount of
money to be "recaptured" from wealthy school districts and
redistributed to property-poor school districts. However, the
amendment was rejected by the voters on May 1, 1993, requiring
the legislature to develop a new school finance plan. At the end
of May 1993, the legislature passed a new school finance bill
that provides school districts with certain choices to achieve
funding equalization. The Texas Supreme Court upheld this school
finance law in January, 1995.
A wide variety of Texas laws, rules and regulations affect,
directly, or indirectly, the payment of interest on, or the
repayment of the principal of, Bonds in a Texas Trust. The
impact of such laws and regulations on particular Bonds may vary
depending upon numerous factors including, among others, the
particular type of Bonds involved, the public purpose funded by
the Bonds and the nature and extent of insurance or other
security for payment of principal and interest on the Bonds. For
example, Bonds in a Texas Trust which are payable only from the
revenues derived from a particular facility may be adversely
affected by Texas laws or regulations which make it more
difficult for the particular facility to generate revenues
sufficient to pay such interest and principal. Such laws and
regulations may include those which limit the amount of fees,
rates or other charges which may be imposed for use of the
facility or which increase competition among facilities of that
type or which limit or otherwise have the effect of reducing the
use of such facilities generally, thereby reducing the revenues
generated by the particular facility. Bonds in a Texas Trust,
the payment of interest and principal on which is payable from
annual appropriations, may be adversely affected by local laws or
regulations that restrict the availability of monies with which
to make such appropriations. Similarly, Bonds in a Texas Trust,
the payment of interest and principal on which is secured (in
whole or in part) by an interest in real property, may be
adversely affected by declines in real estate values and by Texas
laws that limit the availability of remedies or the scope of
remedies available in the event of a default on such Bonds.
Because of the diverse nature of such laws and regulations and
the impossibility of predicting the nature or extent of future
changes in existing laws or regulations or the future enactment
or adoption of additional laws or regulations, it is not
presently possible to determine the impact of such laws and
regulations on the Bonds in a Texas Trust and therefore, on the
Units.
The foregoing information constitutes only a brief summary
of some of the financial difficulties which may impact certain
issuers of Bonds in a Texas Trust and does not purport to be a
complete or exhaustive description of all adverse conditions to
which the issuers of Bonds held by the Texas Trust are subject.
Additionally, many factors including national, economic, social
and environmental policies and conditions, which are not within
the control of the issuers of Bonds, could affect or could have
an adverse impact on the financial condition of the issuers. The
Sponsor is unable to predict whether or to what extent such
factors or other factors may affect the issuers of the Bonds, the
market value or marketability of the Bonds or the ability of the
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respective issuers of the Bonds acquired by the Texas Trust to
pay interest on or principal of the Bonds.
VIRGINIA TRUSTS - ECONOMIC FACTORS
Virginia Trusts are susceptible to political, economic or
regulatory factors affecting issuers of Virginia Bonds. Without
intending to be complete, the following briefly summarizes some
of these matters, as well as some of the complex factors
affecting the financial situation in the Commonwealth of Virginia
(the "COMMONWEALTH" or "VIRGINIA"). This information is derived
from sources that are generally available to investors and is
based in part on information obtained from various agencies in
Virginia. No independent verification has been made of the
accuracy or completeness of the following information.
There can be no assurance that current or future statewide
or regional economic difficulties, and the resulting impact on
State or local governmental finances, generally, will not
adversely affect the market value of Virginia Bonds held in the
portfolio of the Trusts or the ability of particular obligors to
make timely payments of debt service on (or relating to) those
obligations.
The Commonwealth's financial condition is supported by a
broad-based economy, including manufacturing, tourism,
agriculture, ports, mining and fisheries. Manufacturing
continues to be a major source of employment, ranking behind only
services, wholesale and retail trade, and government (federal,
state and local). Defense activity continues to be an important
component of Virginia's economy. In federal fiscal year 1995 the
Commonwealth accounted for 9.8% of all military and civilian U.S.
Department of Defense (DOD) employees and ranked first in per
capita defense spending, while ranking second in total defense
spending. Northern Virginia and the Hampton Roads area accounted
for 91.3% of DOD employment in Virginia in 1995. However, for
federal fiscal year 1995, total DOD employment in Virginia
decreased 2.1% from the previous year.
The Commonwealth's economy continues to experience the
effects of a reduced defense program and downsizing of the
federal government, and "slow growth" best describes the Virginia
economy in fiscal year 1996. As in the previous year, there were
only modest gains in real personal income while declining
unemployment added some luster to an otherwise lackluster year.
Although real personal income continued to grow during the first
three quarters of the fiscal year, the rate of growth trailed the
national gains in both the second and third quarter, after
matching them in the first quarter. Unemployment, however,
dropped to 4.4%, the best fiscal year performance since 1990.
While recent decisions by large private firms to locate or expand
in Virginia provide encouragement, those decisions are not yet
reflected in the employment statistics and, meanwhile, additional
company downsizings, defense cutbacks and cuts in both federal
and state government positions darkened the employment picture.
Losses of jobs remain a cause for concern.
While changes in personal income for the Commonwealth were
generally higher than the U.S. figures in the 1980s, the
Commonwealth and the nation have grown at similar rates more
recently. In the last two quarters
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available, however, Virginia's real growth rate has been more than one
percentage point less than the national rate. Virginia's per capita income
of $23,597 for 1995 was 103.6% of the national figure, continuing a clear
downward trend since the peak of 106.1% in 1989. At 105.6% of the South
Atlantic region's per capita income, the ratio remains at its lowest since
1980, following a downward trend parallel to that of the national ratio.
Since FY 1990, growth in Virginia's nonagricultural
employment has trailed the South Atlantic region and the nation,
respectively. During that period, Virginia's number of jobs grew
less than 7%, while the South Atlantic region's figure grew more
than 10% and the nation's more than 8%.
Virginia has consistently outperformed the nation, usually
by more than a percentage point, in its unemployment rate. Since
fiscal year 1980, the Commonwealth's unemployment rate has been
lower than the national rate by more than a percentage point
except in 1989 and 1990. For fiscal year 1996, the
Commonwealth's unemployment rate decreased to 4.4%, approaching
the recent low of 4% in 1989. The national rate for 1996 was
5.6%.
Battered by the 1990-91 recession and subsequent defense
cutbacks, the Commonwealth is now enduring the effects of cuts in
both state and federal employment as well as a shrinking
manufacturing sector. Employment grew in only 6 of 11 sectors in
fiscal year 1996, compared to 8 of 11 in the previous year. In
every category, either the increase was lower or the decline
greater than over the previous year, with the exception of
mining, which accounts for only a small percentage of employment.
The greatest gain was in the service sector with an increase of
4.2%, while manufacturing declined 1.7%, accelerating the trend
from an industrial to a service economy.
Despite Virginia's continued economic growth in recent
years, the pace has been slow with the Commonwealth lagging the
South Atlantic Region. While some indicators such as per capita
personal income still show Virginia at a higher level than the
nation, the gap has narrowed. Despite Virginia's vulnerability
to the downsizing of the defense establishment and the federal
government restructuring, it has essentially matched the national
growth rate. This performance testifies to the underlying
strength of the Virginia economy and bodes well for the future as
Virginia continues to diversify its economic base by moving into
new ventures such as the manufacture of computer chips.
The Commonwealth of Virginia has historically operated on a
fiscally conservative basis and is required by its Constitution
to have a balanced biennial budget. At the end of the June 30,
1996, fiscal year, the General Fund of the Commonwealth had an
ending fund balance, computed on a budgetary cash basis, of
$476.3 million, of which $475.2 million was in required reserves
or designated for appropriations, leaving an undesignated,
unreserved fund balance of $1.1 million available for future
appropriation. Computed on a modified accrual basis in
accordance with generally accepted accounting principles, the
General Fund balance at the end of the fiscal year ended June 30,
1996, was $180.4 million, compared with a General Fund balance of
negative $86.4 million at the end of the fiscal year ended
June 30, 1995.
As of June 30, 1996, total debt of the Commonwealth
aggregated $9.5 billion. Of that amount, $3.0 billion was tax-
supported. Outstanding general obligation bonded debt backed by
the full faith and credit of the Commonwealth
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was $1.05 billion at June 30, 1996. Of that amount, $584 million was also
secured by revenue producing capital projects.
The Virginia Constitution contains limits on the amount of
general obligation bonds which the Commonwealth can issue. These
limits are substantially in excess of current levels of
outstanding bonds, and at June 30, 1996 would permit an
additional total of approximately $6.3 billion of bonds secured
by revenue-producing projects and approximately $6.5 billion of
unsecured general obligation bonds for capital projects, with not
more than approximately $1.1 billion of the latter to be issued
in any four-year period. Bonds which are not secured by revenue-
producing projects must be approved in a State-wide election.
The Commonwealth of Virginia maintains a "triple A" bond
rating from Standard & Poor's, Moody's Investors Service and
Fitch Investors Service on its general obligation indebtedness,
reflecting in part its sound fiscal management, diversified
economic base, and low debt ratios. There can be no assurances
that these conditions will continue. Nor are these same
conditions necessarily applicable to securities which are not
general obligations of the Commonwealth. Securities issued by
specific municipalities, governmental authorities or similar
issuers may be subject to economic risks or uncertainties
peculiar to the issuers of such securities or the sources from
which they are to be paid.
TAX STATUS OF UNITHOLDERS
At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exclusion of interest
thereon from Federal gross income were rendered by bond counsel
to the respective issuing authorities. In addition, with respect
to State Trusts, where applicable, bond counsel to the issuing
authorities rendered opinions as to the exemption of interest on
such Bonds, when held by residents of the state in which the
issuers of such Bonds are located, from state income taxes and
certain state or local intangibles and local income taxes.
Neither the Sponsor nor its counsel have made any special review
for the Trusts of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection
therewith. If the interest on a Bond should be determined to be
taxable, the Bond would generally have to be sold at a
substantial discount. In addition, investors could be required
to pay income tax on interest received prior to the date of which
interest is determined to be taxable.
Gain realized on the sale or redemption of the Bonds by the
Trustee or of a Unit by a Unitholder is includable in gross
income for Federal income tax purposes, and may be includable in
gross income for state tax purposes. (Such gain does not include
any amounts received in respect of tax-exempt accrued interest or
accrued original issue discount, if any.)
In the opinion of Chapman and Cutler, Counsel to the
Sponsor, under existing law:
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(1) the Trusts are not associations taxable as
corporations for Federal income tax purposes and interest
and accrued original issue discount on Bonds which is
excludible from gross income under the Internal Revenue Code
of 1986 (the "CODE") will retain its status for Federal
income tax purposes, when received by the Trusts and when
distributed to the Unitholders; however, such interest may
be taken into account in computing the alternative minimum
tax, an additional tax on branches of foreign corporations
and the environmental tax (the "SUPERFUND TAX"). See
"CERTAIN TAX MATTERS APPLICABLE TO CORPORATE UNITHOLDERS,"
below;
(2) each Unitholder of a Trust is considered to be the
owner of a pro rata portion of each asset of such Trust
under Subpart E, subchapter J of Chapter 1 of the Code and
will have a taxable event when the Trust disposes of a Bond
or when the Unitholder redeems or sells Units. If the
Unitholder disposes of a Unit, he is deemed thereby to have
disposed of his entire pro rata interest in all assets of
the Trust involved including his pro rata portion of all the
Bonds represented by the Unit. Legislative proposals have
been made that would treat certain transactions designed to
reduce or eliminate risk of loss and opportunities for gain
as constructive sales for purposes of recognition of gain
(but not loss). Unitholders should consult their own tax
advisors with regard to any such constructive sale rules.
Unitholders must reduce the tax basis of their Units for
their share of accrued interest received by the Trust, if
any, on Bonds delivered after the date the Unitholders pay
for their Units to the extent that such interest accrued on
such Bonds before the date the Trust acquired ownership of
the Bonds (and the amount of this reduction may exceed the
amount of accrued interest paid to the seller) and,
consequently, such Unitholders may have an increase in
taxable gain or reduction in capital loss upon the
disposition of such Units. Gain or loss upon the sale or
redemption of Units is measured by comparing the proceeds of
such sale or redemption with the adjusted basis of the
Units. If the Trustee disposes of Bonds (whether by sale,
payment at maturity, redemption or otherwise), gain or loss
is recognized to the Unitholder (subject to various non-
recognition provisions of the Code). The amount of any such
gain or loss is measured by comparing the Unitholder's pro
rata share of the total proceeds from such disposition with
the Unitholder's basis for his or her fractional interest in
the asset disposed of. In the case of a Unitholder who
purchases Units, such basis (before adjustment for accrued
original issue discount and amortized bond premium, if any)
is determined by apportioning the cost of the Units among
each of the Trust assets ratably according to value as of
the valuation date nearest the date of acquisition of the
Units. It should be noted that certain legislative
proposals have been made which could affect the calculation
of basis for Unitholders holding securities that are
substantially identical to the Bonds. Unitholders should
consult their own tax advisors with regard to the
calculation of basis. The tax basis reduction requirements
of the Code relating to amortization of bond premium may,
under some circumstances, result in the Unitholder realizing
a taxable gain when his or her Units are sold or redeemed
for an amount less than or equal to their original cost; and
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(3) any amounts paid on defaulted Bonds held by the
Trustee under policies of insurance issued with respect to
such Bonds will be excludable from Federal gross income if,
and to the same extent as, such interest would have been so
excludable if paid in the normal course by the respective
issuer of the defaulted Bonds; PROVIDED that, at the time
such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the Bonds, rather
than the insurer, will pay debt service on the Bonds.
Sections 1288 and 1272 of the Code provide a complex set of
rules governing the accrual of original issue discount. These
rules provide that original issue discount accrues either on the
basis of a constant compound interest rate or ratably over the
term of the Bond, depending on the date the Bond was issued. In
addition, special rules apply if the purchase price of a Bond
exceeds the original issue price plus the amount of original
issue discount which would have previously accrued based on its
issue price (its "adjusted issue price") to prior owners. If a
Bond is acquired with accrued interest, that portion of the price
paid for the accrued interest is added to the tax basis of the
Bond. When this accrued interest is received, it is treated as a
return of capital and reduces the tax basis of the Bond. If a
Bond is purchased for a premium, the amount of the premium is
added to the tax basis of the Bond. Bond premium is amortized
over the remaining term of the Bond, and the tax basis of the
Bond is reduced each tax year by the amount of the premium
amortized in that tax year. The application of these rules will
also vary depending on the value of the Bond on the date a Unit
holder acquires his Unit, and the price the Unit holder pays for
his Unit. Unit holders should consult their tax advisors
regarding these rules and their application.
The Revenue Reconciliation Act of 1993 -- (the "Tax Act")
subjects tax-exempt bonds to the market discount rules of the
Code effective for bonds purchased after April 30, 1993. In
general, market discount is the amount (if any) by which the
stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if
any, is attributable to original issue discount not yet accrued),
subject to statutory DE MINIMIS rule. Market discount can arise
based on the price a Trust pays for Bonds or the price a Unit
holder pays for his or her Units. Under the Tax Act, accretion
of market discount is taxable as ordinary income; under prior law
the accretion had been treated as capital gain. Market discount
that accretes while a Trust holds a Bond would be recognized as
ordinary income by the Unit holders when principal payments are
received on the Bond, upon sale or at redemption (including early
redemption) or upon the sale or redemption of the Units, unless a
Unit holder elects to include market discount in taxable income
as it accrues. The market discount rules are complex and Unit
holders should consult their tax advisors regarding these rules
and their application.
CERTAIN TAX MATTERS APPLICABLE TO CORPORATE UNITHOLDERS. In
the case of certain corporations, the alternative minimum tax and
the Superfund Tax for taxable years beginning after December 31,
1986 depend upon the corporation's alternative minimum taxable
income ("AMTI"), which is the corporation's taxable income with
certain adjustments. One of the adjustment items used in
computing AMTI and the Superfund Tax of a corporation (other than
an S corporation, Regulated Investment Company, Real Estate
Investment Trust, or REMIC) is an amount equal to 75% of the
excess of such corporation's "adjusted current earnings" over an
amount equal to its AMTI (before such adjustment item and the
alternative tax net operating loss deduction). "Adjusted current
earnings" includes all tax-exempt interest, including interest on
all Bonds in the Trust. Under current Code provisions, the
Superfund Tax does not apply to tax years beginning on or after
January 1, 1996. Legislative proposals have been made that would
extend the Superfund Tax. Under the provisions of Section 884 of
the Code, a branch profits tax is levied on the "effectively
connected earnings and profits" of certain foreign corporations
which include tax-exempt interest such as interest on the Bonds
in the Trust. Unit holders should consult their tax advisers
with respect to the particular tax consequences to them,
including the corporate alternative minimum tax, the Superfund
Tax and the branch profits tax imposed by Section 884 of the
Code.
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Counsel for the Sponsor has also advised that under
Section 265 of the Code, interest on indebtedness incurred or
continued to purchase or carry Units of a Trust is not deductible
for Federal income tax purposes. The Internal Revenue Service
has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however,
these rules generally do not apply to interest paid on
indebtedness incurred to purchase or improve a personal
residence). Under Section 265 of the Code, certain financial
institutions that acquire Units generally would not be able to
deduct any of the interest expense attributable to ownership of
Units. Legislative proposals have been made that would extend
the financial institution rules to most corporations. Investors
with questions regarding these issues should consult with their
tax advisors.
In the case of certain of the Bonds in a Trust, the opinions
of bond counsel indicate that interest on such Bonds received by
a "substantial user" of the facilities being financed with the
proceeds of these Bonds, or persons related thereto, for periods
while such Bonds are held by such a user or related person, will
not be excludable from Federal gross income, although interest on
such Bonds received by others would be excludable from Federal
gross income. "Substantial user" and "related person" are
defined under the Code and the U.S. Treasury Regulations. Any
person who believes he or she may be a substantial user or
related person as so defined should contact his tax advisor.
In general, Section 86 of the Code provides that 50% of
Social Security benefits are includable in gross income to the
extent that the sum of "modified adjusted gross income" plus 50%
of the Social Security benefits received exceeds the "base
amount." The base amount is $25,000 for unmarried taxpayers,
$32,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the
taxable year and who file separate returns. Modified adjusted
gross income is adjusted gross income determined without regard
to certain otherwise allowable deductions and exclusions from
gross income and by including tax-exempt interest. To the extent
that Social Security benefits are includable in gross income,
they will be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning
after December 31, 1993, up to 85% of Social Security benefits
are includable in gross income to the extent that the sum of
"modified adjusted gross income" plus 50% of Social Security
benefits received exceeds an "adjusted base amount." The
adjusted base amount is $34,000 for unmarried taxpayers, $44,000
for married taxpayers filing a joint return, and zero for married
taxpayers who do not live apart at all times during the taxable
year and who file separate returns.
Although tax-exempt interest is included in modified
adjusted gross income solely for the purpose of determining what
portion, if any, of Social Security benefits will be included in
gross income, no tax-exempt interest, including that received
from a Trust, will be subject to tax. A taxpayer whose adjusted
gross income already exceeds the base amount or the adjusted base
amount must include 50% or 85%, respectively, of his Social
Security benefits in gross income whether or not he receives any
tax-exempt interest. A taxpayer whose modified adjusted gross
income (after inclusion of tax-exempt interest) does not exceed
the base amount need not include any Social Security benefits in
gross income.
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For purposes of computing the alternative minimum tax
applicable to all taxpayers (including non-corporate taxpayers)
subject to the alternative minimum tax and the Superfund Tax for
corporations, interest on certain private activity bonds (which
includes most industrial and housing revenue bonds) issued on or
after August 8, 1986 is included as an item of tax preference.
EXCEPT AS OTHERWISE NOTED IN PART TWO FOR CERTAIN TRUSTS, THE
TRUSTS DO NOT INCLUDE ANY SUCH PRIVATE ACTIVITY BONDS ISSUED ON
OR AFTER THAT DATE.
In the case of corporations, the alternative tax rate
applicable to long-term capital gains is 35%, effective for long-
term capital gains realized in taxable years beginning on or
after January 1, 1993. For taxpayers other than corporations,
net capital gains (which are defined as net long-term capital
gain over net short-term capital loss for a taxable year) are
subject to a maximum stated marginal tax rate of 28%. However,
it should be noted that legislative proposals are introduced from
time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed.
Under the Code, taxpayers must disclose to the Internal Revenue
Service the amount of tax-exempt interest earned during the year.
Ownership of the Units may result in collateral federal
income tax consequences to certain taxpayers, including, without
limitation, corporations subject to either the environmental tax
or the branch profits tax, financial institutions, certain
insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and
taxpayers who may be deemed to have incurred (or continued)
indebtedness to purchase or carry tax-exempt obligations.
Prospective investors should consult their tax advisors as to the
applicability of any such collateral consequences.
In the opinion of Carter, Ledyard & Milburn, counsel to the
Trustee, and, in the absence of a New York Trust from the Series,
special counsel for the Series for New York tax matters, under
existing law:
Under the income tax laws of the State and City of New York,
each Trust is not an association taxable as a corporation and the
income of each Trust will be treated as the income of the
Unitholders.
A summary of each opinion of special counsel to the
respective State Trusts for state tax matters is set forth below.
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<PAGE>
ALL STATEMENTS IN THE PROSPECTUS CONCERNING EXCLUSION FROM
GROSS INCOME FOR FEDERAL, STATE OR OTHER TAX PURPOSES ARE THE
OPINION OF COUNSEL AND ARE TO BE SO CONSTRUED.
EXCEPT AS NOTED HEREIN, THE EXEMPTION OF INTEREST ON STATE
AND LOCAL OBLIGATIONS FOR FEDERAL INCOME TAX PURPOSES DISCUSSED
ABOVE DOES NOT NECESSARILY RESULT IN EXEMPTION UNDER THE INCOME
OR OTHER TAX LAWS OF ANY STATE OR CITY. THE LAWS OF THE SEVERAL
STATES VARY WITH RESPECT TO THE TAXATION OF SUCH OBLIGATIONS.
TAXABLE EQUIVALENT YIELDS
The following tables show the approximate taxable estimated
current returns for individuals that are equivalent to tax-exempt
estimated current returns under published 1997 marginal Federal
tax rates. The tables incorporate increased tax rates for
higher-income taxpayers that were included in the Revenue
Reconciliation Act of 1993. The tables illustrate what you would
have to earn on taxable investments to equal the tax-exempt
estimated current return for your income tax bracket. A
taxpayer's marginal tax rate is affected by both his taxable
income and his adjusted gross income. Locate your adjusted gross
income and your taxable income (which is your adjusted gross
income reduced by any deductions and exemptions), then locate
your tax bracket based on joint or single tax filing. Read
across to the equivalent taxable estimated current return you
would need to match the tax-free income.
1997 TAX YEAR
MARGINAL FEDERAL TAX RATES FOR JOINT TAXPAYERS
WITH FOUR PERSONAL EXEMPTIONS
<TABLE>
<CAPTION>
TAX-FREE ESTIMATED CURRENT RETURN
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FEDERAL
FEDERAL ADJUSTED
TAXABLE GROSS FEDERAL
INCOME INCOME TAX
(1,000's) (1,000's) RATE* 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25%
- ------------------------------------------------------------------------------------------
$ 0-41.2 $0-121.20 15.00% 5.59% 5.88% 6.18% 6.47% 6.76% 7.06% 7.35%
41.2-99.6 0-121.20 28.00% 6.60% 6.94% 7.29% 7.64% 7.99% 8.33% 8.68%
121.20- 29.00% 6.69% 7.04% 7.39% 7.75% 8.10% 8.45% 8.80%
181.80
99.6- 0-121.20 31.00% 6.88% 7.25% 7.61% 7.97% 8.33% 8.70% 9.06%
151.75
121.20- 32.00% 6.99% 7.35% 7.72% 8.09% 8.46% 8.82% 9.19%
181.80
181.80- 34.50% 7.25% 7.63% 8.02% 8.40% 8.78% 9.16% 9.54%
304.30
151.75- 121.20- 37.00% 7.54% 7.94% 8.33% 8.73% 9.13% 9.52% 9.92%
271.05 181.80
181.80- 40.00% 7.92% 8.33% 8.75% 9.17% 9.58% 10.00% 10.42%
304.30
Over- 37.00%** 7.54% 7.94% 8.33% 8.73% 9.13% 9.52% 9.92%
304.30
Over 181.80- 44.00% 8.48% 8.93% 9.38% 9.82% 10.27% 10.71% 11.16%
271.05 304.30
Over 41.00%*** 8.05% 8.47% 8.90% 9.32% 9.75% 10.17% 10.59%
304.30
</TABLE>
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<PAGE>
MARGINAL FEDERAL TAX RATES FOR SINGLE TAXPAYERS
WITH ONE PERSONAL EXEMPTIONS
<TABLE>
<CAPTION>
TAX-FREE ESTIMATED CURRENT RETURN
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FEDERAL
FEDERAL ADJUSTED
TAXABLE GROSS FEDERAL
INCOME INCOME TAX
(1,000's) (1,000's) RATE* 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25%
- ------------------------------------------------------------------------------------------
$ 0- $0-121.20 15.00% 5.59% 5.88% 6.18% 6.47% 6.76% 7.06% 7.35%
24.65
24.65- 0-121.20 28.00% 6.60% 6.94% 7.29% 7.64% 7.99% 8.33% 8.68%
59.75
59.75- 0-121.20 31.00% 6.88% 7.25% 7.61% 7.97% 8.33% 8.70% 9.06%
124.65
121.20- 32.50% 7.04% 7.41% 7.78% 8.15% 8.52% 8.89% 9.26%
243.70
124.65- 121.20- 38.00% 7.66% 8.06% 8.47% 8.87% 9.27% 9.68% 10.08%
271.05 243.70
Over 37.00%** 7.54% 7.94% 8.33% 8.73% 9.13% 9.52% 9.92%
243.70
Over Over 41.00%*** 8.05% 8.47% 8.90% 9.32% 9.75% 10.17% 10.59%
271.05 243.70
</TABLE>
____________________
* The table reflects the effect of the limitations on itemized deductions
and the deduction for personal exemptions. They were designed to phase out
certain benefits of these deductions for higher income taxpayers. These
limitations, in effect, raise the current maximum marginal combined state and
Federal tax rate to approximately 44.15% for taxpayers filing a joint return
and entitled to four personal exemptions and to approximately 40.79% for
taxpayers filing a single return entitled to only one personal exemption.
These limitations are subject to certain maximums, which depend on the number
of exemptions claimed and the total amount of the taxpayer's itemized
deductions. For example, the limitation on itemized deductions will not
cause a taxpayer to lose more than 80% of his allowable itemized deductions,
with certain exceptions.
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** Federal tax rate reverts to 36% after the 80% cap on the limitation on
itemized deductions has been met. The above table reflects only the effect
of exemption from Federal income taxes. Unitholders of State Trusts, which
are exempt from both Federal and state taxes, would need a somewhat higher
taxable yield than shown in the table to equal the tax-exempt yield of such
Trusts. There can be no assurance that state tax rates will remain
unchanged.
***Federal tax rate reverts to 39.6% after the 80% cap on the limitation on
itemized deductions has been met.
A comparison of tax-free and equivalent taxable estimated current returns
with the returns on various taxable investments is one element to consider in
making an investment decision. The Sponsor may from time to time in its
advertising and sales materials compare the then current estimated returns on
a Trust and returns over specified periods on other similar Nuveen Trusts
with returns on taxable investments such as corporate or U.S. Government
bonds, bank CDs and money market accounts or money market funds, each of
which has investment characteristics that may differ from those of the Trust.
U.S. Government bonds, for example, are backed by the full faith and credit
of the U.S. Government and bank CDs and money market accounts are insured by
an agency of the Federal government. Money market accounts and money market
funds provide stability of principal, but pay interest at rates that vary
with the condition of the short-term debt market. The investment
characteristics of the Trusts are described more fully elsewhere in this
Prospectus.
ALABAMA TRUSTS - TAX MATTERS
At the time of closing for each Alabama Trust, Balch &
Bingham, special counsel for the Trusts for Alabama tax matters,
rendered an opinion under then existing law substantially to the
effect that:
Under the income tax laws of Alabama, the Alabama Trust is
not taxable as a corporation or otherwise.
Income of the Alabama Trust, to the extent it is taxable,
will be taxable to the Unitholders, not to the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trusts'
net income will be treated as the income of the Unitholder for
Alabama income tax purposes.
Interest on obligations of the State and subdivisions
thereof and the Possessions of the United States held by the
Alabama Trust which is exempt from the Alabama income tax will
retain its tax-exempt character when the distributive share
thereof is distributed or deemed distributed to each Unitholder.
Each Unitholder will, for the purposes of the Alabama income
tax, treat his distributive share of gains realized upon the sale
or other disposition of the Bonds held by the Alabama Trust as
though the Bonds were sold or disposed of directly by the
Unitholders.
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Gains realized on the sale or redemption of Units by
Unitholders who are subject to the Alabama income tax will be
includable in the Alabama income of such Unitholders.
ARIZONA TRUSTS - TAX MATTERS
Snell & Wilmer acted as special Arizona counsel to Arizona
Traditional Trust 192 and all prior Arizona Traditional Trusts.
Chapman and Cutler, Counsel for the Sponsor, acted as special
Arizona counsel to Arizona Traditional Trust 193 and all
subsequent Arizona Trusts, including all Arizona Insured Trusts.
At the time of the closing for each Arizona Trust, the respective
counsel to the Trusts rendered an opinion under then existing law
substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be
treated as the owner of a pro rata portion of the related Arizona
Trust, and the income of the Arizona Trust therefore will be
treated as the income of the Unitholder under State law.
For Arizona income tax purposes, interest on the Bonds which
is excludable from Federal gross income and which is exempt from
Arizona income taxes when received by the Arizona Trust, and
which would be excludable from Federal gross income and exempt
from Arizona income taxes if received directly by a Unitholder,
will retain its status as tax-exempt interest when received by
the Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from an Arizona Trust by
a Unitholder with respect to the Bonds is excludable from Federal
gross income, such interest will not be subject to Arizona income
taxes.
Each Unitholder will receive taxable gain or loss for
Arizona income tax purposes when Bonds held in the Arizona Trust
are sold, exchanged, redeemed or paid at maturity, or when the
Unitholder redeems or sells Units, at a price that differs from
original cost as adjusted for amortization of Bond discount or
premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of
interest, if any, accruing on Bonds during the interval between
the Unitholder's settlement date and the date such Bonds are
delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or
policies issued to the Trust, if any, with respect to the Bonds
in the Trust which represent maturing interest on defaulted Bonds
held by the Trustee will be exempt from State income taxes if,
and to the same extent as, such interest would have been so
exempt if paid by the issuer of the defaulted Bonds PROVIDED
that, at the time such policies are purchased, the amounts paid
for such policies are reasonable, customary and consistent with
the reasonable expectation that the issuer of the Bonds, rather
than the insurer, will pay debt service on the Bonds.
Arizona law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or
carry Units in the Arizona Trust, the interest on which is exempt
from Arizona income taxes.
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<PAGE>
Neither the Bonds nor the Units will be subject to Arizona
property taxes, sales tax or use tax.
Chapman and Cutler has expressed no opinion with respect to
taxation under any other provision of Arizona law. Ownership of
the Units may result in collateral Arizona tax consequences to
certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral
consequences.
CALIFORNIA TRUSTS - TAX MATTERS
Jones, Day, Reavis & Pogue acted as special California
counsel to California Traditional Trust 206 and all prior
California Traditional Trusts and to California Insured Trust 77
and all prior California Insured Trusts. Wyman, Bautzer, Kuchel
& Silbert acted as special California counsel to California
Traditional Trust 207 through California Traditional Trust 239
and California Insured Trust 78 through California Insured Trust
107. Orrick, Herrington & Sutcliffe, L.L.P. acted as special
California counsel to California Traditional Trust 240 and all
subsequent California Traditional Trusts and to California
Insured Trust 108 and to all subsequent California Insured Trusts
and to California Intermediate Insured Trust 1 and all subsequent
California Intermediate Insured Trusts. At the time of the
closing for each California Trust, the respective counsel to the
Trusts rendered an opinion under then existing California income
and property tax law applicable to individuals who are California
residents substantially to the effect that:
The California Trust is not an association taxable as a
corporation and the income of the California Trust will be
treated as the income of the Unitholders thereof under the income
tax laws of California.
Interest on the underlying securities (which may include
bonds or other obligations issued by the governments of Puerto
Rico, the Virgin Islands, Guam or the Northern Mariana Islands)
which is exempt from tax under California personal income tax and
property tax laws when received by the California Trust will,
under such laws, retain its status as tax-exempt interest when
distributed to Unitholders. However, interest on the underlying
securities attributed to a Unitholder which is a corporation
subject to the California franchise tax laws may be includable in
its gross income for purposes of determining its California
franchise tax.
Under California income tax law, each Unitholder in the
California Trust will have a taxable event when the California
Trust disposes of a security (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems
or sells Units. Because of the requirement that tax cost basis
be reduced to reflect amortization of bond premium, under some
circumstances a Unitholder may realize taxable gain when Units
are sold or redeemed for an amount equal to, or less than, their
original cost. The total tax cost of each Unit to a Unitholder
is allocated among each of the bond issues held in the California
Trust (in accordance with the proportion of the California Trust
comprised by each bond issue) in order to determine his per unit
tax cost for each bond issue; and the tax cost reduction
requirements relating to amortization of bond premium will apply
separately to the per unit cost of each bond issue. Unitholders'
bases in their Units, and the bases for their fractional interest
in each California Trust asset, may have to be adjusted for the
their pro rata share of accrued interest received, if any, on
securities delivered after the Unitholders' respective settlement
dates.
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<PAGE>
Under the California personal property tax laws, bonds
(including the bonds in the California Trust as well as "regular-
way" and "when-issued" contracts for the purchase of bonds) or
any interest therein are exempt from such tax.
Any proceeds paid under an insurance policy, if any, issued
to the Trustee of the Fund with respect to the bonds in a
California Trust as well as "regular-way" and "when-issued"
contracts for the purchase of bonds which represent maturing
interest on defaulted obligations held by the Trustee will be
exempt from California personal income tax if, and to the same
extent as, such interest would have been so exempt if paid by the
issuer of the defaulted obligations.
Under Section 17280(b)(2) of the California Revenue and
Taxation Code, interest on indebtedness incurred or continued to
purchase or carry Units of the Trust is not deductible for the
purposes of the California personal income tax. While there
presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to
prescribe regulations determining the proper allocation and
apportionment of interest costs for this purpose. The Franchise
Tax Board has not yet proposed or prescribed such regulations.
In interpreting the generally similar Federal provision, the
Internal Revenue Service has taken the position that such
indebtedness need not be directly traceable to the purchase or
carrying of Units (although the Service has not contended that a
deduction for interest on indebtedness incurred to purchase or
improve a personal residence or to purchase goods or services for
personal consumption will be disallowed). In the absence of
conflicting regulations or other California authority, the
California Franchise Tax Board generally has interpreted
California statutory tax provisions in accord with Internal
Revenue Service interpretations of similar Federal provisions.
COLORADO TRUSTS - TAX MATTERS
At the time of the closing for each Colorado Trust, Sherman
& Howard L.L.C, special Colorado counsel to the Trusts, rendered
an opinion under then existing law substantially to the effect
that:
Each Colorado Trust consists of obligations which were
issued by the State of Colorado or its political subdivisions or
by the United States or possessions of the United States,
including Puerto Rico, the Virgin Islands and Guam ("COLORADO
BONDS").
Because Colorado income tax law is based upon the Federal
law and in light of the opinion of Chapman and Cutler, the
Colorado Trust is not an association taxable as a corporation for
purposes of Colorado income taxation.
With respect to Colorado Unitholders, in view of the
relationship between Federal and Colorado tax computations
described above and the opinion of Chapman and Cutler referred to
above:
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<PAGE>
Each Colorado Unitholder will be treated as owning a share
of each asset of the Colorado Trust for Colorado income tax
purposes, in the proportion that the number of Units of such
Colorado Trust held by him bears to the total number of
outstanding Units of such Colorado Trust, and the income of such
Colorado Trust will therefore be treated as the income of the
Colorado Unitholders under Colorado law in the proportion
described.
Interest on Colorado Bonds that would not be subject to
Colorado income tax or Colorado alternative minimum tax when paid
directly to a Colorado Unitholder will not be subject to Colorado
income tax or Colorado alternative minimum tax when received by
the related Colorado Trust and attributed to such Colorado
Unitholder and when distributed to such Colorado Unitholder.
Any proceeds paid under an insurance policy issued to the
issuer of the Colorado Bonds involved, to the Depositor prior to
deposit of the Colorado Bonds in the Colorado Trust, or to the
Colorado Trust, which proceeds represent maturing interest on
defaulted Colorado Bonds and which proceeds would not be subject
to Colorado income tax or alternative minimum tax when paid
directly to a Colorado Unitholder will not be subject to Colorado
income and alternative minimum tax when received by the Colorado
Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder.
Each Colorado Unitholder will realize gain or loss taxable
in Colorado when the related Colorado Trust disposes of a
Colorado Bond (whether by sale, exchange, redemption or payment
at maturity) or when the Colorado Unitholder redeems or sells
Units at a price that differs from original cost as adjusted for
amortization of bond discount or premium and other basis
adjustments (including any basis reduction that may be required
to reflect a Colorado Unitholder's share of interest, if any,
accruing on Colorado Bonds during the interval between the
Colorado Unitholder's settlement date and the date such Colorado
Bonds are delivered to the Colorado Trust, if later).
Tax cost reduction requirements relating to amortization of
bond premium may, under some circumstances, result in Colorado
Unitholders realizing gain taxable in Colorado when their Units
are sold or redeemed for an amount equal to or less than their
original cost.
If interest on indebtedness incurred or continued by a
Colorado Unitholder to purchase Units in a Colorado Trust is not
deductible for Federal income tax purposes, it will not be
deductible for Colorado income tax purposes.
CONNECTICUT TRUSTS - TAX MATTERS
The assets of each Connecticut Trust consist of obligations
issued by or on behalf of the State of Connecticut or its
political subdivisions or public instrumentalities, State or
local authorities, districts, or similar public entities created
under the laws of the State of Connecticut or by or on behalf of
a United States territory or possession the interest on the
obligations of which Federal law would prohibit Connecticut from
taxing if received directly by a Unitholder (the "BONDS").
Certain Bonds in the Connecticut Trust that were issued by the
State of Connecticut or governmental authorities located in
Connecticut may have been issued prior to the enactment of a
Connecticut tax on the interest income of individuals; therefore,
bond counsel to the issuers of such Connecticut Bonds did not
opine as to the exemption of the interest on such Connecticut
Bonds from such tax. However, the Sponsor and special counsel to
the Trusts for Connecticut tax matters believe that such interest
will be so exempt. Interest on Connecticut Bonds in the
Connecticut Trusts issued by other issuers, if any, is, in the
opinion of bond counsel to such issuers, exempt from state
taxation.
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<PAGE>
At the time of the closing for each Connecticut Trust, Day,
Berry & Howard, special counsel to the Trusts for Connecticut tax
matters, rendered an opinion which relied explicitly on the
opinion of Chapman and Cutler, rendered at such time, regarding
Federal income tax matters under then existing Connecticut law,
substantially to the effect that:
The Connecticut Trust is not subject to any tax on or
measured by net income imposed by the State of Connecticut.
Interest income from Bonds held by the Connecticut Trust is
not taxable under the Connecticut tax on the Connecticut taxable
income of individuals, trusts and estates (the "CONNECTICUT
INCOME TAX"), when such interest is received by the Connecticut
Trust or distributed by it to a Unitholder.
Gains and losses recognized by a Unitholder for Federal
income tax purposes upon the maturity, redemption, sale, or other
disposition by the Connecticut Trust of a Bond held by the
Connecticut Trust or upon the redemption, sale, or other
disposition of a Unit of a Connecticut Trust held by a Unitholder
are taken into account as gains or losses, respectively, for
purposes of the Connecticut Income Tax, except that, in the case
of a Unitholder holding a Unit of the Connecticut Trust as a
capital asset, such gains and losses recognized upon the
maturity, redemption, sale or exchange of a Bond issued by or on
behalf of the State of Connecticut, any political subdivision
thereof, or public instrumentality, state or local authority,
district, or similar public entity created under the laws of the
State of Connecticut (a "CONNECTICUT BOND") held by the
Connecticut Trust are excluded from gains and losses taken into
account for purposes of such tax, and no opinion is expressed as
to the treatment for purposes of such tax of gains and losses
recognized, to the extent attributable to Connecticut Bonds, upon
the redemption, sale, or other disposition by a Unitholder of a
Unit of the Connecticut Trust held by him.
The portion of any interest income or capital gain of the
Connecticut Trust that is allocable to a Unitholder that is
subject to the Connecticut corporation business tax is includable
in the gross income of such Unitholder for purposes of such tax.
An interest in a Unit of the Connecticut Trust that is owned
by or attributable to a Connecticut resident at the time of his
death is includable in his gross estate for purposes of the
Connecticut succession tax and the Connecticut estate tax.
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FLORIDA TRUSTS - TAX MATTERS
The assets of each Florida Trust will consist solely of
interest-bearing obligations issued by or on behalf of the State
of Florida, its political subdivisions and authorities or by the
Commonwealth of Puerto Rico, Guam, the Virgin Islands, American
Samoa, or the Northern Mariana Islands (the "BONDS").
At the time of the closing for each Florida Trust, Carlton,
Fields, Ward, Emmanuel, Smith & Cutler, P.A., special counsel to
the Trusts for Florida tax matters, rendered an opinion under
then existing law substantially to the effect that:
For Florida State income tax purposes, the Florida Trust
will not be subject to the Florida income tax imposed by the
Florida Code so long as the Trust has no income subject to
federal taxation. In addition, political subdivisions of Florida
do not impose any income taxes.
Because Florida does not impose an income tax on individuals, non-corporate
Unitholders will not be subject to any Florida income tax on income realized
by the Trust. Each corporate Unitholder will be subject to Florida income
taxation on its share of the income realized by the Trust notwithstanding the
tax exempt status of the interest received from any bonds under Section
103(a) of the Internal Revenue Code of 1986 or any other federal law, unless
the interest income constitutes nonbusiness income. Nevertheless, any
corporate Unitholder that has its commercial domicile in Florida will be
taxable under the Florida Code on its share of the Florida Trust income which
constitutes nonbusiness income.
Florida Trust Units will be subject to Florida estate tax
only if owned by Florida residents, certain natural persons not
domiciled in Florida, or certain natural persons not residents of
the United States. However, the Florida estate tax is limited to
the amount of the credit allowable under the applicable Federal
Revenue Act (currently Section 2011 (and in some cases
Section 2102) of the Internal Revenue Code of 1986, as amended)
for death taxes actually paid to the several states.
Neither the Bonds nor the Units will be subject to the
Florida AD VALOREM property tax or Florida sales or use tax.
Because Bonds issued by the State of Florida or its
political subdivisions or by the Commonwealth of Puerto Rico,
Guam, the Virgin Islands, American Samoa and the Northern Mariana
Islands are exempt from Florida intangible personal property
taxation under Chapter 199, Florida Statutes, as amended, the
Florida Trust will not be subject to Florida intangible personal
property tax. In addition, the Unitholders will not be subject
to Florida intangible personal property tax on the Units.
GEORGIA TRUSTS - TAX MATTERS
Smith, Gambrell & Russell acted as special Georgia counsel
to Georgia Trust 188 and all prior Georgia Trusts. Chapman and
Cutler, Counsel for the Sponsor, acted as special Georgia Counsel
to Georgia Trust 189 and all subsequent Georgia Trusts, including
all Georgia Insured Trusts. At the time of the closing for each
Georgia Trust, the respective counsel to the Trusts rendered an
opinion under then existing law substantially to the effect that:
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<PAGE>
For Georgia income tax purposes, the Georgia Trust is not an
association taxable as a corporation, and the income of the
Georgia Trust will be treated as the income of the Unitholders.
Interest on the Bonds which is exempt from Georgia income tax
when received by the Georgia Trust, and which would be exempt
from Georgia income tax if received directly by a Unitholder,
will retain its status as tax-exempt interest when distributed by
the Georgia Trust and received by the Unitholders.
If the Trustee disposes of a Bond (whether by sale,
exchange, payment on maturity, retirement or otherwise) or if a
Unitholder redeems or sells his Units, the Unitholder will
recognize gain or loss for Georgia income tax purposes to the
same extent that gain or loss would be recognized for federal
income tax purposes (except in the case of Bonds issued before
March 11, 1987 issued with original issue discount owned by the
Georgia Trust, in which case gain or loss for Georgia income tax
purposes may differ from the amount recognized for federal income
tax purposes because original issue discount on such Bonds may be
determined by accruing said original issue discount on a ratable
basis). Due to the amortization of bond premium and other basis
adjustments required by the Internal Revenue Code, a Unitholder,
under some circumstances, may realize taxable gain when his or
her Units are sold or redeemed for an amount less than or equal
to their original cost.
Amounts paid by the Insurer under an insurance policy or
policies issued to the Georgia Trust, if any, with respect to the
Bonds in the Trust which represent maturing interest on defaulted
obligations held by the Trustee will be exempt from State income
taxes if, and to the extent as, such interest would have been so
exempt if paid by the issuer of the defaulted obligations
PROVIDED that, at the time such policies are purchased, the
amounts paid for such policies are reasonable, customary and
consistent with the reasonable expectation that the issuer of the
obligations, rather than the insurer, will pay debt service on
the obligations.
Neither the Bonds nor the Units will be subject to Georgia
sales or use tax.
Counsel has expressed no opinion with respect to taxation
under any other provision of Georgia law. Ownership of the Units
may result in collateral Georgia tax consequences to certain
taxpayers. Prospective investors should consult their tax
advisors as to the applicability of any such collateral
consequences.
MARYLAND TRUSTS - TAX MATTERS
The assets of each Maryland Trust will consist of interest-
bearing obligations issued by or on behalf of the State of
Maryland, its political subdivisions and authorities and,
PROVIDED the interest thereon is exempt from State income taxes
by the laws or treaties of the United States, obligations issued
by or on behalf of the United States' territories or possessions,
including Puerto Rico, Guam and the Virgin Islands, their
political subdivisions and authorities (the "MARYLAND BONDS").
-141-
<PAGE>
At the time of the closing for each Maryland Trust, Venable,
Baetjer and Howard, special counsel for the Trusts previous to
Trust 319 for Maryland tax matters and Ober, Kaler, Grimes &
Shriver, P.C., special counsel for Trust 319 and subsequent
series, for Maryland tax matters, rendered an opinion under then
existing law substantially to the effect that:
For Maryland State and local income tax purposes, the
Maryland Trust will not be taxable as an association, and the
income of the Maryland Trust will be treated as the income of the
Unitholders.
For Maryland State and local tax purposes, interest on the
Maryland Bonds which is exempt from Maryland State and local
income tax when received by the Maryland Trust, and which would
be exempt from Maryland State and local income tax if received
directly by a Unitholder, will retain its status as tax-exempt
interest when received by the Maryland Trust and distributed to
the Unitholders.
Interest derived from the Maryland Trust by a Unitholder
with respect to the Maryland Bonds will not be subject to
Maryland State or local income taxes; PROVIDED that interest or
profit derived from the Maryland Trust by a financial
institution, as defined in Section 8-101(c) of the Tax-General
Article of the Annotated Code of Maryland, will be subject to the
Maryland state franchise tax on financial institutions, except to
the extent such interest is expressly exempt from the Maryland
state franchise tax by the statutes which authorize the issuance
of such Maryland Bonds (see Section 8-204 of the Tax-General
Article of the Annotated Code of Maryland).
A Unitholder will not be subject to Maryland state or local
income tax with respect to gain realized when Maryland Bonds held
in the Maryland Trust are sold, redeemed or paid at maturity,
except with respect to gain realized upon a sale, redemption or
payment at maturity of such Maryland Bonds as are issued by or on
behalf of United States territories or possessions, their
political subdivisions and authorities; such gain will equal the
proceeds of sale, redemption or payment, less the tax basis of
the Maryland Bonds (adjusted to reflect (a) the amortization of
Bond premium or discount, and (b) the deposit in the Maryland
Trust after the Unitholder's settlement date of Maryland Bonds
with accrued interest).
Although the matter is not free from doubt, gain realized by
a Unitholder from the redemption, sale or other disposition of a
Maryland Trust Unit (i) will be subject to Maryland state income
tax except in the case of individual Unitholders who are not
Maryland residents, and (ii) will be subject to Maryland local
income tax in the case of individual Unitholders who are Maryland
residents.
If interest on indebtedness incurred or continued by a
Unitholder to purchase Units in the Maryland Trust is not
deductible for Federal income tax purposes, it will also be
nondeductible for Maryland state income tax purposes and, if
applicable, local income tax purposes.
Maryland Trust Units will be subject to Maryland inheritance
and estate tax only if held by Maryland residents. Neither the
Maryland Bonds nor the Maryland Trust Units will be subject to
Maryland personal property tax, sales tax or use tax.
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MASSACHUSETTS TRUSTS - TAX MATTERS
Peabody & Arnold acted as special Massachusetts counsel to
Massachusetts Traditional Trust 182 and all prior Massachusetts
Traditional Trusts and to Massachusetts Insured Trust 44 and all
prior Massachusetts Insured Trusts. Edwards & Angell acted as
special Massachusetts counsel to Massachusetts Traditional Trust
183 and all subsequent Massachusetts Traditional Trusts and to
Massachusetts Insured Trust 45 and all subsequent Massachusetts
Insured Trusts. At the time of the closing for each
Massachusetts Trust, the respective counsel to the Trusts
rendered an opinion, based on rulings by the Commissioner of
Revenue and under then existing law, substantially to the effect
that:
For Massachusetts income tax purposes, the Massachusetts
Trust will be treated as a corporate trust under Section 8 of
Chapter 62 of the Massachusetts General Laws ("M.G.L.") and not
as a grantor trust under Section 10(e) of M.G.L. Chapter 62.
The Massachusetts Trust will not be held to be engaging in
business in Massachusetts within the meaning of said Section 8
and will, therefore, not be subject to Massachusetts income tax.
Unitholders who are subject to Massachusetts income taxation
under M.G.L. Chapter 62 will not be required to include their
respective shares of the earnings of or distributions from the
Massachusetts Trust in their Massachusetts gross income to the
extent that such earnings or distributions represent tax-exempt
interest excludable from gross income for Federal income tax
purposes received by the Massachusetts Trust on obligations
issued by Massachusetts, its counties, municipalities,
authorities, political subdivisions or instrumentalities, or by
Puerto Rico, the Virgin Islands, Guam, the Northern Mariana
Islands or other possessions of the United States within the
meaning of Section 103(c) of the Internal Revenue Code of 1986,
as amended ("OBLIGATIONS").
In the case of a Massachusetts Insured Trust, Unitholders
who are subject to Massachusetts income taxation under M.G.L.
Chapter 62 will not be required to include their respective
shares of the earnings of or distributions from such Trust in
their Massachusetts gross income to the extent that such earnings
of or distributions are derived from the proceeds of insurance
obtained by the Sponsor of such Trust or by the issuer or
underwriter of an obligation held by such Trust that represent
maturing interest on defaulted obligations held by the Trustee,
if and to the same extent that such earnings or distributions
would have been excludable from the gross income of such
Unitholders if derived from interest paid by the issuer of the
defaulted obligation.
Unitholders which are corporations subject to taxation under
M.G.L. Chapter 63 will be required to include their respective
shares of the earnings of or distributions from the Trust in
their Massachusetts gross income to the extent that such earnings
or distributions represent interest from bonds, notes or
indebtedness of any state, including Massachusetts, except for
interest which is specifically exempted from such tax by the acts
authorizing issuance of said Obligations.
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The Massachusetts Trust's capital gains and/or capital
losses which are includable in the Federal gross income of
Unitholders who are subject to Massachusetts income taxation
under M.G.L. Chapter 62, or Unitholders which are corporations
subject to Massachusetts income taxation under M.G.L. Chapter 63
will be included as capital gains and/or losses, in the
Unitholders' Massachusetts gross income, except for capital gain
which is specifically exempted from taxation under such Chapters
by the acts authorizing issuance of said Obligations.
Unitholders which are corporations subject to tax under
M.G.L. Chapter 63 and which are tangible property corporations
will not be required to include the Units when determining the
value of their tangible property. Unitholders which are
intangible property corporations will be required to include the
Units when determining their net worth.
Gains or losses realized on sale or redemption of Units by
Unitholders who are subject to Massachusetts income taxation
under M.G.L. Chapter 62, or Unitholders which are corporations
subject to Massachusetts income taxation under M.G.L. Chapter 63,
will be includable in their Massachusetts gross incomes. In
determining such gain or loss Unitholders will, to the same
extent required as for Federal tax purposes, have to adjust their
tax bases for their Units for accrued interest received, if any,
on Obligations delivered to the Trustee after the Unitholders pay
for their Units, for amortization of premiums, if any, on
Obligations held by the Massachusetts Trust, and for accrued
original issue discount with respect to each Obligation which, at
the time the Obligation was issued, had original issue discount.
The Units of the Trust are not subject to any property tax
levied by Massachusetts or any political subdivision thereof, nor
to any income tax levied by any such political subdivision. They
are includable in the gross estate of a deceased holder who is a
resident of Massachusetts for purposes of the Massachusetts
Estate Tax.
MICHIGAN TRUSTS - TAX MATTERS
At the time of the closing for each Michigan Trust,
Dickinson, Wright, Moon, Van Dusen & Freeman, special Michigan
counsel to the Trusts, rendered an opinion under then-existing
law substantially to the effect that:
The assets of a Michigan Trust will consist of interest-
bearing obligations issued by or on behalf of the State of
Michigan, and counties, municipalities, authorities and political
subdivisions thereof, and, in limited instances, bonds issued by
Puerto Rico, the Virgin Islands, Guam, the Northern Mariana
Islands or possessions of the United States (the "MICHIGAN
BONDS").
Under the Michigan income tax act, the Michigan single
business tax act, the Michigan intangibles tax act, the Michigan
city income tax act (which authorizes the only income tax
ordinance that may be adopted by cities in Michigan), and under
the law which authorizes a "first class" school district to levy
an excise tax upon income, the Michigan Trust is not subject to
tax. The income of the Michigan Trust will be treated as the
income of the Unitholders and be deemed to have been received by
them when received by the Michigan Trust.
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Interest on the Michigan Bonds in the Michigan Trust which
is exempt from Federal income tax is exempt from Michigan state
and local income taxes and from the Michigan single business tax.
Further, any amounts paid under the insurance representing
maturing interest on defaulted obligations held by the Trustee
will be excludable from Michigan state and local income taxes and
from the Michigan single business tax if, and to the same extent
as, such interest would have been excludable if paid by the
respective issuer.
For purposes of the foregoing Michigan tax laws
(corporations and financial institutions are not subject to the
Michigan income tax), each Unitholder will be considered to have
received his pro rata share of Michigan Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a
taxable event when the Michigan Trust disposes of a Michigan Bond
(whether by sale, exchange, redemption or payment at maturity) or
when the Unitholder redeems or sells Units. Due to the
requirement that tax cost be reduced to reflect amortization of
bond premium, under some circumstances a Unitholder may realize
taxable gain when Units are sold or redeemed for an amount equal
to, or less than, their original cost. The tax cost of each Unit
to a Unitholder will be allocated for purposes of these Michigan
tax laws in the same manner as the cost is allocated for Federal
income tax purposes.
Pursuant to the position of the Michigan Department of
Treasury in a bulletin dated December 19, 1986, reaffirmed in a
bulletin dated March 31, 1989, the portion of a Michigan Trust
represented by the Michigan Bonds will be exempt from the
Michigan Intangibles Tax. The Department of Treasury has not
indicated a position with respect to treatment of amounts paid
under a policy of insurance with respect to maturing interest on
defaulted obligations (which amounts would have been excludable
if paid by the respective issuer) for purposes of determining the
income base for the Michigan Intangibles Tax.
If a Unitholder is subject to the Michigan single business
tax (I.E., is engaged in a "business activity" as defined in the
Michigan single business tax act), and has a taxable event for
Federal income tax purposes when the Michigan Trust sells or
exchanges Michigan Bonds or the Unitholder sells or exchanges
Units, such event may impact the adjusted tax base upon which the
single business tax is computed. Any capital gain or loss
realized from such taxable event which was included in the
computation of the Unitholder's Federal taxable income, plus the
portion, if any, of such capital gain excluded in such
computation and minus the portion, if any, of such capital loss
not deducted in such computation for the year the loss occurred,
will be included in the adjusted tax base. The adjusted tax base
of any person other than a corporation is affected by any gain or
loss realized from the taxable event only to the extent that the
resulting Federal taxable income is derived from "business
activity."
MINNESOTA TRUSTS - TAX MATTERS
At the time of the closing for each Minnesota Trust, Dorsey
& Whitney, special Minnesota counsel for the Trusts, rendered an
opinion under then-existing law substantially to the effect that:
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Counsel understands that the Minnesota Trust will have no
income other than (i) interest income on bonds issued by the
State of Minnesota and its political and governmental
subdivisions, municipalities and governmental agencies and
instrumentalities and on bonds issued by Puerto Rico, the Virgin
Islands, the Northern Mariana Islands or Guam which would be
exempt from Federal and Minnesota income taxation when paid
directly to an individual, trust or estate (and the term "BONDS"
as used herein refers only to such bonds), (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain
insurance policies issued to the Trustee or to the issuers of the
Bonds which represent maturing interest or principal payments on
defaulted Bonds held by the Trustee.
"Taxable income" for Minnesota income tax purposes is the
same as "taxable income" for Federal income tax purposes with
certain modifications that (with one exception) do not apply to
the present circumstances. The exception is that corporations
must add to Federal taxable income the amount of any interest
received on the obligations of states and their agencies and
instrumentalities, political and governmental subdivisions, and
municipalities. The terms "trust" and "corporation" have the
same meanings for Minnesota income tax purposes, as relevant to
the Minnesota tax status of the Minnesota Trust, as for Federal
income tax purposes.
In view of the relationship between Federal and Minnesota
law described in the preceding paragraph and the opinion of
Chapman and Cutler with respect to the Federal tax treatment of
the Minnesota Trust and its Unitholders, (1) the Minnesota Trust
will be treated as a trust rather than a corporation for
Minnesota income tax purposes and will not be deemed the
recipient of any Minnesota taxable income; (2) each Unitholder of
the Minnesota Trust will be treated as the owner of a pro rata
portion of the Minnesota Trust for Minnesota income tax purposes
and the income of the Minnesota Trust will therefore be treated
as the income of the Unitholders under Minnesota law; (3)
interest on the Bonds will be exempt from Minnesota income
taxation of Unitholders who are individuals, trusts and estates,
when received by the Minnesota Trust and attributed to such
Unitholders and when distributed to such Unitholders (except as
hereinafter provided with respect to "industrial development
bonds" and "private activity bonds" held by "substantial users");
(4) interest on the Bonds will be includable in the Minnesota
taxable income (subject to allocation and apportionment) of
Unitholders that are corporations; (5) each Unitholder will
realize taxable gain or loss when the Minnesota Trust disposes of
a Bond (whether by sale, exchange, redemption or payment at
maturity) or when the Unitholder redeems or sells Units at a
price which differs from original cost as adjusted for
amortization of bond discount or premium and other basis
adjustments (including any basis reduction that may be required
to reflect a Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement
date and the date such Bonds are delivered to the Minnesota
Trust, if later); (6) tax cost reduction requirements relating to
amortization of bond premium may, under some circumstances,
result in Unitholders' realizing taxable gain when their Units
are sold or redeemed for an amount equal to or less than their
original cost; (7) any proceeds paid under an insurance policy
issued to the Trustee with respect to the Bonds which represent
maturing interest on defaulted obligations held by the Trustee
will be excludable from Minnesota gross income if, and to the
same extent as, such interest would have been so excludable if
paid by the issuer of the defaulted obligation; (8) any proceeds
paid under
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individual insurance policies obtained by issuers of
Bonds which represent maturing interest on defaulted obligations
held by the Trustee will be excludable from Minnesota 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; (9) net capital gains of Unitholder
attributable to the Bonds will be fully includable in the
Minnesota taxable income of Unitholders (subject to allocation
and apportionment in the case of corporate Unitholders); and (10)
interest on bonds includable in the computation of "alternative
minimum taxable income" for Federal income tax purposes will also
be includable in the computation of "alternative minimum taxable
income" for Minnesota income tax purposes.
Interest income attributable to Bonds that are "industrial
development bonds" or "private activity bonds" as those terms are
defined in the Internal Revenue Code, will be taxable under
Minnesota law to a Unitholder who is a "substantial user" of the
facilities financed by the proceeds of such Bonds (or a "related
person" to such a "substantial user") to the same extent as if
such Bonds were held directly by such Unitholder.
MISSOURI TRUSTS - TAX MATTERS
At the time of the closing for each Missouri Trust, Watson &
Marshall special counsel to the Trusts for Missouri tax matters,
rendered an opinion under then existing Missouri income tax law
(not including any Missouri law imposing a franchise tax)
applicable to corporations with Missouri taxable income and to
individuals who are Missouri residents for Missouri income tax
purposes substantially to the effect that:
The Missouri Trust will not be an association taxable as a
corporation for purposes of Missouri income taxation.
Each Missouri Unitholder will be treated as owning a pro
rata share of each asset of the Missouri Trust for Missouri
income tax purposes in the proportion that the number of Units of
such Trust held by the Unitholder bears to the total number of
outstanding Units of the Missouri Trust, and the income of the
Missouri Trust will therefore be treated as the income of each
Missouri Unitholder under Missouri law in the proportion
described.
Interest on Bonds that would not be includable in Missouri
adjusted gross income when paid directly to a Missouri Unitholder
will not be includable in Missouri adjusted gross income when
received by the Missouri Trust and attributed to such Missouri
Unitholder or when distributed to such Missouri Unitholder.
Each Missouri Unitholder will realize taxable gain or loss
when the Missouri Trust disposes of a Bond (whether by sale,
exchange, redemption, or payment at maturity) at a gain or loss
or when the Missouri Unitholder redeems or sells Units at a price
that differs from the adjusted basis. Gain or loss and the
adjusted basis will be computed in the same manner as for Federal
income tax treatment. Due to the amortization of bond premium
and other basis adjustments required by the Internal Revenue
Code, a Missouri Unitholder, under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed
for an amount equal to or less than their original cost.
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If interest on indebtedness incurred or continued by a
Missouri Unitholder to purchase Units in the Missouri Trust is
not deductible for Federal income tax purposes, it also will be
nondeductible for Missouri income tax purposes.
Obligations issued by U.S. Possessions will not be subject
to a Missouri intangibles tax or a personal property tax.
NEW JERSEY - TAX MATTERS
The assets for each New Jersey Trust will consist of
interest-bearing obligations issued by or on behalf of the State
of New Jersey and counties, municipalities, authorities and other
political subdivisions thereof, and certain territories of the
United States, including Puerto Rico, Guam, the Virgin Islands
and the Northern Mariana Islands (the "BONDS").
At the time of the closing for each New Jersey Trust,
Pitney, Hardin, Kipp & Szuch, special counsel to the Trusts for
New Jersey tax matters, rendered an opinion under then-existing
law substantially to the effect that:
The New Jersey Trust will be recognized as a Trust and not
an association taxable as a corporation. The New Jersey Trust
will not be subject to the New Jersey Corporation Business Tax or
the New Jersey Corporation Income Tax.
With respect to the non-corporate Unitholders who are
residents of New Jersey, the income of the New Jersey Trust will
be treated as the income of such Unitholders under the New Jersey
Gross Income Tax. Interest on the underlying Bonds which is
exempt from tax under the New Jersey Gross Income Tax Law when
received by the New Jersey Trust will retain its status as tax-
exempt interest when distributed to Unitholders.
A non-corporate Unitholder will not be subject to the New
Jersey Gross Income Tax on any gain realized either when a New
Jersey Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Unitholder
redeems or sells his Units. Any loss realized on such
disposition may not be utilized to offset gains realized by such
Unitholder on the disposition of assets the gain on which is
subject to the New Jersey Gross Income Tax.
Units of the New Jersey Trust may be taxable on the death of
a Unitholder under the New Jersey Transfer Inheritance Tax Law or
the New Jersey Estate Tax Law.
If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax,
interest from the Bonds in the New Jersey Trust which is
allocable to such corporation will be includable in its entire
net income for purposes of the New Jersey Corporation Business
Tax or New Jersey Corporation Income Tax, less any interest
expense incurred to carry such investment to the extent such
interest expense has not been deducted in computing Federal
taxable income. Net gains derived by such corporation on the
disposition of the Bonds by the New Jersey Trust or on the
disposition of its Units will be included in its entire net
income for purposes of the New Jersey Corporation Business Tax or
New Jersey Corporation Income Tax.
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NEW YORK TRUSTS - TAX MATTERS
In the opinion of Edwards & Angell, special counsel to the
Trusts for New York tax matters, under existing law:
Interest on obligations issued by New York State, a
political subdivision thereof, Puerto Rico, the Virgin Islands,
Guam, the Northern Mariana Islands, or other possessions of the
United States within the meaning of Section 103(c) of the
Internal Revenue Code of 1986, as amended ("NEW YORK
OBLIGATIONS"), which would be exempt from New York State or New
York City personal income tax if directly received by a
Unitholder, will retain its status as tax-exempt interest when
received by the New York Insured Trust (the "TRUST") and
distributed to such Unitholder. Thus, interest on bonds received
by Unitholders which is not subject to New York State tax is also
exempt from New York City personal income tax.
Interest (less amortizable premium, if any) derived from the
Trust by a resident of New York State (or New York City) in
respect of obligations issued by states other than New York (or
their political subdivisions) will be subject to New York State
(or New York City) personal income tax.
A Unitholder who is a resident of New York State (or New
York City) will be subject to New York State (or New York City)
personal income tax with respect to gains realized when New York
Obligations held in the New York Insured Trust are sold, redeemed
or paid at maturity or when the Unitholder's Units are sold or
redeemed; such gain will equal the proceeds of sale, redemption
or payment less the tax basis of the New York Obligation or Unit
(adjusted to reflect (a) the amortization of premium or discount,
if any, on New York Obligations held by the Trust, (b) accrued
original issue discount, with respect to each New York Obligation
which, at the time the New York Obligation was issued, had
original issue discount, and (c) the deposit of New York
Obligations with accrued interest in the Trust after the
Unitholder's settlement date).
Interest or gain from the Trust derived by a Unitholder who
is not a resident of New York State (or New York City) will not
be subject to New York State (or New York City) personal income
tax, unless the Units are property employed in a business, trade,
profession or occupation carried on in New York State (or New
York City).
In the case of the Trust, amounts paid under the insurance
policies representing maturing interest on defaulted New York
Obligations held by the Trustee in the Trust will be excludable
from New York State and New York City income if, and to the same
extent as, such interest would have been excludable if paid by
the respective issuer.
For purposes of the New York State and New York City
franchise tax on corporations, Unitholders which are subject to
such tax will be required to include in their entire net income
any interest or gains distributed to them even though distributed
in respect of obligations of any state or subdivision thereof
including New York.
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If borrowed funds are used to purchase Units in the Trust,
all (or part) of the interest on such indebtedness will not be
deductible for New York State and New York City tax purposes.
The purchase of Units may be considered to have been made with
borrowed funds even though such funds are not directly traceable
to the purchase of Units in any New York Trust.
NORTH CAROLINA - TAX MATTERS
The assets of the Trust will consist of interest-bearing
obligations issued by or on behalf of the State of North
Carolina, its political subdivisions and authorities and,
PROVIDED the interest thereon is exempt from North Carolina
income taxes by the laws or treaties of the United States, by or
on behalf of the United States territories or possessions
(including Puerto Rico, the Virgin Islands, Guam and the Northern
Mariana Islands), their political subdivisions and authorities
(the "NORTH CAROLINA BONDS").
At the time of the closing for each North Carolina Trust,
Moore & Van Allen, special North Carolina counsel to the Trusts,
rendered an opinion under then existing law substantially to the
effect that:
The North Carolina Trust is not an association taxable
as a corporation for North Carolina income tax purposes.
Interest on the North Carolina Bonds which is exempt from
North Carolina income tax when received by the North
Carolina Trust will retain its status as tax-exempt interest
when distributed to Unitholders.
For North Carolina income tax purposes, each Unitholder
will have a taxable event when, upon redemption or sale of
his Units, he receives cash or other property. Gain or loss
will be determined by computing the difference between the
proceeds of such a redemption or sale and the Unitholder's
adjusted basis for the Units.
For North Carolina income tax purposes, each Unitholder
will have a taxable event when the North Carolina Trust
disposes of one of the North Carolina Bonds (whether by
sale, payment at maturity, retirement or otherwise);
PROVIDED that when any of the North Carolina Bonds held by
the North Carolina Trust have been issued under an act of
the General Assembly of North Carolina that provides that
all income from such North Carolina Bond, including a profit
made from the sale thereof, shall be free from all taxation
by the State of North Carolina, any such profit received by
the North Carolina Trust will retain its tax-exempt status
in the hands of each Unitholder.
Interest on indebtedness paid or accrued by a
Unitholder in connection with ownership of Units in the
North Carolina Trust will not be deductible by the
Unitholder for North Carolina state income tax purposes.
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Amortization of North Carolina Bond premiums is mandatory for North
Carolina state income tax purposes for all North Carolina resident
Unitholders. Amortization for the taxable year is accomplished by
lowering the basis or adjusted basis of the Units, with no deduction
against gross income for the year.
Trust Units will be subject to North Carolina inheritance and estate tax
if owned by a North Carolina resident on the date of his death. Neither
the North Carolina Bonds nor the Units will be subject to the North
Carolina sales tax or use tax.
OHIO TRUSTS - TAX MATTERS
Each Ohio Trust is comprised primarily of interest-bearing
obligations issued by or on behalf of the State of Ohio,
political subdivisions thereof, or agencies or instrumentalities
thereof (the "OHIO OBLIGATIONS"), or by the governments of Puerto
Rico, the Virgin Islands, the Northern Mariana Islands or Guam
("TERRITORIAL OBLIGATIONS") (collectively, "OBLIGATIONS").
At the time of the closing for each Ohio Trust, Squire,
Sanders & Dempsey, special Ohio counsel to the Trusts, rendered
an opinion under then existing law substantially to the effect
that, PROVIDED that at all times at least 50% of the value of the
total assets of the Ohio Trust consist of Ohio Obligations or
similar obligations of other states or their subdivisions, under
existing Ohio law:
The Ohio Trust is not taxable as a corporation or otherwise
for purposes of the Ohio personal income tax, Ohio school
district income taxes, the Ohio corporation franchise tax, or the
Ohio dealers in intangibles tax.
Income of the Ohio Trust will be treated as the income of
the Unitholders for purposes of the Ohio personal income tax and
municipal and school district income taxes in Ohio and the Ohio
corporation franchise tax in proportion to the respective
interest therein of each Unitholder.
Interest on Obligations held by the Ohio Trust is exempt
from the Ohio personal income tax and municipal and school
district income taxes in Ohio, and is excluded from the net
income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
Proceeds paid under insurance policies, if any, to the
Trustee of the Ohio Trust, representing maturing interest on
defaulted obligations held by the Ohio Trust that is excluded
from gross income for federal income tax purposes will be exempt
from the Ohio personal income tax, and municipal and school
district income taxes in Ohio and the net income base of the Ohio
corporation franchise tax.
Gains and losses realized on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations are excluded in
determining adjusted gross and taxable income for purposes of the
Ohio personal income tax, and municipal and school district
income taxes in Ohio and are excluded from the net income base of
the Ohio corporation franchise tax when distributed or deemed
distributed to Unitholders.
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OREGON TRUSTS - TAX MATTERS
At the time of the closing for each Oregon Trust, Schwabe,
Williamson, Wyatt, Moore & Roberts, special counsel to the Trusts
for Oregon tax matters, who relied on the opinion of Chapman and
Cutler, rendered at such time, an opinion under then existing
Oregon law applicable to individuals who are Oregon residents for
Oregon tax purposes substantially to the effect that:
The Oregon Trust is not an association taxable as a
corporation for Oregon income tax or corporate excise tax
purposes.
Each Unitholder of the Oregon Trust will be considered the
owner of a fractional portion of the Oregon Trust for purposes of
Oregon personal income taxes.
An item of Oregon Trust income which would be exempt from
income tax under Oregon law if directly received by a Unitholder
and which is exempt from income tax under Oregon law when
received by the Oregon Trust will retain its status as tax-exempt
when distributed by such Oregon Trust and received by the
Unitholders.
A Unitholder of the Oregon Trust will have a taxable event
when the Oregon Trust disposes of a trust asset (whether by sale,
payment on maturity, retirement or otherwise) or when the
Unitholder redeems or sells his Units. Because of the
requirement that tax cost basis be reduced to reflect
amortization of bond premiums, if any, on obligations held by the
Oregon Trust, a Unitholder may realize taxable gains when his
Units are sold or redeemed for an amount equal to or less than
his original cost.
To the extent that the assets of the Oregon Trust consist of
intangible personal property, such assets and any interest
thereon are exempt from property tax under Oregon law.
PENNSYLVANIA TRUSTS - TAX MATTERS
At the time of the closing for each Pennsylvania Trust,
Dechert Price & Rhoads, special Pennsylvania counsel to the
Trusts, rendered an opinion under then existing law substantially
to the effect that:
Units evidencing fractional undivided interests in the
Pennsylvania Trusts are not subject to any of the personal
property taxes presently in effect in Pennsylvania to the extent
of that proportion of the Trusts represented by Bonds issued by
the Commonwealth of Pennsylvania, its agencies and
instrumentalities, or by any county, city, borough, town,
township, school district, municipality and local housing or
parking authority in the Commonwealth of Pennsylvania or issued
by Puerto Rico, the Virgin Islands, Guam, or the Northern Mariana
Islands ("PENNSYLVANIA BONDS"). The taxes referred to above
include the County Personal Property Tax, the additional personal
property taxes imposed on Pittsburgh residents by the School
District of Pittsburgh and by the City of Pittsburgh. The City
of Pittsburgh, the School District of Pittsburgh and Allegheny
County cannot impose personal property taxes as of January 1,
1995. Pennsylvania Trust Units may be taxable under the
Pennsylvania inheritance and estate taxes.
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The proportion of interest income representing interest
income from Pennsylvania Bonds distributed to Unitholders of a
Pennsylvania Trust is not taxable under the Pennsylvania Personal
Income Tax or under the Corporate Net Income Tax imposed on
corporations by Article IV of the Tax Reform Code. Nor will such
interest be taxable under the Philadelphia School District
Investment Income Tax imposed on Philadelphia resident
individuals.
The disposition by a Pennsylvania Trust of a Pennsylvania
Bond (whether by sale, exchange, redemption or payment at
maturity) will not constitute a taxable event to a Unitholder
under the Pennsylvania Personal Income Tax if the Pennsylvania
Bond was issued prior to February 1, 1994. Further, although
there is no published authority on the subject, counsel is of the
opinion that (i) a Unitholder of a Pennsylvania Trust will not
have a taxable event under the Pennsylvania State and local
income taxes referred to in the preceding paragraph (other than
the Corporate Net Income Tax) upon the redemption or sale of his
Unit to the extent that the Pennsylvania Trust is then comprised
of Pennsylvania Bonds issued prior to February 1, 1994 and (ii)
the disposition by a Pennsylvania Trust of a Pennsylvania Bond
(whether by sale, exchange, redemption or payment at maturity)
will not constitute a taxable event to a Unitholder under the
Corporation Net Income Tax or the Philadelphia School District
Investment Income Tax if the Pennsylvania Bond was issued prior
to February 1, 1994. (The School District tax has no application
to gain on the disposition of property held by the taxpayer for
more than six months.)
Gains on the sale, exchange, redemption, or payment at
maturity of a Pennsylvania Bond issued on or after February 1,
1994, will be taxable under all of these taxes, as will gains on
the redemption or sale of a unit to the extent that the Trust is
comprised of Pennsylvania Bonds issued on or after February 1,
1994.
TENNESSEE TRUSTS - TAX MATTERS
The assets of the Trust will consist of bonds issued by the
State of Tennessee (the "STATE"), or any county or any
municipality or political subdivision thereof, including any
agency, board, authority or commission, the interest on which is
exempt from the Hall Income Tax imposed by the State of Tennessee
("TENNESSEE BONDS") or by the Commonwealth of Puerto Rico (the
"PUERTO RICO BONDS") (collectively, the "BONDS").
Under Tennessee law, a unit investment trust taxable as a
grantor trust for Federal income tax purposes is entitled to
special Tennessee State tax treatment (as more fully described
below) with respect to its proportionate share of interest income
received or accrued with respect to Tennessee Bonds. An
exemption is also produced under Tennessee law for distributions
made by a unit investment trust or mutual fund that are
attributable to "bonds or securities of the United States
government or any agency or instrumentality thereof" ("U.S.
GOVERNMENT, AGENCY OR INSTRUMENTALITY BONDS"). If it were
determined that the Trust held assets other than Tennessee Bonds
or U.S. Government, Agency or Instrumentality Bonds, a
proportionate share of distributions from the Trust would be
taxable to Unitholders for Tennessee Income Tax purposes.
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Further, because Tennessee law only provides an exemption
for distributions that relate to interest income, distributions
by the Trust that relate to capital gains realized from the sale
or redemptions of Tennessee Bonds or U.S. Government, Agency or
Instrumentality Bonds are likely to be treated as taxable
dividends for purposes of the Hall Income Tax. However, capital
gains realized directly by a Unitholder when the Unitholder sells
or redeems his Unit will not be subject to the Hall Income Tax.
The opinion set forth below assumes that the interest on the
Tennessee Bonds, if received directly by a Unitholder, would be
exempt from the Hall Income Tax under State law. This opinion
does not address the taxation of persons other than full-time
residents of the State of Tennessee.
Because this provision only provides an exemption for
distributions attributable to interest on Tennessee Bonds or U.S.
Government, Agency or Instrumentality Bonds, it must be
determined whether bonds issued by the Government of Puerto Rico
qualify as U.S. Government, Agency or Instrumentality Bonds. For
Hall Income Tax purposes, there is currently no published
administrative interpretation or opinion of the Attorney General
of Tennessee dealing with the status of distributions made by
unit investment trusts such as the Tennessee Trust that are
attributable to interest paid on bonds issued by the Government
of Puerto Rico. However, in a letter dated August 14, 1992 (the
"COMMISSIONER'S LETTER"), the Commissioner of the State of
Tennessee Department of Revenue advised that Puerto Rico would be
an "instrumentality" of the U.S. Government and treated bonds
issued by the Government of Puerto Rico as U.S. Government,
Agency or Instrumentality Bonds. Based on this conclusion, the
Commissioner advised that distributions from a mutual fund
attributable to investments in Puerto Rico Bonds are exempt from
the Hall Income Tax. Both the Sponsor and Chapman and Cutler,
for purposes of its opinion (as set forth below), have assumed,
based on the Commissioner's Letter, that bonds issued by the
Government of Puerto Rico are U.S. Government, Agency or
Instrumentality Bonds. However, it should be noted that the
position of the Commissioner is not binding, and is subject to
change, even on a retroactive basis.
The Sponsor cannot predict whether new legislation will be
enacted into law affecting the tax status of the Trusts. The
occurrence of such an event could cause distributions of interest
income from the Trust to be subject to the Hall Income Tax.
Investors should consult their own tax advisors in this regard.
In the opinion of Chapman and Cutler, Special Counsel to the
Trust for Tennessee tax matters, under existing law as of the
date of this Prospectus:
For purposes of the Hall Income Tax, the Tennessee Excise
Tax imposed by Section 67-4-806 (the "STATE CORPORATE INCOME
TAX"), and the Tennessee Franchise Tax imposed by Section 67-4-
903, the Trust will not be subject to such taxes.
For Hall Income Tax purposes, a proportionate share of such
distributions from the Trust to Unitholders, to the extent
attributable to interest on the Tennessee Bonds (based on the
relative proportion of interest received or accrued attributable
to Tennessee Bonds), will be exempt from the Hall Income Tax when
distributed to such Unitholders. Based on the Commissioner's
letter, distributions from the Trust to Unitholders, to the
extent attributable to interest on the Puerto Rico Bonds (based
on the relative proportion of interest received or accrued
attributable to the Puerto Rico Bonds), will be exempt from the
Hall Income Tax when distributed to such Unitholders. A
proportionate share of distributions from the Trust attributable
to assets other than the Bonds would not, under current law, be
exempt from the Hall Income Tax when distributed to Unitholders.
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For Tennessee State Corporate Income Tax purposes, Tennessee
law does not provide an exemption for interest on Tennessee Bonds
and requires that all interest excludible from Federal gross
income must be included in calculating "net earnings" subject to
the State Corporate Income Tax. No opinion is expressed
regarding whether such tax would be imposed on the earnings or
distributions of the Trust (including interest on the Bonds or
gain realized upon the disposition of the Bonds by the Trust)
attributable to Unitholders subject to the State Corporate Income
Tax. However, based upon prior written advice from the Tennessee
Department of Revenue, earnings and distributions from the Trust
(including interest on the Tennessee Bonds or gain realized upon
the disposition of the Tennessee Bonds by the Trust) attributable
to the Unitholders should be exempt from the State Corporate
Income Tax. The position of the Tennessee Department of Revenue
is not binding, and is subject to change, even on a retroactive
basis.
Each Unitholder will realize taxable gain or loss for
Tennessee State Corporate Income Tax purposes when the Unitholder
redeems or sells his Units at a price that differs from original
cost as adjusted for accretion or any discount or amortization of
any premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of
interest, if any, accruing on Bonds during the interval between
the Unitholder's settlement date and the date such Bonds are
delivered to the Trust, if later. Tax basis reduction
requirements relating to amortization of bond premium may, under
some circumstances, result in Unitholders realizing taxable gain
when the Units are sold or redeemed for an amount equal to less
than their original cost.
For purposes of the Tennessee Property Tax, the Trust will
be exempt from taxation with respect to the Bonds it holds. As
for the taxation of the Units held by the Unitholders, although
intangible personal property is not presently subject to
Tennessee taxation, no opinion is expressed with regard to
potential property taxation of the Unitholders with respect to
the Units because the determination of whether property is exempt
from such tax is made on a county by county basis.
No opinion is expressed herein regarding whether insurance
proceeds paid in lieu of interest on the Bonds held by the Trust
(including Tennessee Bonds) are exempt from the Hall Income Tax.
Distributions of such proceeds to Unit holders may be subject to
the Hall Income Tax.
The Bonds and the Units held by the Unitholder will not be
subject to Tennessee sales and use taxes.
We have not examined any of the Bonds to be deposited and
held in the Trust or the proceedings for the issuance thereof or
the opinions of bond counsel with respect thereto, and therefore
express no opinion as to the exemption from State income taxes of
interest on the Bonds if received directly by a Unit holder.
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Chapman and Cutler has expressed no opinion with respect to
taxation under any other provisions of Tennessee law. Ownership
of the Units may result in collateral Tennessee tax consequences
to certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral
consequences.
TEXAS TRUSTS - TAX MATTERS
At the time of the closing for each Texas Trust, an opinion
was rendered under then existing law substantially to the effect
that:
The State of Texas currently imposes no income tax.
However, several proposals have been introduced in the Texas
Legislature that would, among other things, impose a Texas income
tax on individuals, trusts and businesses. It is impossible to
predict whether any such proposals will be enacted, and whether,
if enacted, any such law would exempt interest on Texas Bonds (or
out of state Bonds) from the Texas income tax, or if so whether
income distributed by a Texas Trust would retain its tax-exempt
status when received by unitholders. While no opinion is
rendered as to whether income distributions from any Texas Trust
will be exempt from any income tax that may be imposed on
residents of Texas in the future, at the time of the closing for
each Texas Trust, Johnson & Gibbs, P.C., special Texas counsel to
the Texas Trusts, rendered an opinion pursuant to then existing
Texas law applicable to individuals who are residents of Texas
for Texas tax purposes substantially to the effect that:
Neither the State nor any political subdivision of the State
currently imposes an income tax. Therefore, no portion of any
distribution received by a Unitholder of a Texas Trust in respect
of his Units is subject to income taxation by the State or any
political subdivision of the State.
Except in the case of certain transportation businesses,
savings and loan associations and insurance companies, no Unit of
the Fund is taxable under any property tax levied in the State;
The "inheritance tax" of the State, imposed upon certain
transfers of property of a deceased resident individual
Unitholder, may be measured in part upon the value of Units of a
Texas Trust included in the estate of such Unitholder; and
With respect to any Unitholder which is subject to the State
corporate franchise tax, Units in a Texas Trust held by such
Unitholder, and distributions received thereon, will be taken
into account in computing the taxable capital of the Unitholder
allocated to the State, upon which such franchise tax is
measured.
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VIRGINIA TRUSTS - TAX MATTERS
At the time of the closing for each Virginia Trust,
Christian & Barton, L.L.P., special counsel for the Trusts for
Virginia tax matters, rendered an opinion under then existing law
substantially to the effect that:
The assets of each Virginia Trust will consist of interest-
bearing obligations issued by or on behalf of the Commonwealth of
Virginia, its counties, municipalities, authorities or political
subdivisions and, provided the interest thereon is exempt from
Virginia income taxes by the laws or treaties of the United
States, by or on behalf of the United States' territories or
possessions, including Puerto Rico, Guam, the Virgin Islands and
the Northern Mariana Islands, and their political subdivisions
and authorities (the "VIRGINIA BONDS").
The Virginia Trust will be treated as a trust for Virginia
income tax purposes and not as an association taxable as a
corporation. As a result, income of the Virginia Trust will be
treated as the income of the Unitholders.
Amounts representing tax-exempt interest for Federal income
tax purposes received or accrued by the Virginia Trusts with
respect to the Virginia Bonds, will not be taxed to the Virginia
Trusts or to the Unitholders for Virginia income tax purposes.
To the extent that interest on obligations of the Commonwealth or
any political subdivision or instrumentality thereof is included
in Federal adjusted gross income, that income shall be subtracted
in arriving at Virginia taxable income.
Where an independent Virginia income tax exemption is
provided for interest on certain obligations, including those
issued by industrial development authorities pursuant to the
Virginia Industrial Development and Revenue Bond Act, by the
Virginia Housing Development Authority, by the Virginia Resources
Authority and by the Virginia Education Loan Authority, interest
on such obligations is exempt from Virginia income taxation
without regard to any exemption from Federal income taxes.
Gain which is subject to Federal income taxation (whether as
a result of the sale of Virginia Bonds by the Trust or as a
result of the sale of a Unit by the Unitholder) will be included
in the Unitholder's Virginia taxable income. Notwithstanding the
foregoing, under the language of certain enabling legislation,
however, such as the Virginia Industrial Development and Revenue
Bond Act, the Virginia Resources Authority Act and the Virginia
Housing Development Authority Act, profit made on the sale of
obligations issued by authorities thereunder is expressly exempt
from Virginia income taxation. Such enabling legislation does
not appear to require a disallowance in the calculation of
Virginia taxes of any loss that may be deductible for Federal
income tax purposes with respect to such obligations, although
the Virginia Department of Taxation has taken a contrary view.
No income tax is imposed by any political subdivision of the
Commonwealth of Virginia. The Commonwealth of Virginia does not
impose a gift tax and the Virginia estate tax on a resident's
Federal taxable estate and a non-resident's Federal taxable
estate located in the Commonwealth is equal to the maximum state
death tax credit allowable against the Federal estate tax payable
by the estate.
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COUNSEL FOR TRUSTEE
At the time of the closing for each Trust, Carter, Ledyard &
Milburn, counsel for the Trustee and, in the absence of a New
York Trust from a Series, special counsel for such Series for New
York tax matters, rendered an opinion under then existing law
substantially to the effect that:
Under the income tax laws of the State and City of New York,
each Trust is not an association taxable as a corporation and the
income of each Trust will be treated as the income of the
Unitholders.
OPERATING EXPENSES
No annual advisory fee is charged to the Trusts by the
Sponsor. The Sponsor does, however, receive a fee of $0.17 per
annum per $1,000 principal amount of the underlying Bonds in each
Trust for regularly evaluating the Bonds and for maintaining
surveillance over the portfolio. (See "UNIT VALUE AND
EVALUATION.") Except as provided below, for Traditional Trusts,
the Trustee receives for ordinary recurring services an annual
fee computed at $1.08, $0.76 and $0.57 per $1,000 principal
amount of underlying Bonds, respectively, for those portions of
each Traditional Trust representing monthly, quarterly, and semi-
annual distribution plans. For Insured Trusts, the Trustee
receives for ordinary recurring services an annual fee computed
at $1.12, $0.80 and $0.61 per $1,000 principal amount of
underlying Bonds, respectively, for those portions of each
Insured Trust representing monthly, quarterly, and semi-annual
distribution plans.
For the Traditional Trusts set forth in this paragraph, the
following Trustee's fees apply. For Compound Interest Trust
Series 3-5, the Trustee receives for ordinary recurring services
an annual fee computed at $0.20 per $1,000 principal amount of
underlying Bonds for each Trust. For National Traditional Trust
Series 1 and 2, the Trustee receives for ordinary recurring
services an annual fee computed at $1.70 per $1,000 principal
amount of underlying Bonds for each Trust under the semi-annual
distribution plan. For National Traditional Trust Series 15-39,
the Trustee receives for ordinary recurring services an annual
fee computed at $0.725 per $1,000 principal amount of underlying
Bonds for each Trust under the semi-annual distribution plan.
For National Traditional Trust Series 40-51, the Trustee receives
for ordinary recurring services an annual fee computed at $1.35
per $1,000 principal amount of underlying Bonds for each Trust
under the monthly distribution plan. For National Traditional
Trust Series 52-79, the Trustee receives for ordinary recurring
services an annual fee computed at $1.40, $0.98, $0.75 per $1,000
principal amount of underlying Bonds, respectively, for each
Trust under the monthly, quarterly and semi-annual distribution
plans. The Trustee's fee may be adjusted PROVIDED that all
adjustments upward will not exceed the cumulative percentage
increases of the United States Department of Labor's Consumer
Price Index entitled "All Services Less Rent of Shelter" since
the establishment of the Trusts. The Trustee has the use of
funds, if any, being held in the Interest and Principal Accounts
of each Trust for future distributions, payment of expenses and
redemptions. These Accounts are non-interest bearing to
Unitholders. Pursuant to normal banking procedures, the Trustee
benefits from the use of funds held therein. Part of the
Trustee's compensation for its services to the Trusts is expected
to result from such use of these funds.
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For all Trusts beginning with those in Nuveen Tax-Free Unit
Trust, Series 723 and all subsequent Trusts, the Trustee receives
for ordinary recurring services an annual fee for each plan of
distribution for each Trust as set forth in "Essential
Information Regarding the Trusts" in Part Two of the Prospectus.
Each annual fee is per $1,000 principal amount of the underlying
Bonds in a Trust for that portion of the Trust that represents a
particular plan of distribution. The Trustee's fee may be
periodically adjusted in response to fluctuations in short-term
interest rates (reflecting the cost to the Trustee of advancing
funds to a Trust to meet scheduled distributions) and may be
further adjusted in accordance with the cumulative percentage
increase of the United States Department of Labor's Consumer
Price Index entitled "All Services Less Rent of Shelter" since
the establishment of the Trusts. The Trustee has the use of
funds, if any, being held in the Interest and Principal Accounts
of each Trust for future distributions, payment of expenses and
redemptions. These Accounts are non-interest bearing to
Unitholders. Pursuant to normal banking procedures, the Trustee
benefits from the use of funds held therein. Part of the
Trustee's compensation for its services to the Fund is expected
to result from such use of these funds.
Premiums for the policies of insurance obtained by the
Sponsor or by the Bond issuers with respect to Bonds in Insured
Trusts and with respect to insured Bonds in Traditional Trusts
have been paid in full prior to the deposit of the Bonds in the
Trusts, and the value of such insurance has been included in the
evaluation of the Bonds in each Trust and accordingly in the
Public Offering Price of Units of each Trust. There are no
annual or continuing premiums for such insurance.
Commencing with Series 814, all or a portion of the expenses
incurred in establishing the Trusts, including costs of preparing
the registration statements, the trust indentures and other
closing documents, registering Units with the Securities and
Exchange Commission and states, the initial audit of each Trust
portfolio, the initial evaluation, legal fees, the initial fees
and expenses of the Trustee and any other non-material out-of-
pocket expenses, will be paid by the Trusts and amortized over
the first five years of such Trusts. For Series prior to
Series 814, the Sponsor has borne all costs of creating and
establishing such Trusts. The following are additional expenses
of the Trusts and, when paid by or owed to the Trustee, are
secured by a lien on the assets of the Trust or Trusts to which
such expenses are allocable: (1) the expenses and costs of any
action undertaken by the Trustee to protect the Trusts and the
rights and interests of the Unitholders; (2) all taxes and other
governmental charges upon the Bonds or any part of the Trust (no
such taxes or charges are being levied or made or, to the
knowledge of the Sponsor, contemplated); (3) amounts payable to
the Trustee as fees for ordinary recurring services and for
extraordinary non-recurring services rendered pursuant to the
Indenture, all disbursements and expenses including counsel fees
(including fees of bond counsel which the Trustee may retain)
sustained or incurred by the Trustee in connection therewith; and
(4) any losses or liabilities accruing to the Trustee without
negligence, bad faith or willful misconduct on its part. The
Trustee is empowered to sell Bonds in order to pay these amounts
if funds are not otherwise available in the Interest and
Principal Accounts of the appropriate Trust.
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The Indenture for certain Series requires each Trust to be
audited on an annual basis at the expense of the Trust by
independent public accountants selected by the Sponsor. The
Trustee shall not be required, however, to cause such an audit to
be performed if its cost to a Trust shall exceed $.05 per Unit on
an annual basis. Unitholders of a Trust covered by an audit may
obtain a copy of the audited financial statements upon request.
DISTRIBUTIONS TO UNITHOLDERS
Interest received by the Trustee on the Bonds in each Trust,
including that part of the proceeds of any disposition of Bonds
which represents accrued interest and including any insurance
proceeds representing interest due on defaulted Bonds, shall be
credited to the "Interest Account" of the appropriate Trust and
all other moneys received by the Trustee shall be credited to the
"Principal Account" of the appropriate Trust.
NATIONAL TRADITIONAL TRUSTS 4 THROUGH 39 -- SEMI-ANNUAL DISTRIBUTIONS
The pro rata share of the Interest Account and the pro rata
share of the cash in the Principal Account for each Trust will be
computed by the Trustee semi-annually each year on the Record
Dates (stated in Part Two of this Prospectus). Shortly after
such computations, distributions will be made to the Unitholders
as of the Record Date. Proceeds received from the disposition of
any of the Bonds after a Record Date and prior to the following
Distribution Date will be held in the Principal Account and
either used to pay for Units redeemed or distributed on the
Distribution Date following the next Record Date. The Trustee is
not required to make a distribution from the Principal Account
unless the amount available for distribution shall equal at least
ten cents per Unit. Persons who purchase Units after a Record
Date and prior to the following Distribution Date will receive
their first distribution on the second Distribution Date after
their purchase of Units.
As of each Record Date, the Trustee will deduct from the
Interest Account or, to the extent funds are not sufficient
therein, from the Principal Account, amounts needed for payment
of expenses of the Trust. The Trustee also may withdraw from
said accounts such amount, if any, as it deems necessary to
establish a reserve for any governmental charges payable out of
the Trust. Amounts so withdrawn shall not be considered a part
of the Trust's assets until such time as the Trustee shall return
all or part of such amount to the appropriate account.
NATIONAL TRADITIONAL TRUST 40 AND SUBSEQUENT NATIONAL TRADITIONAL TRUSTS;
ALL OTHER TRUSTS -- OPTIONAL DISTRIBUTIONS
The pro rata share of cash in the Principal Account in each
Trust will be computed as of each semi-annual Record Date and
distributions to the Unitholders as of such Record Date will be
made on or shortly after the fifteenth day of the month.
Proceeds received from the disposition, including sale, call or
maturity, of any of the Bonds and all amounts paid with respect
to zero coupon bonds and Stripped Obligations will be held in the
Principal Account and either used to pay for Units redeemed or
distributed on the Distribution Date following the next semi-
annual Record Date. The Trustee is not required to make a
distribution from the Principal Account of any Trust unless the
amount available for distribution in such account equals at least
ten cents per Unit.
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The pro rata share of the Interest Account in each Trust
will be computed by the Trustee each month as of the Record Date.
For National Traditional Trusts 40 through 51, distributions will
be made on or shortly after the fifteenth day of each month to
Unitholders as of the Record Date. For National Traditional
Trust 52 and subsequent National Traditional Trusts, State
Traditional Trust and subsequent State Traditional Trusts and all
other Trusts, Unitholders have the option of receiving
distributions monthly, quarterly or semi-annually. Record Dates
are the first day of each month for Unitholders under the monthly
plan of distribution, the first day of March, June, September and
December for quarterly distributions, and the first day of June
and December for semi-annual distributions (for National
Traditional Trust 140 and subsequent National Traditional Trusts
and all other Trusts, quarterly Record Dates are the first day of
February, May, August and November and for semi-annual
distributions the Record Dates are the first day of May and
November). Distributions will be made on or shortly after the
fifteenth day of the month to Unitholders of such Trust as of the
Record Date who are entitled to distributions at that time under
the plan of distribution in effect. Persons who purchase Units
between a Record Date and a Distribution Date will receive their
first distribution on the Distribution Date following the next
Record Date under the applicable plan of distribution.
The plan of distribution selected by a Unitholder will
remain in effect until changed. Unitholders purchasing Units of
a Trust in the secondary market will initially receive
distributions in accordance with the election of the prior owner.
Unitholders of Trusts having more than one available plan of
distribution who desire to change their plan of distribution may
do so by sending a written notice requesting the change, together
with any Certificate(s), to the Trustee. The notice and any
Certificate(s) must be received by the Trustee not later than the
semi-annual Record Date to be effective as of the semi-annual
distribution following the subsequent semi-annual Record Date.
Unitholders are requested to make any such changes within 45 days
prior to the applicable Record Date. Certificates should only be
sent by registered or certified mail, return receipt requested,
to minimize the possibility of their being lost or stolen. If no
notice is received by the Trustee in proper form the Unitholder
will be deemed to have elected to continue the same plan.
As of the first day of each month the Trustee will deduct
from the Interest Account of a Trust or, to the extent funds are
not sufficient therein, from the Principal Account of a Trust,
amounts needed for payment of expenses of such Trust. The
Trustee also may withdraw from said accounts such amount, if any,
as it deems necessary to establish a reserve for any governmental
charges payable out of such Trust. Amounts so withdrawn shall
not be considered a part of the Trust's assets until such time as
the Trustee shall return all or any part of such amounts to the
appropriate account.
For the purpose of minimizing fluctuations in the
distributions from the Interest Account of a Trust, the Trustee
is authorized to advance such amounts as may be necessary to
provide for interest distributions of approximately equal
amounts. The Trustee shall be reimbursed, without interest, for
any such advances from funds in the Interest Account of such
Trust. The Trustee's fee takes into account the costs
attributable to the outlay of capital needed to make such
advances.
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The Trustee shall withdraw from the Interest Account and the
Principal Account of a Trust such amounts as may be necessary to
cover redemptions of Units of such Trust by the Trustee. (See
"HOW UNITS MAY BE REDEEMED WITHOUT CHARGE.")
Funds which are available for future distributions,
redemptions and payments of expenses are held in accounts which
are non-interest bearing to Unitholders and are available for use
by the Trustee pursuant to normal banking procedures.
ACCUMULATION PLAN
The Sponsor, John Nuveen & Co. Incorporated, is also the
principal underwriter of the Accumulation Funds listed in the
following table. Each of these funds is an open-end, diversified
management investment company into which Unitholders may choose
to reinvest Trust distributions automatically, without any sales
charge. Unitholders may reinvest both interest and principal
distributions or principal distributions only. Each Accumulation
Fund has investment objectives which differ in certain respects
from those of the Trusts and may invest in securities which would
not be eligible for deposit in the Trusts. The investment
adviser to each Accumulation Fund is a wholly-owned subsidiary of
the Sponsor. Unitholders should contact their financial adviser
or the Sponsor to determine which of the Accumulation Funds may
be restricted to residents of a particular state or states.
Unitholders may obtain a prospectus for each Accumulation Fund
through their financial adviser or through the Sponsor at (800)
621-7227. For a more detailed description, Unitholders should
read the prospectus of the Accumulation Fund in which they are
interested.
The following is a complete list of the Accumulation Funds
currently available, as of the Date of this Prospectus, to
Unitholders under the Accumulation Plan. The list of available
Accumulation Funds is subject to change without the consent of
any of the Unitholders.
ACCUMULATION FUNDS
MUTUAL FUNDS:
NUVEEN FLAGSHIP MUNICIPAL TRUST
Nuveen Municipal Bond Fund
Nuveen Insured Municipal Bond Fund
Nuveen Flagship All-American Municipal Bond Fund
Nuveen Flagship Limited Term Municipal Bond Fund
Nuveen Flagship Intermediate Municipal Bond Fund
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NUVEEN FLAGSHIP MULTISTATE TRUST I
Nuveen Flagship Arizona Municipal Bond Fund
Nuveen Flagship Colorado Municipal Bond Fund
Nuveen Flagship Florida Municipal Bond Fund
Nuveen Flagship Florida Intermediate Municipal Bond Fund
Nuveen Maryland Municipal Bond Fund
Nuveen Flagship New Mexico Municipal Bond Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
Nuveen Flagship Virginia Municipal Bond Fund
NUVEEN FLAGSHIP MULTISTATE TRUST II
Nuveen California Municipal Bond Fund
Nuveen California Insured Municipal Bond Fund
Nuveen Flagship Connecticut Municipal Bond Fund
Nuveen Massachusetts Municipal Bond Fund
Nuveen Massachusetts Insured Municipal Bond Fund
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
Nuveen Flagship New York Municipal Bond Fund
Nuveen New York Insured Municipal Bond Fund
NUVEEN FLAGSHIP MULTISTATE TRUST III
Nuveen Flagship Alabama Municipal Bond Fund
Nuveen Flagship Georgia Municipal Bond Fund
Nuveen Flagship Louisiana Municipal Bond Fund
Nuveen Flagship North Carolina Municipal Bond Fund
Nuveen Flagship South Carolina Municipal Bond Fund
Nuveen Flagship Tennessee Municipal Bond Fund
NUVEEN FLAGSHIP MULTISTATE TRUST IV
Nuveen Flagship Kansas Municipal Bond Fund
Nuveen Flagship Kentucky Municipal Bond Fund
Nuveen Flagship Kentucky Limited Term Municipal Bond Fund
Nuveen Flagship Michigan Municipal Bond Fund
Nuveen Flagship Missouri Municipal Bond Fund
Nuveen Flagship Ohio Municipal Bond Fund
Nuveen Flagship Wisconsin Municipal Bond Fund
Flagship Utility Income Fund
Nuveen Growth and Income Stock Fund
Nuveen Balanced Stock and Bond Fund
Nuveen Balanced Municipal and Stock Fund
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MONEY MARKET FUNDS
Nuveen California Tax-Free Money Market Fund
Nuveen Massachusetts Tax-Free Money Market Fund
Nuveen New York Tax-Free Money Market Fund
Nuveen Tax-Free Reserves, Inc.
Nuveen Tax-Exempt Money Market Fund, Inc.
Each person who purchases Units of a Trust may become a
participant in the Accumulation Plan and elect to have his or her
distributions on Units of the Trust invested directly in shares
of one of the Accumulation Funds. Reinvesting Unitholders may
select any interest distribution plan. Thereafter, each
distribution of interest income or principal on the participant's
Units (principal only in the case of a Unitholder who has chosen
to reinvest only principal distributions) will, on the applicable
distribution date, or the next day on which the New York Stock
Exchange is normally open ("BUSINESS DAY") if the distribution
date is not a business day, automatically be received by the
transfer agent for each of the Accumulation Funds, on behalf of
such participant and applied on that date to purchase shares (or
fractions thereof) of the Accumulation Fund chosen at net asset
value as computed as of 4:00 p.m. eastern time on each such date.
All distributions will be reinvested in the Accumulation Fund
chosen and no part thereof will be retained in a separate
account. These purchases will be made without a sales charge.
The Transfer Agent of the Accumulation Fund will mail to
each participant in the Accumulation Plan a quarterly statement
containing a record of all transactions involving purchases of
Accumulation Fund shares (or fractions thereof) with Trust
interest distributions or as a result of reinvestment of
Accumulation Fund dividends. Any distribution of principal used
to purchase shares of an Accumulation Fund will be separately
confirmed by the Transfer Agent. Unitholders will also receive
distribution statements from the Trustee detailing the amounts
transferred to their Accumulation Fund accounts.
Participants may at any time, by so notifying the Trustee in
writing, elect to change the Accumulation Fund into which their
distributions are being reinvested, to change from principal only
reinvestment to reinvestment of both principal and interest or
vice versa, or to terminate their participation in the
Accumulation Plan altogether and receive future distributions on
their Units in cash. There will be no charge or other penalty
for such change of election or termination. The character of
Trust distributions for income tax purposes will remain unchanged
even if they are reinvested in an Accumulation Fund.
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DETAILED REPORTS TO UNITHOLDERS
The Trustee shall furnish Unitholders of a Trust in
connection with each distribution, a statement of the amount of
interest, if any, and the amount of other receipts (received
since the preceding distribution) being distributed, expressed in
each case as a dollar amount representing the pro rata share of
each Unit of a Trust outstanding and a year-to-date summary of
all distributions paid on said Units. Within a reasonable period
of 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 registered Unitholder of a Trust, a statement with respect
to such Trust (i) as to the Interest Account: interest received
(including amounts representing interest received upon any
disposition of Bonds), and, the percentage of such interest with
respect to Trust's other than State Trusts by states in which the
issuers of the Bonds are located, deductions for fees and
expenses of such Trust, redemption of Units and the balance
remaining after such distributions and deductions, expressed in
each case both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (ii) as to the Principal
Account: the dates of disposition of any Bonds and the net
proceeds received therefrom (excluding any portion representing
accrued interest), the amount paid for purchase of Replacement
Bonds, the amount paid upon redemption of Units, deductions for
payment of applicable taxes and fees and expenses of the Trustee,
and the balance remaining after such distributions and deductions
expressed both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (iii) a list of the
Bonds held and the number of Units outstanding on the last
business day of such calendar year; (iv) the Unit Value based
upon the last computation thereof made during such calendar year;
and (v) amounts actually distributed during such calendar year
from the Interest Account and from the Principal Account,
separately stated, expressed both as total dollar amounts and as
dollar amounts representing the pro rata share of each Unit
outstanding. Each annual statement will reflect pertinent
information in respect of all plans of distribution so that
Unitholders may be informed regarding the results of other plans
of distribution.
UNIT VALUE AND EVALUATION
The value of each Trust is determined by the Sponsor on the
basis of (1) the cash on hand in the Trust or moneys in the
process of being collected, (2) the value of the Bonds in the
Trust based on the BID prices of the Bonds and (3) interest
accrued thereon not subject to collection, LESS (1) amounts
representing taxes or governmental charges payable out of the
Trust and (2) the accrued expenses of the Trust. The result of
such computation is divided by the number of Units of such Trust
outstanding as of the date thereof to determine the per Unit
value ("UNIT VALUE") of such Trust. The Sponsor may determine
the value of the Bonds in each Trust (1) on the basis of current
bid prices of the Bonds obtained from dealers or brokers who
customarily deal in bonds comparable to those held by the Trust,
(2) if bid prices are not available for any of the Bonds, on the
basis of bid prices for comparable bonds, (3) by causing the
value of the Bonds to be determined by others engaged in the
practice of evaluating, quoting or appraising comparable bonds or
(4) by any combination of the above. Although the Unit Value of
each Trust is based on the BID prices of the Bonds, the Units are
sold initially to the public at the Public Offering Price based
on the OFFERING prices of the Bonds.
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Because the insurance obtained by the Sponsor or by the
issuers of Bonds with respect to the Bonds in the Insured Trusts
and with respect to insured Bonds in Traditional Trusts is
effective so long as such Bonds are outstanding, such insurance
will be taken into account in determining the bid and offering
prices of such Bonds and therefore some value attributable to
such insurance will be included in the value of Units of Trusts
that include such Bonds.
DISTRIBUTION OF UNITS TO THE PUBLIC
The Sponsor currently intends to maintain a secondary market
for Units of each Trust. (See "MARKET FOR UNITS" below.) The
amount of the dealer concession on secondary market purchases of
Trust Units through the Sponsor will be computed based upon the
value of the Bonds in the Trust portfolio, including the sales
charge computed as described in "Public Offering Price," and
adjusted to reflect the cash position of the Trust principal
account, and will vary with the size of the purchase as shown in
the following table:
AMOUNT OF PURCHASE*
<TABLE>
<CAPTION>
YEARS TO
MATURITY
$50,000 $100,000 $250,000 $500,000 $1,000,000 $2,500,000 $5,000,000
YEARS TO UNDER T0 TO TO TO TO TO OR
MATURITY $50,000 $99,999 $249,999 $499,999 $999,999 $2,499,999 $4,999,999 MORE
- ---------------- ------- ------- -------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 1 0 0 0 0 0 0 0 0
1 but less than 2 1.00% .90% .85% .80% .70% .55% .467% .389%
2 but less than 3 1.30% 1.20% 1.10% 1.00% .90% .73% .634% .538%
3 but less than 4 1.60% 1.45% 1.35% 1.25% 1.10% .90% .781% .662%
4 but less than 5 2.00% 1.85% 1.75% 1.55% 1.40% 1.25% 1.082% .914%
5 but less than 7 2.30% 2.15% 1.95% 1.80% 1.65% 1.50% 1.320% 1.140%
7 but less than 10 2.60% 2.45% 2.25% 2.10% 1.95% 1.70% 1.496% 1.292%
10 but less than 13 3.00% 2.80% 2.60% 2.45% 2.30% 2.00% 1.747% 1.494%
13 but less than 16 3.25% 3.15% 3.00% 2.75% 2.50% 2.15% 1.878% 1.606%
16 or more 3.50% 3.50% 3.40% 3.35% 3.00% 2.50% 2.185% 1.873%
</TABLE>
____________________
* Breakpoint sales charges and related dealer concessions are
computed both on a dollar basis and on the basis of the
number of Units purchased, using the equivalent of 500 Units
to $50,000, 2,500 Units to $250,000, etc., and will be
applied on that basis which is more favorable to the
purchaser.
The Sponsor reserves the right to change the foregoing dealer concessions
from time to time.
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Registered investment advisers, certified financial planners
and registered broker-dealers who in each case either charge
periodic fees for financial planning, investment advisory or
asset management services, or provide such services in connection
with the establishment of an investment account for which a
comprehensive "wrap fee" charge is imposed, and bank trust
departments investing funds over which they exercise exclusive
discretionary investment authority and that are held in a
fiduciary, agency, custodial or similar capacity, are not
entitled to receive any dealer concession for secondary market
purchases in which an investor purchases any number of Units at
the Public Offering Price for non-breakpoint purchases minus the
concession the Sponsor typically allows to brokers and dealers
for non-breakpoint purchases (see "PUBLIC OFFERING PRICE").
Certain commercial banks are making Units of the Trusts
available to their customers on an agency basis. A portion of
the sales charge paid by these customers is retained by or
remitted to the banks in the amounts shown in the above table.
The Glass-Steagall Act prohibits banks from underwriting Trust
Units; the Act does, however, permit certain agency transactions
and banking regulators have not indicated that these particular
agency transactions are not permitted under the Act. In Texas
and in certain other states, any bank making Units available must
be registered as a broker-dealer under state law.
The Sponsor offers a program of advertising support to
registered broker-dealer firms, banks and bank affiliates
("FIRMS") that sell Trust Units or shares of Nuveen Open-End Tax-
Free Mutual Funds (excluding money-market funds) ("FUNDS").
Under this program, the Sponsor will pay or reimburse the Firm
for up to one half of specified media costs incurred in the
placement of advertisements which jointly feature the Firm and
the Nuveen Funds and Trusts. Reimbursements to the Firm will be
based on the number of the Firm's registered representatives who
have sold Fund shares and/or Trust Units during the prior
calendar year according to an established schedule.
Reimbursement under this program will be made by the Sponsor and
not by the Funds or Trusts.
To facilitate the handling of transactions, sales of Units
shall be limited to transactions involving a minimum of either of
$5,000 or 50 Units, whichever is less. The Sponsor reserves the
right to reject, in whole or in part, any order for the purchase
of Units.
OWNERSHIP AND TRANSFER OF UNITS
Ownership of Units is evidenced either by Certificates
executed by the Trustee or by book-entry positions recorded on
the books and records of the Trustee in accordance with whichever
option is available to the dealer through whom the purchase was
made. For Trusts included in Nuveen Tax-Free Unit Trust, Series
723 and all subsequent Trusts, the ownership of Units is
evidenced by book entry positions recorded on the books and
records of the Trustee unless the Unitholder expressly requests
that the purchased Units be evidenced in Certificate form. The
Trustee is authorized to treat as the owner of Units that person
who at the time is registered as such on the books of the
Trustee. Any Unitholder who holds a Certificate may change to
book-entry ownership by submitting to the Trustee the Certificate
along with a written request that the Units represented by such
Certificate be held in book-entry form. Likewise, a Unitholder
who holds Units in book-entry form may obtain a Certificate for
such Units by written request to the Trustee. Units may be held
in denominations of one Unit or any multiple or fraction thereof.
Fractions of Units are computed to three decimal places. Any
Certificates issued will be numbered serially for identification,
and are issued in fully registered form, transferable only on the
books of the Trustee. Book-entry Unitholders will receive a
Book-Entry Position Confirmation reflecting their ownership.
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For series allowing optional plans of distribution,
Certificates for Units bear an appropriate notation on their face
indicating which plan of distribution has been selected. When a
holder of certificated Units changes his plan of distribution,
the existing Certificate must be surrendered to the Trustee and a
new Certificate issued to reflect the currently effective plan of
distribution. There will be no charge for this service. Holders
of book-entry Units can change their plan of distribution by
making a written request to the Trustee, which will issue a new
Book-Entry Position Confirmation to reflect the change.
Units are transferable by making a written request to the
Trustee and, in the case of Units evidenced by Certificate(s), by
presenting and surrendering such Certificate(s) to the Trustee,
at its unit investment trust office in New York City, properly
endorsed or accompanied by a written instrument or instruments of
transfer. The Certificate(s) should be sent registered or
certified mail for the protection of the Unitholders. Each
Unitholder must sign such written request, and such
Certificate(s) or transfer instrument, exactly as his name
appears on (a) the face of the Certificate(s) representing the
Units to be transferred, or (b) the Book-Entry Position
Confirmation(s) relating to the Units to be transferred. Such
signature(s) must be guaranteed by a guarantor acceptable to the
Trustee. In certain instances the Trustee may require additional
documents such as, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator
or certificates of corporate authority. Mutilated Certificates
must be surrendered to the Trustee in order for a replacement
Certificate to be issued.
Although at the date hereof no charge is made and none is
contemplated, a Unitholder may be required to pay $2.00 to the
Trustee for each Certificate reissued or transfer of Units
requested and to pay any governmental charge which may be imposed
in connection therewith.
The process of registration and delivery to the Unitholder
of Certificates or Book-Entry Position Confirmations may take up
to 30 days. Purchasers of Units will be unable to exercise any
right to transfer or redemption until they have received their
Certificate(s) or Book-Entry Position Confirmation(s). (See "HOW
UNITS MAY BE REDEEMED WITHOUT CHARGE.")
REPLACEMENT OF LOST, STOLEN OR DESTROYED CERTIFICATES
To obtain a new Certificate replacing one that has been
lost, stolen, or destroyed, the Unitholder must furnish the
Trustee with sufficient indemnification and pay such expenses as
the Trustee may incur. The indemnification protects the Trustee,
Sponsor, and Trust from risk if the original Certificate is
presented for transfer or redemption by a person who purchased it
in good faith, for value, and without notice of any fraud or
irregularity. This indemnification must be in the form of an
Open Penalty Bond of Indemnification. The premium for such an
indemnity bond may vary from time to time, but currently amounts
to 1.0% of the market value of the Units represented by the
Certificate. In the case, however, of a Trust as to which notice
of termination has been given, the premium currently amounts to
0.5% of the market value of the Units represented by such
Certificate.
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MARKET FOR UNITS
Although it is not obligated to do so, the Sponsor intends
to maintain a secondary market for outstanding Units of each
Trust at its own expense and continuously to offer to purchase
Units of each Trust at prices, subject to change at any time,
which are based upon the bid prices of Bonds in the respective
portfolios of the Trusts. If the supply of Units of any of the
Trusts exceeds the demand, or for some other business reason, the
Sponsor may discontinue purchases of Units of such Trust at such
prices. Unitholders who wish to dispose of Units should inquire
of the Trustee or their broker as to current redemption prices.
(See "HOW UNITS MAY BE REDEEMED WITHOUT CHARGE.")
In connection with its secondary market-making activities,
the Sponsor may from time to time enter into secondary market
joint account agreements with other brokers and dealers.
Pursuant to such an agreement, the Sponsor will purchase Units
from the broker or dealer at the bid price and will place the
Units into a joint account managed by the Sponsor; sales from the
account will be made in accordance with the then current
prospectus and the Sponsor and the broker or dealer will share
profits and losses in the joint account in accordance with the
terms of their joint account agreement.
HOW UNITS MAY BE REDEEMED WITHOUT CHARGE
Unitholders may redeem all or a portion of their Units by
(1) making a written request for such redemption (book entry
Unitholders may use the redemption form on the reverse side of
their Book Entry Position Confirmation) to the Trustee at its
unit investment trust office in New York City (redemptions of
1,000 Units or more will require a signature guarantee), (2) in
the case of Units evidenced by a Certificate, by also tendering
such Certificate to the Trustee, duly endorsed or accompanied by
proper instruments of transfer with signatures guaranteed as
explained above, or provide satisfactory indemnity required in
connection with lost, stolen or destroyed Certificates and (3)
payment of applicable governmental charges, if any. Certificates
should be sent only by registered or certified mail to minimize
the possibility of their being lost or stolen. (See "OWNERSHIP
AND TRANSFER OF UNITS.") No redemption fee will be charged by
the Trust, Sponsor or the Trustee. However, a Unitholder's
financial adviser may charge for serving as agent in the
redemption of Units. A Unitholder may authorize the Trustee to
honor telephone instructions for the redemption of Units held in
book entry form. Units represented by Certificates may not be
redeemed by telephone. The proceeds of Units redeemed by
telephone will be sent by check either to the Unitholder at the
address specified on his account or to a financial institution
specified by the Unitholder for credit to the account of the
Unitholder. A Unitholder wishing to use this method of
redemption must complete a Telephone Redemption Authorization
Form and furnish the Form to the Trustee. Telephone Redemption
Authorization Forms can be obtained from a Unitholder's
registered representative or by calling the Trustee. Once the
completed Form is on file, the Trustee will honor telephone
redemption requests by any authorized person. The time a
telephone redemption request is received determines the "date of
tender" as discussed below. The redemption proceeds will be
mailed within three business days following the telephone
redemption request. Only Units held in the name of individuals
may be redeemed by telephone; accounts registered in broker name,
or accounts of corporations or fiduciaries (including among
others, trustees, guardians, executors and administrators) may
not use the telephone redemption privilege.
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On the third business day following the date of tender, the
Unitholder will be entitled to receive in cash for each Unit
tendered an amount equal to the Unit Value of such Trust
determined by the Trustee, as of 4:00 p.m. eastern time, or as of
any earlier closing time on a day on which the Exchange is
scheduled in advance to close at such earlier time, on the date
of tender as defined hereafter, plus accrued interest to, but not
including, the third business day after the date of tender
("REDEMPTION PRICE"). The price received upon redemption may be
more or less than the amount paid by the Unitholder depending on
the value of the Bonds on the date of tender. Unitholders should
check with the Trustee or their broker to determine the
Redemption Price before tendering Units.
The "date of tender" is deemed to be the date on which the
request for redemption of Units is received in proper form by the
Trustee, except that as regards a redemption request received
after 4:00 p.m. eastern time, or as of any earlier closing time
on a day on which the Exchange is scheduled in advance to close
at such earlier time, or on any day on which the Exchange is
normally closed, the date of tender is the next day on which the
Exchange is normally open for trading and such request will be
deemed to have been made on such day and the redemption will be
effected at the Redemption Price computed on that day.
Accrued interest paid on redemption will be withdrawn from
the Interest Account of the appropriate Trust or, if the balance
therein is insufficient, from the Principal Account of such
Trust. All other amounts paid on redemption shall be withdrawn
from the Principal Account of the Trust. The Trustee is
empowered to sell underlying Bonds of a Trust in order to make
funds available for redemption. (See "HOW BONDS MAY BE REMOVED
FROM THE TRUSTS.") Units so redeemed shall be cancelled. To the
extent that Bonds are sold from a Trust, the size and diversity
of such Trust will be reduced. Such sales may be required at a
time when Bonds would not otherwise be sold and might result in
lower prices than might otherwise be realized.
The Redemption Price is determined on the basis of the BID
prices of the Bonds in each Trust.
The right of redemption may be suspended and payment
postponed for any period during which the Securities and Exchange
Commission determines that trading in the municipal bond market
is restricted or 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.
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Under regulations issued by the Internal Revenue Service,
the Trustee will be required to withhold a specified percentage
of the principal amount of a Unit redemption if the Trustee has
not been furnished the redeeming Unitholder's tax identification
number in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may
be recovered by the Unitholder only when filing his or her tax
return. Under normal circumstances the Trustee obtains the
Unitholder's tax identification number from the selling broker at
the time the Certificate or Book Entry Return Confirmation is
issued, and this number is printed on the Certificate or Book
Entry Return Confirmation and on distribution statements. If a
Unitholder's tax identification number does not appear as noted
above, or if it is incorrect, the Unitholder should contact the
Trustee before redeeming Units to determine what action, if any,
is required to avoid this "back-up withholding."
HOW UNITS MAY BE PURCHASED BY THE SPONSOR
The Trustee will notify the Sponsor of any tender of Units
for redemption. If the Sponsor's bid in the secondary market at
that time equals or exceeds the Redemption Price it may purchase
such Units by notifying the Trustee before the close of business
on the second succeeding business day and by making payment
therefor to the Unitholder not later than the day on which
payment would otherwise have been made by the Trustee. (See "HOW
UNITS MAY BE REDEEMED WITHOUT CHARGE.") The Sponsor's current
practice is to bid at the Redemption Price in the secondary
market. Units held by the Sponsor may be tendered to the Trustee
for redemption as any other Units.
HOW BONDS MAY BE REMOVED FROM THE TRUSTS
Bonds will be removed from a Trust as they mature or are
redeemed by the issuers thereof. See the "Schedule of
Investments" in Part Two and "Selection of Bonds for Deposit in
the Trusts" herein for a discussion of call provisions of Bonds
in the Trusts.
The Indenture also empowers the Trustee to sell Bonds for
the purpose of redeeming Units tendered by any Unitholder, and
for the payment of expenses for which income may not be
available. Under the Indenture, the Sponsor is obligated to
provide the Trustee with a current list of Bonds in each Trust to
be sold in such circumstances. In deciding which Bonds should be
sold the Sponsor intends to consider, among other things, such
factors as: (1) market conditions; (2) market prices of the
Bonds; (3) the effect on income distributions to Unitholders of
the sale of various Bonds; (4) the effect on principal amount of
underlying Bonds per Unit of the sale of various Bonds; (5) the
financial condition of the issuers; and (6) the effect of the
sale of various Bonds on the investment character of the Trust.
Such sales, if required, could result in the sale of Bonds by the
Trustee at prices less than original cost to the Trust. To the
extent Bonds are sold, the size and diversity of the Trust will
be reduced.
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In addition, the Sponsor is empowered to direct the Trustee
to liquidate Bonds upon the happening of certain other events,
such as default in the payment of principal and/or interest, an
action of the issuer that will adversely affect its ability to
continue payment of the principal of and interest on its Bonds,
or an adverse change in market, revenue or credit factors
affecting the investment character of the Bonds. If a default in
the payment of the principal of and/or interest on any of the
Bonds occurs, and if the Sponsor fails to instruct the Trustee
whether to sell or continue to hold such Bonds within 30 days
after notification by the Trustee to the Sponsor of such default,
the Indenture provides that the Trustee shall liquidate said
Bonds forthwith and shall not be liable for any loss so incurred.
The Sponsor may also direct the Trustee to liquidate Bonds in a
Trust if the Bonds in the Trust are the subject of an advanced
refunding, generally considered to be when refunding bonds are
issued and the proceeds thereof are deposited in irrevocable
trust to retire the refunded bonds on their redemption date.
Except for refunding securities that may be exchanged for
Bonds under certain conditions specified in the Indenture, the
Indenture does not permit either the Sponsor or the Trustee to
acquire or deposit bonds either in addition to, or in
substitution for, any of the Bonds initially deposited in the
Trust.
INFORMATION ABOUT THE TRUSTEE
The Trustee is The Chase Manhattan Bank, 4 New York Plaza,
New York, New York 10004. The Trustee is subject to supervision
and examination by the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System and either the
Comptroller of the Currency or state banking authorities. In
connection with the storage and handling of certain Bonds
deposited in the Trusts, the Trustee may use the services of The
Depository Trust Company. These services would include
safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery services. The Depository
Trust Company is a limited purpose trust company organized under
the Banking Law of the State of New York, a member of the Federal
Reserve System and a clearing agency registered under the
Securities Exchange Act of 1934, as amended.
LIMITATIONS ON LIABILITIES OF SPONSOR AND TRUSTEE
The Sponsor and the Trustee shall be under no liability to
Unitholders for taking any action or for refraining from any
action in good faith pursuant to the Indenture, or for errors in
judgment, but shall be liable only for their own negligence, lack
of good faith or willful misconduct. The Trustee shall not be
liable for depreciation or loss incurred by reason of the sale by
the Trustee of any of the Bonds. In the event of the failure of
the Sponsor to act under the Indenture, the Trustee may act
thereunder and shall not be liable for any action taken by it in
good faith under the Indenture.
The Trustee shall not be liable for any taxes or other
governmental charges imposed upon or in respect of the Bonds or
upon the interest thereon or upon it as Trustee under the
Indenture or upon or in respect of any Trust which the Trustee
may be required to pay under any present or future law of the
United States of America or of any other taxing authority having
jurisdiction. In addition, the Indenture contains other
customary provisions limiting the liability of the Trustee.
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SUCCESSOR TRUSTEES AND SPONSORS
The Trustee or any successor trustee may resign by executing
an instrument of resignation in writing and filing same with the
Sponsor and mailing a copy of a notice or resignation to all
Unitholders then of record. Upon receiving such notice, the
Sponsor is required to promptly appoint a successor trustee. If
the Trustee becomes incapable of acting or is adjudged a bankrupt
or insolvent, or a receiver or other public officer shall take
charge of its property or affairs, the Sponsor may remove the
Trustee and appoint a successor by written instrument. The
resignation or removal of a trustee and the appointment of a
successor trustee shall become effective only when the successor
trustee accepts its appointment as such. Any successor trustee
shall be a corporation authorized to exercise corporate trust
powers, having capital, surplus and undivided profits of not less
than $5,000,000. Any corporation into which a trustee may be
merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which a trustee
shall be a party, shall be the successor trustee.
If upon resignation of a trustee no successor has been
appointed and has accepted the appointment within 30 days after
notification, the retiring trustee may apply to a court of
competent jurisdiction for the appointment of a successor.
If the Sponsor fails to undertake any of its duties under
the Indenture, and no express provision is made for action by the
Trustee in such event, the Trustee may, in addition to its other
powers under the Indenture, (1) appoint a successor sponsor, or
(2) terminate the Indenture and liquidate the Trusts.
INFORMATION ABOUT THE SPONSOR
Since our founding in 1898, John Nuveen & Co. Incorporated
has been synonymous with investments that withstand the test of
time. Today, we offer a broad range of investments designed for
mature investors whose portfolio is the principal source of their
ongoing financial security. More than 1.3 million investors have
entrusted Nuveen to help them maintain the lifestyle they
currently enjoy. The Sponsor is also principal underwriter of
the registered open-end investment companies set forth herein
under "Accumulation Plan" as well as for the Golden Rainbow A
James Advised Mutual Fund, and acted as co-managing underwriter
of Nuveen Municipal Value Fund, Inc., Nuveen California Municipal
Value Fund, Inc., Nuveen New York Municipal Value Fund, Inc.,
Nuveen Municipal Income Fund, Inc., Nuveen Premium Income
Municipal Fund, Inc., Nuveen Performance Plus Municipal Fund,
Inc., Nuveen California Performance Plus Municipal Fund, Inc.,
Nuveen New York Performance Plus Municipal Fund, Inc., Nuveen
Municipal Advantage Fund, Inc., Nuveen Municipal Market
Opportunity Fund, Inc., Nuveen California Municipal Market
Opportunity Fund, Inc., Nuveen Investment Quality Municipal Fund,
Inc., Nuveen California Investment Quality Municipal Fund, Inc.,
Nuveen New York Investment Quality Municipal Fund, Inc., Nuveen
Insured Quality Municipal Fund, Inc., Nuveen Florida Investment
Quality Municipal Fund, Nuveen Pennsylvania Investment Quality
Municipal Fund, Nuveen New Jersey Investment Quality Municipal
Fund, Inc., and the Nuveen Select Quality Municipal Fund, Inc.,
Nuveen California Select Quality Municipal Fund, Inc., Nuveen New
York Select Quality Municipal Fund, Inc., Nuveen Quality Income
Municipal Fund, Inc., Nuveen Insured Municipal Opportunity Fund,
Inc., Nuveen Florida Quality Income Municipal Fund, Nuveen
Michigan Quality Income Municipal Fund, Inc., Nuveen Ohio Quality
Income Municipal Fund, Inc., Nuveen Texas Quality Income
Municipal Fund, Nuveen California Quality Income Municipal Fund,
Inc., Nuveen New York Quality Income Municipal Fund, Inc., Nuveen
Premier Municipal Income Fund, Inc., Nuveen Premier Insured
Municipal Income Fund, Inc., Nuveen Select Tax-Free Income
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Portfolio, Nuveen Select Tax-Free Income Portfolio 2, Nuveen
Insured California Select Tax-Free Income Portfolio, Nuveen
Insured New York Select Tax-Free Income Portfolio, Nuveen Premium
Income Municipal Fund 2, Inc., Nuveen Select Tax-Free Income
Portfolio 3, Nuveen Select Maturities Municipal Fund, Nuveen
Insured California Premium Income Municipal Fund, Inc., Nuveen
Arizona Premium Income Municipal Fund, Inc., Nuveen Insured
Florida Premium Income Municipal Fund, Nuveen Michigan Premium
Income Municipal Fund, Inc., Nuveen New Jersey Premium Income
Municipal Fund, Inc., Nuveen Insured New York Premium Income
Municipal Fund, Inc., Nuveen Premium Income Municipal Fund 4,
Inc., Nuveen Pennsylvania Premium Income Municipal Fund 2, Nuveen
Maryland Premium Income Municipal Fund, Nuveen Virginia Premium
Income Municipal Fund, Nuveen Massachusetts Premium Income
Municipal Fund, Nuveen Insured California Premium Income
Municipal Fund 2, Inc., Nuveen Washington Premium Income
Municipal Fund, Nuveen Georgia Premium Income Municipal Fund,
Nuveen Missouri Premium Income Municipal Fund, Nuveen Connecticut
Premium Income Municipal Fund, Nuveen North Carolina Premium
Income Municipal Fund, Nuveen California Premium Income Municipal
Fund, Nuveen Insured Premium Income Municipal Fund 2, all
registered closed-end management investment companies. These
registered open-end and closed-end investment companies currently
have approximately $35 billion in securities under management.
To meet the unique circumstances and financial planning needs of
mature investors, Nuveen offers a wide array of taxable and tax-
free investment products-- including equity and fixed-income
mutual funds, unit trusts, exchange-traded funds, customized
asset management services and cash management products. Nuveen
is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by the St. Paul Companies, Inc. ("St.
Paul"). St. Paul is located in St. Paul, Minnesota and is
principally engaged in providing property-liability insurance
through subsidiaries. Nuveen is a member of the National
Association of Securities Dealers, Inc. and the Securities
Industry Association and has its principal offices located in
Chicago (333 W. Wacker Drive). Nuveen maintains 11 regional
offices.
To help advisers and investors better understand and more
efficiently use an investment in the Trust to reach their
investment goals, the Sponsor may advertise and create specific
investment programs and systems. For example, such activities
may include presenting information on how to use an investment in
the Trust, alone or in combination with an investment in other
mutual funds or unit investment trusts sponsored by Nuveen, to
accumulate assets for future education needs or periodic payments
such as insurance premiums. The Sponsor may produce software or
additional sales literature to promote the advantages of using
the Trust to meet these and other specific investor needs.
The Sponsor offers a program of advertising support to
registered broker-dealer firms, banks and bank affiliates
("FIRMS") that sell Trust Units or shares of Nuveen Open-End
Mutual Funds (excluding money-market funds) ("FUNDS"). Under
this program, the Sponsor will pay or reimburse the Firm for up
to one half of specified media costs incurred in the placement of
advertisements which jointly feature the Firm and the Nuveen
Funds and Trusts. Reimbursements to the Firm will be based on
the number of the Firm's registered representatives who have sold
Fund Shares and/or Trust Units during the prior calendar year
according to an established schedule. Reimbursements under this
program will be made by the Sponsor and not by the Funds or
Trusts.
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AMENDMENT AND TERMINATION OF INDENTURE
The Indenture may be amended by the Trustee and the Sponsor
without the consent of any of the Unitholders (1) to cure any
ambiguity or to correct or supplement any provision thereof which
may be defective or inconsistent, or (2) to make such other
provisions as shall not adversely affect the Unitholders,
PROVIDED, HOWEVER, that the Indenture may not be amended to
increase the number of Units in a Trust or to permit the deposit
or acquisition of bonds either in addition to, or in substitution
for any of the Bonds initially deposited in a Trust except the
substitution of refunding bonds under certain circumstances. The
Trustee shall advise the Unitholders of any amendment promptly
after execution thereof.
A Trust may be liquidated at any time by the written consent
of 100% of the Unitholders or by the Trustee when the value of
such Trust, as shown by any evaluation, is less than 20% of the
original principal amount of the Trust and will be liquidated by
the Trustee in the event that Units not yet sold aggregating more
than 60% of the Units originally created are tendered for
redemption by the Sponsor thereby reducing the net worth of the
Trust to less than 40% of the principal amount of the Bonds
originally deposited in the portfolio. The sale of Bonds from
the Trusts upon termination may result in realization of a lesser
amount than might otherwise be realized if such sale were not
required at such time. For this reason, among others, the amount
realized by a Unitholder upon termination may be less than the
principal amount of Bonds originally represented by the Units
held by such Unitholder. The Indenture will terminate upon the
redemption, sale or other disposition of the last Bond held
thereunder, but in no event shall it continue beyond the end of
the calendar year preceding the fiftieth anniversary of its
execution for National and State Trusts, beyond the end of the
calendar year preceding the twentieth anniversary of its
execution for Long Intermediate, and Intermediate Trusts or
beyond the end of the calendar year preceding the tenth
anniversary of its execution for Short Intermediate and Short
Term Trusts.
Written notice of any termination specifying the time or
times at which Unitholders may surrender their Certificates, if
any, for cancellation shall be given by the Trustee to each
Unitholder at the address appearing on the registration books of
the Trust maintained by the Trustee. Within a reasonable time
thereafter, the Trustee shall liquidate any Bonds in the Trust
then held and shall deduct from the assets of the Trust any
accrued costs, expenses or indemnities provided by the Indenture
which are allocable to such Trust, including estimated
compensation of the Trustee and costs of liquidation and any
amounts required as a reserve to provide for payment of any
applicable taxes or other governmental charges. The Trustee
shall then distribute to Unitholders of such Trust their pro rata
share of the balance of the Interest and Principal Accounts.
With such distribution, the Unitholders shall be furnished a
final distribution statement, in substantially the same form as
the annual distribution statement, of the amount distributable.
At such time as the Trustee in its sole discretion shall
determine that any amounts held in reserve are no longer
necessary, it shall make distribution thereof to Unitholders in
the same manner.
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LEGAL OPINION
The legality of the Units offered hereby has been passed
upon by Chapman and Cutler, 111 West Monroe Street, Chicago,
Illinois 60603. Special counsel for the Trusts for respective
state matters are named in "Tax Status of Unitholders" herein.
Carter, Ledyard & Milburn, 2 Wall Street, New York, New York
10005, act as counsel for the Trustee with respect to the Trusts
and, in the absence of a New York Trust from a Series, as special
New York tax counsel for the Trusts.
AUDITORS
The "Statement of Condition" and the "Schedule of
Investments" for each Trust in a Series and the related
"Statement of Operations" and "Statement of Changes in Condition"
and changes in the Trust Units have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in
their report in Part Two of this Prospectus with information
pertaining to the specific Trusts in the Series to which such
report relates, and are set forth in reliance upon the authority
of said firm as experts in giving said report.
DESCRIPTION OF RATINGS (AS PUBLISHED BY THE RATING COMPANIES)
STANDARD & POOR'S CORPORATION. A description of the
applicable Standard & Poor's Corporation rating symbols and their
meanings follows:
A Standard & Poor's rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors
such as guarantors, insurers or lessees.
The rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
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II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization
or other arrangements under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal, and differ from the highest rated
issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and
repay principal, although they are somewhat more susceptible to
the adverse effect of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than for bonds in the higher rated categories.
PLUS (+) OR MINUS (-): 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.
PROVISIONAL RATINGS: The letter "p" indicates that the
rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the
issuance of bonds being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the
risk of default upon failure of, such completion. Accordingly,
the investor should exercise his own judgment with respect to
such likelihood and risk.
NOTE RATINGS: A Standard & Poor's note rating reflects the
liquidity concerns and market access risks unique to notes.
Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-
term debt rating.
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and
interest. Those issues determined to possess
overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
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<PAGE>
MOODY'S INVESTORS SERVICE, INC. A brief description of the
applicable Moody's Investors Service, Inc. rating symbols and
their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues. Their safety is so absolute that, with the occasional
exception of oversupply in a few specific instances,
characteristically, their market value is affected solely by
money market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear
somewhat larger than in Aaa securities. Their market value is
virtually immune to all but money market influences, with the
occasional exception of oversupply in a few specific instances.
A - Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds may be influenced to
some degree by economic performance during a sustained period of
depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few
specific instances.
Moody's bond rating symbols may contain numerical modifiers
of a generic rating classification. The modifier 1 indicates
that the bond ranks at the high end of its category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates
that the issue ranks in the lower end of its generic rating
category.
Baa - Bonds which are rated Baa are considered as medium
grade obligations, I.E., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to
changes in economic circumstances, and aside from occasional
speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations
during periods of economic normalcy, except in instances of
oversupply.
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Con.(-) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned
in operation experience, (c) rentals which begin when facilities
are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis
of condition.
NOTE RATINGS:
MIG 1 - This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broad-
based access to the market for refinancing.
MIG 2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
FITCH INVESTORS SERVICE, INC. A brief description of the
applicable Fitch Investors Service, Inc. rating symbols and their
meanings follow:
AAA--Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to
be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated AAA. Bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments.
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
To provide more detailed indications of credit quality, the
AA, A and BBB ratings may be modified by the addition of a plus
or minus sign to show relative standing within these major rating
categories.
Note Ratings:
FIN-1 Notes assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
FIN-2 Notes assigned this rating reflect a degree of
assurance for timely payment only slightly less in
degree than the highest category.
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Prospectus Part One must be
accompanied by Part Two
Sponsor John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, Illinois 60606-1286
Trustee The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004-2413
800/257-8787
Legal Counsel to Sponsor Chapman and Cutler
111 West Monroe Street
Chicago, Illinois 60603
Legal Counsel to Trustee Carter, Ledyard & Milburn
2 Wall Street
New York, New York 10005
Independent Public
Accountants for the Trust Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
____________________
Except as to statements made herein furnished by the
Trustee, the Trustee has assumed no responsibility for the
accuracy, adequacy and completeness of the information contained
in this Prospectus.
This Prospectus does not contain all of the information set
forth in the registration statement and exhibits relating
thereto, filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Act of 1933, as amended,
and to which reference is made.
No person is authorized to give any information or to make
any representations not contained in this Prospectus or in
supplementary sales literature prepared by the Sponsor, and any
information or representation not contained herein must not be
relied upon as having been authorized by either the Trusts, the
Trustee or the Sponsor. 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. The Trusts are registered as Unit
Investment Trusts under the Investment Company Act of 1940, as
amended. Such registration does not imply that the Trusts or any
of their Units have been guaranteed, sponsored, recommended or
approved by the United States or any State or agency or officer
thereof.
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Nuveen Tax-Exempt Unit Trust, Series 705
RULE 497(d)
SEC FILE NO. 33-50415
June 18, 1997
This is the first page of the Prospectus Supplement dated June 17, 1997 of the
Prospectus for the above named series.
