File No. 33-50315 CIK #896290
Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 6 to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Insured Municipals Income Trust, 149th Insured Multi-Series
(Exact Name of Trust)
Van Kampen Funds Inc.
(Exact Name of Depositor)
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Complete address of Depositor's principal executive offices)
VAN KAMPEN FUNDS INC. CHAPMAN AND CUTLER
Attention: A. Thomas Smith III, General Counsel Attention: Mark J. Kneedy
One Parkview Plaza 111 West Monroe Street
Oakbrook Terrace, Illinois 60181 Chicago, Illinois 60603
(Name and complete address of agents for service)
( X ) Check if it is proposed that this filing will become effective
on October 25, 1999 pursuant to paragraph (b) of Rule 485.
149TH INSURED MULTI-SERIES
California/6th Intermediate New Mexico/11
Laddered Maturity Series Ohio/2nd Intermediate
Louisiana/13 Laddered Maturity Series
Michigan/111
- --------------------------------------------------------------------------------
PROSPECTUS PART ONE
NOTE: Part I of this Prospectus may not be distributed unless accompanied by
Part II. Please retain both parts of this Prospectus for future reference.
- --------------------------------------------------------------------------------
THE FUND
This series of Insured Municipals Income Trust-Insured Multi-Series (the
"Fund") consists of underlying separate unit investment trusts described above.
Each Trust consists of an insured portfolio of interest-bearing obligations (the
"Bonds" or "Securities") issued by or on behalf of municipalities and other
governmental authorities, the interest on which is, in the opinion of recognized
bond counsel to the issuing governmental authority, exempt from all Federal
income taxes under existing law. In addition, the interest income of each State
Trust is, in the opinion of counsel, exempt to the extent indicated from state
and local taxes, when held by residents of the state where the issuers of Bonds
in such Trust are located.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units of each Trust includes the aggregate
bid price of the Securities in such Trust, an applicable sales charge, cash, if
any, in the Principal Account held or owned by such Trust, and accrued interest,
if any. See "Summary of Essential Financial Information".
ESTIMATED CURRENT AND LONG-TERM RETURNS
Estimated Current and Long-Term Returns to Unitholders are indicated under
"Summary of Essential Financial Information". The methods of calculating
Estimated Current Returns and Estimated Long-Term Return are set forth in Part
II of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is October 25, 1999
Van Kampen
INSURED MUNICIPALS INCOME TRUST, 149TH INSURED MULTI-SERIES
Summary of Essential Financial Information
As of August 9, 1999
Sponsor: Van Kampen Funds Inc.
Evaluator: American Portfolio Evaluation Services
(A division of an affiliate of the Sponsor)
Trustee: The Bank of New York
The income, expense and distribution data set forth below have been
calculated for Unitholders electing to receive monthly distributions.
Unitholders choosing a different distribution plan (if available) will receive a
slightly higher net annual interest income because of the lower Trustee's fees
and expenses under such plan.
<TABLE>
<CAPTION>
California
Intermediate
Laddered
Maturity Louisiana
Trust Trust
-------------- --------------
General Information
<S> <C> <C>
Principal Amount (Par Value) of Securities $ 1,925,000 $ 2,255,000
Number of Units 1,915 2,361
Fractional Undivided Interest in Trust per Unit 1/1,915 1/2,361
Public Offering Price:
Aggregate Bid Price of Securities in Portfolio $ 1,918,638.55 $ 2,142,996.85
Aggregate Bid Price of Securities per Unit $ 1,001.90 $ 907.66
Sales charge 2.040% (2.00% of Public Offering Price excluding principal
cash) for the California Intermediate Laddered Maturity Trust and 5.042%
(4.80% of Public Offering
Price excluding principal cash) for the Louisiana Trust $ 20.40 $ 45.54
Principal Cash per Unit $ (2.14) $ (4.36)
Public Offering Price per Unit (1) $ 1,020.16 $ 948.84
Redemption Price per Unit $ 999.76 $ 903.30
Excess of Public Offering Price per Unit over
Redemption Price per Unit $ 20.40 $ 45.54
Minimum Value of the Trust under which Trust
Agreement may be terminated $ 600,000.00 $ 607,000.00
Annual Premium on Portfolio Insurance $ -- $ 365.00
Evaluator's Annual Evaluation Fee (4) $ 819 $ 945
Special Information
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit $ 43.39 $ 48.08
Less: Estimated Annual Expense $ 2.16 $ 2.03
Less: Annual Premium on Portfolio Insurance $ -- $ .15
Estimated Net Annual Interest Income per Unit $ 41.23 $ 45.90
Calculation of Estimated Interest Earnings per Unit:
Estimated Net Annual Interest Income $ 41.23 $ 45.90
Divided by 12 $ 3.44 $ 3.83
Estimated Daily Rate of Net Interest Accrual per Unit $ .11453 $ .12748
Estimated Current Return Based on Public Offering Price (2)(3) 4.03% 4.81%
Estimated Long-Term Return (2)(3) 3.67% 4.84%
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest to the date of settlement (three business days after
purchase) of $9.86 and $11.69 for the California Intermediate Laddered
Maturity and Louisiana Trusts, respectively.
(2) The Estimated Current Returns and Estimated Long-Term Returns are described
under "Estimated Current and Long-Term Returns" in Part II.
(3) The Estimated Current Return and Estimated Long-Term Return on an identical
portfolio without the insurance obtained by the Louisiana Trust would have
been slightly higher.
(4) Notwithstanding information to the contrary in Part II of this Prospectus,
the Trust Indenture provides that as compensation for its services, the
Evaluator shall receive a fee of $.30 per $1,000 principal amount of Bonds
per Trust annually. This fee may be adjusted for increases in consumer
prices for services under the category "All Services Less Rent of Shelter"
in the Consumer Price Index.
INSURED MUNICIPALS INCOME TRUST, 149TH INSURED MULTI-SERIES
Summary of Essential Financial Information
As of August 9, 1999
Sponsor: Van Kampen Funds Inc.
Evaluator: American Portfolio Evaluation Services
(A division of an affiliate of the Sponsor)
Trustee: The Bank of New York
The income, expense and distribution data set forth below have been
calculated for Unitholders electing to receive monthly distributions.
Unitholders choosing a different distribution plan (if available) will receive a
slightly higher net annual interest income because of the lower Trustee's fees
and expenses under such plan.
<TABLE>
<CAPTION>
Ohio
Intermediate
Laddered
Michigan New Mexico Maturity
Trust Trust Trust
------------- ------------- -------------
General Information
<S> <C> <C> <C>
Principal Amount (Par Value) of Securities $ 3,960,000 $ 2,843,000 $ 1,640,000
Number of Units 4,025 2,939 1,608
Fractional Undivided Interest in Trust per Unit 1/4,025 1/2,939 1/1,608
Public Offering Price
Aggregate Bid Price of Securities in Portfolio $ 3,675,429.90 $ 2,754,928.25 $ 1,616,877.85
Aggregate Bid Price of Securities per Unit $ 913.15 $ 937.37 $ 1,005.52
Sales charge of 5.485% (5.20% of Public Offering Price excluding
principal cash) for the Michigan Trust, 4.931% (4.70% of Public
Offering Price excluding principal cash) for the New Mexico Trust
and 2.040% (2.00% of Public Offering Price excluding principal
cash) for the Ohio Intermediate Laddered Maturity Trust $ 49.92 $ 45.80 $ 20.36
Principal Cash per Unit $ (3.01) $ (8.67) $ (8.18)
Public Offering Price per Unit (1) $ 960.06 $ 974.50 $ 1,017.70
Redemption Price per Unit $ 910.14 $ 928.70 $ 997.34
Excess of Public Offering Price per Unit over
Redemption Price per Unit $ 49.92 $ 45.80 $ 20.36
Minimum Value of the Trust under which Trust
Agreement may be terminated $ 800,000.00 $ 603,600.00 $ 600,000.00
Annual Premium on Portfolio Insurance $ -- $ 2,246.60 $ --
Evaluator's Annual Fee (4) $ 1,495 $ 1,101 $ 769
Special Information
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit $ 50.54 $ 50.88 $ 41.97
Less: Estimated Annual Expense $ 1.95 $ 2.02 $ 2.29
Less: Annual Premium on Portfolio Insurance $ -- $ .76 $ --
Estimated Net Annual Interest Income per Unit $ 48.59 $ 48.10 $ 39.68
Calculation of Estimated Interest Earnings per Unit:
Estimated Net Annual Interest Income $ 48.59 $ 48.10 $ 39.68
Divided by 12 $ 4.05 $ 4.01 $ 3.31
Estimated Daily Rate of Net Interest Accrual per Unit $ .13499 $ .13359 $ .11022
Estimated Current Return Based on Public Offering Price (2)(3) 5.04% 4.89% 3.87%
Estimated Long-Term Return (2)(3) 5.17% 4.77% 3.74%
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest to the date of settlement (three business days after
purchase) of $9.58, $9.92 and $8.93 for the Michigan, New Mexico and Ohio
Intermediate Laddered Maturity Trusts, respectively.
(2) The Estimated Current Returns and Estimated Long-Term Returns are described
under "Estimated Current and Long-Term Returns" in Part II.
(3) The Estimated Current Return and Estimated Long-Term Return on an identical
portfolio without the insurance obtained by the New Mexico Trust would have
been slightly higher.
(4) Notwithstanding information to the contrary in Part II of this Prospectus,
the Trust Indenture provides that as compensation for its services, the
Evaluator shall receive a fee of $.30 per $1,000 principal amount of Bonds
per Trust annually. This fee may be adjusted for increases in consumer
prices for services under the category "All Services Less Rent of Shelter"
in the Consumer Price Index.
Summary of Essential Financial Information (continued)
Evaluations for purpose of sales, purchase or redemption of Units are made as of
the close of trading on the New York Stock Exchange on days such Exchange is
open next following receipt of an order for a sale or purchase of Units or
receipt by The Bank of New York of Units tendered for redemption.
Minimum Principal Distribution $1.00 per Unit
Date of Deposit October 28, 1993
Evaluator's Annual Supervisory Fee Maximum of $.25 per Unit
Record and Computation Dates.............. TENTH day of the month as follows:
monthly - each month; semi-annual - May and November for the California
Intermediate Laddered Maturity and Ohio Intermediate Laddered Maturity
Trusts and January and July for the Louisiana, Michigan and New Mexico
Trusts.
Distribution Dates........................ TWENTY-FIFTH day of the month as
follows: monthly - each month; semi-annual - May and November for the
California Intermediate Laddered Maturity and Ohio Intermediate Laddered
Maturity Trusts and January and July for the Louisiana, Michigan and New
Mexico Trusts.
Trustee's Annual Fee...................... $.91 and $.51 per $1,000 principal
amount of Bonds respectively, for those portions of the Trusts under the
monthly and semi-annual distribution plans.
PORTFOLIO
As of June 30, 1999, the California Insured Municipals Income Trust,
Intermediate Laddered Maturity Trust Series 6 consists of 8 issues which are
payable from the income of a specific project or authority. The portfolio is
divided by purpose of issue as follows: Certificate of Participation, 1 (23%);
General Obligation, 1 (5%); General Purpose, 2 (24%); Health Care, 1 (7%);
Public Building, 1 (13%) and Water and Sewer, 2 (28%). See "Portfolio" herein.
<TABLE>
<CAPTION>
PER UNIT INFORMATION
1994 (1) 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
Net asset value per Unit at
<S> <C> <C> <C> <C> <C>
beginning of period..................... $ 987.11 $ 923.97 $ 964.21 $ 972.37 $ 995.19
============ ============ ============ ============ ============
Net asset value per Unit at
end of period........................... $ 923.97 $ 964.21 $ 972.37 $ 995.19 $ 1,021.11
============ ============ ============ ============ ============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)...... $ 13.70 $ 41.88 $ 44.45 $ 42.85 $ 42.31
============ ============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period).......................... $ (76.88) $ 43.50 $ 13.92 $ 25.03 $ 27.30
============ ============ ============ ============ ============
Distributions of investment income by
frequency of payment (2)
Monthly.............................. $ 14.57 $ 41.28 $ 42.36 $ 41.40 $ 41.43
Semiannual........................... $ 11.19 $ 41.68 $ 42.81 $ 41.96 $ 41.95
Units outstanding at end of period......... 3,000 2,890 2,497 2,257 2,116
</TABLE>
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PER UNIT INFORMATION (continued)
1999
-------------
Net asset value per Unit at
beginning of period.................................... $ 1,021.11
=============
Net asset value per Unit at
end of period.......................................... $ 1,020.08
=============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)..................... $ 43.00
=============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period)......................... $ --
=============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period)......................................... $ (2.02)
=============
Distributions of investment income by
frequency of payment (2)
Monthly............................................. $ 41.43
Semiannual.......................................... $ 41.86
Units outstanding at end of period........................ 1,915
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PORTFOLIO
As of June 30, 1999, the Louisiana Insured Municipals Income Trust, Series 13
consists of 8 issues which are payable from the income of a specific project or
authority. The portfolio is divided by purpose of issue as follows: General
Obligation, 1 (7%); General Purpose, 1 (22%); Higher Education, 1 (10%); Retail
Electric/Gas/Telephone, 1 (7%); Single Family Mortgage Revenue, 1 (16%) and
Water and Sewer, 3 (38%). See "Portfolio" herein.
<TABLE>
<CAPTION>
PER UNIT INFORMATION
1994 (1) 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
Net asset value per Unit at
<S> <C> <C> <C> <C> <C>
beginning of period..................... $ 951.00 $ 854.08 $ 879.52 $ 895.07 $ 921.98
============ ============ ============ ============ ============
Net asset value per Unit at
end of period........................... $ 854.08 $ 879.52 $ 895.07 $ 921.98 $ 958.80
============ ============ ============ ============ ============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)...... $ 14.44 $ 45.87 $ 48.65 $ 48.19 $ 47.34
============ ============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......... $ -- $ 10.04 $ 1.59 $ 12.59 $ --
============ ============ ============ ============ ============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period).......................... $ (114.17) $ 33.79 $ 19.49 $ 42.26 $ 39.09
============ ============ ============ ============ ============
Distributions of investment income by
frequency of payment (2)
Monthly.............................. $ 16.00 $ 47.13 $ 47.95 $ 46.42 $ 46.02
Semiannual........................... $ 4.15 $ 39.87 $ 48.56 $ 47.06 $ 46.62
Units outstanding at end of period......... 3,152 3,139 3,078 2,753 2,592
</TABLE>
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PER UNIT INFORMATION (continued)
1999
-------------
Net asset value per Unit at
beginning of period.................................... $ 958.80
============
Net asset value per Unit at
end of period.......................................... $ 934.62
============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)..................... $ 47.38
============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period)......................... $ 4.86
============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period)......................................... $ (20.14)
============
Distributions of investment income by
frequency of payment (2)
Monthly............................................. $ 45.81
Semiannual.......................................... $ 46.41
Units outstanding at end of period........................ 2,361
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PORTFOLIO
As of June 30, 1999, the Michigan Insured Municipals Income Trust, Series 111
consists of 9 issues which are payable from the income of a specific project or
authority. The portfolio is divided by purpose of issue as follows: General
Obligation, 6 (51%); Health Care, 1 (18%); Retail Electric/Gas/Telephone, 1
(15%) and Water and Sewer, 1 (16%). See "Portfolio" herein.
<TABLE>
<CAPTION>
PER UNIT INFORMATION
1994 (1) 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
Net asset value per Unit at
<S> <C> <C> <C> <C> <C>
beginning of period..................... $ 951.00 $ 848.37 $ 883.14 $ 890.80 $ 939.32
============ ============ ============ ============ ============
Net asset value per Unit at
end of period........................... $ 848.37 $ 883.14 $ 890.80 $ 939.32 $ 984.01
============ ============ ============ ============ ============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)...... $ 13.10 $ 47.10 $ 49.97 $ 49.06 $ 48.68
============ ============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period).......................... $ (121.73) $ 32.97 $ 8.84 $ 49.08 $ 44.75
============ ============ ============ ============ ============
Distributions of investment income by
frequency of payment (2)
Monthly.............................. $ 18.55 $ 48.60 $ 49.81 $ 46.80 $ 48.39
Semiannual........................... $ 2.35 $ 44.84 $ 50.14 $ 48.98 $ 48.95
Units outstanding at end of period......... 4,080 4,080 4,076 4,064 4,052
</TABLE>
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PER UNIT INFORMATION (continued)
1999
-------------
Net asset value per Unit at
beginning of period..................................... $ 984.01
============
Net asset value per Unit at
end of period........................................... $ 950.25
============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)...................... $ 48.80
============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......................... $ --
============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period).......................................... $ (33.72)
============
Distributions of investment income by
frequency of payment (2)
Monthly.............................................. $ 48.47
Semiannual........................................... $ 48.91
Units outstanding at end of period......................... 4,036
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PORTFOLIO
As of June 30, 1999, the New Mexico Insured Municipals Income Trust, Series
11 consists of 9 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows: Escrowed
to Maturity, 1 (2%); Higher Education, 1 (17%); Multi-Family Mortgage Revenue, 3
(36%); Pre-refunded, 1 (19%); Public Building, 1 (9%) and Retail
Electric/Gas/Telephone, 2 (17%). See "Portfolio" herein.
<TABLE>
<CAPTION>
PER UNIT INFORMATION
1994 (1) 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
Net asset value per Unit at
<S> <C> <C> <C> <C> <C>
beginning of period..................... $ 951.00 $ 866.07 $ 895.04 $ 909.51 $ 943.24
============ ============ ============ ============ ============
Net asset value per Unit at
end of period........................... $ 866.07 $ 895.04 $ 909.51 $ 943.24 $ 971.07
============ ============ ============ ============ ============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)...... $ 9.24 $ 46.18 $ 49.52 $ 48.36 $ 48.18
============ ============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period).......................... $ (107.59) $ 27.72 $ 15.68 $ 34.55 $ 27.90
============ ============ ============ ============ ============
Distributions of investment income by
frequency of payment (2)
Monthly.............................. $ 17.96 $ 47.88 $ 49.07 $ 47.88 $ 47.80
Semiannual........................... $ 2.00 $ 44.27 $ 49.51 $ 48.42 $ 48.34
Units outstanding at end of period......... 3,158 3,127 3,122 3,091 3,087
</TABLE>
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PER UNIT INFORMATION (continued)
1999
-------------
Net asset value per Unit at
beginning of period................................... $ 971.07
=============
Net asset value per Unit at
end of period......................................... $ 961.93
=============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2).................... $ 48.85
=============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period)........................ $ --
=============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period)........................................ $ (9.28)
=============
Distributions of investment income by
frequency of payment (2)
Monthly............................................ $ 47.73
Semiannual......................................... $ 48.25
Units outstanding at end of period....................... 2,964
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PORTFOLIO
As of June 30, 1999, the Ohio Insured Municipals Income Trust, Intermediate
Laddered Maturity Trust Series 2 consists of 12 issues which are payable from
the income of a specific project or authority. The portfolio is divided by
purpose of issue as follows: Escrowed to Maturity, 4 (25%); Health Care, 1
(24%); Retail Electric/Gas/Telephone, 3 (24%) and Water and Sewer, 4 (27%). See
"Portfolio" herein.
<TABLE>
<CAPTION>
PER UNIT INFORMATION
1994 (1) 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
Net asset value per Unit at
<S> <C> <C> <C> <C> <C>
beginning of period..................... $ 994.93 $ 937.89 $ 971.79 $ 981.23 $ 999.81
============ ============ ============ ============ ============
Net asset value per Unit at
end of period........................... $ 937.89 $ 971.79 $ 981.23 $ 999.81 $ 1,017.30
============ ============ ============ ============ ============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)...... $ 14.44 $ 42.41 $ 43.44 $ 42.33 $ 43.19
============ ============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period).......................... $ (70.65) $ 37.57 $ 14.32 $ 23.22 $ 20.80
============ ============ ============ ============ ============
Distributions of investment income by
frequency of payment (2)
Monthly.............................. $ 15.84 $ 41.40 $ 42.13 $ 40.77 $ 40.55
Semiannual........................... $ 12.50 $ 42.02 $ 42.82 $ 41.36 $ 41.15
Units outstanding at end of period......... 2,990 2,840 2,633 2,371 1,889
</TABLE>
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
PER UNIT INFORMATION (continued)
1999
-------------
Net asset value per Unit at
beginning of period.................................. $ 1,017.30
=============
Net asset value per Unit at
end of period........................................ $ 1,018.50
=============
Distributions to Unitholders of investment
income including accrued interest paid
on Units redeemed (average Units
outstanding for entire period) (2)................... $ 42.15
=============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period)....................... $ --
=============
Unrealized appreciation (depreciation) of
Bonds (per Unit outstanding at
end of period)....................................... $ 2.21
=============
Distributions of investment income by
frequency of payment (2)
Monthly.............................................. $ 39.91
Semiannual........................................... $ 40.36
Units outstanding at end of period...................... 1,616
- --------------------------------------------------------------------------------
(1) For the period from October 28, 1993 (date of deposit) through June 30,
1994.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Van Kampen Funds Inc. and the Unitholders of
Insured Municipals Income Trust, 149th Insured Multi-Series:
We have audited the accompanying statements of condition (including the
analyses of net assets) and the related portfolio of Insured Municipals Income
Trust, 149th Insured Multi-Series (California Intermediate Laddered Maturity,
Louisiana, Michigan, New Mexico and Ohio Intermediate Laddered Maturity Trusts)
as of June 30, 1999, and the related statements of operations and changes in net
assets for the three years ended June 30, 1999. These statements are the
responsibility of the Trustee and the Sponsor. Our responsibility is to express
an opinion on such statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of tax-exempt securities owned at June 30, 1999 by correspondence
with the Trustee. An audit also includes assessing the accounting principles
used and significant estimates made by the Trustee and the Sponsor, as well as
evaluating the overall financial statement presentation. We believe our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Insured Municipals Income
Trust, 149th Insured Multi-Series (California Intermediate Laddered Maturity,
Louisiana, Michigan, New Mexico and Ohio Intermediate Laddered Maturity Trusts)
as of June 30, 1999, and the results of operations and changes in net assets for
the three years ended June 30, 1999, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Chicago, Illinois
August 20, 1999
<TABLE>
<CAPTION>
INSURED MUNICIPALS INCOME TRUST, 149TH INSURED MULTI-SERIES
Statements of Condition
June 30, 1999
California
Intermediate
Laddered
Maturity Louisiana
Trust Trust
----------- -----------
Trust property
<S> <C> <C>
Cash.................................................................................. $ 13,512 $ 4,889
Tax-exempt securities at market value, (cost $1,890,245
and $2,199,055, respectively) (note 1)............................................. 1,930,439 2,175,348
Accrued interest...................................................................... 9,502 26,393
Receivable for securities sold........................................................ -- --
----------- -----------
$ 1,953,453 $ 2,206,630
=========== ===========
Liabilities and interest to Unitholders
Cash overdraft........................................................................ $ -- $ --
Redemptions payable................................................................... -- --
Interest to Unitholders............................................................... 1,953,453 2,206,630
----------- -----------
$ 1,953,453 $ 2,206,630
=========== ===========
Analyses of Net Assets
Interest of Unitholders (1,915 and 2,361 Units, respectively of fractional undivided
interest outstanding)
Cost to original investors of 3,000 and 3,156 Units, respectively (note 1)............ $ 3,052,920 $ 3,156,000
Less initial underwriting commission (note 3)...................................... 91,568 154,616
----------- -----------
2,961,352 3,001,384
Less redemption of Units (1,085 and 795 Units, respectively)....................... 1,063,284 728,967
----------- -----------
1,898,068 2,272,417
Undistributed net investment income
Net investment income.............................................................. 597,053 768,864
Less distributions to Unitholders.................................................. 569,946 727,268
----------- -----------
27,107 41,596
Realized gain (loss) on Bond sale or redemption....................................... (11,916) 1,768
Unrealized appreciation (depreciation) of Bonds (note 2).............................. 40,194 (23,707)
Distributions to Unitholders of Bond sale or redemption proceeds...................... -- (85,444)
----------- -----------
Net asset value to Unitholders.................................................. $ 1,953,453 $ 2,206,630
=========== ===========
Net asset value per Unit (Units outstanding of 1,915 and 2,361, respectively)............ $ 1,020.08 $ 934.62
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
INSURED MUNICIPALS INCOME TRUST, 149TH INSURED MULTI-SERIES
Statements of Condition
June 30, 1999
Ohio
Intermediate
New Laddered
Michigan Mexico Maturity
Trust Trust Trust
------------ ------------ -----------
Trust property
<S> <C> <C> <C>
Cash..................................................................... $ 21,047 $ 20,262 $ 2,630
Tax-exempt securities at market value, (cost $3,840,148, $2,820,387
and $1,598,224, respectively) (note 1)................................ 3,758,760 2,781,683 1,629,311
Accrued interest......................................................... 55,387 49,208 13,959
Receivable for securities sold........................................... -- -- --
------------ ------------ -----------
$ 3,835,194 $ 2,851,153 $ 1,645,900
============ ============ ===========
Liabilities and interest to Unitholders
Cash overdraft........................................................... $ -- $ -- $ --
Redemptions payable...................................................... -- -- --
Interest to Unitholders.................................................. 3,835,194 2,851,153 1,645,900
------------ ------------ -----------
$ 3,835,194 $ 2,851,153 $ 1,645,900
============ ============ ===========
Analyses of Net Assets
Interest of Unitholders (4,036, 2,964 and 1,616 Units, respectively of
fractional undivided interest outstanding) Cost to original investors of
4,080, 3,158 and 3,000 Units,
respectively (note 1)................................................. $ 4,080,000 $ 3,158,000 $ 3,077,100
Less initial underwriting commission (note 3)......................... 199,888 154,719 92,293
------------ ------------ -----------
3,880,112 3,003,281 2,984,807
Less redemption of Units (44, 194 and 1,384
Units, respectively)............................................... 41,285 177,899 1,363,453
------------ ------------ -----------
3,838,827 2,825,382 1,621,354
Undistributed net investment income
Net investment income................................................. 1,122,676 847,303 582,693
Less distributions to Unitholders..................................... 1,044,185 775,726 560,979
------------ ------------ -----------
78,491 71,577 21,714
Realized gain (loss) on Bond sale or redemption.......................... (736) (7,102) (28,255)
Unrealized appreciation (depreciation) of Bonds (note 2)................. (81,388) (38,704) 31,087
Distributions to Unitholders of Bond sale or redemption proceeds......... -- -- --
------------ ------------ -----------
Net asset value to Unitholders..................................... $ 3,835,194 $ 2,851,153 $ 1,645,900
============ ============ ===========
Net asset value per Unit (Units outstanding of 4,036, 2,964
and 1,616, respectively)................................................. $ 950.25 $ 961.93 $ 1,018.50
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
CALIFORNIA INSURED MUNICIPALS INCOME TRUST,
INTERMEDIATE LADDERED MATURITY SERIES 6
Statements of Operations
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Investment income
<S> <C> <C> <C>
Interest income.......................................................... $ 105,647 $ 95,647 $ 90,738
Expenses
Trustee fees and expenses............................................. 3,060 2,875 2,453
Evaluator fees........................................................ 850 741 819
Insurance expense..................................................... -- -- --
Supervisory fees...................................................... 680 656 624
------------ ------------ -----------
Total expenses..................................................... 4,590 4,272 3,896
------------ ------------ -----------
Net investment income................................................. 101,057 91,375 86,842
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. 237,644 140,327 201,498
Cost..................................................................... 239,357 140,528 198,594
------------ ------------ -----------
Realized gain (loss).................................................. (1,713) (201) 2,904
Net change in unrealized appreciation (depreciation) of Bonds............... 56,484 57,758 (3,864)
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 155,828 $ 148,932 $ 85,882
============ ============ ===========
Statements of Changes in Net Assets
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 101,057 $ 91,375 $ 86,842
Realized gain (loss) on Bond sale or redemption.......................... (1,713) (201) 2,904
Net change in unrealized appreciation (depreciation) of Bonds............ 56,484 57,758 (3,864)
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 155,828 148,932 85,882
Distributions to Unitholders from:
Net investment income.................................................... (103,407) (92,754) (89,129)
Bonds sale or redemption proceeds........................................ -- -- --
Redemption of Units......................................................... (234,283) (141,656) (203,959)
------------ ------------ -----------
Total increase (decrease)............................................. (181,862) (85,478) (207,206)
Net asset value to Unitholders
Beginning of period...................................................... 2,427,999 2,246,137 2,160,659
------------ ------------ -----------
End of period (including undistributed net investment income of
$30,773, $29,394 and $27,107, respectively)........................... $ 2,246,137 $ 2,160,659 $ 1,953,453
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
LOUISIANA INSURED MUNICIPALS INCOME TRUST, SERIES 13
Statements of Operations
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Investment income
<S> <C> <C> <C>
Interest income.......................................................... $ 141,733 $ 130,286 $ 118,932
Expenses
Trustee fees and expenses............................................. 3,460 3,621 3,077
Evaluator fees........................................................ 955 839 945
Insurance expense..................................................... 405 426 315
Supervisory fees...................................................... 804 783 762
------------ ------------ -----------
Total expenses..................................................... 5,624 5,669 5,099
------------ ------------ -----------
Net investment income................................................. 136,109 124,617 113,833
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. 302,874 152,407 221,161
Cost..................................................................... 304,531 152,231 218,085
------------ ------------ -----------
Realized gain (loss).................................................. (1,657) 176 3,076
Net change in unrealized appreciation (depreciation) of Bonds............... 116,345 101,317 (47,542)
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 250,797 $ 226,110 $ 69,367
============ ============ ===========
Statements of Changes in Net Assets
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 136,109 $ 124,617 $ 113,833
Realized gain (loss) on Bond sale or redemption.......................... (1,657) 176 3,076
Net change in unrealized appreciation (depreciation) of Bonds............ 116,345 101,317 (47,542)
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 250,797 226,110 69,367
Distributions to Unitholders from:
Net investment income.................................................... (141,096) (127,617) (117,320)
Bonds sale or redemption proceeds........................................ (36,856) -- (12,045)
Redemption of Units......................................................... (289,672) (151,492) (218,572)
------------ ------------ -----------
Total increase (decrease)............................................. (216,827) (52,999) (278,570)
Net asset value to Unitholders
Beginning of period...................................................... 2,755,026 2,538,199 2,485,200
------------ ------------ -----------
End of period (including undistributed net investment income of
$48,083, $45,083 and $41,596, respectively)........................... $ 2,538,199 $ 2,485,200 $ 2,206,630
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
MICHIGAN INSURED MUNICIPALS INCOME TRUST, SERIES 111
Statements of Operations
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Investment income
<S> <C> <C> <C>
Interest income.......................................................... $ 205,421 $ 204,758 $ 204,305
Expenses
Trustee fees and expenses............................................. 4,645 4,789 4,603
Evaluator fees........................................................ 1,326 1,245 1,495
Insurance expense..................................................... -- -- --
Supervisory fees...................................................... 1,085 1,134 1,171
------------ ------------ -----------
Total expenses..................................................... 7,056 7,168 7,269
------------ ------------ -----------
Net investment income................................................. 198,365 197,590 197,036
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. 9,382 9,900 19,944
Cost..................................................................... 10,169 9,931 19,862
------------ ------------ -----------
Realized gain (loss).................................................. (787) (31) 82
Net change in unrealized appreciation (depreciation) of Bonds............... 199,458 181,338 (136,088)
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 397,036 $ 378,897 $ 61,030
============ ============ ===========
Statements of Changes in Net Assets
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 198,365 $ 197,590 $ 197,036
Realized gain (loss) on Bond sale or redemption.......................... (787) (31) 82
Net change in unrealized appreciation (depreciation) of Bonds............ 199,458 181,338 (136,088)
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 397,036 378,897 61,030
Distributions to Unitholders from:
Net investment income.................................................... (199,782) (197,581) (197,561)
Bonds sale or redemption proceeds........................................ -- -- --
Redemption of Units......................................................... (10,763) (11,498) (15,483)
------------ ------------ -----------
Total increase (decrease)............................................. 186,491 169,818 (152,014)
Net asset value to Unitholders
Beginning of period...................................................... 3,630,899 3,817,390 3,987,208
------------ ------------ -----------
End of period (including undistributed net investment income of
$79,007, $79,016 and $78,491, respectively)........................... $ 3,817,390 $ 3,987,208 $ 3,835,194
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
NEW MEXICO INSURED MUNICIPALS INCOME TRUST, SERIES 11
Statements of Operations
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Investment income
<S> <C> <C> <C>
Interest income.......................................................... $ 157,508 $ 156,317 $ 152,562
Expenses
Trustee fees and expenses............................................. 3,401 3,474 3,311
Evaluator fees........................................................ 992 929 1,101
Insurance expense..................................................... 2,297 2,488 1,914
Supervisory fees...................................................... 830 864 882
------------ ------------ -----------
Total expenses..................................................... 7,520 7,755 7,208
------------ ------------ -----------
Net investment income................................................. 149,988 148,562 145,354
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. 29,663 -- 124,919
Cost..................................................................... 31,598 -- 125,062
------------ ------------ -----------
Realized gain (loss).................................................. (1,935) -- (143)
Net change in unrealized appreciation (depreciation) of Bonds............... 106,797 86,135 (27,501)
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 254,850 $ 234,697 $ 117,710
============ ============ ===========
Statements of Changes in Net Assets
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 149,988 $ 148,562 $ 145,354
Realized gain (loss) on Bond sale or redemption.......................... (1,935) -- (143)
Net change in unrealized appreciation (depreciation) of Bonds............ 106,797 86,135 (27,501)
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 254,850 234,697 117,710
Distributions to Unitholders from:
Net investment income.................................................... (150,501) (148,794) (147,382)
Bonds sale or redemption proceeds........................................ -- -- --
Redemption of Units......................................................... (28,300) (3,750) (116,871)
------------ ------------ -----------
Total increase (decrease)............................................. 76,049 82,153 (146,543)
Net asset value to Unitholders
Beginning of period...................................................... 2,839,494 2,915,543 2,997,696
------------ ------------ -----------
End of period (including undistributed net investment income of
$73,837, $73,605 and $71,577, respectively)........................... $ 2,915,543 $ 2,997,696 $ 2,851,153
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
OHIO INSURED MUNICIPALS INCOME TRUST,
INTERMEDIATE LADDERED MATURITY SERIES 2
Statements of Operations
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Investment income
<S> <C> <C> <C>
Interest income.......................................................... $ 109,775 $ 91,454 $ 75,535
Expenses
Trustee fees and expenses............................................. 2,985 2,922 1,880
Evaluator fees........................................................ 894 767 769
Insurance expense..................................................... -- -- --
Supervisory fees...................................................... 711 673 582
------------ ------------ -----------
Total expenses..................................................... 4,590 4,362 3,231
------------ ------------ -----------
Net investment income................................................. 105,185 87,092 72,304
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. 272,227 484,389 276,349
Cost..................................................................... 279,060 483,711 275,549
------------ ------------ -----------
Realized gain (loss).................................................. (6,833) 678 800
Net change in unrealized appreciation (depreciation) of Bonds............... 55,051 39,287 3,572
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 153,403 $ 127,057 $ 76,676
============ ============ ===========
Statements of Changes in Net Assets
Years ended June 30,
1997 1998 1999
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 105,185 $ 87,092 $ 72,304
Realized gain (loss) on Bond sale or redemption.......................... (6,833) 678 800
Net change in unrealized appreciation (depreciation) of Bonds............ 55,051 39,287 3,572
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 153,403 127,057 76,676
Distributions to Unitholders from:
Net investment income.................................................... (107,868) (92,473) (75,537)
Bonds sale or redemption proceeds........................................ -- -- --
Redemption of Units......................................................... (258,560) (483,457) (276,922)
------------ ------------ -----------
Total increase (decrease)............................................. (213,025) (448,873) (275,783)
Net asset value to Unitholders
Beginning of period...................................................... 2,583,581 2,370,556 1,921,683
------------ ------------ -----------
End of period (including undistributed net investment income of
$30,328, $24,947 and $21,714, respectively)........................... $ 2,370,556 $ 1,921,683 $ 1,645,900
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
149TH INSURED MULTI-SERIES
CALIFORNIA INSURED MUNICIPALS INCOME TRUST,
INTERMEDIATE LADDERED MATURITY SERIES PORTFOLIO as of June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- ------ ----------- ------------------------------------------------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
A $ - 0 - County of San Joaquin (California) San Joaquin County Public
Facilities Financing Corporation, Certificates of
Participation, Series 1993 (MBIA Insured)
4.200% Due 11/15/00 $ - 0 -
- -------------------------------------------------------------------------------------------------------------------------
B 435,000 City of Anaheim, California, Certificates of Participation
(Anaheim Memorial Hospital Association)
AMBAC Indemnity Insured
4.400% Due 05/15/01 AAA 436,810
- -------------------------------------------------------------------------------------------------------------------------
C 100,000 Arcadia Unified School District (County of Los Angeles,
California) General Obligation Bonds, Election 1993,
Series A (MBIA Insured)
0.000% Due 09/01/02 AAA 88,240
- -------------------------------------------------------------------------------------------------------------------------
D 130,000 Loma Linda, California, Hospital Revenue Refunding Bonds
(Loma Linda University Medical Center Project)
Series 1993C (MBIA Insured)
4.500% Due 12/01/02 AAA 131,228
- -------------------------------------------------------------------------------------------------------------------------
E 250,000 State Public Works Board of the State of California, Lease
Revenue Refunding Bonds (Department of Corrections)
Series 1993C (Del Norte/Imperial) MBIA Insured
4.600% Due 12/01/02 AAA 253,552
- -------------------------------------------------------------------------------------------------------------------------
F 545,000 Monterey Regional Water Pollution Control Agency (Monterey
County, California) Wastewater Revenue Refunding Bonds,
Series 1993 (FSA Insured)
255M-4.700% Due 06/01/03 AAA 259,266
290M-4.800% Due 06/01/04 AAA 2003 @ 100 293,628
- -------------------------------------------------------------------------------------------------------------------------
G 465,000 Culver City Redevelopment Financing Authority, California,
1993 Tax Allocation Refunding Revenue Bonds
(AMBAC Indemnity Insured)
235M-4.400% Due 11/01/03 AAA 236,645
230M-4.500% Due 11/01/04 AAA 2003 @ 102 231,070
------------- -------------
$ 1,925,000 $ 1,930,439
============= =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
149TH INSURED MULTI-SERIES
LOUISIANA INSURED MUNICIPALS INCOME TRUST PORTFOLIO as of June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- ------ ----------- ------------------------------------------------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
A $ 160,000 City of Alexandria, State of Louisiana, Utilities Revenue
Refunding Bonds, Series 1993 (FGIC Insured)
5.250% Due 05/01/11 AAA 2003 @ 102 $ 162,550
- -------------------------------------------------------------------------------------------------------------------------
B 160,000 City of New Orleans, Louisiana, General Obligation Refunding
Bonds, Series 1991 (AMBAC Indemnity Insured)
0.000% Due 09/01/13 AAA 80,338
- -------------------------------------------------------------------------------------------------------------------------
C 200,000 City of Natchitoches, State of Louisiana, Utilities Revenue
Bonds, Series 1993B (AMBAC Indemnity Insured) 2002 @ 102
5.375% Due 12/01/13 AAA 2009 @ 100 S.F. 201,614
- -------------------------------------------------------------------------------------------------------------------------
D 365,000 East Baton Rouge, Louisiana, Mortgage Finance Authority,
Single Family Mortgage Revenue Refunding Bonds,
Series 1993B 2003 @ 102
5.300% Due 10/01/14 Aaa* 2010 @ 100 S.F. 363,427
- -------------------------------------------------------------------------------------------------------------------------
E 475,000 City of Shreveport, State of Louisiana, Water and Sewer
Revenue Bonds, Series 1986A (FGIC Insured) 2003 @ 103
5.950% Due 12/01/14 AAA 2005 @ 100 S.F. 495,169
- -------------------------------------------------------------------------------------------------------------------------
F 500,000 Lafayette, Louisiana, Public Improvement Sales Tax Bonds,
Series 1993B (FGIC Insured)
5.000% Due 03/01/17 AAA 2003 @ 101.50 479,140
- -------------------------------------------------------------------------------------------------------------------------
G 175,000 Parish of East Baton Rouge, State of Louisiana, Public
Improvement Sales Tax Revenue Bonds,
Series St-1993 (FSA Insured)
5.200% Due 02/01/18 AAA 2003 @ 101.50 169,918
- -------------------------------------------------------------------------------------------------------------------------
H 220,000 Louisiana Public Facilities Authority, Tulane University
Revenue Bonds, Series 1992A-1 (FGIC Insured) - 0 -
0M-5.750% Due 02/15/18 2003 @ 102
220M-5.750% Due 02/15/18 AAA 2013 @ 100 S.F. 223,192
------------- -------------
$ 2,255,000 $ 2,175,348
============= =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
149TH INSURED MULTI-SERIES
MICHIGAN INSURED MUNICIPALS INCOME TRUST PORTFOLIO as of June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- ------ ----------- ------------------------------------------------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
A $ 370,000 City of Bay City, County of Bay, State of Michigan, Unlimited
Tax-General Obligation, Sewerage System
Improvement Refunding Bonds
(AMBAC Indemnity Insured) 2003 @ 100
5.200% Due 09/01/12 AAA 2010 @ 100 S.F. $ 368,024
- -------------------------------------------------------------------------------------------------------------------------
B 490,000 Livonia, Michigan, Public School District Crossover Refunding
Bonds (Unlimited Tax-General Obligation)
Series 1993 (FGIC Insured) 2003 @ 102
5.500% Due 05/01/14 AAA 2010 @ 100 S.F. 491,392
- -------------------------------------------------------------------------------------------------------------------------
C 600,000 City of Grand Haven, Michigan, Electric System Revenue
Refunding Bonds, Series 1993 (MBIA Insured) 2003 @ 102
5.250% Due 07/01/16 AAA 2013 @ 100 S.F. 583,122
- -------------------------------------------------------------------------------------------------------------------------
D 250,000 Brighton Area School District, Michigan, Unlimited Tax-General
Obligation School Bonds, Series 1993-I (FSA Insured) 2003 @ 101.50
5.250% Due 05/01/20 AAA 2015 @ 100 S.F. 238,500
- -------------------------------------------------------------------------------------------------------------------------
E 350,000 Gull Lake Community Schools, Counties of Kalamazoo, Barry,
and Calhoun, State of Michigan, 1993 Refunding
Bonds (Unlimited Tax-General Obligation)
FGIC Insured 2003 @ 101.50
5.250% Due 05/01/21 AAA 2014 @ 100 S.F. 335,989
- -------------------------------------------------------------------------------------------------------------------------
F 50,000 Okemos, Michigan, Public School District Refunding Bonds
(Unlimited Tax-General Obligation) Series 1993
(MBIA Insured)
0.000% Due 05/01/21 AAA 15,256
- -------------------------------------------------------------------------------------------------------------------------
G 500,000 Grand Rapids Community College, Michigan Community College
Bonds (Limited Tax-General Obligation Bonds)
Series 1993 (MBIA Insured) 2003 @ 102
5.000% Due 05/01/21 AAA 2015 @ 100 S.F. 462,690
- -------------------------------------------------------------------------------------------------------------------------
H 700,000 County of Jackson Hospital Finance Authority, Hospital Revenue
Refunding Bonds (W.A. Foote Memorial Hospital, Jackson,
Michigan) Series 1993A (FGIC Insured) 2003 @ 102
5.250% Due 06/01/23 AAA 2016 @ 100 S.F. 668,290
- -------------------------------------------------------------------------------------------------------------------------
I 650,000 City of Detroit, Michigan, Water Supply System Revenue
Refunding Bonds, Series 1993 (FGIC Insured) 2004 @ 102
5.000% Due 07/01/23 AAA 2020 @ 100 S.F. 595,497
------------- -------------
$ 3,960,000 $ 3,758,760
============= =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
149TH INSURED MULTI-SERIES
NEW MEXICO INSURED MUNICIPALS INCOME TRUST PORTFOLIO as of June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- ------ ----------- ------------------------------------------------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
A $ 400,000 City of Farmington, New Mexico, Utility System Revenue Bonds,
Series 1992 (FGIC Insured) 2002 @ 102
335M-5.750% Due 05/15/13 AAA 2008 @ 100 S.F. $ 341,884
65M-5.750% Due 05/15/13** AAA 66,969
- -------------------------------------------------------------------------------------------------------------------------
B 250,000 City of Las Vegas, New Mexico, Gross Receipts Tax Refunding
and Improvement Revenue Bonds, Series July 1, 1993
(MBIA Insured) 2001 @ 101
5.400% Due 06/01/15 AAA 2005 @ 100 S.F. 250,690
- -------------------------------------------------------------------------------------------------------------------------
C 218,000 New Mexico Mortgage Finance Authority, Rental Housing
Refunding Revenue Bonds (FNMA Pass-Through
Certificates Loans-To-Lenders Program) Series 1993B
(Colorado Street Apartments) 2003 @ 102
5.450% Due 01/01/17 AAA 2010 @ 100 S.F. 217,987
- -------------------------------------------------------------------------------------------------------------------------
D 400,000 New Mexico Mortgage Finance Authority, Rental Housing
Refunding Revenue Bonds (FNMA Pass-Through
Certificates Loans-To-Lenders Program)
Series 1993C (Netherwood Village Apartments) 2003 @ 102
5.450% Due 01/01/17 AAA 2010 @ 100 S.F. 399,976
- -------------------------------------------------------------------------------------------------------------------------
E 400,000 New Mexico Mortgage Finance Authority, Rental Housing
Refunding Revenue Bonds (FNMA Pass-Through Certificates
Loans-To-Lenders Program-Vila Ladera Apartments) 2003 @ 102
5.450% Due 01/01/17 AAA 2010 @ 100 S.F. 399,028
- -------------------------------------------------------------------------------------------------------------------------
F 550,000 City of Albuquerque, New Mexico, Joint Water and Sewer 2002 @ 100
System Revenue Bonds, Series 1992 2009 @ 100 S.F.
5.500% Due 07/01/17 AA 2002 @ 100 P.R. 565,791
- -------------------------------------------------------------------------------------------------------------------------
G 150,000 Puerto Rico Electric Power Authority, Power Revenue Refunding
Bonds, Series 1989N (Capital Guaranty Insured)
0.000% Due 07/01/17 AAA 2015 @ 87.06 S.F. 59,333
- -------------------------------------------------------------------------------------------------------------------------
H 475,000 The Regents of the University of New Mexico, New Mexico,
System Revenue Refunding Bonds, Series 1992B 2002 @ 102
5.750% Due 06/01/22 AA 2013 @ 100 S.F. 480,025
------------- -------------
$ 2,843,000 $ 2,781,683
============= =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
** The issuer of these Bonds has placed funds or securities in escrow against
payment of the issue on the date or dates indicated.
<TABLE>
<CAPTION>
149TH INSURED MULTI-SERIES
OHIO INSURED MUNICIPALS INCOME TRUST,
INTERMEDIATE LADDERED MATURITY SERIES PORTFOLIO as of June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- ------ ----------- ------------------------------------------------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
A $ 315,000 City of Hamilton, Ohio, Gas System Revenue Bonds,
Series 1993A (MBIA Insured)
75M-4.200% Due 10/15/00 AAA $ 75,298
240M-4.400% Due 10/15/02 AAA 241,411
0M-4.500% Due 10/15/04 - 0 -
- -------------------------------------------------------------------------------------------------------------------------
B 350,000 City of Warren, Ohio, General Obligation (Limited Tax) Various
Purpose Refunding Bonds, Series 1993
(AMBAC Indemnity Insured)
0M-4.250% Due 11/15/00 - 0 -
185M-4.350% Due 11/15/01** AAA 185,357
165M-4.500% Due 11/15/03** AAA 165,511
- -------------------------------------------------------------------------------------------------------------------------
C 65,000 County of Stark, Ohio, Hospital Facilities Refunding Revenue
Bonds (Timken Mercy Medical Center) Series 1993A
(MBIA Insured)
50M-4.375% Due 12/01/00** AAA 50,361
15M-4.625% Due 12/01/02** AAA 15,129
0M-4.875% Due 12/01/04 - 0 -
- -------------------------------------------------------------------------------------------------------------------------
D 165,000 County of Clermont, Ohio, Clermont County Sewer District,
Sewer System Revenue Refunding Bonds, Series 1993
(AMBAC Indemnity Insured)
4.300% Due 12/01/01 AAA 165,721
- -------------------------------------------------------------------------------------------------------------------------
E 40,000 Ohio State Water Development Authority, Water Development
Revenue Refunding Bonds, 1992 Clean Water
Series (MBIA Insured)
5.250% Due 12/01/01 AAA 41,044
- -------------------------------------------------------------------------------------------------------------------------
F 80,000 City of Hamilton, Ohio, Electric System Mortgage Revenue
Refunding Bonds, Series 1992A (FGIC Insured)
5.500% Due 10/15/02 AAA 83,155
- -------------------------------------------------------------------------------------------------------------------------
G 175,000 Ohio State Water Development Authority, Water Development
Revenue Refunding Bonds, 1992 Safe Water Series
(MBIA Insured)
0.000% Due 06/01/03 AAA 149,375
- -------------------------------------------------------------------------------------------------------------------------
H 65,000 Ohio State Water Development Authority, Water Development
Revenue Refunding Bonds, Pure Water Refunding and
Improvement Series (MBIA Insured)
5.750% Due 12/01/03 AAA 2002 @ 102 68,580
- -------------------------------------------------------------------------------------------------------------------------
I 385,000 Lucas County, Ohio, Hospital Revenue Refunding Bonds (St.
Vincent Medical Center) Series 1993B (MBIA Insured)
4.700% Due 08/15/04 AAA 2003 @ 102 388,369
------------- -------------
$ 1,640,000 $ 1,629,311
============= =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
** The issuer of these Bonds has placed funds or securities in escrow against
payment of the issue on the date or dates indicated.
INSURED MUNICIPALS INCOME TRUST, 149TH INSURED MULTI-SERIES
Notes to Financial Statements
June 30, 1997, 1998 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation - Tax-exempt municipal securities are stated at the value
determined by the Evaluator, American Portfolio Evaluation Services (a division
of an affiliate of the Sponsor). The Evaluator may determine the value of the
Bonds (1) on the basis of current bid prices of the Bonds obtained from dealers
or brokers who customarily deal in Bonds comparable to those held by each of the
Trusts, (2) on the basis of bid prices for comparable Bonds, (3) by determining
the value of the Bonds by appraisal or (4) by any combination of the above. The
Louisiana and New Mexico Trusts maintain insurance which provides for the timely
payment when due, of all principal and interest on Bonds owned by it. Except in
cases in which Bonds are in default, or significant risk of default, the
valuation of the Bonds in such Trusts does not include any value attributable to
this insurance feature since the insurance terminates as to any Bond at the time
of its disposition.
Security Cost - The original cost to each of the Trusts (California
Intermediate Laddered Maturity, Louisiana, Michigan, New Mexico and Ohio
Intermediate Laddered Maturity) was based on the determination by Interactive
Data Corporation of the offering prices of the Bonds on the date of deposit
(October 28, 1993). Since the valuation is based upon the bid prices, such
Trusts (California Intermediate Laddered Maturity, Louisiana, Michigan, New
Mexico and Ohio Intermediate Laddered Maturity) recognized downward adjustments
of $23,196, $39,609, $31,612, $22,476 and $23,302, respectively, on the date of
deposit resulting from the difference between the bid and offering prices. These
downward adjustments were included in the aggregate amount of unrealized
depreciation reported in the financial statements for each Trust for the period
ended June 30, 1994.
Unit Valuation - The redemption price per Unit is the pro rata share of each
Unit in each Trust based upon (1) the cash on hand in such Trust or monies in
the process of being collected, (2) the Bonds in such Trust based on the value
determined by the Evaluator and (3) interest accrued thereon, less accrued
expenses of the Trust, if any.
Federal Income Taxes - The Trust is not a taxable entity for Federal income
tax purposes. Each Unitholder is considered to be the owner of a pro rata
portion of such Trust and, accordingly, no provision has been made for Federal
income taxes.
Other - The financial statements are presented on the accrual basis of
accounting. Any realized gains or losses from securities transactions are
reported on an identified cost basis.
NOTE 2 - PORTFOLIO
Ratings - The source of all ratings, exclusive of those designated N/R or *
is Standard & Poor's, A Division of the McGraw-Hill Companies. Ratings marked *
are by Moody's Investors Service, Inc. as these Bonds are not rated by Standard
& Poor's, A Division of the McGraw-Hill Companies. N/R indicates that the Bond
is not rated by Standard & Poor's, A Division of the McGraw-Hill Companies or
Moody's Investors Service, Inc. The ratings shown represent the latest published
ratings of the Bonds. For a brief description of rating symbols and their
related meanings, see "Description of Securities Ratings" in the Information
Supplement.
Redemption Feature - There is shown under this heading the year in which each
issue of Bonds is initially or currently callable and the call price for that
year. Each issue of Bonds continues to be callable at declining prices
thereafter (but not below par value) except for original issue discount Bonds
which are redeemable at prices based on the issue price plus the amount of
original issue discount accreted to redemption date plus, if applicable, some
premium, the amount of which will decline in subsequent years. "S.F." indicates
a sinking fund is established with respect to an issue of Bonds. "P.R."
indicates a bond has been prerefunded. Redemption pursuant to call provisions
generally will, and redemption pursuant to sinking fund provisions may, occur at
times when the redeemed Bonds have an offering side evaluation which represents
a premium over par. To the extent that the Bonds were deposited in the Trust at
a price higher than the price at which they are redeemed, this will represent a
loss of capital when compared with the original Public Offering Price of the
Units. Conversely, to the extent that the Bonds were acquired at a price lower
than the redemption price, this will represent an increase in capital when
compared with the original Public Offering Price of the Units. Distributions
will generally be reduced by the amount of the income which would otherwise have
been paid with respect to redeemed Bonds and there will be distributed to
Unitholders the principal amount in excess of $1 per Unit semi-annually and any
premium received on such redemption. However, should the amount available for
distribution in the Principal Account exceed $10.00 per Unit, the Trustee will
make a special distribution from the Principal Account on the next succeeding
monthly distribution date to holders of record on the related monthly record
date. The Estimated Current Return in this event may be affected by such
redemptions. For the Federal tax effect on Unitholders of such redemptions and
resultant distributions, see "Federal Tax Status" in Part II.
NOTE 2 - PORTFOLIO (continued)
Insurance - Insurance coverage providing for the timely payment when due of
all principal and interest on the Bonds in the Trusts has been obtained by the
Trusts or by one of the Preinsured Bond Insurers (as indicated in the Bond
name). Such insurance does not guarantee the market value of the Bonds or the
value of the Units. For Bonds covered under the Trust's insurance policy the
insurance is effective only while Bonds thus insured are held in the Trust and
the insurance premium, which is a Trust obligation, is paid on a monthly basis.
The premium for insurance which has been obtained from various insurance
companies by the issuer of the Bond involved is payable by the issuer. Insurance
expense for the period reflects adjustments for redeemed or sold Bonds.
An Accounting and Auditing Guide issued by the American Institute of
Certified Public Accountants states that, for financial reporting purposes,
insurance coverage of the type acquired by the Trust does not have any
measurable value in the absence of default of the underlying Bonds or indication
of the probability of such default. In the opinion of the Evaluator, there is no
indication of a probable default of Bonds in the portfolio as of the date of
these financial statements.
Unrealized Appreciation and Depreciation - An analysis of net unrealized
appreciation (depreciation) at June 30, 1999 is as follows:
<TABLE>
<CAPTION>
California Ohio
Intermediate Intermediate
Laddered Laddered
Maturity Louisiana Michigan New Mexico Maturity
Trust Trust Trust Trust Trust
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Unrealized Appreciation $ 40,194 $ 24,626 $ 4,834 $ 16,107 $ 40,606
Unrealized Depreciation -- (48,333) (86,222) (54,811) (9,519)
----------- ----------- ------------ ----------- ------------
$ 40,194 $ (23,707) $ (81,388) $ (38,704) $ 31,087
=========== =========== ============ =========== ============
</TABLE>
NOTE 3 - OTHER
Marketability - Although it is not obligated to do so, the Sponsor intends to
maintain a market for Units and to continuously offer to purchase Units at
prices, subject to change at any time, based upon the aggregate bid price of the
Bonds in the portfolio of each Trust, plus interest accrued to the date of
settlement. If the supply of Units exceeds demand, or for other business
reasons, the Sponsor may discontinue purchases of Units at such prices. In the
event that a market is not maintained for the Units, a Unitholder desiring to
dispose of his Units may be able to do so only by tendering such Units to the
Trustee for redemption at the redemption price.
Cost to Investors - The cost to original investors was based on the
Evaluator's determination of the aggregate offering price of the Bonds per Unit
on the date of an investor's purchase, plus a sales charge of 3.0% of the public
offering price which is equivalent to 3.093% of the aggregate offering price of
the Bonds for the California Intermediate Laddered Maturity and Ohio
Intermediate Laddered Maturity Trusts and 4.9% of the public offering price
which is equivalent to 5.152% of the aggregate offering price of the Bonds for
the remaining Trusts. The secondary market cost to investors is based on the
Evaluator's determination of the aggregate bid price of the Bonds per Unit on
the date of an investor's purchase plus a sales charge based upon the years to
average maturity of the Bonds in the portfolio. The sales charge ranges from
1.0% of the public offering price (1.010% of the aggregate bid price of the
Bonds) for a Trust with a portfolio with less than two years to average maturity
to 5.40% of the public offering price (5.708% of the aggregate bid price of the
Bonds) for a Trust with a portfolio with twenty-one or more years to average
maturity.
Compensation of Evaluator - The Evaluator receives a fee for providing
portfolio supervisory services for each of the Trusts ($.25 per Unit, not to
exceed the aggregate cost of the Evaluator for providing such services to all
applicable Trusts). In addition, the Evaluator receives an annual fee for
regularly evaluating each of the Trust's portfolios. Both fees may be adjusted
for increases under the category "All Services Less Rent of Shelter" in the
Consumer Price Index.
NOTE 4 - REDEMPTION OF UNITS
Units were presented for redemption as follows:
Years ended June 30,
1997 1998 1999
-------------- -------------- --------------
California Intermediate
Laddered Maturity Trust 240 141 201
Louisiana Trust 325 161 231
Michigan Trust 12 12 16
New Mexico Trust 31 4 123
Ohio Intermediate
Laddered Maturity Trust 262 482 273
VAN KAMPEN FOCUS PORTFOLIOS(SM)
A DIVISION OF VAN KAMPEN FUNDS INC.
PROSPECTUS PART II
SEPTEMBER 1999
INSURED MUNICIPALS INCOME TRUST
AND
INVESTORS' QUALITY TAX-EXEMPT TRUST
AND
VAN KAMPEN FOCUS PORTFOLIOS
MUNICIPAL SERIES
A convenient way to invest in a diversified
portfolio of tax-exempt municipal bonds
This prospectus contains two parts.
No one may use this Prospectus Part II
unless accompanied by Prospectus Part I.
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved of
the Trust units or passed upon the adequacy oraccuracy of this prospectus.
Any contrary representation is a criminal offense.
<PAGE>
THE TRUSTS
THE FUND. Your Trust is one of several unit investment trusts created
under the name Insured Municipals Income Trust, Insured Municipals Income Trust
and Investors' Quality Tax-Exempt Trust or Van Kampen Focus Portfolios,
Municipal Series (the "Fund"). The Fund was created under the laws of the State
of New York pursuant to a Trust Indenture and Agreement (the "Trust Agreement"),
dated the Date of Deposit among Van Kampen Funds Inc., as Sponsor, American
Portfolio Evaluation Services, a division of Van Kampen Investment Advisory
Corp., as Evaluator, and The Bank of New York, as Trustee or their predecessors
The Fund consists of separate portfolios of interest-bearing
obligations issued by or on behalf of states and territories of the United
States, and political subdivisions and authorities thereof, the interest on
which is, in the opinion of recognized bond counsel to the issuing authorities,
excludable from gross income for Federal income tax purposes under existing law.
All issuers of Bonds in a State Trust are located in the state for which the
Trust is named or in United States territories or possessions and their public
authorities; consequently, in the opinion of recognized bond counsel to the Bond
issuers, the interest earned on the Bonds is exempt to the extent indicated
herein from state and local taxes. Further, in the opinion of bond counsel to
the respective issuers, the interest income of each Bond in a U.S. Territorial
IM-IT Trust is exempt from state, Commonwealth of Puerto Rico and local income
taxation. Interest on certain Bonds in a National Quality AMTTrust may be a
preference item for purposes of the alternative minimum tax. Accordingly, a
National Quality AMTTrust may be appropriate only for investors who are not
subject to the alternative minimum tax. With the exception of New York and
Pennsylvania Trusts, Units of a State Trust may be purchased only by residents
of the state for which the Trust is named. Units of a New York Trust may be
purchased by residents of New York, Connecticut and Florida. Units of a
Pennsylvania Trust may be purchased by residents of Pennsylvania, Connecticut,
Florida, Maryland, New York, Ohio and West Virginia. State Trusts, other than
State Intermediate Laddered Maturity Trusts or State Intermediate Trusts, are
referred to herein as "Long-Term State Trusts".
On the Date of Deposit, the Sponsor deposited the Bonds with the
Trustee. The Bonds initially consisted of delivery statements relating to
contracts for their purchase and cash, cash equivalents and/or irrevocable
letters of credit issued by a financial institution. Thereafter, the Trustee, in
exchange for the Bonds, delivered to the Sponsor evidence of ownership of the
Units.
The portfolio of any IM-IT, IM-IT Discount, U.S. Territorial IM-IT,
Long-Term State or National Quality Trust consists of Bonds maturing
approximately 15 to 40 years from the Date of Deposit. The approximate range of
maturities from the Date of Deposit for Bonds in any IM-IT Limited Maturity
Trust, IM-IT Intermediate Trust, State Intermediate Laddered Maturity Trust and
IM-IT Short Intermediate Trust is 12 to 15 years, 5 to 15 years, 5 to 10 years
and 3 to 7 years, respectively. The portfolio of any State Intermediate Laddered
Maturity Trust is structured so that approximately 20% of the Bonds will mature
each year, beginning in approximately the fifth year of the Trust, entitling
each Unitholder to a return of principal. This return of principal may offer
Unitholders the opportunity to respond to changing economic conditions and to
specific financial needs that may arise between the fifth and tenth years of the
Trust. However, the flexibility provided by the return of principal may also
eliminate a Unitholder's ability to reinvest at a rate as high as the yield on
the Bonds which matured.
Each Unit represents a fractional undivided interest in the principal
and net income of a Trust. To the extent that any Units are redeemed by the
Trustee, the fractional undivided interest in a Trust represented by each Unit
will increase, although the actual interest in the Trust will remain unchanged.
Units will remain outstanding until redeemed by Unitholders or until the
termination of the Trust Agreement.
OBJECTIVES AND BOND SELECTION. The objectives of the Fund are income
exempt from Federal income taxation and, in the case of a State Trust, Federal
and state income taxation and conservation of capital through an investment in
diversified portfolios of Federal and state tax-exempt obligations. A State
Intermediate Laddered Maturity Trust has additional objectives of providing
protection against changes in interest rates and investment flexibility through
an investment in a laddered portfolio of intermediate-term interest-bearing
obligations with maturities ranging from approximately 5 to 10 years in which
roughly 20% of the Bonds mature each year beginning in approximately the fifth
year of the Trust. There is, of course, no guarantee that the Trusts will
achieve their objectives. The Fund may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of tax-exempt fixed income
bonds with greater diversification than they might be able to acquire
individually. Insurance guaranteeing the timely payment, when due, of all
principal and interest on the Bonds in each Insured Trust has been obtained from
a municipal bond insurance company. For information relating to insurance on the
Bonds, see "Insurance on the Bonds in the Insured Trusts". In addition, these
bonds are often not available in small amounts.
In selecting Bonds for the Trusts, the Sponsor considered the following
factors, among others: (a) either the Standard & Poor's rating of the Bonds was
not less than "BBB-" for Insured Trusts and "A-" for Quality Trusts, or the
Moody's Investors Service, Inc. ("Moody's") rating of the Bonds was not less
than "Baa" for Insured Trusts and "A" for the Quality Trusts, including
provisional or conditional ratings, respectively, (or, if not rated, the Bonds
had credit characteristics sufficiently similar to the credit characteristics of
interest-bearing tax-exempt bonds that were so rated as to be acceptable for
acquisition by the Fund in the opinion of the Sponsor), (b) the prices of the
Bonds relative to other bonds of comparable quality and maturity, (c) the
diversification of Bonds as to purpose of issue and location of issuer and (d)
with respect to the Insured Trusts, the availability and cost of insurance.
After the Date of Deposit, a Bond may cease to be rated or its rating may be
reduced below the minimum required as of the Date of Deposit. Neither event
requires elimination of a Bond from a Trust but may be considered in the
Sponsor's determination as to whether or not to direct the Trustee to dispose of
the Bond (see "Fund Administration--Portfolio Administration").
THE BONDS. Your Trust invests in municipal bonds. States, municipalities
and public authorities issue these bonds to raise money for a variety of
purposes. In selecting bonds, we seek to diversify your portfolio by bond
purpose. This section briefly describes different bond types to help you better
understand your investment. We list the types of bonds in your portfolio in
Prospectus Part I. We also describe these bonds in greater detail in the
Information Supplement. See "Additional Information".
GENERAL OBLIGATION BONDS are backed by the general taxing power of the
issuer. The issuer secures these bonds by pledging its faith, credit and
unlimited taxing power for the payment of principal and interest.
REVENUE BONDS are payable only from the revenue of a specific project or
authority. They are not supported by the issuer's general power to levy taxes.
The risk of default in payment of interest or principal increases if the income
of the related project falters because that income is the only source of
payment. All of the following bonds are revenue bonds.
AIRPORT BONDS are obligations of issuers that own and operate airports. The
ability of the issuer to make payments on these bonds primarily depends on the
ability of airlines to meet their obligations under use agreements. Due to
increased competition, deregulation, increased fuel costs and other factors,
some airlines may have difficulty meeting these obligations.
BOND BANKS are vehicles that pool various municipal obligations into larger
offerings. This reduces the cost of borrowing for the municipalities. The types
of financing projects that these obligations support vary.
CERTIFICATES OF PARTICIPATION are generally a type of municipal lease
obligation. Lease payments of a governmental entity secure payments on these
bonds. These payments depend on the governmental entity budgeting appropriations
for the lease payments. A governmental body cannot obligate future governments
to appropriate for or make lease payments, but governments typically promise to
take action necessary to include lease payments in their budgets. If a
government fails to budget for or make lease payments, sufficient funds may not
exist to pay interest or principal on these bonds.
HEALTH CARE BONDS are obligations of issuers that derive revenue from
hospitals and hospital systems. The ability of these issuers to make payments on
bonds depends on factors such as facility occupancy levels, demand for services,
competition resulting from hospital mergers and affiliations, the need to reduce
costs, government regulation, costs of malpractice insurance and claims, and
government financial assistance (such as Medicare and Medicaid).
HIGHER EDUCATION BONDS are obligations of issuers that operate universities
and colleges. These issuers derive revenues from tuition, dormitories, grants
and endowments. These issuers face problems related to declines in the number of
college-age individuals, possible inability to raise tuitions and fees,
uncertainty of continued federal grants, state funding or donations, and
government legislation or regulation.
INDUSTRIAL REVENUE BONDS finance the cost of acquiring, building or
improving industrial projects. Private corporations usually operate these
projects. The ability of the issuer to make payments on these bonds depends on
factors such as the creditworthiness of the corporation operating the project,
revenues generated by the project, expenses of the project and environmental or
other regulatory restrictions.
MULTI-FAMILY HOUSING BONDS are obligations of issuers that derive revenues
from mortgage loans on multiple family residences, retirement housing or housing
projects for low to moderate-income families. These bonds are generally
pre-payable at any time. It is likely that their life will be less than their
stated maturity. The ability of these issuers to make payments on bonds depends
on such factors as rental income, occupancy levels, operating expenses, mortgage
default rates, taxes, government regulations and appropriation of subsidies.
OTHER CARE BONDS include obligations of issuers that derive revenue from
mental health facilities, nursing homes and intermediate care facilities. These
bonds are similar to health care bonds and the issuers face the same general
risks.
PUBLIC BUILDING BONDS finance the cost of acquiring, leasing, building or
improving public buildings such as offices, recreation facilities, convention
centers, police stations, correctional institutions and parking garages. The
ability of the issuers to make payments on these bonds depends on factors such
as the government budgeting sufficient funds to make lease or mortgage payments
on the facility, user fees or rents, costs of maintenance and decreases in use
of the facility.
PUBLIC EDUCATION BONDS are obligations of issuers that operate primary and
secondary schools. The ability of these issuers to make payments on these bonds
depends primarily on ad valorem taxes. These issuers may also face problems
related to litigation contesting state constitutionality of public education
financing.
RETAIL ELECTRIC/GAS/TELEPHONE BONDS are obligations of issuers that derive
revenues from the retail sale of utilities to customers. The ability of these
issuers to make payments on these bonds depends on factors such as the rates and
demand for these utilities, competition, government regulation and rate
approvals, overhead expenses and the cost of fuels.
SINGLE FAMILY HOUSING BONDS are obligations of issuers that derive revenues
from mortgage loans on single family residences. Single family residences
generally include one to four-family dwellings. These bonds are similar to
multi-family housing bonds and the issuers face the same general risks.
TAX DISTRICT BONDS are obligations secured by a pledge of taxing power by a
municipality, such as tax increment financing or tax allocation bonds. These
bonds are similar to general obligation bonds. Unlike general obligation bonds,
however, the municipality does not pledge its unlimited taxing power to pay
these bonds. Instead, the municipality pledges revenues from a specific tax to
pay these bonds. If the tax cannot support payment of interest and principal, a
municipality may need to raise the related tax to pay these bonds. An inability
to raise the tax could have an adverse affect on these bonds.
TRANSPORTATION BONDS are obligations of issuers that own and operate public
transit systems, ports, highways, turnpikes, bridges and other transportation
systems. The ability of these issuers to make payments on these bonds depends on
variations in use, the degree of government subsidization, competition from
other forms of transportation and increased costs. Port authorities derive
revenues primarily from fees imposed on ships using the port facilities. These
fees can fluctuate depending on the local economy and competition from air, rail
and truck transportation. Increased fuel costs, alternative transportation modes
and competition from toll-free bridges and roads will impact revenues of issuers
that operate bridges, roads or tunnels.
WASTE DISPOSAL BONDS are obligations of issuers that derive revenues from
resource recovery facilities. These facilities process solid waste, generate
steam and convert steam to electricity. These issuers face problems such as
costs and delays due to environmental concerns, effects of conservation and
recycling, destruction or condemnation of a project, void or unenforceable
contracts, changes in the economic availability of raw materials, operating
supplies or facilities, and other unavoidable changes that adversely affect
operation of a project.
WATER AND SEWER BONDS are obligations of issuers that derive revenues from
user fees from the sale of water and sewerage services. These issuers face
problems such as the ability to obtain rate increases, population declines,
difficulties in obtaining new fresh water supplies and "no-growth" zoning
ordinances. These issuers also face many of the same problems of waste disposal
issuers.
WHOLESALE ELECTRIC BONDS are obligations of issuers that derive revenues
from selling electricity to other utilities. The ability of these issuers to
make payments on these bonds depends on factors such as the rates and demand for
electric utilities, competition, overhead expenses and government regulation and
rate approvals.
MORE ABOUT THE BONDS. In addition to describing the purpose of the bonds,
we also list other information about the bonds in the "Portfolio" in Prospectus
Part I. This information relates to other characteristics of the bonds. This
section briefly describes some of these characteristics.
ORIGINAL ISSUE DISCOUNT BONDS were initially issued at a price below their
face (or par) value. These bonds typically pay a lower interest rate than
comparable bonds that were issued at or above their par value. In a stable
interest rate environment, the market value of these bonds tends to increase
more slowly in early years and in greater increments as the bonds approach
maturity. The issuers of these bonds may be able to call or redeem a bond before
its stated maturity date and at a price less than the bond's par value.
ZERO COUPON BONDS are a type of original issue discount bond. These bonds
do not pay any current interest during their life. If you own this type of bond,
you have the right to receive a final payment of the bond's par value at
maturity. The price of these bonds often fluctuates greatly during periods of
changing market interest rates compared to bonds that make current interest
payments. The issuers of certain of these bonds can call the bond at a price
below the bond's par value.
"When, as and if issued" bonds are bonds that trade before they are
actually issued. This means that we can only deliver them to your Trust "when,
as and if" the bonds are actually issued. Delivery of these bonds may be delayed
or may not occur. Interest on these bonds does not begin accruing to your Trust
until we deliver the bond to the Trust. You may have to adjust your tax basis if
we deliver any of these bonds after the expected delivery date. Any adjustment
would reflect interest that accrued between the time you purchased your units
and the delivery of the bonds to your Trust. This could lower your first year
estimated current return. You may experience gains or losses on these bonds from
the time you purchase units even though your Trust has not yet received them.
RISK FACTORS. All investments involve risk. This section describes the main
risks that can impact the value of bonds in your Trust. You should understand
these risks before you invest. If the value of the bonds falls, the value of
your units will also fall. We cannot guarantee that your Trust will achieve it
objective or that your investment return will be positive over any period.
MARKET RISK is the risk that the value of the bonds in your Trust will
fluctuate. This could cause the value of your units to fall below your original
purchase price or below the par value. Market value fluctuates in response to
various factors. These can include changes in interest rates, inflation, the
financial condition of a bond's issuer or insurer, perceptions of the issuer or
insurer, or ratings on a bond. Even though we carefully supervise your
portfolio, you should remember that we do not manage your portfolio. Your Trust
will not sell a bond solely because the market value falls as is possible in a
managed fund.
INTEREST RATE RISK is the risk that the value of bonds will fall if
interest rates increase. Bonds typically fall in value when interest rates rise
and rise in value when interest rates fall. Bonds with longer periods before
maturity are often more sensitive to interest rate changes.
CREDIT RISK is the risk that a bond's issuer or insurer is unable to meet
its obligation to pay principal or interest on the bond.
CALL RISK is the risk that the issuer prepays or "calls" a bond before its
stated maturity. An issuer might call a bond if interest rates fall and the bond
pays a higher interest rate or if it no longer needs the money for the original
purpose. If an issuer calls a bond, your Trust will distribute the principal to
you but your future interest distributions will fall. You might not be able to
reinvest this principal at as high a yield. A bond's call price could be less
than the price your Trust paid for the bond and could be below the bond's par
value. This means that you could receive less than the amount you paid for your
units. If enough bonds in your Trust are called, your Trust could terminate
early. We list the first date that the issuer can call each bond in the
portfolio in Prospectus Part I along with the price the issuer would have to
pay.
BOND QUALITY RISK is the risk that a bond will fall in value if a rating
agency decreases the bond's rating.
BOND CONCENTRATION RISK is the risk that your Trust is less diversified
because it concentrates in a particular type of bond. When a certain type of
bond makes up 25% or more of a Trust, the Trust is considered to be
"concentrated" in that bond type. We describe the different bond types under
"The Bonds".
REDUCED DIVERSIFICATION RISK is the risk that your Trust will become
smaller and less diversified as bonds are sold, are called or mature. This could
increase your risk of loss and increase your share of Trust expenses.
LIQUIDITY RISK is the risk that the value of a bond will fall if trading in
the bond is limited or absent. No one can guarantee that a liquid trading market
will exist for any bond because these bonds generally trade in the
over-the-counter market (they are not listed on a securities exchange).
LITIGATION AND LEGISLATION RISK is the risk that future litigation or
legislation could affect the value of your Trust. For example, future
legislation could reduce tax rates, impose a flat tax, exempt all investment
income from tax or change the tax status of the bonds. Litigation could
challenge an issuer's authority to issue or make payments on bonds.
NO FDIC GUARANTEE. An investment in your Trust is not a deposit of any bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
YEAR 2000 READINESS DISCLOSURE. These two paragraphs constitute "Year 2000
Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act of 1998. Your Trust could be negatively impacted if
computer systems used by the Sponsor, Evaluator, Trustee or other service
providers to your Trust do not properly process date-related information after
December 31, 1999. This is commonly known as the "Year 2000 Problem". The
Sponsor, Evaluator and Trustee are taking steps to address this problem and to
obtain reasonable assurances that other service providers to the Trust are
taking comparable steps. We cannot guarantee that these steps will be sufficient
to avoid any adverse impact on your Trust. This problem may impact issuers to
varying degrees based on factors such as issuer type and degree of technological
sophistication. We cannot predict what impact, if any, this problem will have on
the issuers or insurers of the bonds.
In addition, computer failures in the financial services industry could
detrimentally affect the markets for the bonds beginning January 1, 2000.
Improperly functioning trading systems may result in settlement problems and
liquidity issues. Moreover, corporate and governmental data processing errors
may adversely affect issuers or insurers and overall economic uncertainties.
Remediation costs will affect the ability of individual issuers or insurers to
make payments on the bonds will be affected by remediation costs. All of these
factors could adversely affect the bonds in your Trust.
ESTIMATED CURRENT AND LONG-TERM RETURNS
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The Estimated Current Returns and the Estimated Long-Term Returns are
set forth in the Prospectus Part I. Estimated Current Return is calculated by
dividing the estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per Unit will vary with
changes in fees and expenses of the Trust and with the principal prepayment,
redemption, maturity, exchange or sale of Bonds. The Public Offering Price will
vary with changes in the price of the Bonds. Accordingly, there is no assurance
that the present Estimated Current Return will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums and
the accretion of discounts) and estimated retirements of the Bonds and (2) takes
into account the expenses and sales charge associated with Units. Since the
value and estimated retirements of the Bonds and the expenses of a Trust will
change, there is no assurance that the present Estimated Long-Term Return will
be realized in the future. The Estimated Current Return and Estimated Long-Term
Return are expected to differ because the calculation of Estimated Long-Term
Return reflects the estimated date and amount of principal returned while the
Estimated Current Return calculation includes only net annual interest income
and Public Offering Price.
PUBLIC OFFERING
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GENERAL. Units are offered at the Public Offering Price. The secondary
market public offering price is based on the bid prices of the Bonds, the sales
charge described below, cash, if any, in the Principal Account and accrued
interest, if any. The minimum purchase is one Unit.
The secondary market sales charge is computed as described in the
following table based upon the estimated long-term return life of a Trust's
portfolio:
<TABLE>
<CAPTION>
Years To Maturity Sales Charge Years To Maturity Sales Charge Years To Maturity Sales Charge
------------------ -------------- ------------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
1............... 1.010% 8............... 3.627% 15............... 5.042%
2............... 1.523 9............... 4.167 16............... 5.152
3............... 2.041 10............... 4.384 17............... 5.263
4............... 2.302 11............... 4.603 18............... 5.374
5............... 2.564 12............... 4.712 19............... 5.485
6............... 2.828 13............... 4.822 20............... 5.597
7............... 3.093 14............... 4.932 21 to 30............... 5.708
</TABLE>
For purposes of computation of the estimated long-term return life,
Bonds will be deemed to mature on their expressed maturity dates unless: (a) the
Bonds have been called for redemption or are subject to redemption at an earlier
call date, in which case this call date will be deemed to be the maturity date;
or (b) the Bonds are subject to a "mandatory tender", in which case the
mandatory tender will be deemed to be the maturity date. The sales charges in
the above table are expressed as a percentage of the aggregate bid prices of the
Bonds. Expressed as a percent of the Public Offering Price, the sales charge on
a Trust consisting entirely of Bonds with 15 years to maturity would be 4.80%.
The sales charges in the table above do not apply to IM-IT Discount Trusts. The
applicable secondary market sales charges for an IM-IT Discount Trust are set
forth in the applicable Prospectus Part I.
Any reduced sales charge is the responsibility of the selling
Underwriter, broker, dealer or agent.
Employees, officers and directors (including their spouses, children,
grandchildren, parents, grandparents, siblings, mothers-in-law, fathers-in-law,
sons-in-law and daughters-in-law, and trustees, custodians or fiduciaries for
the benefit of such persons (collectively referred to herein as "related
purchasers")) of Van Kampen Funds Inc. and its affiliates and Underwriters and
their affiliates may purchase Units at the Public Offering Price less the
applicable underwriting commission or less the applicable dealer concession in
the absence of an underwriting commission. Employees, officers and directors
(including related purchasers) of dealers and their affiliates and vendors
providing services to the Sponsor may purchase Units at the Public Offering
Price less the applicable dealer concession.
Units may be purchased at the Public Offering Price less the concession
the Sponsor typically allows to brokers and dealers for purchases by (1)
investors who purchase Units through registered investment advisers, certified
financial planners and registered broker-dealers who in each case either charge
periodic fees for financial planning, investment advisory or asset management
services, or provide such services in connection with the establishment of an
investment account for which a comprehensive "wrap fee" charge is imposed, (2)
bank trust departments investing funds over which they exercise exclusive
discretionary investment authority and that are held in a fiduciary, agency,
custodial or similar capacity, (3) any person who for at least 90 days, has been
an officer, director or bona fide employee of any firm offering Units for sale
to investors or their immediate family members (as described above) and (4)
officers and directors of bank holding companies that make Units available
directly or through subsidiaries or bank affiliates. Notwithstanding anything to
the contrary in this Prospectus, such investors, bank trust departments, firm
employees and bank holding company officers and directors who purchase Units
through this program will not receive sales charge reductions for quantity
purchases.
OFFERING PRICE. The Public Offering Price of Units will vary from the
amounts stated under "Summary of Essential Financial Information" in Prospectus
Part I in accordance with fluctuations in the prices of the Bonds. The
"Evaluation Time" is the close of trading on the New York Stock Exchange on each
day that the Exchange is open for trading. Orders received by the Trustee,
Sponsor or any Underwriter for purchases, sales or redemptions after that time,
or on a day when the New York Stock Exchange is closed, will be held until the
next determination of price. The secondary market Public Offering Price per Unit
will be equal to the aggregate bid price of the Bonds plus the applicable
secondary market sales charge and dividing the sum by the number of Units
outstanding. For secondary market purposes, this computation will be made by the
Evaluator as of the Evaluation Time for each day on which any Unit is tendered
for redemption and as necessary. The offering price of Bonds may be expected to
average approximately 0.5%-1% more than the bid price.
The aggregate price of the Bonds is determined on the basis of bid
prices (a) on the basis of current market prices obtained from dealers or
brokers who customarily deal in bonds comparable to those held by the Fund; (b)
if these prices are not available, on the basis of current market prices for
comparable bonds; (c) by causing the value of the Bonds to be determined by
others engaged in the practice of evaluation, quoting or appraising comparable
bonds; or (d) by any combination of the above. Market prices of the Bonds will
generally fluctuate with changes in market interest rates. Unless Bonds are in
default in payment of principal or interest or in significant risk of default,
the Evaluator will not attribute any value to the insurance obtained by an
Insured Trust, if any.
The Evaluator will consider in its evaluation of Bonds which are in
default in payment of principal or interest or, in the Sponsor's opinion, in
significant risk of default (the "Defaulted Bonds") the value of any insurance
guaranteeing interest and principal payments. The value of the insurance will be
equal to the difference between (i) the market value of Defaulted Bonds assuming
the exercise of the right to obtain Permanent Insurance (less the insurance
premiums and related expenses attributable to the purchase of Permanent
Insurance) and (ii) the market value of Defaulted Bonds not covered by Permanent
Insurance. In addition, the Evaluator will consider the ability of a Portfolio
Insurer to meet its commitments under any insurance policy, including
commitments to issue Permanent Insurance. No value has been ascribed to
insurance obtained by an Insured Trust, if any, as of the date of this
Prospectus.
A person will become the owner of Units on the date of settlement
provided payment has been received. Cash, if any, made available to the Sponsor
prior to the date of settlement for the purchase of Units may be used in the
Sponsor's business and may be deemed to be a benefit to the Sponsor, subject to
the limitations of the Securities Exchange Act of 1934.
ACCRUED INTEREST
ACCRUED INTEREST (ACCRUED INTEREST TO CARRY). Accrued interest to carry
is included in the Public Offering Price for Insured Municipals Income Trust,
151st Insured Multi-Series and prior series and Insured Municipals Income Trust
and Investors' Quality Tax-Exempt Trust, Multi-Series 212 and prior series.
Accrued interest to carry consists of two elements. The first element arises as
a result of accrued interest which is the accumulation of unpaid interest on a
bond from the last day on which interest thereon was paid. Interest on
Securities in each Trust is actually paid either monthly, quarterly, if
applicable, or semi-annually to such Trust. However, interest on the Securities
in each Trust is accounted for daily on an accrual basis. Because of this, each
Trust always has an amount of interest earned but not yet collected by the
Trustee because of coupons that are not yet due. For this reason, the Public
Offering Price will have added to it the proportionate share of accrued and
undistributed interest to the date of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities in
such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the Trustee
to advance its own funds in connection with such interest distributions. The
Interest Account balances are also structured so that there will generally be
positive cash balances and since the funds held by the Trustee may be used by it
to earn interest thereon, it benefits thereby. If a Unitholder sells or redeems
all or a portion of his Units or if the Bonds in a Trust are sold or otherwise
removed or if a Trust is liquidated, he will receive at that time his
proportionate share of the accrued interest to carry computed to the settlement
date in the case of sale or liquidation and to the date of tender in the case of
redemption.
PURCHASED AND ACCRUED INTEREST. Included in the Public Offering Price
for Insured Municipals Income Trust, 152nd-173rd Insured Multi-Series and
Insured Municipals Income Trust and Investors' Quality Tax-Exempt Trust,
Multi-Series 213-246 is Purchased Interest and accrued interest. Included in the
Public Offering Price for Insured Municipals Income Trust, 174th Insured
Multi-Series and subsequent series and Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Multi-Series 247 and subsequent series is
accrued interest only. References to "accrued interest" in this prospectus
include both Purchased Interest and accrued interest as described in this
section.
Purchased Interest - Purchased Interest is a portion of the unpaid
interest that has accrued on the Securities from the later of the last payment
date on the Securities or the date of issuance thereof through the First
Settlement Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information" in this Prospectus Part I for the amount of Purchased Interest per
Unit for each Trust. Purchased Interest is an element of the price Unitholders
will receive in connection with the sale or redemption of Units prior to the
termination of a Trust.
Accrued Interest - Accrued Interest is an accumulation of unpaid
interest on securities which generally is paid semi-annually, although a Trust
accrues such interest daily. Because of this, a Trust always has an amount of
interest earned but not yet collected by the Trustee. For this reason, with
respect to sales settling after the First Settlement Date, the proportionate
share of accrued interest to the settlement date is added to the Public Offering
Price of Units. Unitholders will receive on the next distribution date of a
Trust the amount, if any, of accrued interest paid on their Units. As indicated
in "Purchased Interest", accrued interest as of the First Settlement Date
includes Purchased Interest. In an effort to reduce the amount of Purchased
Interest which would otherwise have to be paid by Unitholders, the Trustee may
advance a portion of such accrued interest to the Sponsor as the Unitholder of
record as of the First Settlement Date. Consequently, the accrued interest added
to the Public Offering Price of Units will include only accrued interest from
the First Settlement Date to the date of settlement (other than the Purchased
Interest already included therein), less any distributions from the Interest
Account after the First Settlement Date. Because of the varying interest payment
dates of the Bonds, accrued interest at any point in time will be greater than
the amount of interest actually received by a Trust and distributed to
Unitholders. If a Unitholder sells or redeems all or a portion of his Units, he
will be entitled to receive his proportionate share of the Purchased Interest
and accrued interest from the purchaser of his Units. Since the Trustee has the
use of the funds (including Purchased Interest) held in the Interest Account for
distributions to Unitholders and since such Account is non-interest-bearing to
Unitholders, the Trustee benefits thereby.
UNIT DISTRIBUTION. Units will be distributed to the public by
broker-dealers and others at the Public Offering Price, plus accrued interest.
The Sponsor intends to qualify Units for sale in a number of states.
Broker-dealers or others will be allowed a concession or agency commission in
connection with the distribution of Units equal to 70% of the sales charge
applicable to the transaction provided that the Units are acquired from the
Sponsor. Certain commercial banks may be making Units available to their
customers on an agency basis. A portion of the sales charge paid by these
customers (equal to the agency commission referred to above) is retained by or
remitted to the banks. Any discount provided to investors will be borne by the
selling dealer or agent. The Sponsor reserves the right to reject, in whole or
in part, any order for the purchase of Units and to change the amount of the
concession or agency commission to dealers and others up to the entire amount of
the sales charge.
SPONSOR COMPENSATION. The Sponsor will receive a gross sales commission
equal to the sales charge applicable to the transaction involved. See "Public
Offering--General". In addition, the Sponsor realized a profit or loss, as a
result of the difference between the price paid for the Bonds by the Sponsor and
the cost of the Bonds to a Trust. The Sponsor has not participated as sole
underwriter or as manager or as a member of the underwriting syndicates from
which the Bonds in the Trusts were acquired. The Sponsor may further realize
profit or loss as a result of possible fluctuations in the market value of the
Bonds since all proceeds received from purchasers of Units (excluding dealer
concessions or agency commissions allowed, if any) will be retained by the
Sponsor. The Sponsor will also realize profits or losses in the amount of any
difference between the price at which Units are purchased and the price at which
Units are resold in connection with maintaining a secondary market for Units and
will also realize profits or losses resulting from a redemption of repurchased
Units at a price above or below the purchase price.
Broker-dealers of the Trusts, banks and/or others are eligible to
participate in a program in which such firms receive from the Sponsor a nominal
award for each of their representatives who have sold a minimum number of units
of unit investment trusts created by the Sponsor during a specified time period.
In addition, at various times the Sponsor may implement other programs under
which the sales forces of such firms may be eligible to win other nominal awards
for certain sales efforts, or under which the Sponsor will reallow to any such
firms that sponsor sales contests or recognition programs conforming to criteria
established by the Sponsor, or participate in sales programs sponsored by the
Sponsor, an amount not exceeding the total applicable sales charges on the sales
generated by such persons at the public offering price during such programs.
Also, the Sponsor in its discretion may from time to time pursuant to objective
criteria established by the Sponsor pay fees to qualifying firms for certain
services or activities which are primarily intended to result in sales of Units
of the Trusts. Such payments are made by the Sponsor out of its own assets, and
not out of the assets of the Trusts. These programs will not change the price
Unitholders pay for their Units or the amount that the Trusts will receive from
the Units sold. Approximately every eighteen months the Sponsor holds a business
seminar which is open to certain Underwriters that sell units of trusts it
sponsors. The Sponsor pays substantially all costs associated with the seminar,
excluding travel costs. These Underwriters are invited to send a certain number
of representatives based on the gross number of units such firm underwrites
during a designated time period.
<PAGE>
MARKET FOR UNITS. Although not obligated to do so, the Sponsor intends
to maintain a market for Units and offer to purchase Units at prices, subject to
change at any time, based upon the aggregate bid prices of the Bonds plus
accrued interest and any principal cash on hand, less any amounts representing
taxes or other governmental charges payable out of the Trust and less any
accrued Trust expenses. If the supply of Units exceeds demand or if some other
business reason warrants it, the Sponsor may either discontinue all purchases of
Units or discontinue purchases of Units at these prices. If a market is not
maintained and the Unitholder cannot find another purchaser, a Unitholder will
be able to dispose of Units by tendering them to the Trustee for redemption at
the Redemption Price. See "Rights of Unitholders--Redemption of Units". A
Unitholder who wishes to dispose of his Units should inquire of his broker as to
current market prices in order to determine whether there is in any price in
excess of the Redemption Price and, if so, the amount thereof. 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 per
Unit, it may purchase the Units not later than the day on which the Units would
otherwise have been redeemed by the Trustee.
RIGHTS OF UNITHOLDERS
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DISTRIBUTIONS OF INTEREST AND PRINCIPAL. Interest received by a Trust,
pro rated on an annual basis, will be distributed monthly unless a Unitholder
elects to receive quarterly or semi-annual distributions. Certain Trusts offer
only monthly distribution options while others offer only monthly and
semi-annual distribution options. The distribution options applicable to a Trust
are described in Prospectus Part I. The plan of distribution selected by a
Unitholder will remain in effect until changed. Unitholders who purchase Units
in the secondary market will receive distributions in accordance with the
election of the prior owner. Unitholders may change their distribution plan by
indicating the change on a card which may be obtained from the Trustee and
return the card to the Trustee with their certificates and other documentation
required by the Trustee. Certificates should be sent by registered or certified
mail to avoid their being lost or stolen. If the card and certificate are
properly presented to the Trustee, the change will become effective on the first
day after the next semi-annual record date and will remain effective until
changed.
Interest received by a Trust, including that part of the proceeds of
any disposition of Bonds which represents accrued interest, is credited by the
Trustee to the Interest Account. Other receipts are credited to the Principal
Account. After deduction of amounts sufficient to reimburse the Trustee, without
interest, for any amounts advanced and paid to the Sponsor as the Unitholder of
record as of the First Settlement Date, interest received will be distributed on
each distribution date to Unitholders of record as of the preceding record date.
All distributions will be net of estimated expenses. Funds in the Principal
Account will be distributed on each semi-annual distribution date to Unitholders
of record as of the preceding semi-annual record date. The Trustee is not
required to pay interest on funds held in the Principal or Interest Account (but
may itself earn interest thereon and therefore benefits from the use of these
funds) nor to make a distribution from the Principal Account unless the amount
available for distribution therein shall equal at least $1.00 per Unit. However,
should the amount available for distribution in the Principal Account equal or
exceed $10.00 per Unit, the Trustee will make a special distribution from the
Principal Account on the next monthly distribution date to Unitholders of record
on the related monthly record date.
Because interest payments are not received by a Trust at a constant
rate throughout the year, interest distributions may be more or less than the
amount credited to the Interest Account as of the record date. For the purpose
of minimizing fluctuations in interest distributions, the Trustee is authorized
to advance amounts necessary to provide interest distributions of approximately
equal amounts. The Trustee is reimbursed for these advances from funds in the
Interest Account on the next record date. Persons who purchase Units between a
record date and a distribution date will receive their first distribution on the
second distribution date after the purchase, under the applicable plan of
distribution.
REINVESTMENT OPTION. Unitholders may elect to have distributions on
their Units automatically reinvested in shares of certain Van Kampen mutual
funds which are registered in the Unitholder's state of residence (the
"Reinvestment Funds"). Each Reinvestment Fund has investment objectives that
differ from those of the Trusts. The prospectus relating to each Reinvestment
Fund describes its investment policies and the procedures to follow to begin
reinvestment. A Unitholder may obtain a prospectus for the Reinvestment Funds
from Van Kampen Funds Inc. at One Parkview Plaza, Oakbrook Terrace, Illinois
60181.
After becoming a participant in a reinvestment plan, each Trust
distribution will automatically be applied on the applicable distribution date
to purchase shares of the applicable Reinvestment Fund at a net asset value
computed on such date. Unitholders with an existing Guaranteed Reinvestment
Option (GRO) Program account (whereby a sales charge is imposed on distribution
reinvestments) may transfer their existing account into a new GRO account which
allows purchases of Reinvestment Fund shares at net asset value. Confirmations
of all reinvestments will be mailed to the Unitholder by the Reinvestment Fund.
A participant may elect to terminate his or her reinvestment plan and receive
future distributions in cash by notifying the Trustee in writing at least five
days before the next distribution date. Each Reinvestment Fund, its sponsor and
investment adviser have the right to terminate its reinvestment plan at any
time. Unitholders of New York Trusts who are New York residents may elect to
have distributions reinvested in shares of First Investors New York Insured Tax
Free Fund, Inc. subject to a sales charge of $1.50 per $100 reinvested (paid to
First Investors Management Company, Inc.).
REDEMPTION OF UNITS. A Unitholder may redeem all or a portion of his
Units by tender to the Trustee, at its Unit Investment Trust Division, 101
Barclay Street, 20th Floor, New York, New York 10286, of the certificates
representing the Units to be redeemed, duly endorsed or accompanied by proper
instruments of transfer with signature guaranteed (or by providing satisfactory
indemnity, such as in connection with lost, stolen or destroyed certificates)
and by payment of applicable governmental charges, if any. Redemption of Units
cannot occur until certificates representing the Units or satisfactory indemnity
have been received by the Trustee. No later than seven calendar days following
satisfactory tender, the Unitholder will receive an amount for each Unit equal
to the Redemption Price per Unit next computed after receipt by the Trustee of
the tender of Units. The "date of tender" is deemed to be the date on which
Units are received by the Trustee, except that as regards Units received after
the Evaluation Time on days of trading on the New York Stock Exchange, the date
of tender is the next day on which that Exchange is open and the Units will be
deemed to have been tendered to the Trustee on that day for redemption at the
Redemption Price.
Under Internal Revenue Service regulations, the Trustee is required to
withhold a specified percentage of a Unit redemption if the Trustee has not
received the Unitholder's tax identification number as required by such
regulations. Any amount withheld is transmitted to the Internal Revenue Service
and may be recovered by the Unitholder only when filing a return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, at any time a Unitholder elects to tender
Units for redemption, the Unitholder should provide a tax identification number
to the Trustee in order to avoid this possible "back-up withholding".
The Redemption Price per Unit (as well as the secondary market Public
Offering Price) will be determined on the basis of the bid price of the Bonds as
of the Evaluation Time on days of trading on the New York Stock Exchange on the
date any such determination is made. The Evaluator determines the Redemption
Price per Unit on days Units are tendered for redemption. The Redemption Price
per Unit is the pro rata share of each Unit on the basis of (i) the cash on hand
in the Trust or moneys in the process of being collected, (ii) the value of the
Bonds based on the bid prices of the Bonds, except for cases in which the value
of insurance has been included, (iii) accrued interest, less (a) amounts
representing taxes or other governmental charges and (b) the accrued Trust
expenses. The Evaluator may determine the value of the Bonds by employing any of
the methods set forth in "Public Offering--Offering Price". In determining the
Redemption Price per Unit no value will be assigned to the portfolio insurance
maintained on the Bonds in an Insured Trust unless the Bonds are in default in
payment of principal or interest or in significant risk of default. For a
description of the situations in which the Evaluator may value the insurance
obtained by the Insured Trusts, see "Public Offering--Offering Price". Accrued
interest paid on redemption shall be withdrawn from the Interest Account or, if
the balance therein is insufficient, from the Principal Account. All other
amounts will be withdrawn from the Principal Account. Units so redeemed shall be
cancelled.
The price at which Units may be redeemed could be less than the price
paid by the Unitholder and may be less than the par value of the Bonds
represented by the Units redeemed. The Trustee may sell Bonds to cover
redemptions. When Bonds are sold, the size and diversity of the Trust will be
reduced. 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 right of redemption may be suspended and payment postponed for any
period during which the New York Stock Exchange is closed, other than for
customary weekend and holiday closings, or during which the SEC determines that
trading on that Exchange is restricted or an emergency exists, as a result of
which disposal or evaluation of the Bonds is not reasonably practicable, or for
other periods as the SEC may by order permit. Under certain extreme
circumstances the Sponsor may apply to the SEC for an order permitting a full or
partial suspension of the right of Unitholders to redeem their Units.
UNITS. Ownership of Units is evidenced in book-entry form unless a
Unitholder makes a written request to the Trustee that ownership be in
certificate form. Units are transferable by making a written request to the
Trustee and, in the case of Units in certificate form, by presentation and
surrender of the certificate to the Trustee properly endorsed or accompanied by
a written instrument or instruments of transfer. A Unitholder must sign the
written request, or certificate transfer instrument, exactly as his name appears
on the records of the Trustee and on the face of any certificate with the
signature guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or a signature guaranty program accepted by the
Trustee. The Trustee may require additional documents such as, but not limited
to, trust instruments, certificates of death, appointments as executor or
administrator or certificates of corporate authority. Certificates will be
issued in denominations of one Unit or any multiple thereof. Although no such
charge is now made, the Trustee may require a Unitholder to pay a reasonable fee
for each certificate re-issued or transferred and to pay any governmental charge
that may be imposed in connection with each transfer or interchange. Destroyed,
stolen, mutilated or lost certificates will be replaced upon delivery to the
Trustee of satisfactory indemnity, evidence of ownership and payment of expenses
incurred. Mutilated certificates must be surrendered to the Trustee for
replacement.
REPORTS PROVIDED. Unitholders will receive a statement of interest and
other receipts received for each distribution. For as long as the Sponsor deems
it to be in the best interest of Unitholders, the accounts of each Trust will be
audited annually by independent certified public accountants and the report of
the accountants will be furnished to Unitholders upon request. Within a
reasonable period of time after the end of each year, the Trustee will furnish
to each person who was a registered Unitholder during that year a statement
describing the interest and principal received on the Bonds, actual Trust
distributions, Trust expenses, a list of the Bonds and other Trust information.
Unitholders will be furnished the Evaluator's evaluations of the Bonds upon
request.
INSURANCE ON THE BONDS IN THE INSURED TRUSTS
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Insurance has been obtained guaranteeing prompt payment of interest and
principal, when due, in respect of the Bonds in each Insured Trust. An insurance
policy obtained by an Insured Trust, if any, is non-cancellable and will
continue in force so long as the Trust is in existence, the respective Portfolio
Insurer is still in business and the Bonds described in the policy continue to
be held by the Trust. Any portfolio insurance premium for an Insured Trust is
paid by the Trust on a monthly basis. The premium for any Preinsured Bond
insurance has been paid by the issuer, by a prior owner of the Bonds or the
Sponsor and any policy is non-cancellable and will continue in force so long as
the Bonds so insured are outstanding and the Preinsured Bond Insurer remains in
business. The Portfolio Insurers and the Preinsured Bond Insurers are described
in "Portfolio" and the notes thereto in Prospectus Part I. The Portfolio
Insurers are either AMBAC Assurance Corporation or Financial Guaranty Insurance
Company. More detailed information regarding insurance on the Bonds and the
Preinsured Bond and Portfolio Insurers is included in the Information
Supplement. See "Additional Information".
The portfolio insurance obtained by an Insured Trust, if any,
guarantees the timely payment of principal and interest on the Bonds when they
fall due. For this purpose, "when due" generally means the stated payment or
maturity date for the payment of principal and interest. However, in the event
(a) an issuer defaults in the payment of principal or interest, (b) an issuer
enters into a bankruptcy proceeding or (c) the maturity of the Bond is
accelerated, the affected Portfolio Insurer has the option to pay the
outstanding principal amount of the Bond plus accrued interest to the date of
payment and thereby retire the Bond from the Trust prior to the Bond's stated
maturity date. The insurance does not guarantee the market value of the Bonds or
the value of the Units. The Trustee, upon the sale of a Bond covered under a
portfolio insurance policy has the right to obtain permanent insurance with
respect to the Bond (i.e., insurance to maturity of the Bond regardless of the
identity of the holder) (the "Permanent Insurance") upon the payment of a single
predetermined insurance premium and expenses from the proceeds of the sale of
the Bond. It is expected that the Trustee would exercise the right to obtain
Permanent Insurance only if upon exercise the Trust would receive net proceeds
in excess of the sale proceeds if the Bonds were sold on an uninsured basis.
Because the Bonds are insured by Portfolio Insurers or Preinsured Bond
Insurers as to the timely payment of principal and interest, when due, and on
the basis of the various reinsurance agreements in effect, Standard & Poor's has
assigned to the Units of each Insured Trust its "AAA" investment rating. This
rating will be in effect for a period of thirteen months from the Date of
Deposit and will, unless renewed, terminate at the end of such period. See
"Description of Ratings" in the Information Supplement. This rating should not
be construed as an approval of the offering of the Units by Standard & Poor's or
as a guarantee of the market value of the Trust or of the Units.
Each Portfolio Insurer is subject to regulation by the department of
insurance in the state in which it is qualified to do business. Such regulation,
however, is no guarantee that each Portfolio Insurer will be able to perform on
its contract of insurance in the event a claim should be made. At the date
hereof, it is reported that no claims have been submitted or are expected to be
submitted to any of the Portfolio Insurers which would materially impair the
ability of any such company to meet its commitment pursuant to any contract of
insurance. The information relating to each Portfolio Insurer has been furnished
by such companies. The financial information with respect to each Portfolio
Insurer appears in reports filed with state insurance regulatory authorities and
is subject to audit and review by such authorities. No representation is made
herein as to the accuracy or adequacy of such information or as to the absence
of material adverse changes in such information subsequent to the dates thereof.
FUND ADMINISTRATION
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SPONSOR. Van Kampen Funds Inc. is the Sponsor of your Trust. We are a
subsidiary of Van Kampen Investments Inc. (which is an indirect subsidiary of
Morgan Stanley Dean Witter & Co.). We specialize in underwriting and
distribution of investment companies with roots in money management dating back
to 1926. We are a Delaware corporation, a registered broker-dealer and a member
of the National Association of Securities Dealers, Inc. You can contact us by
calling (630) 684-6000 or at our offices listed on the back cover of this
prospectus. As of November 30, 1998, our total stockholders' equity was
$135,236,000 (audited). If we fail to or cannot perform our duties under the
trust agreement or become bankrupt, the Trustee may appoint a new sponsor,
continue to operate your Trust without a sponsor, or terminate your Trust and
distribute the liquidation proceeds.
TRUSTEE. The Trustee is The Bank of New York, a trust company organized
under the laws of New York. The Bank of New York has its unit investment trust
division offices at 101 Barclay Street, New York, New York 10286, telephone
(800) 221-7668. The Bank of New York is subject to supervision and examination
by the Superintendent of Banks of the State of New York and the Board of
Governors of the Federal Reserve System, and its deposits are insured by the
Federal Deposit Insurance Corporation to the extent permitted by law. Additional
information regarding the Trustee is set forth in the Information Supplement,
including the Trustee's qualifications and duties, its ability to resign, the
effect of a merger involving the Trustee and the Sponsor's ability to remove and
replace the Trustee. See "Additional Information".
PORTFOLIO ADMINISTRATION. The Trusts are not managed funds and, except
as provided in the Trust Agreement, Bonds generally will not be sold or
replaced. The Sponsor may, however, direct that Bonds be sold in certain limited
situations to protect the Trust based on advice from the Evaluator. These
situations may include default in interest or principal payments on the Bonds or
other obligations of an issuer, an advanced refunding or institution of certain
legal proceedings. In addition, the Trustee may sell Bonds designated by the
Evaluator for purposes of redeeming Units or payment of expenses. The Evaluator
will consider a variety of factors in designating Bonds to be sold including
interest rates, market value and marketability. Except in limited circumstances,
the Trustee must reject any offer by an issuer to issue bonds in exchange or
substitution for the Bonds (such as a refunding or refinancing plan). The
Trustee will promptly notify Unitholders of any exchange or substitution. The
Information Supplement contains a more detailed description of circumstances in
which Bonds may be sold or replaced. See "Additional Information".
REPLACEMENT BONDS. No assurance can be given that a Trust will retain
its present size or composition because Bonds may be sold, redeemed or mature
from time to time and the proceeds will be distributed to Unitholders and will
not be reinvested. In the event of a failure to deliver any Bond that has been
purchased under a contract ("Failed Bonds"), the Sponsor is authorized under the
Trust Agreement to direct the Trustee to acquire other bonds ("Replacement
Bonds") to make up the original portfolio of a Trust. Replacement Bonds must be
purchased within 20 days after delivery of the notice of the failed contract and
the purchase price (exclusive of accrued interest) may not exceed the amount of
funds reserved for the purchase of the Failed Bonds. The Replacement Bonds must
be substantially identical to the Failed Bonds in terms of (i) the exemption
from federal and state taxation, (ii) maturity, (iii) yield to maturity and
current return, (iv) Standard & Poor's or Moody's ratings, and (v) insurance in
an Insured Trust. The Trustee shall notify all Unitholders of a Trust within
five days after the acquisition of a Replacement Bond and shall make a pro rata
distribution of the amount, if any, by which the cost of the Failed Bond
exceeded the cost of the Replacement Bond plus accrued interest. If Failed Bonds
are not replaced, the Sponsor will refund the sales charge attributable to the
Failed Bonds to all Unitholders of the Trust and distribute the principal and
accrued interest (at the coupon rate of the Failed Bonds to the date of removal
from the Trust) attributable to the Failed Bonds within 30 days after removal.
All interest paid to a Unitholder which accrued after the expected date of
settlement for Units will be paid by the Sponsor and accordingly will not be
treated as tax-exempt income. If Failed Bonds are not replaced, the Estimated
Net Annual Interest Income per Unit would be reduced and the Estimated Current
Return and Estimated Long-Term Return might be lowered. Unitholders may not be
able to reinvest their proceeds in other securities at a yield equal to or in
excess of the yield of the Failed Bonds.
AMENDMENT OF TRUST AGREEMENT. The Sponsor and the Trustee may amend the
Trust Agreement without the consent of Unitholders to correct any provision
which may be defective or to make other provisions that will not adversely
affect the interest of the Unitholders (as determined in good faith by the
Sponsor and the Trustee). The Trust Agreement may not be amended to increase the
number of Units or to permit the acquisition of Bonds in addition to or in
substitution for any of the Bonds initially deposited in the Trust, except for
the substitution of certain refunding Bonds. The Trustee will notify Unitholders
of any amendment.
TERMINATION OF TRUST AGREEMENT. A Trust will terminate upon the
redemption, sale or other disposition of the last Bond held in the Trust. A
Trust may also be terminated at any time by consent of Unitholders of 51% of the
Units then outstanding or by the Trustee when the value of the Trust is less
than 20% of the original principal amount of Bonds. The Trustee will notify each
Unitholder of any termination within a reasonable time and will then liquidate
any remaining Bonds. The sale of Bonds upon termination may result in a lower
amount than might otherwise be realized if the sale was not required at that
time. For this reason, among others, the amount realized by a Unitholder upon
termination may be less than the principal amount of Bonds per Unit or value at
the time of purchase. The Trustee will distribute to each Unitholder his share
of the balance of the Interest and Principal Accounts after deduction of costs,
expenses or indemnities. The Unitholder will receive a final distribution
statement with this distribution. When the Trustee in its sole discretion
determines that any amounts held in reserve are no longer necessary, it will
distribute these amounts to Unitholders. The Information Supplement contains
further information regarding termination of a Trust. See "Additional
Information".
LIMITATION ON LIABILITIES. The Sponsor, Evaluator and Trustee shall be
under no liability to Unitholders for taking any action or for refraining from
taking any action in good faith pursuant to the Trust Agreement, or for errors
in judgment, but shall be liable only for their own willful misfeasance, bad
faith or gross negligence (negligence in the case of the Trustee) in the
performance of their duties or by reason of their reckless disregard of their
obligations and duties hereunder. The Trustee shall not be liable for
depreciation or loss incurred by reason of the sale by the Trustee of any of the
Bonds. In the event of the failure of the Sponsor to act under the Trust
Agreement, the Trustee may act thereunder and shall not be liable for any action
taken by it in good faith under the Trust Agreement. The Trustee is not liable
for any taxes or governmental charges imposed on the Bonds, on it as Trustee
under the Trust Agreement or on the Fund which the Trustee may be required to
pay under any present or future law of the United States of America or of any
other taxing authority having jurisdiction. In addition, the Trust Agreement
contains other customary provisions limiting the liability of the Trustee. The
Trustee and Sponsor may rely on any evaluation furnished by the Evaluator and
have no responsibility for the accuracy thereof. Determinations by the Evaluator
shall be made in good faith upon the basis of the best information available to
it; provided, however, that the Evaluator shall be under no liability to the
Trustee, Sponsor or Unitholders for errors in judgment.
FEDERAL TAX STATUS
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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 Chapman and Cutler has made any review of
the Trust proceedings relating to the issuance of the Bonds or of the basis of
the opinions. 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 on 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 accrued interest or accrued original issue discount, if
any. For purposes of the following opinions, it is assumed that each asset of
the Trust is debt, the interest on which is excluded for Federal income tax
purposes.
In the opinion of Chapman and Cutler, counsel for the Sponsor, under
existing law as of the date of this Prospectus:
(1) Each Trust is not an association taxable as a corporation for Federal
income tax purposes and interest and accrued original issue discount on
Bonds which is excludable from gross income under the Internal Revenue
Code of 1986 (the "Code") will retain its status for Federal income tax
purposes, when received by a Trust and when distributed to Unitholders;
however such interest may be taken into account in computing the
alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted
below;
(2) Each Unitholder is considered to be the owner of a pro rata portion of
each asset of the respective Trust under subpart E, subchapter J of
chapter 1 of the Code and will have a taxable event when such Trust
disposes of a Bond, or when the Unitholder redeems or sells his Units.
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
a Unit. The Taxpayer Relief Act of 1997 ("1997 Act") includes provisions
that treat certain transactions (e.g., short sales, offsetting notional
principal contracts, futures transactions, forward sales, or similar
arrangements) designed to reduce or eliminate risk of loss and
opportunities for gain as constructive sales for purposes of recognition
of gain (but not loss) and for purposes of determining the holding
period. 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
respective Trust, if any, on Bonds delivered after the date that 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.The tax basis reduction requirements of the
Code relating to amortization of bond premium may, under some
circumstances, result in the Unitholder realizing a taxable gain when
his Units are sold or redeemed for an amount less than or equal to his
original cost. Unitholders should consult their own tax advisors with
respect to calculating their basis;
(3) Any proceeds paid under an insurance policy or policies dated the Date
of Deposit, issued to an Insured Trust with respect to the Bonds which
represent maturing interest on defaulted obligations held by the Trustee
will be excludable from Federal gross income if, and to the same extent
as, such interest would have been so excludable if paid in the normal
course by the issuer of the defaulted obligations provided that, at the
time such policies are purchased, the amounts paid for such policies are
reasonable, customary and consistent with the reasonable expectation
that the issuer of the bonds, rather than the insurer, will pay debt
service on the bonds; and
(4) Any proceeds paid under individual policies obtained by issuers of Bonds
which represent maturing interest on defaulted Bonds held by the Trustee
will be excludable from Federal gross income if, and to the same extent
as, such interest would have been excludable if paid in the normal
course by the issuer of the defaulted 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 upon 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 Unitholder acquires his Units and the price the Unitholder pays
for his Units. Unitholders should consult with their tax advisers regarding
these rules and their application.
"The Revenue Reconciliation Act of 1993" (the "1993 Act") subjects
tax-exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount (if
any) by which the stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued), subject to a statutory
de minimis rule. Market discount can arise based on the price a Trust pays for
Bonds or the price a Unitholder pays for his or her Units. Under the 1993 Act,
accretion of market discount is taxable as ordinary income; under prior law the
accretion had been treated as capital gain. Market discount that accretes while
a Trust holds a Bond would be recognized as ordinary income by the Unitholders
when principal payments are received on the Bond, upon sale or at redemption
(including early redemption), or upon the sale or redemption of his or her
Units, unless a Unitholder elects to include market discount in taxable income
as it accrues. Legislative proposals have been made that would require accrual
basis taxpayers to include market discount in income as it accrues. The market
discount rules are complex and Unitholders should consult their tax advisers
regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1986 depends upon
the corporation's alternative minimum taxable income, which is the corporation's
taxable income with certain adjustments. One of the adjustment items used in
computing the alternative minimum taxable income and the Superfund Tax of a
corporation (other than an S Corporation, Regulated Investment Company, Real
Estate Investment Trust, REMIC or FASIT) is an amount equal to 75% of the excess
of such corporation's "adjusted current earnings" over an amount equal to its
alternative minimum taxable income (before such adjustment item and the
alternative tax net operating loss deduction). "Adjusted current earnings"
includes all tax exempt interest, including interest on all of the Bonds in a
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
introduced which would reinstate the Superfund Tax for taxable years beginning
after December 31, 1998 and before January 1, 2010. Under the provisions of
Section 884 of the Code, a branch profits tax is levied on the "effectively
connected earnings and profits" of certain foreign corporations which include
tax-exempt interest such as interest on the Bonds in the Trust. Unitholders
should consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code, interest on indebtedness incurred or continued to purchase or carry Units
of a Trust is not deductible for Federal income tax purposes. The Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however, these rules
generally do not apply to interest paid on indebtedness incurred to purchase or
improve a personal residence). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be able to deduct
any of the interest expense attributable to ownership of such Units. Legislative
proposals have been made that would extend the financial institution rules to
certain other corporations, including securities dealers and other financial
intermediaries. Investors with questions regarding these issues should consult
their tax advisers.
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 excludible from Federal gross income, although interest on
such Bonds received by others would be excludible from Federal gross income.
"Substantial user" and "related person" are defined under the Code and U.S.
Treasury Regulations. Any person who believes that he or she may be a
"substantial user" or a "related person" as so defined should contact his or her
tax adviser.
In the opinion of special counsel to the Trusts for New York tax matters,
under existing law, 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
under the income tax laws of the State and City of New York.
ALL STATEMENTS OF LAW IN THE PROSPECTUS CONCERNING EXCLUSION FROM GROSS
INCOME FOR FEDERAL, STATE OR OTHER TAX PURPOSES ARE THE OPINIONS OF COUNSEL AND
ARE TO BE SO CONSTRUED.
At the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
Trusts of the proceedings relating to the issuance of the Bonds or of the basis
for such opinions.
For taxpayers other than corporations, net capital gain (which is defined
as net long-term capital gain over net short-term capital loss for the taxable
year) generally is subject to a maximum marginal stated tax rate of 20% (10% in
the case of certain taxpayers in the lowest tax bracket). Capital gain or loss
is long-term if the holding period for the asset is more than one year, and is
short-term if the holding period for the asset is one year or less. The date on
which a Unit is acquired (i.e., the "trade date") is excluded from the holding
period for the Unit. Capital gains realized from assets held for one year or
less are taxed at the same rates as ordinary income. Unitholders should consult
their own tax advisers as to the tax rate applicable to capital gain dividends.
In addition, please note that capital gains may be recharacterized as
ordinary income in the case of certain financial transactions that are
considered "conversion transactions" effective for transactions entered into
after April 30, 1993. Unitholders should consult their tax advisers regarding
the potential effect of this provision on their investment in Units.
For purposes of computing the alternative minimum tax for individuals and
corporations, interest on certain private activity bonds (which includes most
industrial and housing revenue bonds) issued on or after August 8, 1996 is
included as an item of tax preference. Except as otherwise noted in Prospectus
Part I, the Trusts do not include any such private activity bonds issued on or
after that date.
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
a "base amount". The base amount is $25,000 for unmarried taxpayers, $32,000 for
married taxpayers filing a joint return and zero for married taxpayers who do
not live apart at all times during the taxable year and who file separate
returns. Modified adjusted gross income is adjusted gross income determined
without regard to certain otherwise allowable deductions and exclusions from
gross income and by including tax-exempt interest. To the extent that Social
Security benefits are includable in gross income, they will be treated as any
other item of gross income.
In addition, under the 1993 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.
Ownership of the Units may result in collateral federal income tax
consequences to certain taxpayers, including, without limitation, corporations
subject to either the environmental tax or the branch profits tax, financial
institutions, certain insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and taxpayers who
may be deemed to have incurred (or continued) indebtedness to purchase or carry
tax-exempt obligations. Prospective investors should consult their tax advisors
as to the applicability of any collateral consequences.
<PAGE>
For a discussion of the state tax status of income earned on Units of a
Trust, see "State Trust Risk Factors and Tax Status". Except as noted therein,
the exemption of interest on state and local obligations for Federal income tax
purposes discussed above does not necessarily result in exemption under the
income or other tax laws of any state or city. The laws of the several states
vary with respect to the taxation of such obligations.
STATE TRUST RISK FACTORS AND TAX STATUS
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ALABAMA RISK FACTORS. The financial condition of the State of Alabama
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, mining, oil and gas production and
service industries, supplemented by rural areas with selective commercial
agriculture. Alabama has a low growth rate in civilian labor. Income growth has
also slowed in Alabama and is lower than the U.S. average. The Alabama economy
grows at a slower rate than the national economy.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Alabama currently maintains a "AA" and "Aa3" bond rating
from Standard & Poor's and Moody's, respectively, on its general obligation
indebtedness.
Further information concerning Alabama risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Alabama Trust, Special
Counsel to the Fund for Alabama tax matters rendered an opinion under then
existing Alabama income tax law applicable to taxpayers whose income is subject
to Alabama income taxation substantially to the effect that:
In the opinion of special counsel to the Fund for Alabama tax matters,
under existing Alabama income tax law applicable to taxpayers whose income is
subject to Alabama income taxation:
The Alabama Trust is not taxable as a corporation for purposes of the
Alabama income tax.
Income of the Alabama Trust, to the extent it is taxable, will be
taxable to the Unitholders, not the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trust's net income
will be treated as the income of the Unitholder for purposes of the Alabama
income tax.
Interest on obligations held by the Alabama Trust which is exempt from
the Alabama income tax will retain its tax-exempt character when the
distributive share thereof is distributed or deemed distributed to each
Unitholder.
Any proceeds paid to the Alabama Trust under insurance policies issued
to the Sponsor or under individual policies obtained by the Sponsor, the issuer
or underwriter of the respective obligations which represent maturing interest
on defaulted obligations held by the Trustee will be exempt from Alabama income
tax if and to the same extent as such interest would be exempt from such taxes
if paid directly by the issuer of such obligations.
Each Unitholder will, for purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama Trust as though the Bonds were sold or disposed of
directly by the Unitholders.
Gains realized on the sale or redemption of Units by Unitholders, who
are subject to the Alabama income tax, will be includable in the Alabama income
of such Unitholders.
ARIZONA RISK FACTORS. The financial condition of the State of Arizona
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. Historically, the State has experienced significant
revenue shortfalls.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The economy of the State continues to
be dependent on services, tourism and manufacturing. These sectors tend to be
cyclical. Commercial and residential real estate markets, which experienced
depression and high vacancy rates in the early 1980s and early 1990s, have
recovered and are growing strong. Yet, Arizona has experienced rapid declines in
the real estate markets after reaching peaks. Such declines may occur in the
future.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Arizona risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
<PAGE>
TAX STATUS. At the time of the closing for each Arizona Trust, Special
Counsel to the Fund for Arizona tax matters rendered an opinion under then
existing Arizona income tax law applicable to taxpayers whose income is subject
to Arizona income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Arizona (the "State"), its political
subdivisions and authorities (the "Arizona Bonds") and certain bonds issued by
Puerto Rico authorities (the "Possession Bonds") (collectively the Arizona Bonds
and Possession Bonds shall be referred to herein as the "Bonds"), provided the
interest on such Bonds received by the Trust is exempt from State income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
federal income tax purposes and (iii) interest on the Bonds, if received
directly by a Unitholder would be exempt from the Arizona income tax (the
"Arizona Income Tax"). We have assumed that at the respective times of issuance
of the Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, with respect to the Arizona Bonds,
bond counsel to the issuing authorities rendered opinions that the interest on
the Bonds is exempt from the Arizona Income Tax. Neither the Sponsor nor its
counsel has made any review for the Trust of the proceedings relating to the
issuance of the Bonds or of the bases for the opinions rendered in connection
therewith.
In the opinion of counsel to the Sponsor, under existing law:
For Arizona income tax purposes, each Unitholder will be treated as the
owner of a pro rata portion of the Arizona Trust, and the income of the 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 the Arizona Trust by a
Unitholder with respect to the Arizona Bonds is excludable from Federal gross
income, such interest will not be subject to Arizona income taxes.
Interest on the Possession Bonds which is excludable from gross income
for federal tax purposes and is exempt from state and local taxation pursuant to
federal law when received by the Arizona Trust will be exempt from Arizona
income taxation and therefore will not be includable in the income of the
Unitholders for income tax purposes when distributed by the Arizona Trust and
received by the Unitholders.
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.
Neither the Bonds nor the Units will be subject to Arizona property
taxes, sales tax or use tax.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Arizona law. Ownership of the Units may
result in collateral Arizona tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
ARKANSAS RISK FACTORS. The financial condition of the State of Arkansas
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. During the past several decades,
Arkansas's economic base has shifted from agriculture to light manufacturing.
Agriculture has traditionally been a major component of Arkansas's economy, but
total income from this sector continues to decrease. The services sector is
growing rapidly in Arkansas. Although the economy is more diversified, Arkansas
is still subject to shifts in its economy.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
<PAGE>
The State of Arkansas currently maintains a "AA" and "Aa3" bond rating
from Standard & Poor's and Moody's, respectively, on its general obligation
indebtedness.
Further information concerning Arkansas risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Arkansas Trust, Special
Counsel to each Arkansas Trust for Arkansas tax matters rendered an opinion
under then existing Arkansas income tax law applicable to taxpayers whose income
is subject to Arkansas income taxation substantially to the effect that:
The Arkansas Trust is not an association taxable as a corporation or
otherwise for purposes of Arkansas income taxation;
Each Arkansas Unitholder will be treated as the owner of a pro rata
portion of the Arkansas Trust for Arkansas income tax purposes, and will have a
taxable event when the Arkansas Trust disposes of a Bond or when the Unitholder
sells, exchanges, redeems or otherwise disposes of his Units;
Any gains realized upon the sale, exchange, maturity, redemption or
other disposition of Bonds held by the Arkansas Trust resulting in the
distribution of income to Arkansas Unitholders will be subject to Arkansas
income taxation to the extent that such income would be subject to Arkansas
income taxation if the Bonds were held, sold, exchanged, redeemed or otherwise
disposed of by the Arkansas Unitholders; and
Interest on Bonds, issued by the State of Arkansas, or by or on behalf
of political subdivisions, thereof, that would be exempt from Federal income
taxation when paid directly to an Arkansas Unitholder will be exempt from
Arkansas income taxation when received by the Arkansas Trust and attributed to
such Arkansas Unitholder and when distributed to such Arkansas Unitholder.
CALIFORNIA RISK FACTORS. The financial condition of the State of
California is affected by various national, economic, social and environmental
policies and conditions. Additionally, limitations imposed by constitutional
amendments, legislative measures, or voter initiatives on the State and its
local governments concerning taxes, bond indebtedness and other matters may
constrain the revenue-generating capacity of the State and its local governments
and, therefore, the ability of the issuers of the Bonds to satisfy their
obligations. The State faces 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.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors, such as natural disasters,
complications with exports and industry deregulation. The California economy
continues to show weakness in manufacturing, particularly aerospace as well as
in the telephone, communications and public utility industries. California's
population increase has resulted in traffic congestion, school overcrowding and
high housing costs which have caused an increase in demand for government
services and which may impede future economic growth.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations. On December 7,
1994, Orange County, California, together with its pooled investment fund (the
"Pooled Fund") filed for protection under Chapter 9 of the federal Bankruptcy
Code. Many governmental entities kept moneys in the Pooled Fund.
All outstanding general obligation bonds of the State are rated "A+" by
Standard and Poor's and "A1" by Moody's.
Further information concerning California risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each California Trust, the
respective counsel to the California Trusts rendered an opinion under then
existing California income tax law applicable to taxpayers whose income was
subject to California income taxation substantially to the effect that:
We have examined the income tax laws of the State of California to
determine its applicability to the California Trust and the holders of Units in
the California Trust who are full-time residents of the State of California
("California Unitholders"). The assets of the California Trust will consist of
bonds issued by the State of California or a local government of California (the
"California Bonds") or by the Commonwealth of Puerto Rico or its authority (the
"Possession Bonds") (collectively, the "Bonds"). For purposes of the following
opinions, it is assumed that each asset of the California Trust is debt, the
interest on which is excluded from gross income for federal income tax purposes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the California Trust. However, although
counsel to the Sponsor expresses no opinion with respect to the issuance of the
Bonds, in rendering its opinion expressed herein, it has assumed that: (i) the
Bonds were validly issued; (ii) the interest thereon is excludable from gross
income for federal income tax purposes; and (iii) interest on the Bonds, if
received directly by a California Unitholder, would be exempt from the income
tax imposed by the State of California that is applicable to individuals, trusts
and estates (the "California Personal Income Tax"). This opinion does not
address the taxation of persons other than full time residents of California. We
have assumed that, at the respective times of issuance of the Bonds, opinions
that the Bonds were validly issued and that interest on the Bonds is excluded
from gross income for Federal income tax purposes were rendered by bond counsel
to the respective issuing authorities. In addition, we have assumed that, with
respect to the California Bonds, bond counsel to the issuing authorities
rendered opinions that the interest on the California Bonds is exempt from the
California Personal Income Tax and, with respect to the Possession Bonds, bond
counsel to the issuing authorities rendered opinions that the Possession Bonds
and the interest thereon is exempt from all state and local income taxation.
Neither the Sponsor nor its counsel has made any review for the California Trust
of the proceedings relating to the issuance of the Bonds or of the bases for the
opinions rendered in connection therewith.
<PAGE>
Based upon the foregoing, and upon an investigation of such matters of
law as we considered to be applicable, we are of the opinion that, under
existing provisions of the law of the State of California as of the date hereof:
1. The California Trust is not an association taxable as a corporation
for purposes of the California Bank and Corporation Tax Law, and each California
Unitholder will be treated as the owner of a pro rata portion of the California
Trust, and the income of such portion of the California Trust will be treated as
the income of the California Unitholders under the California Personal Income
Tax.
2. Interest on the Bonds which is exempt from tax under the California
Personal Income Tax when received by the California Trust and which would be
excludable from California taxable income for purposes of the California
Personal Income Tax if received directly by a California Unitholder, will be
excludable from California taxable income for purposes of the California
Personal Income Tax when received by the California Trust and distributed to a
California Unitholder.
3. Each California Unitholder of the California Trust will generally
recognize gain or loss for California Personal Income Tax purposes if the
Trustee disposes of a Bond (whether by redemption, sale or otherwise) or when
the California Unitholder redeems or sells Units of the California Trust, to the
extent that such a transaction results in a recognized gain or loss to such
California Unitholder for federal income tax purposes. However, there are
certain differences between the recognition of gain or loss for federal income
tax purposes and for California Personal Income Tax purposes, and California
Unitholders are advised to consult their own tax advisors. Tax basis reduction
requirements relating to amortization of bond premium may, under some
circumstances, result in a California Unitholder realizing taxable gain for
California Personal Income Tax purposes when a Unit is sold or redeemed for an
amount equal to or less than its original cost.
4. Under the California Personal Income Tax, interest on indebtedness
incurred or continued by a California Unitholder to purchase Units in the
California Trust is not deductible for purposes of the California Personal
Income Tax.
This opinion relates only to California Unitholders subject to the
California Personal Income Tax. No opinion is expressed with respect to the
taxation of California Unitholders subject to the California Bank and
Corporation Tax Law and such California Unitholders are advised to consult their
own tax advisors. Please note, however, that interest on the underlying Bonds
attributed to a California Unitholder that is subject to the California Bank and
Corporation Tax Law may be includable in its gross income for purposes of
determining its California franchise tax. We have not examined any of the Bonds
to be deposited and held in the California Trust or the proceedings for the
issuance thereof or the opinions of bond counsel with respect thereto, and we
express no opinion with respect to taxation under any other provisions of the
California law. Ownership of the Units may result in collateral California tax
consequences to certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral consequences.
COLORADO RISK FACTORS. The financial condition of the State of Colorado
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. Colorado has an expenditure limitation which it
breached in fiscal year 1997.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The economy of the State continues to
be dependent on services and trade, with construction reporting large gains in
recent years. These sectors tend to be cyclical. Rapid job growth has kept
unemployment low. There is no guarantee that such conditions will continue.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Colorado risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Colorado Trust, counsel
to the Fund for Colorado tax matters rendered an opinion under then existing
Colorado income tax law applicable to taxpayers whose income is subject to
Colorado income taxation substantially to the effect that:
The assets of the Colorado Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Colorado ("Colorado") or
counties, municipalities, authorities or political subdivisions thereof (the
"Colorado Bonds") or by the Commonwealth of Puerto Rico (the "Puerto Rico
Bonds") (collectively, the "Bonds") the interest on which is expected to qualify
as exempt from Colorado income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although counsel to the
Fund expresses no opinion with respect to the issuance of the Bonds, in
rendering its opinion expressed herein, it has assumed that: (i) opinions
relating to the validity thereof and to the exemption of interest thereon from
Federal income tax were rendered by bond counsel to the respective issuing
authorities; (ii) with respect to the Colorado Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest from the
income tax imposed by the State of Colorado that is applicable to individuals
and corporations (the "State Income Tax") and, (iii) with respect to the
Possession Bonds, bond counsel to the issuing authorities rendered opinions as
to the exemption from all state and local income taxation of the Possession
Bonds and the interest thereon. Neither the Sponsor nor its counsel has made any
review for the Colorado Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith. This
opinion does not address the taxation of persons other than full time residents
of Colorado.
<PAGE>
In the opinion of counsel to the Fund, under existing Colorado law:
Because Colorado income tax law is based upon the Federal law, the
Colorado Trust is not an association taxable as a corporation for purposes of
Colorado income taxation.
With respect to Colorado Unitholders, in view of the relationship
between Federal and Colorado tax computations described above:
Each Colorado Unitholder will be treated as owning a pro rata share of
each asset of the Colorado Trust for Colorado income tax purposes in the
proportion that the number of Units of such Trust held by the Unitholder bears
to the total number of outstanding Units of the Colorado Trust, and the income
of the Colorado Trust will therefore be treated as the income of each Colorado
Unitholder under Colorado law in the proportion described and an item of income
of the Colorado Trust will have the same character in the hands of a Colorado
Unitholder as it would have in the hands of the Trustee;
Interest on Colorado Bonds that would not be includable in income for
Colorado income tax purposes when paid directly to a Colorado Unitholder will be
exempt from Colorado income taxation when received by the Colorado Trust and
attributed to such Colorado Unitholder and when distributed to such Colorado
Unitholder;
To the extent that interest income derived from the Colorado Trust by a
Unitholder with respect to Puerto Rico Bonds is exempt from state taxes pursuant
to 48 U.S.C. 745, such interest will not be subject to the Colorado State Income
Tax.
Any proceeds paid under an insurance policy or policies issued to the
Colorado Trust with respect to the Bonds in the Colorado Trust which represent
maturing interest on defaulted Bonds held by the Trustee will be excludable from
Colorado adjusted gross income if, and to the same extent as, such interest is
so excludable for federal income tax purposes if paid in he normal course by the
issuer notwithstanding that the source of payment is from insurance proceeds
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.
Each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity) or when the Colorado Unitholder redeems or sells Units at a
price that differs from original cost as adjusted for amortization of bond
discount or premium and other basis adjustments (including any basis reduction
that may be required to reflect a Colorado Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Colorado Unitholder's
settlement date and the date such Bonds are delivered to the Colorado Trust, if
later);
Tax basis reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Colorado Unitholders realizing
taxable gain when their Units are sold or redeemed for an amount equal to or
less than their original cost; and
If interest on indebtedness incurred or continued by a Colorado
Unitholder to purchase Units in the Colorado Trust is not deductible for federal
income tax purposes, it also will be non-deductible for Colorado income tax
purposes.
Unitholders should be aware that all tax-exempt interest, including
their share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
Counsel to the Fund has expressed no opinion with respect to taxation
under any other provision of Colorado law. Ownership of the Units may result in
collateral Colorado tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
CONNECTICUT RISK FACTORS. The financial condition of the State of
Connecticut is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture. The State has
a relatively high wage labor market which has resulted in the State's business
sector becoming more vulnerable to competitive pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Connecticut currently maintains a "AA", "Aa3" and "AA"
bond rating from Standard & Poor's, Moody's and Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.), respectively, on its general obligation indebtedness.
Further information concerning Connecticut risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Connecticut Trust,
special counsel to the Fund for Connecticut tax matters rendered an opinion
under then existing Connecticut income tax law applicable to taxpayers whose
income is subject to Connecticut income taxation substantially to the effect
that:
The assets of the Connecticut Trust will consist of obligations (the
"Bonds"); certain of the Bonds have been issued by or on behalf of the State of
Connecticut or its political subdivisions or other public instrumentalities,
state or local authorities, districts, or similar public entities created under
the laws of the State of Connecticut ("Connecticut Bonds") and the balance of
the Bonds have been issued by or on behalf of entities classified for the
relevant purposes as territories or possessions of the United States, including
<PAGE>
one or more of Puerto Rico, Guam, or the Virgin Islands, the interest on the
obligations of which Federal law would prohibit Connecticut from taxing if
received directly by the Unitholders. Certain Connecticut Bonds in the
Connecticut Trust were issued prior to the enactment of the Connecticut income
tax on the Connecticut taxable income of individuals, trusts, and estates (the
"Connecticut Income Tax"); therefore, bond counsel to the issuers of such Bonds
did not opine as to the exemption of the interest on such Bonds from such tax.
However, the Sponsor and special counsel to the Trusts for Connecticut tax
matters believe that such interest will be so exempt. Interest on Bonds in the
Connecticut Trust issued by other issuers, if any, is, in the opinion of bond
counsel to such issuers, exempt from state taxation.
Generally, a Unitholder recognizes gain or loss for purposes of the
Connecticut Income Tax to the same extent as the Unitholder recognizes gain or
loss for Federal income tax purposes. Ordinarily this would mean that gain or
loss would be recognized by a Unitholder upon the maturity, redemption, sale, or
other disposition by the Connecticut Trust of a Bond held by it, or upon the
redemption, sale or other disposition of a Unit of the Connecticut Trust held by
the Unitholder. However, gains and losses from the sale or exchange of
Connecticut Bonds held as capital assets are not taken into account for purposes
of this tax. Regulations indicate that this rule would apply to gain or loss
recognized by a Unitholder holding a Unit of the Connecticut Trust as a capital
asset upon the maturity, redemption, sale, or other disposition of a Connecticut
Bond held by the Connecticut Trust. However, it is not clear whether this rule
would also apply, to the extent attributable to Connecticut Bonds held by the
Connecticut Trust, to gain or loss recognized by a Unitholder upon the
redemption, sale, or other disposition of a Unit of the Connecticut Trust held
by such Unitholder. Unitholders are urged to consult their own tax advisors
concerning these matters.
In the opinion of special counsel to the Fund for Connecticut tax
matters, which relies explicitly on the opinion of counsel to the Sponsor
regarding Federal income tax matters, under existing Connecticut law:
The Connecticut Trust is not liable for any tax on or measured by net
income imposed by the State of Connecticut.
Interest income of the Connecticut Trust from a Bond issued by or on
behalf of the State of Connecticut, any political subdivision thereof, or public
instrumentality, state or local authority, district, or similar public entity
created under the laws of the State of Connecticut (a "Connecticut Bond"), or
from a Bond issued by United States territories or possessions the interest on
which Federal law would prohibit Connecticut from taxing if received directly by
a Unitholder from the issuer thereof, is not taxable under the Connecticut tax
on the Connecticut taxable income of individuals, trusts, and estates (the
"Connecticut Income Tax"), when any such interest is received by the Connecticut
Trust or distributed by it to such a Unitholder.
Insurance proceeds received by the Connecticut Trust representing
maturing interest on defaulted Bonds held by the Connecticut Trust are not
taxable under the Connecticut Income Tax if, and to the same extent as, such
interest would not be taxable thereunder if paid directly to the Connecticut
Trust by the issuer of such Bonds.
Gains and losses recognized by a Unitholder for Federal income tax
purposes upon the maturity, redemption, sale, or other disposition by the
Connecticut Trust of a Bond held by the Connecticut Trust or upon the
redemption, sale, or other disposition of a Unit of the Connecticut Trust held
by a Unitholder are taken into account as gains or losses, respectively, for
purposes of the Connecticut Income Tax, except that, in the case of a Unitholder
holding a Unit of the Connecticut Trust as a capital asset, such gains and
losses recognized upon the maturity, redemption, sale, or exchange of a
Connecticut Bond held by the Connecticut Trust are excluded from gains and
losses taken into account for purposes of such tax, and no opinion is expressed
as to the treatment for purposes of such tax of gains and losses recognized, to
the extent attributable to Connecticut Bonds, upon the redemption, sale, or
other disposition by a Unitholder of a Unit of the Connecticut Trust held by
him.
The portion of any interest income or capital gain of the Connecticut
Trust that is allocable to a Unitholder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Unitholder
for purposes of such tax.
An interest in a Unit of the Connecticut Trust that is owned by or
attributable to a Connecticut resident at the time of his death is includable in
his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
DELAWARE RISK FACTORS. The financial condition of the State of Delaware
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Delaware's economy is dominated by the
chemical and automotive industries. Manufacturing, services and trade are also a
part of the economy, with agriculture playing a vital part. Delaware's economy
is sensitive to shifts which may impact the Bonds in Delaware portfolio.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Delaware currently maintains a "AA+" and "Aa1" bond rating
from Standard & Poor's and Moody's, respectively, on its general obligation
indebtedness.
Further information concerning Delaware risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Delaware Trust, Special
Counsel to each Delaware Trust for Delaware tax matters rendered an opinion
under then existing Delaware income tax law applicable to taxpayers whose income
is subject to Delaware income taxation substantially to the effect that:
<PAGE>
(1) Distributions of interest income to Unitholders that would not be
taxable if received directly by a Delaware resident are not subject to personal
income tax under the Delaware personal income tax imposed by 30 Del. C. et seq.;
(2) Distributions of interest income to Unitholders which are estates
or trusts that would not be taxable if received directly by a Delaware resident
estate or trust are not subject to the personal income tax imposed by 30 Del. C.
et seq.;
(3) Distributions of interest income to Unitholders which are
corporations that would not be taxable for Delaware income tax purposes if
received directly by a corporation will not be subject to the Delaware corporate
income tax imposed by 30 Del. C. 1 et seq.;
(4) To the extent that any gain or loss from the sale of obligations
held by the Fund or from the sale of a Unit by a Unitholder is includable or
deductible in the calculation of a resident individuals, estate's or trust's
adjusted gross income for federal income tax purposes, any such gain or loss
will be includable or deductible in the calculation of taxable income for the
purposes of Delaware resident personal income taxes;
(5) To the extent that any gain or loss from the sale of obligations
held by the Fund or from the sale of a Unit by a Unitholder is includable or
deductible in the calculation of taxable income for purposes of federal income
tax imposed upon a corporation, such gain or loss shall not be includable or
deductible in the calculation of taxable income for purposes of the Delaware
corporate income tax since gains or losses from the sale or other disposition of
securities issued by the State of Delaware or political subdivisions thereof are
not included in computing the taxable income of a corporation for Delaware
corporate income tax purposes.
(6) Any proceeds paid under insurance policies issued to the Trustee or
obtained by issuers or underwriters of the Bonds, the Sponsor, or others which
represent interest on defaulted obligations held by the Trustee will be
excludable from Delaware gross income for individuals, trusts and estates, or
corporations, if, and to the same extent as, such proceeds would have been so
excludable from federal income taxation;
(7) Interest income received by a Unitholder is not exempt from the
franchise tax imposed on banking organizations under 5 Del. C. et seq. and the
franchise tax imposed on building and loan associates imposed under 5 Del. C. et
seq.; and
(8) The Units are not exempt from Delaware inheritance, estate and gift
tax.
FLORIDA RISK FACTORS. The financial condition of the State of Florida
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. 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.
Additionally, the State Constitution prohibits issuance of State obligations to
fund State operations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State continues to be dependent on
the construction and construction related manufacturing industries. These
industries tend to be highly cyclical and there is no assurance that Florida's
rapid population growth, which drove these industries in the past, will
continue. Tourism is also one of the State's most important industries. Because
many international travelers visit Florida, an increase in the value of the U.S.
dollar adversely affects this industry. Moreover, Florida could be impacted by
problems in the agricultural sector, including crop failures, severe weather
conditions or other agricultural-related problems, particularly with regard to
the citrus and sugar industries.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa and AA from Moody's and
Standard & Poor's, respectively, on the majority of its general obligation
bonds, although the rating of a particular series of revenue bonds relates
primarily to the project, facility, or other revenue resource from which such
series derives funds for repayment.
Further information concerning Florida risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Florida Trust, Counsel
to each Florida Trust for Florida tax matters rendered an opinion under then
existing Florida income tax law applicable to taxpayers whose income is subject
to Florida income taxation substantially to the effect that:
The Bonds were accompanied by opinions of Bond Counsel to the
respective issuers thereof to the effect that the Bonds were exempt from the
Florida intangibles tax. Neither the Sponsor nor its counsel have independently
reviewed such opinions or examined the Bonds to be deposited in and held by the
Florida Trust and have assumed the correctness as of the date of deposit of the
opinions of Bond Counsel.
"Non-Corporate Unitholder" means a Unitholder of the Florida Trust who
is an individual not subject to the Florida state income tax on corporations
under Chapter 220, Florida Statutes and "Corporate Unitholder" means a
Unitholder of the Florida Trust that is a corporation, bank or savings
association or other entity subject to Florida state income tax on corporations
or franchise tax imposed on banks or savings associations under Chapter 200,
Florida Statutes.
In the opinion of counsel to the Sponsor, under existing law:
For Florida state income tax purposes, the Florida Trust will not be
subject to the Florida income tax imposed by Chapter 220, Florida Statutes.
<PAGE>
Because Florida does not impose an income tax on individuals,
Non-Corporate Unitholders residing in Florida will not be subject to any Florida
income taxation on income realized by the Florida Trust. Any amounts paid to the
Florida Trust or to Non-Corporate Unitholders under an insurance policy issued
to the Florida Trust or the Sponsor which represent maturing interest on
defaulted obligations held by the Trustee will not be subject to the Florida
income tax imposed by Chapter 220, Florida Statutes.
Corporate Unitholders with commercial domiciles in Florida will be
subject to Florida income or franchise taxation on income realized by the
Florida Trust and on payments of interest pursuant to any insurance policy to
the extent such income constitutes "non business income" as defined by Chapter
220 or is otherwise allocable to Florida under Chapter 220. Other Corporate
Unitholders will be subject to Florida income or franchise taxation on income
realized by the Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does not
constitute "non-business income" as defined by Chapter 220 and if such income is
otherwise allocable to Florida under Chapter 220.
Units will be subject to Florida estate tax only if held by Florida
residents. However, the Florida estate tax is limited to the amount of the
credit for state death taxes provided for in Section 2011 of the Internal
Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida ad
valorem property tax, the Florida intangible personal property tax or the
Florida sales or use tax.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Florida law. Ownership of the Units may
result in collateral Florida tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
GEORGIA RISK FACTORS. The financial condition of the State of Georgia
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. Historically, the State has experienced significant
revenue shortfalls.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Weather conditions may have a
significant impact on Georgia's agricultural sector. In the past, widespread
flooding in central and southern Georgia has caused extensive damage and
destruction of farmland, private residences, businesses and local and state
government facilities.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds of the State are rated "AAA"
by Standard & Poor's and "Aaa" by Moody's.
Further information concerning Georgia risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Georgia Trust, Special
Counsel to the Fund for Georgia tax matters rendered an opinion under then
existing Georgia income tax law applicable to taxpayers whose income is subject
to Georgia income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Georgia or counties, municipalities,
authorities or political subdivisions thereof (the "Georgia Bonds") and certain
bonds issued by Puerto Rico authorities (the "Possession Bonds," and
collectively with the Georgia Bonds, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
federal income tax purposes and (iii) interest on the Bonds, if received
directly by a Unitholder would be exempt from the Georgia income tax (the
"Georgia Income Tax"). We have assumed that, at the respective times of issuance
of the Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, we have assumed that, with respect
to the Georgia Bonds, bond counsel to the issuing authorities rendered opinions
that interest on the Georgia Bonds is exempt from the Georgia Income Tax and,
with respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions that the Possession Bonds and the interest thereon is exempt
from all state and local income taxation. Neither the Sponsor nor its counsel
has made any review for the Trust of the proceedings relating to the issuance of
the Bonds or of the bases for the opinions rendered in connection therewith.
In the opinion of counsel to the Sponsor, under existing Georgia law:
(1) For Georgia income tax purposes, the Georgia Trust is not an
association taxable as a corporation, and the income of the Georgia Trust will
be treated as the income of the Unitholders. Interest on the Georgia Bonds which
is exempt from Georgia income tax when received by the Georgia Trust, and which
would be exempt from Georgia income tax if received directly by a Unitholder,
will retain its status as tax-exempt interest when distributed by the Georgia
Trust and received by the Unitholders. Interest on the Possession Bonds which is
excludable from gross income for federal income tax purposes and is exempt from
state and local taxation pursuant to federal law when received by the Georgia
Trust will be exempt from Georgia income taxation and therefore will not be
includable in the income of the Unitholder for Georgia income tax purposes when
distributed by the Georgia Trust and received by the Unitholders.
(2) 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 Unit, the Unitholder will recognize gain or loss for Georgia income
tax purposes to the same extent that gain or loss would be recognized for
federal income tax purposes (except in the case of Bonds issued before March 11,
1987 issued with original issue discount owned by the Georgia Trust in which
<PAGE>
case gain or loss for Georgia income tax purposes may differ from the amount
recognized for federal income tax purposes because original issue discount on
such Georgia Bonds may be determined by accruing said original issue discount on
a ratable basis). Due to the amortization of bond premium and other basis
adjustments required by the Internal Revenue Code, a Unitholder, under some
circumstances, may realize taxable gain when his or her Units are sold or
redeemed for an amount less than or equal to their original cost.
(3) Amounts paid under an insurance policy or policies issued to the
Georgia Trust, if any, with respect to the Bonds in the Georgia Trust which
represent maturing interest on defaulted obligations held by the Trustee will be
exempt from State income taxes if, and to the extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations provided
that, at the time such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
(4) Neither the Bonds nor the Units will be subject to Georgia sales or
use tax.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Georgia law. Ownership of the Units may
result in collateral Georgia tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
HAWAII RISK FACTORS. The financial condition of the State of Hawaii is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. Historically, the State has experienced significant
revenue shortfalls.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Hawaii's economy has struggled for
nearly eight years. Jobs are continually lost. Hawaii's tourism industry is a
major part of its economy. The State is attempting to restructure its commitment
to the tourist industry to further its economy.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds of the State are rated "A+" by
Standard & Poor's and "A1" by Moody's.
Further information concerning Hawaii risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Hawaii Trust, Special
Counsel to the Fund for Hawaii tax matters rendered an opinion under then
existing Hawaii income tax law applicable to taxpayers whose income is subject
to Hawaii income taxation substantially to the effect that:
(1) The Hawaii Trust is not an association taxable as a corporation and
each Unitholder of the Hawaii Trust will be treated as the owner of a pro rata
portion of the Hawaii Trust, and the income of such portion of the Hawaii Trust
will therefore be treated as the income of the Unitholder for Hawaii Income Tax
purposes;
(2) Income on the Bonds which is exempt from the Hawaii Income Tax when
received by a Unitholder of the Hawaii Trust and which would be exempt from the
Hawaii Income Tax if received directly by a Unitholder, will retain its status
as exempt from such tax when received by the Hawaii Trust and distributed to
such Unitholder;
(3) To the extent that interest on the Bonds, if any, is includable in
the computation of "alternative minimum taxable income" for federal income tax
purposes, such interest will also be includable in the computation of
"alternative minimum taxable income" for purposes of Hawaii's corporate
alternative minimum tax on corporations;
(4) Each Unitholder of the Hawaii Trust will recognize gain or loss for
Hawaii Income Tax purposes if the Trustee disposes of a Bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Hawaii Trust to the extent that such a transaction results in a recognized
gain or loss to such Unitholder for federal income tax purposes;
(5) Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Unitholders realizing taxable
gain for Hawaii Income Tax purposes when their Units are sold or redeemed for an
amount equal to or less than their original cost;
(6) Proceeds, if any, paid under individual insurance policies obtained
by issuers of Bonds or the Trustee which represent maturing interest on
defaulted obligations held by the Trustee will be excludable from Hawaii net
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
obligation provided that, at the time such policies are purchased, the amounts
paid for such policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the bonds, rather than the insurer,
will pay debt service on the bonds; and
(7) To the extent that interest derived from the Hawaii Trust by a
Unitholder with respect to any Possession Bonds is excludable from gross income
for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will also not be subject
to the Hawaii Income Tax. It should be noted that interest relating to
Possession Bonds is subject to tax in the case of certain banks and financial
institutions subject to the Hawaii's franchise tax and corporations subject to
Hawaii's corporate alternative minimum tax.
<PAGE>
We have not examined any of the Bonds to be deposited and held in the
Hawaii Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and therefore express no opinion as to the
exemption from State income taxes of interest on the Bonds if received directly
by a Unitholder.
KANSAS RISK FACTORS. The financial condition of the State of Kansas is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The Kansas economy is composed of
manufacturing, trade, services and agriculture. Severe weather conditions could
have a significant impact on the Kansas economy. The slower pace of the national
economic expansion will dampen the growth rate of the Kansas economy.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Although the State has no general obligation debt rating, it seeks an
underlying rating on specific issues of at least "AA-" from Standard & Poor's
and "A1" from Moody's.
Further information concerning Kansas risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Kansas Trust, Special
Counsel to each Kansas Trust for Kansas tax matters, rendered an opinion under
then existing Kansas income tax law applicable to taxpayers whose income is
subject to Kansas income taxation, assuming interest on the Bonds is excludable
from gross income under Section 103 of the Internal Revenue Code of 1986, as
amended, substantially to the effect that:
The Kansas Trust is not an association taxable as a corporation for
Kansas income tax purposes;
Each Unitholder of the Kansas Trust will be treated as the owner of a
pro rata portion of the Kansas Trust, and the income and deductions of the
Kansas Trust will therefore be treated as income (and deductions) of the
Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas
or any of its political subdivisions will be exempt from income taxation imposed
on individuals, corporations and fiduciaries (other than banks, trust companies
or savings and loan associations). However, interest on Bonds issued prior to
January 1, 1988 by the State of Kansas or any of its political subdivisions will
not be exempt from income taxation imposed on individuals, corporations and
fiduciaries (other than banks, trust companies or savings and loan associations)
unless the laws of the State of Kansas authorizing the issuance of such Bonds
specifically exempt the interest on the Bonds from income taxation by the State
of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on the Bonds which is exempt from Kansas income taxation when
received by the Kansas Trust will continue to be exempt when distributed to a
Unitholder (other than a bank, trust company or savings and loan association);
Each Unitholder of the Kansas Trust will recognize gain or loss for
Kansas income tax purposes if the Trustee disposes of a Bond (whether by sale,
exchange, payment on maturity, retirement or otherwise) or if the Unitholder
redeems or sells Units of the Kansas Trust to the extent that such transaction
results in a recognized gain or loss for federal income tax purposes;
Interest received by the Kansas Trust on the Bonds is exempt from
intangibles taxation imposed by any counties, cities and townships pursuant to
present Kansas law; and
No opinion is expressed regarding whether the gross earnings derived
from the Units is subject to intangibles taxation imposed by any counties,
cities and townships pursuant to present Kansas law. Chapman and Cutler has
expressed no opinion with respect to taxation under any other provision of
Kansas law. Ownership of the Units may result in collateral Kansas tax
consequences to certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral consequences.
KENTUCKY RISK FACTORS. The financial condition of the State of Kentucky
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Kentucky has a strong industrial base
of steel, aluminum, chemicals and machinery production. Services and trade make
up a large part of Kentucky's employment. These industries tend to be highly
cyclical and there is no assurance that these industries will continue to grow.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Kentucky risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
<PAGE>
TAX STATUS. At the time of the closing for each Kentucky Trust, the
respective counsel to the Kentucky Trusts for Kentucky tax matters rendered an
opinion under then existing Kentucky income tax law applicable to taxpayers
whose income is subject to Kentucky income taxation substantially to the effect
that:
The assets of the Kentucky Trust will consist of interest-bearing
obligations issued by or on behalf of the Commonwealth of Kentucky (the "State")
or counties, municipalities, authorities or political subdivisions thereof (the
"Kentucky Bonds") and by an authority of the Commonwealth of Puerto Rico (the
"Possession Bonds") (collectively, the "Bonds").
Although we express no opinion herein regarding such matters, we have
assumed that: (i) the Bonds were validly issued, (ii) the interest thereon is
excludable from gross income for Federal income tax purposes, (iii) interest on
the Bonds, if received directly by a Unitholder, would be exempt from the income
tax imposed by the Commonwealth of Kentucky that is applicable to individuals
and corporations (the "Kentucky State Income Tax"); and (iv) the Bonds are
exempt from the ad valorem tax imposed by the Commonwealth of Kentucky. Neither
the Sponsor nor its counsel has made any review of the proceedings relating to
the issuance of the Bonds or of the bases for the opinions, if any, rendered in
connection therewith. This opinion does not address the taxation of persons
other than full time residents of Kentucky.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Kentucky income tax law as of the date of this prospectus and based
upon the assumptions above:
(i) The Kentucky Trust is not an association taxable as a corporation
and each Kentucky Unitholder will be treated as the owner of a pro rata portion
of the Kentucky Trust, and the income of such portion of the Kentucky Trust will
therefore be treated as the income of the Kentucky Unitholder for Kentucky
Income Tax purposes;
(ii) For Kentucky State Income Tax purposes, interest on the Bonds
which is excludable from Federal gross income and which is also exempt from
taxation under the Kentucky State Income Tax when received by the Kentucky
Trust, and which would be excludable from Federal gross income and also exempt
from Kentucky State Income Tax if received directly by a Unitholder, will retain
its status as tax-exempt interest when received by the Kentucky Trust and
distributed to the Unitholders.
(iii) Each Kentucky Unitholder of the Kentucky Trust will recognize
gain or loss for Kentucky State Income Tax purposes if the Trustee disposes of a
Bond (whether by redemption, sale or otherwise) or if the Kentucky Unitholder
redeems or sells Units of the Kentucky Trust to the extent that such a
transaction results in a recognized gain or loss to such Unitholder for Federal
income tax purposes;
(iv) Tax reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Kentucky Unitholders realizing
taxable gain for Kentucky State Income Tax purposes when their Units are sold or
redeemed for an amount equal to or less than their original cost;
(v) State law does not permit a deduction for interest paid or incurred
on indebtedness incurred or continued to purchase or carry Units in the Kentucky
Trust, the interest on which is exempt from State income taxes.
(vi) Units of the Kentucky Trust, but only to the extent the same
represent an ownership in obligations issued by or on behalf of the Commonwealth
of Kentucky or governmental units of the Commonwealth of Kentucky, the interest
on which is excludable from gross income for federal and Kentucky State Income
Tax purposes will not be subject to ad valorem taxation by the Commonwealth of
Kentucky or any political subdivision thereof; and
(vii) Proceeds, if any, paid under individual insurance policies
obtained by issuers of Bonds that represent maturing interest on defaulted
obligations held by the Trustee will not be subject to Kentucky State Income Tax
purposes if, and to the same extent as, such interest would have not been
subject to Kentucky State Income Tax purposes if paid in the normal course by
the issuer of the defaulted obligation provided that, at the time such policies
are purchased, the amounts paid for such policies were 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.
Chapman and Cutler expresses no opinion with respect to taxation under
any other provision of Kentucky law. Ownership of the Units may result in
collateral Kentucky tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
LOUISIANA RISK FACTORS. The financial condition of the State of
Louisiana is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economy is composed of
services, gambling, industrial sectors and agriculture. These industries tend to
be highly cyclical. The State's manufacturing sector may be adversely affected
by the North American Free Trade Agreement and the General Agreements on Tariffs
and Trade. Moreover, Louisiana could be impacted by problems in the agricultural
sector, including crop failures, severe weather conditions or other
agricultural-related problems.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of A2, A- and A from Moody's,
Standard & Poor's and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.),
respectively, on its general obligation indebtedness.
Further information concerning Louisiana risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
<PAGE>
TAX STATUS. At the time of the closing for each Louisiana Trust,
Special Counsel to each Louisiana Trust for Louisiana tax matters rendered an
opinion under then existing Louisiana income tax law applicable to taxpayers
whose income is subject to Louisiana income taxation substantially to the effect
that:
(1) The Louisiana Trust will be treated as a trust for Louisiana income
tax purposes and not as an association taxable as a corporation.
(2) The Louisiana income tax on resident individuals is imposed upon
the "tax table income" of resident individuals. The calculation of the "tax
table income" of a resident individual begins with federal adjusted gross
income. Certain modifications are specified, but no such modification requires
the addition of interest on obligations of the State of Louisiana and its
political subdivisions, public corporations created by them and constitutional
authorities thereof authorized to issue obligations on their behalf.
Accordingly, amounts representing interest excludable from gross income for
federal income tax purposes received by the Louisiana Trust with respect to such
obligations will not be taxed to the Louisiana Trust, or, except as provided
below, to the resident individual Unitholder, for Louisiana income tax purposes.
In addition to the foregoing, interest on the respective Securities may also be
exempt from Louisiana income taxes pursuant to the statutes authorizing their
issuance.
(3) To the extent that gain from the sale, exchange or other
disposition of obligations held by the Louisiana Trust (whether as a result of a
sale or exchange of such obligations by the Louisiana Trust or as a result of a
sale or exchange of a Unit by a Unitholder) is includable in the federal
adjusted gross income of a resident individual, such gain will be included in
the calculation of the Unitholder's Louisiana taxable income; and
(4) Gain or loss on the Unit or as to underlying bonds for Louisiana
income tax purposes would be determined by taking into account the basis
adjustments for federal income tax purposes described in this Prospectus.
As no opinion is expressed regarding the Louisiana tax consequences of
Unitholders other than individuals who are Louisiana residents, tax counsel
should be consulted by other prospective Unitholders. The Internal Revenue Code
of 1986, as amended (the "1986 Code"), contains provisions relating to investing
in tax-exempt obligations (including, for example, corporate minimum tax
provisions which treat certain tax-exempt interest and corporate book income
which may include tax-exempt interest, as tax preference items, provisions
affecting the deductibility of interest expense by financial institutions) which
could have a corresponding effect on the Louisiana tax liability of the
Unitholders.
In rendering the opinions expressed above, counsel has relied upon the
opinion of Counsel to the Sponsor that the Louisiana Trust is not an association
taxable as corporation for Federal income tax purposes, that each Unitholder of
the Louisiana Trust will be treated as the owner of a pro rata portion of such
Louisiana Trust under the 1986 Code and that the income of the Louisiana Trust
will be treated as income of the Unitholders under the 1986 Code.
Tax counsel should be consulted as to the other Louisiana tax
consequences not specifically considered herein, and as to the Louisiana Tax
Status of taxpayers other than Louisiana resident individuals who are
Unitholders in the Louisiana Trust. In addition, no opinion is being rendered as
to Louisiana tax consequences resulting from any proposed or future federal or
state tax legislation.
MAINE RISK FACTORS. The financial condition of the State of Maine is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Maine's economy consists of services,
trade, government and manufacturing. Although Maine's economy is diversified, it
is subject to shifts which may impact certain Bonds in Maine portfolio. One of
Maine's greatest impediments to faster economic growth is slow population
growth.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Maine currently maintains a "AA+", "Aa2" and "AA" bond
rating from Standard & Poor's, Moody's and Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.), respectively, on its general obligation indebtedness.
Further information concerning Maine risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Maine Trust, special
counsel to the Fund for Maine tax matters rendered an opinion under then
existing Maine income tax law applicable to taxpayers whose income is subject to
Maine income taxation substantially to the effect that:
The assets of the Maine Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Maine (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Maine Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Maine Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for Federal income tax purposes, (iii) interest on the Maine Bonds, if
received directly by a Unitholder, would be exempt from the Maine income tax
applicable to individuals, trusts and estates and corporations ("Maine Income
Tax"), and (iv) interest on the Bonds will not be taken into account by
individuals and corporations in computing an additional tax ("Maine Minimum
Tax") or in the case of corporations, a surcharge ("Maine Corporate Income Tax
Surcharge") imposed under the Maine Income Tax. The opinion set forth below does
not address the taxation of persons other than full time residents of Maine.
<PAGE>
In the opinion of Chapman and Cutler, Special Counsel to the Fund for
Maine tax matters, under existing law as of the date of this prospectus and
based upon the assumptions set forth above:
(1) the Maine Trust is not an association taxable as a corporation,
thus each Unitholder of the Trust will be essentially treated as the owner of a
pro rata portion of the Maine Trust and the income of such portion of the Maine
Trust will be treated as the income of the Unitholder for Maine Income Tax
purposes;
(2) Interest on the Bonds which is exempt from the Maine Income Tax
when received by the Maine Trust, and which would be exempt from the Maine
Income Tax and the Maine Minimum Tax if received directly by a Unitholder, will
retain its status as exempt from the Maine Income Tax and the Maine Minimum Tax
when received by the Maine Trust and distributed to the Unitholder;
(3) to the extent that interest derived from the Maine Trust by a
Unitholder with respect to the Possession Bonds is excludable from gross income
for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
the Maine Income Tax;
(4) each Unitholder of the Maine Trust will recognize gain or loss for
Maine Income Tax purposes if the Trustee disposes of a bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Maine Trust to the extent that such a transaction results in a recognized
gain or loss to such Unitholder for Federal income tax purposes; and
(5) the Maine Income Tax does not permit a deduction of interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units in
the Maine Trust, the interest on which is exempt from the Tax.
Prospective purchasers subject to the Maine Franchise Tax should be
advised that for purposes of the Maine Franchise Tax, interest on the Bonds
received by the Trust and distributed to a Unitholder subject to such tax will
be added to the Unitholder's Federal taxable income and therefore will be
taxable. Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Maine law. Ownership of the Units may result in
collateral Maine tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such
consequences.
MARYLAND RISK FACTORS. The financial condition of the State of Maryland
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture. The State has
a relatively high wage labor market which has resulted in the State's business
sector becoming more vulnerable to competitive pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Maryland currently maintains a "triple A" bond rating from
Standard & Poor's and Moody's on its general obligation indebtedness.
Further information concerning Maryland risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Maryland Trust, Special
Counsel to each Maryland Trust for Maryland tax matters rendered an opinion
under then existing Maryland income tax law applicable to taxpayers whose income
is subject to Maryland income taxation substantially to the effect that:
(1) For Maryland State and local income tax purposes, the Maryland
Trust will not be recognized as an association taxable as a corporation, but
rather as a fiduciary whose income will not be subject to Maryland State and
local income taxation.
(2) To the extent that interest derived from the Maryland Trust by a
Unitholder with respect to the obligations of the State of Maryland, the
Government of Puerto Rico and their political subdivisions is excludable from
Federal gross income, such interest will not be subject to Maryland State or
local income taxes. Interest paid to a "financial institution" will be subject
to the Maryland State franchise tax on financial institutions.
(3) In the case of taxpayers who are individuals, Maryland presently
imposes an income tax on items of tax preference with reference to such items as
defined in the Internal Revenue Code, as amended from time to time, for purposes
of calculating the federal alternative minimum tax. Interest paid on certain
private activity bonds constitutes a tax preference item for the purpose of
calculating the federal alternative minimum tax. Accordingly, if the Maryland
Trust holds such bonds, 50% of the interest on such bonds in excess of a
threshold amount is taxable in Maryland.
(4) Capital gain, including gain realized by a Unitholder from the
redemption, sale or other disposition of a Unit, will be included in the
Maryland taxable base of Unitholders for Maryland State and local income
taxation purposes. However, Maryland defines the taxable net income of
individuals as Federal adjusted gross income with certain modifications.
Likewise, the Maryland taxable net income of corporations is Federal taxable
income with certain modifications. There is available to Maryland income
taxpayers a modification which allows those taxpayers to subtract from the
Maryland taxable base the gain included in Federal adjusted gross income or
Federal taxable income, as the case may be, which is realized from the
disposition of obligations by the State of Maryland or its political
subdivisions by the Maryland Trust. Consequently, by making that modification, a
Unitholder who is entitled to make the subtraction modification will not be
<PAGE>
subject to Maryland State or local income tax with respect to gain realized upon
the disposition of obligations by the State of Maryland or its political
subdivisions by the Maryland Trust. Profit realized by a "financial institution"
from the sale or exchange of Bonds will be subject to the Maryland Franchise
Tax.
These opinions relate only to the treatment of the Maryland Trust and
the Units under the Maryland State and local income tax laws and Maryland
franchise tax laws. Unitholders should consult tax counsel as to other Maryland
tax consequences not specifically considered in these opinions. For example, no
opinion is expressed as to the treatment of the Units under the Maryland
inheritance and estate tax laws.
MASSACHUSETTS RISK FACTORS. The financial condition of the Commonwealth
of Massachusetts is affected by various national, economic, social and
environmental policies and conditions. Additionally, limitations imposed by
statute and voter initiative upon the Commonwealth and its local governments
concerning taxes, bond indebtedness and other matters may constrain the
revenue-generating capacity of the Commonwealth and its local governments and,
therefore, the ability of the issuers of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The employment in the Commonwealth has
been and continues to be significantly and adversely affected by reductions in
federal government spending on defense-related industries. The Commonwealth has
many material future liabilities, including an underfunded retirement system and
Medicaid expenditures.
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.
In recent years, the Commonwealth of Massachusetts and certain of its
public bodies and municipalities, particularly the City of Boston, 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. Standard & Poor's
raised its rating of general obligation bonds of the Commonwealth of
Massachusetts from A+ to AA- in October 1997. Moody's rating is Aa3 and Fitch
IBCA, Inc. (formerly Fitch Investors Service, L.P.) raised its rating from A+ to
AA- in January 1998.
Further information concerning Massachusetts risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Massachusetts Trust,
Special Counsel to each Massachusetts Trust for Massachusetts tax matters
rendered an opinion under then existing Massachusetts income tax law applicable
to taxpayers whose income is subject to Massachusetts income taxation
substantially to the effect that:
In the opinion of special counsel to the Fund, under existing
Massachusetts law:
(1) For Massachusetts income tax purposes, the Massachusetts Trust will
be treated as a corporate trust under Section 8 of Chapter 62 of the
Massachusetts General Laws and not as a grantor trust under Section 10(e) of
Chapter 62 of the Massachusetts General Laws.
(2) The Massachusetts Trust will not be held to be engaging in business
in Massachusetts within the meaning of said Section 8 and will, therefore, not
be subject to Massachusetts income tax.
(3) Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of Massachusetts General Laws will not be required to
include their respective shares of the earnings of or distributions from the
Massachusetts Trust in their Massachusetts gross income to the extent that such
earnings or distributions represent tax-exempt interest for federal income tax
purposes received by the Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political subdivisions
or instrumentalities, or issued by United States territories or possessions.
(4) Any proceeds of insurance obtained by the Trustee of the Trust or
by the issuer of a Bond held by the Massachusetts Trust which are paid to
Massachusetts Unitholders and which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Massachusetts gross
income of a Massachusetts Unitholder if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
Bond.
(5) The Massachusetts Trust's capital gains and/or capital losses
realized upon disposition of Bonds held by it will be includable pro rata in the
federal gross income of Massachusetts Unitholders who are subject to
Massachusetts income taxation under Chapter 62 of the Massachusetts General
Laws, and such gains and/or losses will be included as capital gains and/or
losses in the Massachusetts Unitholders' Massachusetts gross income, except
where capital gain is specifically exempted from income taxation under acts
authorizing issuance of said Bonds.
(6) Gains or losses realized upon sale or redemption of Units by
Massachusetts Unitholders who are subject to Massachusetts income taxation under
Chapter 62 of the Massachusetts General Laws will be includable in their
Massachusetts gross income.
(7) In determining such gain or loss Massachusetts Unitholders will, to
the same extent required for Federal tax purposes, have to adjust their tax
bases for their Units for accrued interest received, if any, on Bonds delivered
to the Trustee after the Unitholders pay for their Units and for amortization of
premiums, if any, on obligations held by the Massachusetts Trust.
(8) The Units of the Massachusetts Trust are not subject to any
property tax levied by Massachusetts or any political subdivision thereof, nor
to any income tax levied by any such political subdivision. They are includable
in the gross estate of a deceased Massachusetts Unitholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
<PAGE>
MICHIGAN RISK FACTORS. The financial condition of the State of Michigan
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. 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 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 economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The economy of the State continues to
be dependent on manufacturing, tourism, and agriculture. These sectors tend to
be cyclical and are facing increasing competition from foreign producers.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
As of October 16, 1998, all outstanding general obligation bonds of the
state were rated "Aa1" by Moody's, "AA+" by Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.), and "AA+" by Standard & Poor's.
Further information concerning Michigan risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Michigan Trust, Special
Counsel to each Michigan Trust for Massachusetts tax matters rendered an opinion
under then existing Michigan income tax law applicable to taxpayers whose income
is subject to Michigan income taxation substantially to the effect that:
In the opinion of Miller, Canfield, Paddock and Stone, P.L.C., special
counsel to the Fund for Michigan tax matters, under existing Michigan law:
The Michigan Trust and the owners of Units will be treated for purposes
of the Michigan income tax laws and the Single Business Tax in substantially the
same manner as they are for purposes of the Federal income tax laws, as
currently enacted. Accordingly, we have relied upon the opinion of Messrs.
Chapman and Cutler as to the applicability of Federal income tax under the
Internal Revenue Code of 1986 to the Michigan Trust and the Unitholders.
Under the income tax laws of the State of Michigan, the Michigan Trust
is not an association taxable as a corporation; the income of the Michigan Trust
will be treated as the income of the Unitholders and be deemed to have been
received by them when received by the Michigan Trust. Interest on the underlying
Bonds which is exempt from tax under these laws when received by Michigan Trust
will retain its status as tax exempt interest to the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will
be considered to have received his pro rata share of Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a taxable event
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or sells his
Certificate to the extent the transaction constitutes a taxable event for
Federal income tax purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan tax laws in the same
manner as such cost is established and allocated for Federal income tax
purposes.
The Michigan Intangibles Tax was totally repealed effective January 1,
1998.
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the Intangible
Tax with respect to those intangibles of persons subject to the Single Business
Tax the income from which would be considered in computing the Single Business
Tax. Persons are subject to the Single Business Tax only if they are engaged in
"business activity", as defined in the Act. Under the Single Business Tax, both
interest received by the Michigan Trust on the underlying Bonds and any amount
distributed from the Michigan Trust to a Unitholder, if not included in
determining taxable income for Federal income tax purposes, is also not included
in the adjusted tax base upon which the Single Business Tax is computed, of
either the Michigan Trust or the Unitholders. If the Michigan Trust or the
Unitholders have a taxable event for Federal income tax purposes when the
Michigan Trust disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or the Unitholder redeems or sells his Certificate, an
amount equal to any gain realized from such taxable event which was included in
the computation of taxable income for Federal income tax purposes (plus an
amount equal to any capital gain of an individual realized in connection with
such event but excluded in computing that individual's Federal taxable income)
will be included in the tax base against which, after allocation, apportionment
and other adjustments, the Single Business Tax is computed. The tax base will be
reduced by an amount equal to any capital loss realized from such a taxable
event, whether or not the capital loss was deducted in computing Federal taxable
income in the year the loss occurred. Unitholders should consult their tax
advisor as to their status under Michigan law. The Single Business Tax is being
phased-out over a twenty three year period at a rate of one-tenth of one percent
per year, beginning in 1999.
Any proceeds paid under an insurance policy issued to the Trustee of
the Trust, or paid under individual policies obtained by issuers of Bonds,
which, when received by the Unitholders, represent maturing interest on
defaulted obligations held by the Trustee, will be excludable from the Michigan
income tax laws and the Single Business Tax if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. While treatment under the Michigan Intangibles Tax is not premised
upon the characterization of such proceeds under the Internal Revenue Code, the
Michigan Department of Treasury should adopt the same approach as under the
Michigan income tax laws and the Single Business Tax
<PAGE>
As the Tax Reform Act of 1986 eliminated the capital gain deduction for
tax years beginning after December 31, 1986, the federal adjusted gross income,
the computation base for the Michigan Income Tax, of a Unitholder will be
increased accordingly to the extent such capital gains are realized when the
Michigan Trust disposes of a Bond or when the Unitholder redeems or sells a
Unit, to the extent such transaction constitutes a taxable event for Federal
income tax purposes.
MINNESOTA RISK FACTORS. The financial condition of the State of
Minnesota is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Minnesota relies heavily on a
progressive individual income tax and a retail sales tax for revenue which
results in a fiscal system unusually sensitive to economic conditions. The
State's economic base is diversified, consisting of manufacturing, construction
and service industries, supplemented by rural areas with selective commercial
agriculture. The State has a relatively high wage labor market which has
resulted in the State's business sector becoming more vulnerable to competitive
pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Minnesota currently maintains a "Triple A" bond rating
from Standard & Poor's, Moody's and Fitch IBCA, Inc. (formerly Fitch Investors
Service, L.P.), respectively, on its general obligation indebtedness.
Further information concerning Minnesota risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Minnesota Trust,
Special Counsel to each Minnesota Trust for Minnesota tax matters rendered an
opinion under then existing Minnesota income tax law applicable to taxpayers
whose income is subject to Minnesota income taxation substantially to the effect
that:
We understand that the Minnesota Trust will only have income consisting
of (i) interest from bonds issued by the State of Minnesota and its political
and governmental subdivisions, municipalities and governmental agencies and
instrumentalities (the "Minnesota Bonds") and bonds issued by possessions of the
United States, including bonds issued by Puerto Rico authorities (the
"Possession Bonds" and, with the Minnesota Bonds, the "Bonds") which would be
exempt from federal and Minnesota income taxation when paid directly to an
individual, trust or estate, (ii) gain on the disposition of such Bonds, and
(iii) proceeds paid under certain insurance policies issued to the Trustee or to
the issuers of the Bonds which represent maturing interest or principal payments
on defaulted Bonds held by the Trustee.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
federal income tax purposes and (iii) the interest thereon is exempt from the
income tax imposed by Minnesota that is applicable to individuals, trusts and
estates (the "Minnesota Income Tax"). It should be noted that interest on the
Minnesota Bonds is subject to tax in the case of corporations subject to the
Minnesota Corporate Franchise Tax or the Corporate Alternative Minimum Tax and
is a factor in the computation of the Minimum Fee applicable to financial
institutions; no opinion is expressed with respect to the treatment of interest
on the Possession Bonds for purposes of such taxes. The opinion set forth below
does not address the taxation of persons other than full time residents of
Minnesota. At the respective times of issuance of the Bonds, opinions relating
to the validity thereof and to the exemption of interest thereon from Federal
income tax were rendered by bond counsel to the respective issuing authorities.
In addition, with respect to the Minnesota Bonds, bond counsel to the issuing
authorities rendered opinions as to the exemption of interest from the Minnesota
Income Tax and, with respect to the Possession Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption from all state and
local income taxation. Neither the Sponsor nor its counsel has made any review
for the Minnesota Trust of the proceedings relating to the issuance of the Bonds
or of the bases for the opinions rendered in connection therewith.
Although Minnesota state law provides that interest on Minnesota bonds
is exempt from Minnesota state income taxation, the Minnesota state legislature
has enacted a statement of intent that interest on Minnesota bonds should be
subject to Minnesota state income taxation if it is judicially determined that
the exemption discriminates against interstate commerce, effective for the
calendar year in which such a decision becomes final. It cannot be predicted
whether a court would render such a decision or whether, as a result thereof,
interest on Minnesota bonds and therefore distributions by the Minnesota Trust
would become subject to Minnesota state income taxation.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under
existing Minnesota income tax law as of the date of this prospectus and based
upon the assumptions above:
(1) The Minnesota Trust is not an association taxable as a corporation
and each Unitholder of the Minnesota Trust will be treated as the owner of a pro
rata portion of the Minnesota Trust, and the income of such portion of the
Minnesota Trust will therefore be treated as the income of the Unitholder for
Minnesota Income Tax purposes;
(2) Income on the Bonds excludable from Minnesota taxable income for
purposes of the Minnesota Income Tax when received by the Minnesota Trust and
which would be excludable from Minnesota taxable income for purposes of the
Minnesota Income Tax if received directly by a Unitholder will be excludable
from Minnesota taxable income for purposes of the Minnesota Income Tax when
received by the Minnesota Trust and distributed to such Unitholder;
<PAGE>
(3) To the extent that interest on certain Bonds (except with respect
to Possession Bonds, as to which no opinion is expressed), if any, is includable
in the computation of "alternative minimum taxable income" for federal income
tax purposes, such interest will also be includable in the computation of
"alternative minimum taxable income" for purposes of the Minnesota Alternative
Minimum Tax imposed on individuals, estates and trusts;
(4) Each Unitholder of the Minnesota Trust will recognize gain or loss
for Minnesota Income Tax purposes if the Trustee disposes of a Bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Minnesota Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax purposes;
(5) Tax basis reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Unitholders realizing taxable
gain for Minnesota Income Tax purposes when their Units are sold or redeemed for
an amount equal to or less than their original cost;
(6) Proceeds, if any, paid under individual insurance policies obtained
by issuers of Bonds or the Trustee which represent maturing interest on
defaulted obligations held by the Trustee will be excludable from Minnesota net
income if, and to the same extent as, such interest would have been so
excludable from Minnesota net income if paid in the normal course by the issuer
of the defaulted obligation provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable, customary and
consistent with the reasonable expectation that the issuer of the bonds, rather
than the insurer, will pay debt service on the bonds; and
(7) To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds is excludable from gross income
for federal income tax purposes and is exempt from state and local taxation
pursuant to federal law when received by the Minnesota Trust, such interest will
not be subject to the Minnesota Income Tax when distributed by the Minnesota
Trust and received by the Unitholders. As noted above, we have expressed no
opinion as to the treatment of interest on the Possession Bonds for purposes of
the Minnesota Corporate Franchise Tax or the Alternative Minimum Tax or whether
it is a factor in the computation of the Minimum Fee applicable to financial
institutions. Although a federal statute currently provides that bonds issued by
the Government of Puerto Rico, or by its authority, are exempt from all state
and local taxation, the Supreme Court of Minnesota has held that interest earned
on bonds issued by the Government of Puerto Rico may be included in taxable net
income for purposes of computing the Minnesota bank excise tax. The State of
Minnesota could apply the same reasoning in determining whether interest on the
Possession Bonds is subject to the taxes listed above on which we express no
opinion.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinions to the
exemption from State income taxes of interest on the Bonds if received directly
by a Unitholder. Chapman and Cutler has expressed no opinion with respect to
taxation under any other provision of Minnesota law. Ownership of the Units may
result in collateral Minnesota tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences.
MISSOURI RISK FACTORS. The financial condition of the State of Missouri
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the state and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, agriculture and service industries.
The State's financial situation may be affected by increased costs in
court-ordered desegregation payments in St. Louis.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds to the State are rated "AAA"
by Standard and Poor's and "Aaa" by Moody's.
Further information concerning Missouri risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Missouri Trust, Special
Counsel to each Missouri Trust for Missouri tax matters rendered an opinion
under then existing Missouri income tax law applicable to taxpayers whose income
is subject to Missouri income taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations
issued by or on behalf of the State of Missouri (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Missouri
Bonds") or by the Commonwealth of Puerto Rico or an authority thereof (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Missouri Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for Federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income tax
applicable to individuals and corporations ("Missouri State Income Tax"). It is
assumed that, at the respective times of issuance of the Bonds, opinions that
the Bonds were validly issued and that interest on the Bonds is excluded from
gross income for Federal income tax purposes were rendered by bond counsel to
the respective issuing authorities. In addition, with respect to the Missouri
Bonds, bond counsel to the issuing authorities rendered opinions that the
interest on the Missouri Bonds is exempt from the Missouri State Income Tax and,
with respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions that the Possession Bonds and the interest thereon is exempt
from all state and local income taxation. Neither the Sponsor nor its counsel
has made any review for the Missouri Trust of the proceedings relating to the
issuance of the Bonds or the bases for the opinions rendered in connection
therewith. The opinion set forth below does not address the taxation of persons
other than full time residents of Missouri.
<PAGE>
In the opinion of Chapman and Cutler, counsel to the Sponsor under
existing law:
(1) The Missouri Trust is not an association taxable as a corporation
for Missouri income tax purposes, and each Unitholder of the Missouri Trust will
be treated as the owner of a pro rata portion of the Missouri Trust and the
income of such portion of the Missouri Trust will be treated as the income of
the Unitholder for Missouri State Income Tax purposes.
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Missouri State Income Tax if received directly by
a Unitholder will be exempt from the Missouri State Income Tax when received by
the Missouri Trust and distributed to such Unitholder; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law, including but
not limited to the franchise tax imposed on financial institutions pursuant to
Chapter 148 of the Missouri Statutes.
(3) Each Unitholder of the Missouri Trust will recognize gain or loss
for Missouri State Income Tax purposes if the Trustee disposes of a Bond
(whether by redemption, sale, or otherwise) or if the Unitholder redeems or
sells Units of the Missouri Trust to the extent that such a transaction results
in a recognized gain or loss to such Unitholder for Federal income tax purposes.
Due to the amortization of bond premium and other basis adjustments required by
the Internal Revenue Code, a Unitholder under some circumstances, may realize
taxable gain when his or her Units are sold or redeemed for an amount less than
or equal to their original cost.
(4) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income for
Federal income tax purposes will be excludable from the Missouri State Income
Tax to the same extent as such interest would have been so excludable if paid by
the issuer of such Bonds held by the Missouri Trust; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law, including but
not limited to the franchise tax imposed on financial institutions pursuant to
Chapter 148 of the Missouri Statutes.
(5) The Missouri State Income Tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Trust, the interest on which is exempt from such Tax.
(6) The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of the Bonds held
by the Missouri Trust will not generally be subject to the Kansas City, Missouri
Earnings and Profits Tax or the City of St. Louis Earnings Tax (except that no
opinion is expressed in the case of certain Unitholders, including corporations,
otherwise subject to the St. Louis City Earnings Tax).
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Missouri law. Ownership of the Units may result in
collateral Missouri Tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
NEBRASKA RISK FACTORS. The financial condition of the State of Nebraska
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. Nebraska has imposed a tax cut in its income taxes.
This may result in significant revenue reduction in the future.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State continues to be dependent on
the manufacturing industries and is supplemented by the agricultural sector.
These industries tend to be highly cyclical and there is no assurance that
Nebraska's economic gains in recent years will continue. Moreover, Nebraska
could be impacted by problems in the agricultural sector, including crop
failures, severe weather conditions or other agricultural-related problems.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations. Further
information concerning Nebraska risk factors may be obtained upon request to the
Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Nebraska Trust, Special
Counsel to each Nebraska Trust for Nebraska tax matters rendered an opinion
under then existing Nebraska income tax law applicable to taxpayers whose income
is subject to Nebraska income taxation substantially to the effect that:
The assets of the Nebraska Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Nebraska (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Nebraska Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Nebraska Trust. With respect to certain
Nebraska Bonds which may be held by the Nebraska Trust, the opinions of bond
counsel to the issuing authorities for such Bonds have indicated that the
interest on such Bonds is included in computing the Nebraska Alternative Minimum
Tax imposed by Section 77-2715 (2) of the Revised Nebraska Statutes (the
"Nebraska Minimum Taxes") (the "Nebraska AMT Bonds"). However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
<PAGE>
income for Federal income tax purposes, (iii) none of the Bonds (other than the
Nebraska AMT Bonds, if any) are "specified private activity bonds" the interest
on which is included as an item of tax preference in the computation of the
Alternative Minimum Tax for federal income tax purposes, (iv) interest on the
Nebraska Bonds (other than the Nebraska AMT Bonds, if any), if received directly
by a Unitholder, would be exempt from both the Nebraska income tax, imposed by
Section 77-2714 et seq. of the Revised Nebraska Statutes (other than the
Nebraska Minimum Tax) (the "Nebraska State Income Tax") and the Nebraska Minimum
Tax imposed by Section 77-2715 (2) of the Revised Nebraska Statutes (the
"Nebraska Minimum Tax"), and (v) interest on the Nebraska AMT Bonds, if any, if
received directly by a Unitholder, would be exempt from the Nebraska State
Income Tax. The opinion set forth below does not address the taxation of persons
other than full time residents of Nebraska.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under
existing law as of the date of this prospectus and based upon the assumptions
set forth above:
(1) The Nebraska Trust is not an association taxable as a corporation,
each Unitholder of the Nebraska Trust will be treated as the owner of a pro rata
portion of the Nebraska Trust, and the income of such portion of the Nebraska
Trust will therefore be treated as the income of the Unitholder for both
Nebraska State Income Tax and the Nebraska Minimum Tax purposes;
(2) Interest on the Bonds which is exempt from both the Nebraska State
Income Tax and the Nebraska Minimum Tax when received by the Nebraska Trust, and
which would be exempt from both the Nebraska State Income Tax and the Nebraska
Minimum Tax if received directly by a Unitholder, will retain its status as
exempt from such taxes when received by the Nebraska Trust and distributed to a
Unitholder;
(3) Interest on the Nebraska AMT Bonds, if any, which is exempt from
the Nebraska State Income Tax but is included in the computation of the Nebraska
Minimum Tax when received by the Nebraska Trust, and which would be exempt from
the Nebraska State Income Tax but would be included in the computation of the
Nebraska Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Nebraska State Income Tax but included in the
computation of the Nebraska Minimum Tax when received by the Nebraska Trust and
distributed to a Unitholder;
(4) To the extent that interest derived from the Nebraska Trust by a
Unitholder with respect to the Possession Bonds is excludable from gross income
for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
either the Nebraska State Income Tax or the Nebraska Minimum Tax;
(5) Each Unitholder of the Nebraska Trust will recognize gain or loss
for both Nebraska State Income Tax and Nebraska Minimum Tax purposes if the
Trustee disposes of a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Nebraska Trust to the extent that such
a transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes;
(6) The Nebraska State Income Tax does not permit a deduction for
interest paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Nebraska Trust, the interest on which is exempt from such
Tax; and
(7) In the case of a Unitholder subject to the State financial
institutions franchise tax, the income derived by such Unitholder from his pro
rata portion of the Bonds held by the Nebraska Trust may affect the
determination of such Unitholder's maximum franchise tax.
We have not examined any of the Bonds to be deposited and held in the
Nebraska Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinion as to the
exemption from either the Nebraska State Income Tax or the Nebraska Minimum Tax
of interest on the Nebraska Bonds if received directly by a Unitholder.
NEW JERSEY RISK FACTORS. The financial condition of the State of New
Jersey is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture. The State has
a relatively high wage labor market which has resulted in the State's business
sector becoming more vulnerable to competitive pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds to the State are rated "AA+"
by Standard and Poor's and "Aa1" by Moody's.
Further information concerning New Jersey risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each New Jersey Trust,
Special Council to each New Jersey Trust for New Jersey tax matters rendered an
opinion under then existing New Jersey income tax law applicable to taxpayers
whose income is subject to New Jersey income taxation substantiality to the
effect that:
(1) The New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. The New Jersey Trust will not be subject
to the New Jersey Corporation Business Tax or the New Jersey Corporation Income
Tax.
(2) With respect to the non-corporate Unitholders who are residents of
New Jersey, the income of the New Jersey Trust which is allocable to each such
Unitholder will be treated as the income of such Unitholder under the New Jersey
Gross Income Tax. Interest on the underlying Bonds which would be exempt from
<PAGE>
New Jersey Gross Income Tax if directly received by such Unitholder will retain
its status as tax-exempt interest when received by the New Jersey Trust and
distributed to such Unitholder. Any proceeds paid under the insurance policy
issued to the Trustee of the New Jersey Trust with respect to the Bonds or under
individual policies obtained by issuers of Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be exempt from New
Jersey Gross Income Tax if, and to the same extent as, such interest would have
been so exempt if paid by the issuer of the defaulted obligations.
(3) A non-corporate Unitholder will not be subject to the New Jersey
Gross Income Tax on any gain realized either when the New Jersey Trust disposes
of a Bond (whether by sale, exchange, redemption, or payment at maturity), when
the Unitholder redeems or sells his Units or upon payment of any proceeds under
the insurance policy issued to the Trustee of the New Jersey Trust with respect
to the Bonds or under individual policies obtained by issuers of Bonds which
represent maturing principal on defaulted obligations held by the Trustee. Any
loss realized on such disposition may not be utilized to offset gains realized
by such Unitholder on the disposition of assets the gain on which is subject to
the New Jersey Gross Income Tax.
(4) Units of the New Jersey Trust may be taxable on the death of a
Unitholder under the New Jersey Transfer Inheritance Tax Law or the New Jersey
Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax, interest from the
Bonds in the New Jersey Trust which is allocable to such corporation will be
includable in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, less any interest expense
incurred to carry such investment to the extent such interest expense has not
been deducted in computing Federal taxable income. Net gains derived by such
corporation on the disposition of the Bonds by the New Jersey Trust or on the
disposition of its Units will be included in its entire net income for purposes
of the New Jersey Corporation Business Tax or New Jersey Corporation Income Tax.
Any proceeds paid under the insurance policy issued to the Trustee of the New
Jersey Trust with respect to the Bonds or under individual policies obtained by
issuers of Bonds which represent maturing interest or maturing principal on
defaulted obligations held by the Trustee will be included in its entire net
income for purposes of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax if, and to the same extent as, such interest or proceeds
would have been so included if paid by the issuer of the defaulted obligations.
NEW MEXICO RISK FACTORS. The financial condition of the State of New
Mexico is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economy is composed of
energy resources, services, construction and trade. These industries tend to be
highly cyclical. Tourism is also one of the State's most important industries.
Because many international travelers visit New Mexico, an increase in the value
of the U.S. dollar adversely affects this industry. Moreover, New Mexico could
be impacted by problems in the agricultural sector, including crop failures,
severe weather conditions or other agricultural-related problems.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa1 and AA+ from Moody's and
Standard & Poor's, respectively, on its general obligation indebtedness.
Further information concerning New Mexico risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each New Mexico Trust,
Special Counsel to the Fund for New Mexico tax matters rendered an opinion under
then existing New Mexico income tax law applicable to taxpayers whose income is
subject to New Mexico income taxation substantially to the effect that:
The assets of the New Mexico Trust will consist of interest-bearing
obligations issued by or on behalf of the State of New Mexico ("New Mexico") or
counties, municipalities, authorities or political subdivisions thereof (the
"New Mexico Bonds"), and by or on behalf of the government of Puerto Rico, the
government of Guam, or the government of the Virgin Islands (collectively the
"Possession Bonds") (collectively the New Mexico Bonds and the Possession Bonds
shall be referred to herein as the "Bonds") the interest on which is expected to
qualify as exempt from New Mexico income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the New Mexico Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unitholder, would be exempt from the New Mexico income
taxes applicable to individuals and corporations (collectively, the "New Mexico
State Income Tax"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the Bonds, bond counsel to the issuing
authorities rendered opinions as to the exemption of interest from the New
Mexico State Income Tax. Neither the Sponsor nor its counsel has made any review
for the New Mexico Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith. The
opinion set forth below does not address the taxation of persons other than full
time residents of New Mexico.
<PAGE>
In the opinion of Chapman and Cutler, Special Counsel to the Fund for
New Mexico tax matters, under existing law as of the date of this Prospectus and
based upon the assumptions set forth above:
(1) The New Mexico Trust will not be subject to tax under the New
Mexico State Income Tax.
(2) Interest on the Bonds which is exempt from the New Mexico State
Income Tax when received by the New Mexico Trust, and which would be exempt from
the New Mexico State Income Tax if received directly by a Unitholder, will
retain its status as exempt from such tax when received by the New Mexico Trust
and distributed to such Unitholder provided that the New Mexico Trust complies
with the reporting requirements contained in the New Mexico State Income Tax
regulations.
(3) To the extent that interest income derived from the New Mexico
Trust by a Unitholder with respect to Possession Bonds in excludable from gross
income for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48
U.S.C. Section 1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to New Mexico State Income Tax.
(4) Each Unitholder will recognize gain or loss for New Mexico Income
Tax purposes if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Unitholder redeems or sells Units of the New Mexico Trust
to the extent that such a transaction results in a recognized gain or loss to
such Unitholder for Federal income tax purposes.
(5) The New Mexico State Income Tax does not permit a deduction of
interest paid on indebtedness or other expenses incurred (or continued) in
connection with the purchase or carrying of Units in the New Mexico Trust to the
extent that interest income related to the ownership of Units is exempt from the
New Mexico State Income Tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provisions of New Mexico law. We have assumed that at the
respective times of issuance of the Bonds, opinions relating to the validity
thereof and to the exemption of interest thereon from Federal income tax were
rendered by bond counsel to the respective issuing authorities. In addition, we
have assumed that, with respect to the New Mexico Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest from the
New Mexico Income Tax and, with respect to the Possession Bonds, bond counsel to
the issuing authorities rendered opinions as to the exemption from all state and
local income taxation of the Possession Bonds and the interest thereon. Neither
the Sponsor nor its counsel has made any review for the New Mexico Trust of the
proceedings relating to the issuance of the Bonds or of the bases for the
opinions rendered in connection therewith. Investors should consult their tax
advisors regarding collateral tax consequences under New Mexico law relating to
the ownership of the Units, including, but not limited to, the inclusion of
income attributable to ownership of the Units in "modified gross income" for
purposes of determining eligibility for and the amount of the low income
comprehensive tax rebate, the child day care credit, and the elderly taxpayers'
property tax rebate and the applicability of other New Mexico taxes, such as the
New Mexico estate tax.
NEW YORK RISK FACTORS. The financial condition of the State of New York
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. Historically, the State has been one of the
wealthiest states in the nation; however, for decades the State economy has
grown more slowly than that of the nation as a whole, gradually eroding the
State's relative economic affluence.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The economy of the State continues to
be influenced by the financial health of the City of New York, which faces
greater competition as other major cities develop financial and business
capabilities. 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.
The State is party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations. On January 21,
1994, the State entered into a settlement with Delaware with respect to State of
Delaware v. State of New York. 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.
All outstanding general obligation bonds of the State are rated "A" by
Standard and Poor's and "A2" by Moody's.
Further information concerning New York risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each New York Trust, Special
Counsel to the Fund for New York tax matters rendered an opinion under then
existing New York income tax law applicable to taxpayers whose income is subject
to New York income taxation substantially to the effect that:
The New York Trust is not an association taxable as a corporation and
the income of the New York Trust will be treated as the income of the
Unitholders under the income tax laws of the State and City of New York.
Individuals who reside in New York State or City will not be subject to State
and City tax on interest income which is exempt from Federal income tax under
section 103 of the Internal Revenue Code of 1986 and derived from obligations of
New York State or a political subdivision thereof, although they will be subject
to New York State and City tax with respect to any gains realized when such
obligations are sold, redeemed or paid at maturity or when any such Units are
sold or redeemed.
<PAGE>
A resident of New York State (or New York City) will be subject to New
York State (or New York City) personal income tax with respect to gains realized
when New York Obligations held in the New York Trust are sold, redeemed or paid
at maturity or when his Units are sold or redeemed, such gain will equal the
proceeds of sale, redemption or payment less the tax basis of the New York
Obligation or Unit (adjusted to reflect (a) the amortization of premium or
discount, if any, on New York Obligations held in the Trust, (b) accrued
original issue discount, with respect to each New York Obligation which, at the
time the New York Obligation was issued had original issue discount, and (c) the
deposit of New York Obligations with accrued interest in the Trust after the
Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is
not a resident of New York State (or New York City) will not be subject to New
York State (or New York City) personal income tax, unless the Units are property
employed in a business, trade, profession or occupation carried on in New York
State (or New York City).
Amounts paid on defaulted New York Obligations held by the Trustee
under policies of insurance issued with respect to such New York Obligations
will be excludable from income for New York State and New York City income tax
purposes, if and to the same extent as, such interest would have been excludable
if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or
part) of the interest on such indebtedness will not be deductible for New York
State and New York City tax purposes. The purchase of Units may be considered to
have been made with borrowed funds even though such funds are not directly
traceable to the purchase of Units in any New York Trust.
NORTH CAROLINA RISK FACTORS. The financial condition of the State of
North Carolina is affected by various national, economic, social and
environmental policies and conditions. Additionally, Constitutional and
statutory limitations imposed on the State and its local governments concerning
taxes, bond indebtedness and other matters may constrain the revenue-generating
capacity of the State and its local governments and, therefore, the ability of
the issuers of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture. The State has
a relatively high wage labor market which has resulted in the State's business
sector becoming more vulnerable to competitive pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of North Carolina currently maintains a "triple A" bond
rating from Standard & Poor's and Moody's on its general obligation
indebtedness.
Further information concerning North Carolina risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each North Carolina Trust,
Special Counsel to the Fund for North Carolina tax matters rendered an opinion
under then existing North Carolina income tax law applicable to taxpayers whose
income is subject to North Carolina income taxation substantially to the effect
that:
In the opinion of special counsel to the Fund for North Carolina tax
matters, under existing North Carolina law: Upon the establishing of the North
Carolina Trust and the Units thereunder:
(1) The North Carolina Trust is not an "association" taxable as a
corporation under North Carolina law with the result that income of the North
Carolina Trust will be deemed to be income of the Unitholder.
(2) Interest on the Bonds that is exempt from North Carolina income tax
when received by the North Carolina Trust will retain its tax-exempt status when
received by the Unitholders.
(3) Unitholders will realize a taxable event when the North Carolina
Trust disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when a Unitholder redeems or sells his Units (or any of them), and
taxable gains for Federal income tax purposes may result in gain taxable as
ordinary income for North Carolina income tax purposes. However, when a Bond has
been issued under an act of the North Carolina General Assembly that provides
that all income from such Bond, including any profit made from the sale thereof,
shall be free from all taxation by the State of North Carolina, any such profit
received by the North Carolina Trust will retain its tax-exempt status in the
hands of the Unitholders.
(4) Unitholders must amortize their proportionate shares of any premium
on a Bond. Amortization for each taxable year is accomplished by lowering the
Unitholder's basis (as adjusted) in his Units with no deduction against gross
income for the year.
(5) The Units are exempt from the North Carolina tax on intangible
personal property so long as the corpus of the North Carolina Trust remains
composed entirely of Bonds or, pending distribution, amounts received on the
sale, redemption or maturity of the Bonds and the Trustee periodically supplies
to the North Carolina Department of Revenue at such times as required by the
Department of Revenue a complete description of the North Carolina Trust and
also the name, description and value of the obligations held in the corpus of
the North Carolina Trust.
OHIO RISK FACTORS. The financial condition of the State of Ohio is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
<PAGE>
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. The State operates on the basis of a fiscal biennium
for its appropriations and expenditures, and is precluded by law from ending its
fiscal year or fiscal biennium in a deficit position.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. 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. Yet, the Ohio
economy has become more diversified with expansion into the service and other
non-manufacturing sectors. 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.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a general obligation bond rating of AA from
Standard & Poor's and Aa3 from Moody's.
Further information concerning Ohio risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Ohio Trust, Special
Council to each Ohio Trust for Ohio tax matters rendered an opinion under then
existing Ohio income tax law applicable to taxpayers whose income is subject to
Ohio income taxation substantiality to the effect that:
Commencing in 1985, Ohio municipalities may be permitted under Ohio law
to subject interest on certain of the obligations held by the Ohio Trust to
income taxes imposed on their residents and entities doing business therein.
In the opinion of Squire, Sanders & Dempsey, special counsel to the
Fund for Ohio tax matters, under existing law:
(1) The Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, school district or municipal income
taxes in Ohio, the Ohio corporation franchise tax, or the Ohio dealers in
intangibles tax.
(2) Distributions with respect to Units of the Ohio Trust
("Distributions") will be treated as the income of the Unitholders for purposes
of the Ohio personal income tax, and school district and municipal income taxes
in Ohio and the Ohio corporation franchise tax in proportion to the respective
interest therein of each Unitholder.
(3) Distributions properly attributable to interest on obligations
issued by or on behalf of the State of Ohio, political subdivisions thereof, or
agencies or instrumentalities thereof ("Ohio Obligations") held by the Trust are
exempt from the Ohio personal income tax, school district and municipal 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.
(4) Distributions properly attributable to interest on obligations
issued by the government of Puerto Rico, the Virgin Islands or Guam
("Territorial Obligations") held by the Ohio Trust the interest on which is
exempt from state income taxes under the laws of the United States are exempt
from the Ohio personal income tax, and municipal and school district income
taxes in Ohio and, provided such interest is excluded from gross income for
federal income tax purposes, are excluded from the net income base of the Ohio
corporation franchise tax when distributed or deemed distributed to Unitholders.
(5) Distributions properly attributable to proceeds of insurance paid
to the Ohio Trust that represent maturing or matured interest on defaulted
obligations held by the Ohio Trust and that are excluded from gross income for
federal income tax purposes will be exempt from Ohio personal income tax, and
school district and municipal income taxes in Ohio and the net income base of
the Ohio corporation franchise tax.
(6) Distributions of profit made on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations including distributions of
"capital gain dividends" as defined in Section 852(b)(3)(C) of the Code,
properly attributable to the sale, exchange or other disposition of Ohio
Obligations are exempt from Ohio personal income tax, and school district and
municipal income taxes in Ohio, and are excluded from the net income base of the
Ohio corporation franchise tax.
OKLAHOMA RISK FACTORS. The financial condition of the State of Oklahoma
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Oklahoma has broadened its economic
base to rely less on petroleum and agriculture and has expanded in
manufacturing. These industries tend to be highly cyclical and there is no
assurance that Oklahoma's current expansionary phase will continue.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa3, AA and AA from Moody's,
Standard & Poor's and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.),
respectively, on its general obligation indebtedness.
<PAGE>
Further information concerning Oklahoma risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Oklahoma Trust, Special
Counsel to the Fund for Oklahoma tax matters rendered an opinion under then
existing Oklahoma income tax law applicable to taxpayers whose income is subject
to Oklahoma income taxation substantially to the effect that:
The assets of the Oklahoma Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oklahoma (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Oklahoma Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds"). At
the respective times of issuance of the Oklahoma Bonds, certain, but not
necessarily all, of the issues of the Oklahoma Bonds may have been accompanied
by an opinion of bond counsel to the respective issuing authorities that
interest on such Oklahoma Bonds (the "Oklahoma Tax-Exempt Bonds") are exempt
from the income tax imposed by the State of Oklahoma that is applicable to
individuals and corporations (the "Oklahoma State Income Tax"). The Trust may
include Oklahoma Bonds the interest on which is subject to the Oklahoma State
Income Tax (the "Oklahoma Taxable Bonds"). SEE "PORTFOLIO" WHICH INDICATES BY
FOOTNOTE WHICH OKLAHOMA BONDS ARE OKLAHOMA TAX-EXEMPT BONDS (ALL OTHER OKLAHOMA
BONDS INCLUDED IN THE PORTFOLIO ARE OKLAHOMA TAXABLE BONDS).
Neither the Sponsor nor its counsel has independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
Federal income tax purposes and (iii) interest on the Oklahoma Tax-Exempt Bonds,
if received directly by a Unitholder, would be exempt from the Oklahoma State
Income Tax. At the respective times of issuance of the Bonds, opinions relating
to the validity thereof and to the exemption of interest thereon from Federal
income tax were rendered by bond counsel to the respective issuing authorities.
In addition, with respect to the Oklahoma Tax-Exempt Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest from the
Oklahoma State Income Tax. Neither the Sponsor nor its counsel has made any
review for the Trust of the proceedings relating to the issuance of the Bonds or
of the bases for the opinions rendered in connection therewith. The opinion set
forth below does not address the taxation of persons other than full time
residents of Oklahoma.
In the opinion of Special Counsel to the Fund for Oklahoma tax matters,
under existing laws as of the date of this Prospectus and based upon the
assumptions set forth above:
(1) For Oklahoma State Income Tax purposes, the Trust is not an
association taxable as a corporation, each Unitholder of the Trust will be
treated as the owner of a pro rata portion of the Trust and the income of such
portion of the Trust will be treated as the income of the Unitholder.
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Oklahoma State Income Tax if received directly by
a Unitholder will be exempt from the Oklahoma State Income Tax when received by
the Trust and distributed to such Unitholder. A Unitholder's pro rata portion of
any interest paid and original issue discount, if any, on the Bonds which would
be subject to the Oklahoma State Income Tax if received directly by a
Unitholder, including, for example interest paid and original issue discount, if
any, on the Oklahoma Taxable Bonds, will be taxable to such Unitholder for
Oklahoma State Income Tax purposes when received by the Trust.
(3) To the extent that interest paid and original issue discount, if
any, derived from the Trust by a Unitholder with respect to Possession Bonds is
excludable from gross income for Federal income tax purposes pursuant to 48
U.S.C. Section 745, 48 U.S.C. Section 1423a, and 48 U.S.C. Section 1403, such
interest paid and original issue discount, if any, will not be subject to the
Oklahoma State Income Tax.
(4) Each Unitholder of the Trust will recognize gain or loss for
Oklahoma State Income Tax purposes if the Trustee disposes of a Bond (whether by
redemption, sale, or otherwise) or if the Unitholder redeems or sells Units of
the Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for Federal income tax purposes. Due to the amortization
of bond premium and other basis adjustments required by the Internal Revenue
Code, a Unitholder, under some circumstances, may realize taxable gain when his
or her Units are sold or redeemed for an amount equal to their original cost.
(5) Although no opinion is expressed herein, we have been informally
advised by the Oklahoma Tax Commission that any insurance proceeds paid under
policies which represent maturing interest on defaulted obligations which are
excludable from gross income for Federal income tax purposes should be
excludable from the Oklahoma State Income Tax to the same extent as such
interest would have been if paid by the issuer of such Bonds held by the Trust
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
(6) The Oklahoma State Income Tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Trust, the interest on which is exempt from such tax if such
interest is not deductible for Federal income tax purposes.
The scope of this opinion is expressly limited to the matters set forth
herein, and we express no other opinions of law with respect to the state or
local taxation of the Trust, the purchase, ownership or disposition of Units or
the Unitholders under Oklahoma law. We have assumed that at the respective times
of issuance of the Bonds, opinions relating to the validity thereof and to the
exemption of interest thereon from Federal income tax were rendered by bond
counsel to the respective issuing authorities. In addition, we have assumed
that, with respect to the Oklahoma Bonds, bond counsel to the issuing
authorities rendered opinions as to the exemption of interest from the Oklahoma
<PAGE>
Income Tax and, with respect to the Possession Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption from all state and
local income taxation of the Possession Bonds and the interest thereon. Neither
the Sponsor nor its counsel has made any review for the Trust of the proceedings
relating to the issuance of the Bonds or of the bases for the opinions rendered
in connection therewith.
OREGON RISK FACTORS. The financial condition of the State of Oregon is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The Oregon economy continues to slow
after the economic boom of the construction and manufacturing industries in
1994-96. Oregon consumers are turning to business as the primary force behind
the State's economic expansion. Moreover, Oregon could be impacted by problems
in its timber industry such as severe weather conditions.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa, AA and AA from Moody's,
Standard & Poor's and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.),
respectively, on its general obligation indebtedness.
Further information concerning Oregon risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Oregon Trust, Special
Counsel to each Oregon Trust for Oregon tax matters rendered an opinion under
then existing Oregon income tax law applicable to taxpayers whose income is
subject to Oregon income taxation substantially to the effect that:
The assets of the Oregon Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oregon (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Oregon Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independent examined the Bonds to be
deposited in and held in the Oregon Trust. Although no opinion is expressed
herein regarding such matters, it is assumed that: (i) the Bonds were validly
issued; (ii) the interest thereon is excludable from gross income for Federal
income tax purposes; and (iii) interest on the Bonds, if received directly by an
Oregon Unitholder, would be exempt from the Oregon income tax applicable to
individuals (the "Oregon Personal Income Tax").
In the opinion of counsel to the Sponsor, under existing Oregon law and
based on the assumptions set forth above:
The Oregon Trust is not an association taxable as a corporation and
based upon an administrative rule of the Oregon State Department of Revenue,
each Oregon Unitholder of the Oregon Trust will be essentially treated as the
owner of a pro rata portion of the Oregon Trust and the income of such portion
of the Oregon Trust will be treated as the income of the Oregon Unitholder for
Oregon Personal Income Tax purposes;
Interest on the Bonds which is exempt from the Oregon Personal Income
Tax when received by the Oregon Trust, and which would be exempt from the Oregon
Personal Income Tax if received directly by an Oregon Unitholder, will retain
its status as exempt from such tax when received by the Oregon Trust and
distributed to an Oregon Unitholder;
To the extent that interest derived from the Oregon Trust by an Oregon
Unitholder with respect to the Possession Bonds is excludable from gross income
for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
the Oregon Personal Income Tax;
Each Oregon Unitholder of the Oregon Trust will recognize gain or loss
for Oregon Personal Income Tax purposes if the Trustee disposes of a bond
(whether by redemption, sale or otherwise) or if the Oregon Unitholder redeems
or sells Units of the Oregon Trust to the extent that such a transaction results
in a recognized gain or loss to such Oregon Unitholder for Federal income tax
purposes; and
The Oregon Personal Income Tax does not permit a deduction of interest
paid or incurred on indebtedness incurred or continued to purchase or carry
Units in the Oregon Trust, the interest on which is exempt from such Tax.
Investors should consult their tax advisers regarding collateral tax
consequences under Oregon law relating to the ownership of the Units, including,
but not limited to, the calculation of "net pension income" tax credits for
retirees and the applicability of other Oregon taxes.
Counsel to the Sponsor has not examined any of the Bonds to be
deposited and held in the Oregon Trust or the proceedings for the issuance
thereof or the opinions of bond counsel with respect thereto and therefore it
expresses no opinion as to the exemption from the Oregon Personal Income Tax of
interest on the Bonds if received directly by an Oregon Unitholder. In addition,
prospective purchasers subject to the Oregon corporate income tax should be
advised that for purposes of the Oregon Corporate Income (Excise) Tax, interest
on the Bonds received by the Oregon Trust and distributed to an Oregon
Unitholder subject to such tax will be added to the corporate Oregon
Unitholder's Federal taxable income and therefore will be taxable. No opinion is
expressed regarding the Oregon taxation of foreign or domestic insurance
companies. We have assumed that at the respective times of issuance of the
Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, we have assumed that, with respect
to the Oregon Bonds, bond counsel to the issuing authorities rendered opinions
as to the exemption of interest from the Oregon Income Tax and, with respect to
the Possession Bonds, bond counsel to the issuing authorities rendered opinions
<PAGE>
as to the exemption from all state and local income taxation of the Possession
Bonds and the interest thereon. Neither the Sponsor nor its counsel has made any
review for the Oregon Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith.
Pennsylvania Risk Factors. The financial condition of the Commonwealth
of Pennsylvania is affected by various national, economic, social and
environmental policies and conditions. Additionally, Constitutional and
statutory limitations imposed on the State and its local governments concerning
taxes, bond indebtedness and other matters may constrain the revenue-generating
capacity of the Commonwealth and its local governments and, therefore, the
ability of the issuers of the Bonds to satisfy their obligations. Historically,
the Commonwealth has experienced significant revenue shortfalls.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Historically, the economy of the
Commonwealth has been dependent on heavy industry and manufacturing. Growth in
the Commonwealth economy has more recently been in the service sector, including
trade, health services and educational institutions. Growth in these sectors may
be affected by federal funding and state legislation.
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.
All outstanding general obligation bonds of the Commonwealth are rated
AA by Standard and Poor's and Aa3 by Moody's.
Further information concerning Pennsylvania risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Pennsylvania Trust, the
respective counsel to the Pennsylvania Trusts rendered an opinion under then
existing Pennsylvania income tax law applicable to taxpayers whose income was
subject to Pennsylvania income taxation substantially to the effect that:
We have examined certain laws of the State of Pennsylvania (the
"State") to determine their applicability to the Pennsylvania Trust and to the
holders of Units in the Pennsylvania Trust who are residents of the State of
Pennsylvania (the "Unitholders"). The assets of the Pennsylvania Trust will
consist of interest-bearing obligations issued by or on behalf of the State, any
public authority, commission, board or other agency created by the State or a
political subdivision of the State, or political subdivisions thereof (the
"Bonds"). Distributions of income with respect to the Bonds received by the
Pennsylvania Trust will be made monthly.
Although we express no opinion with respect thereto, in rendering the
opinion expressed herein, we have assumed that: (i) the Bonds were validly
issued by the State or its municipalities, as the case may be, (ii) the interest
thereon is excludable from gross income for federal income tax purposes, (iii)
the interest thereon is exempt from Pennsylvania State and local taxes and (iv)
the Bonds are exempt from county personal property taxes. This opinion does not
address the taxation of persons other than full-time residents of Pennsylvania.
Based on the foregoing, and review and consideration of existing State
laws as of this date, it is our opinion, and we herewith advise you, as follows:
(1) The Pennsylvania Trust will have no tax liability for purposes of
the personal income tax (the "Personal Income Tax"), the corporate income tax
(the "Corporate Income Tax") and the capital stock-franchise tax (the "Franchise
Tax"), all of which are imposed under the Pennsylvania Tax Reform Code of 1971,
or the Philadelphia School District Investment Net Income Tax (the "Philadelphia
School Tax") imposed under Section 19-1804 of the Philadelphia Code of
Ordinances.
(2) Interest on the Bonds, net of Pennsylvania Trust expenses, which is
exempt from the Personal Income Tax when received by the Pennsylvania Trust and
which would be exempt from such tax if received directly by a Unitholder, will
retain its status as exempt from such tax when received by the Pennsylvania
Trust and distributed to such Unitholder. Interest on the Bonds which is exempt
from the Corporate Income Tax and the Philadelphia School Tax when received by
the Pennsylvania Trust and which would be exempt from such taxes if received
directly by a Unitholder, will retain its status as exempt from such taxes when
received by the Pennsylvania Trust and distributed to such Unitholder.
(3) Distributions from the Pennsylvania Trust attributable to capital
gains recognized by the Pennsylvania Trust upon its disposition of a Bond issued
on or after February 1, 1994, will be taxable for purposes of the Personal
Income Tax and the Corporate Income Tax. No opinion is expressed with respect to
the taxation of distributions from the Pennsylvania Trust attributable to
capital gains recognized by the Pennsylvania Trust upon its disposition of a
Bond issued before February 1, 1994.
(4) Distributions from the Pennsylvania Trust attributable to capital
gains recognized by the Pennsylvania Trust upon its disposition of a Bond will
be exempt from the Philadelphia School Tax if the Bond was held by the
Pennsylvania Trust for a period of more than six months and the Unitholder held
his Unit for more than six months before the disposition of the Bond. If,
however, the Bond was held by the Pennsylvania Trust or the Unit was held by the
Unitholder for a period of less than six months, then distributions from the
Pennsylvania Trust attributable to capital gains recognized by the Pennsylvania
Trust upon its disposition of a Bond issued on or after February 1, 1994 will be
taxable for purposes of the Philadelphia School Tax; no opinion is expressed
with respect to the taxation of any such gains attributable to Bonds issued
before February 1, 1994.
(5) Insurance proceeds paid under policies which represent maturing
interest on defaulted obligations will be exempt from the Corporate Income Tax
to the same extent as such amounts are excluded from gross income for federal
income tax purposes. No opinion is expressed with respect to whether such
insurance proceeds are exempt from the Personal Income Tax or the Philadelphia
School Tax.
(6) Each Unitholder will recognize gain for purposes of the Corporate
Income Tax if the Unitholder redeems or sells Units of the Pennsylvania Trust to
the extent that such a transaction results in a recognized gain to such
Unitholder for federal income tax purposes and such gain is attributable to
<PAGE>
Bonds issued on or after February 1, 1994. No opinion is expressed with respect
to the taxation of gains realized by a Unitholder on the sale or redemption of a
Unit to the extent such gain is attributable to Bonds issued prior to February
1, 1994.
(7) A Unitholder's gain on the sale or redemption of a Unit will be
subject to the Personal Income Tax, except that no opinion is expressed with
respect to the taxation of any such gain to the extent it is attributable to
Bonds issued prior to February 1, 1994.
(8) A Unitholder's gain upon a redemption or sale of Units will be
exempt from the Philadelphia School Tax if the Unitholder held his Unit for more
than six months and the gain is attributable to Bonds held by the Pennsylvania
Trust for a period of more than six months. If, however, the Unit was held by
the Unitholder for less than six months or the gain is attributable to Bonds
held by the Pennsylvania Trust for a period of less than six months, then the
gains will be subject to the Philadelphia School Tax; except that no opinion is
expressed with respect to the taxation of any such gains attributable to Bonds
issued before February 1, 1994.
(9) The Bonds will not be subject to taxation under the County Personal
Property Tax Act of June 17, 1913 (the "Personal Property Tax"). Personal
property taxes in Pennsylvania are imposed and administered locally, and thus no
assurance can be given as to whether Units will be subject to the Personal
Property Tax in a particular jurisdiction. However, in our opinion, Units should
not be subject to the Personal Property Tax.
Unitholders should be aware that, generally, interest on indebtedness
incurred or continued to purchase or carry Units is not deductible for purposes
of the Personal Income Tax, the Corporate Income Tax or the Philadelphia School
Tax.
We have not examined any of the Bonds to be deposited and held in the
Pennsylvania Trust or the proceedings for the issuance thereof or the opinions
of bond counsel with respect thereto, and therefore express no opinion as to the
exemption from federal or state income taxation of interest on the Bonds if
interest thereon had been received directly by a Unitholder.
Chapman & Cutler has expressed no opinion with respect to taxation
under any other provision of Pennsylvania law. Ownership of the Units may result
in collateral Pennsylvania tax consequences to certain taxpayers. Prospective
investors should consult their tax advisers as to the applicability of any such
collateral consequences.
SOUTH CAROLINA RISK FACTORS. The state of South Carolina is affected by
various national, economic, social and environmental policies and conditions.
Additionally, Constitutional and statutory limitations imposed on the State and
its local governments concerning taxes, bond indebtedness and other matters may
constrain the revenue-generating capacity of the State and its local governments
and, therefore, the ability of the issuers of the Bonds to satisfy their
obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting primarily of manufacturing, but expanding into the trade
and service industries, supplemented by rural areas with selective commercial
agriculture. The State has a relatively high wage labor market which has
resulted in the State's business sector becoming more vulnerable to competitive
pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of South Carolina currently maintains a "triple A" bond
rating from Standard & Poor's and Moody's on its general obligation
indebtedness.
Further information concerning South Carolina risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each South Carolina Trust,
Special Counsel for each South Carolina Trust for South Carolina tax matters
rendered an opinion under then existing South Carolina income tax law applicable
to taxpayers whose income is subject to South Carolina income taxation
substantially to the effect that:
In the opinion of special counsel to the Fund for South Carolina tax
matters, under existing South Carolina law:
(1) By the provision of paragraph (j) of Section 3 of Article 10 of the
South Carolina Constitution (revised 1977) intangible personal property is
specifically exempted from any and all ad valorem taxation.
(2) Pursuant to the provisions of Section 12-7-430(b), as interpreted
by South Carolina Revenue Ruling #91-15, interest from obligations issued by the
State of South Carolina or any of its political subdivisions, as well as
interest derived from bonds issued by the Government of Puerto Rico, which is
exempt from federal income taxes is exempt from income taxes and that the
exemption so granted extends to all recipients of interest paid thereon through
the Trust. (This opinion does not extend to so-called 63-20 obligations.)
(3) The income of the Trust would be treated as income to each
Unitholder of the Trust in the proportion that the number of Units of the Trust
held by the Unitholder bears to the total number of Units of the Trust
outstanding. For this reason, interest derived by the Trust that would not be
includable in income for South Carolina income tax purposes when paid directly
to a South Carolina Unitholder will be exempt from South Carolina income
taxation when received by the Trust and attributed to such South Carolina
Unitholder.
(4) Each Unitholder will recognize gain or loss for South Carolina
state income tax purposes if the Trustee disposes of a Bond (whether by sale,
payment on maturity, retirement or otherwise) or if the Unitholder redeems or
sells his Unit.
(5) The Trust would be regarded, under South Carolina law, as a common
trust fund and therefore not subject to taxation under any income tax law of
South Carolina.
<PAGE>
The above described opinion has been concurred in by an informal ruling
of the South Carolina Tax Commission pursuant to Section 12-3-170 of the South
Carolina Code.
TENNESSEE RISK FACTORS. The financial condition of the State of
Tennessee is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by a diverse agricultural sector. These sectors tend to be more
cyclical than other sectors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Tennessee currently maintains a "AAA", "Aaa" and "AAA"
bond rating from Standard & Poor's, Moody's and Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.), respectively, on its general obligation indebtedness.
Further information concerning Tennessee risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Tennessee Trust,
Special Counsel to the Fund for Tennessee tax matters rendered an opinion under
then existing Tennessee income tax law applicable to taxpayers whose income is
subject to Tennessee income taxation substantially to the effect that:
The assets of the Tennessee 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 the Tennessee
Bonds. Tennessee law also provides an exemption for distributions made by a unit
investment trust or mutual fund that are attributable to "bonds or securities of
the United States government or any agency or instrumentality thereof" ("U.S.
Government, Agency or Instrumentality Bonds"). If it were determined that the
Trust held assets other than Tennessee Bonds or U.S. Government, Agency or
Instrumentality Bonds, a proportionate share of distributions from the Trust
would be taxable to Unitholders for Tennessee Income Tax purposes.
Further, this provision appears only to provide an exemption for
distributions that relate to interest income, distributions by the Trust that
relate to capital gains realized from the sale or redemption of Tennessee Bonds
or U.S. Government, Agency or Instrumentality Bonds are likely to be treated as
taxable dividends for purposes of the Hall Income Tax. However, capital gains
realized directly by a Unitholder when the Unitholder sells or redeems his Unit
will not be subject to the Hall Income Tax. The opinion set forth below assumes
that the interest on the Tennessee Bonds, if received directly by a Unitholder,
would be exempt from the Hall Income Tax under Tennessee State law. This opinion
does not address the taxation of persons other than full-time residents of the
State of Tennessee.
Because 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 Tennessee 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. It is assumed for purposes of the discussion and opinion below that the
Bonds constitute debt for federal income tax purposes.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under
existing Tennessee State law as of the date of this prospectus:
For purposes of the Hall Income Tax, the Tennessee Excise Tax imposed
by Section 67-4-806 (the "State Corporate Income Tax"), and the Tennessee
Franchise Tax imposed by Section 67-4-903, the Tennessee Trust will not be
subject to such taxes.
For Hall Income Tax purposes, a proportionate share of such
distributions from the Tennessee 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
<PAGE>
the extent attributable to interest on the Puerto Rico Bonds (based on the
relative proportion of interest received or accrued attributable to the Puerto
Rico Bonds) will be exempt from the Hall Income Tax when distributed to such
Unitholders. A proportionate share of distributions from the Tennessee Trust
attributable to assets other than the Bonds would not, under current law, be
exempt from the Hall Income Tax when distributed to Unitholders.
For State Corporate Income Tax Purposes, Tennessee law does not provide
an exemption for interest on Tennessee Bonds and requires that all interest
excludable from Federal gross income must be included in calculating "net
earnings" subject to the State Corporate Income Tax. No opinion is expressed
regarding whether such tax would be imposed on the earnings or distributions of
the Tennessee Trust (including interest on the Bonds or gain realized upon the
disposition of the Bonds by the Tennessee Trust) attributable to Unitholders
subject to the State Corporate Income Tax. However, based upon prior written
advice from the Tennessee Department of Revenue, earnings and distributions from
the Tennessee Trust (including interest on the Tennessee Bonds or gain realized
upon the disposition of the Tennessee Bonds by the Tennessee Trust) attributable
to the Unitholders should be exempt from the State Corporate Income Tax. The
position of the Tennessee Department of Revenue is not binding, and is subject
to change, even on a retroactive basis.
Each Unitholder will realize taxable gain or loss for State Corporate
Income Tax purposes when the Unitholder redeems or sells his Units, at a price
that differs from original cost as adjusted for accretion or any discount or
amortization of any premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Unitholder's settlement
date and the date such Bonds are delivered to the Tennessee Trust, if later. Tax
basis reduction requirements relating to amortization of bond premium may, under
some circumstances, result in Unitholders realizing taxable gain when the Units
are sold or redeemed for an amount equal to or less than their original cost.
For purposes of the Tennessee Property Tax, the Tennessee Trust will be
exempt from taxation with respect to the Bonds it holds. As for the taxation of
the Units held by the Unitholders, although intangible personal property is not
presently subject to Tennessee taxation, no opinion is expressed with regard to
potential property taxation of the Unitholders with respect to the Units because
the determination of whether property is exempt from such tax is made on a
county by county basis.
No opinion is expressed herein regarding whether insurance proceeds
paid in lieu of interest on the Bonds held by the Tennessee Trust (including the
Tennessee Bonds) are exempt from the Hall Income Tax. Distributions of such
proceeds to Unitholders may be subject to the Hall Income Tax.
The Bonds and the Units held by the Unitholder will not be subject to
Tennessee sales and use taxes.
We have not examined any of the Bonds to be deposited and held in the Tennessee
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and therefore express no opinion as to the
exemption from State income taxes of interest on the Bonds if received directly
by a Unitholder. We have assumed that at the respective times of issuance of the
Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, we have assumed that, with respect
to the Tennessee Bonds, bond counsel to the issuing authorities rendered
opinions as the exemption of interest from the Income taxes imposed and, with
respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions as the exemption from all state and local income taxation of
the Possession Bonds and the interest thereon. Neither the Sponsor nor its
counsel has made any review for the Tennessee Trust of the proceedings relating
to the issuance of the Bonds or the bases for the opinions rendered in
connection therewith.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision 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 RISK FACTORS. The financial condition of the State of Texas is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The Texas labor force is concentrated
in oil and gas extraction, pipelines and petroleum production. These industries
tend to be highly cyclical. Texas's largest industries in terms of earnings have
traditionally been services, government and trade. There is no assurance that
these industries will continue to grow.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa2 and AA from Moody's and
Standard & Poor's, respectively, on its general obligation indebtedness.
Further information concerning Texas risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Texas Trust, Special
Counsel to the Fund for Texas tax matters rendered an opinion under then
existing Texas income taw law applicable to taxpayers whose income is subject to
Texas income taxation substantially to the effect that:
(1) Neither the State nor any political subdivision of the State
currently imposes an income tax on individuals. Therefore, no portion of any
distribution received by an individual Unitholder of the Trust in respect of his
Units, including a distribution of the proceeds of insurance in respect of such
Units, is subject to income taxation by the State or any political subdivision
of the State;
<PAGE>
(2) Except in the case of certain transportation businesses, savings
and loan associations and insurance companies, no Unit of the Trust is taxable
under any property tax levied in the State;
(3) The "inheritance tax" of the State, imposed upon certain transfers
of property of a deceased resident individual Unitholder, may be measured in
part upon the value of Units of the Trust included in the estate of such
Unitholder; and
(4) With respect to any Unitholder which is subject to the State
corporate franchise tax, Units in the Trust held by such Unitholder, and
distributions received therein, will be taken into account in computing the
"taxable capital" of the Unitholder allocated to the State, one of the bases by
which such franchise tax is currently measured (the other being a corporation's
"net capital earned surplus," which is, generally, its net corporate income plus
officers and directors income).
The opinion set forth in clause (2), above, is limited to the extent
that Units of the Trust may be subject to property taxes levied in the State if
held on the relevant date: (i) by a transportation business described in
V.T.C.A., Tax Code, Subchapter A, Chapter 24; (ii) by a savings and loan
association formed under the laws of the State (but only to the extent described
in section 11.09 of the Texas Savings and Loan Act, Vernon's Ann. Civ. St. art.
852a); or (iii), by an insurance company incorporated under the laws of the
State (but only to the extent described in V.A.T.S., Insurance Code, Art. 4.01).
Each Unitholder described in the preceding sentence should consult its own tax
advisor with respect to such matters.
Corporations subject to the State franchise tax should be aware that in
its first called 1991 session, the Texas Legislature adopted, and the Governor
has signed into law, certain substantial amendments to the State corporate
franchise tax, the effect of which may be to subject to taxation all or a
portion of any gains realized by such a corporate Unitholder upon the sale,
exchange or other disposition of a Unit. The amendments are applicable to
taxable periods commencing January 1991, and to each taxable period thereafter.
Because no authoritative judicial, legislative or administrative interpretation
of these amendments has been issued, and there remain many unresolved questions
regarding its potential effect on corporate franchise taxpayers, each
corporation which is subject to the State franchise tax and which is considering
the purchase of Units should consult its tax advisor regarding the effect of
these amendments.
VIRGINIA RISK FACTORS. The financial condition of the Commonwealth of
Virginia is affected by various national, economic, social and environmental
policies and conditions. The Virginia Constitution requires a balanced biennial
budget and contains limits on the amount of general obligation bonds which the
Commonwealth can issue. Additionally, Constitutional and statutory limitations
concerning taxes, bond indebtedness and other matters may constrain the
revenue-generating capacity of the Commonwealth and its local governments and,
therefore, the ability of the issuers of the Bonds to satisfy their obligations.
The economic vitality of the Commonwealth and its various regions and,
therefore, the ability of the Commonwealth and its local governments to satisfy
the Bonds, are affected by numerous factors. The employment in the Commonwealth
has been and continues to be significantly and adversely affected by the
cutbacks in federal government spending, particularly defense, and the reduction
of jobs in the mining industry.
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 of Virginia currently maintains a "triple A" bond
rating from Standard & Poor's, Moody's and Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.).
Further information concerning Virginia risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of the closing for each Virginia Trust, Special
Counsel to each Virginia Trust for Virginia tax matters rendered an opinion
under then existing Virginia income tax law applicable to taxpayers whose income
is subject to Virginia income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations
issued by or on behalf of the Commonwealth of Virginia or counties,
municipalities, authorities or political subdivisions thereof (the "Virginia
Bonds") and certain bonds issued by Puerto Rico authorities (the "Possession
Bonds," and collectively with the Virginia Bonds, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) opinions
relating to the validity thereof and to the exemption of interest thereon from
Federal income tax where rendered by bond counsel to the respective issuing
authorities, (ii) the interest thereon is excludable from gross income for
federal income tax purposes (iii) the interest thereon is exempt from income tax
imposed by Virginia that is applicable to individuals and corporations (the
"Virginia Income Tax") and, (iv) with respect to the Possession Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption from
all state and local taxation. The opinion set forth below does not address the
taxation of persons other than full time residents of Virginia.
In the opinion of Chapman and Cutler, special counsel to the Fund for
Virginia tax matters, under existing law as of the date of this prospectus and
based upon the assumptions set forth above:
(1) The Virginia Trust is not an association taxable as a corporation
for purposes of the Virginia Income Tax and each Unitholder of the Trust will be
treated as the owner of a pro rata portion of each of the assets held by the
Trust and the income of such portion of the Virginia Trust will be treated as
income of the Unitholder for purposes of the Virginia Income Tax.
(2) Interest on the Virginia Bonds which is exempt from Virginia Income
Tax when received by the Virginia Trust, and which would be exempt from Virginia
Income Tax if received directly by a Unitholder, will retain its status as
exempt from such tax when received by the Trust and distributed to such
Unitholder.
<PAGE>
(3) Interest on the Possession Bonds which is excludable from gross
income for federal income tax purposes and is exempt from state and local
taxation pursuant to federal law when received by the Trust will be exempt from
Virginia income taxation and therefore will not be includable in the income of
the Unitholder for Virginia income tax purposes when distributed by the Trust
and received by the Unitholders.
(4) The Virginia legislature has recently enacted a law, effective July
1, 1997, that would exempt from the Virginia Income Tax income derived on the
sale or exchange of obligations of the Commonwealth of Virginia or any political
subdivision or instrumentality of the Commonwealth of Virginia. However,
Virginia law does not address whether this exclusion would apply to gains
recognized through entities such as the Virginia Trust. Accordingly, we express
no opinion as to the treatment for Virginia Income Tax purposes of any gain or
loss recognized by a Unitholder for federal income tax purposes.
(5) The Virginia Income Tax does not permit a deduction of interest
paid on indebtedness incurred or continued to purchase or carry Units in the
Virginia Trust to the extent that interest income related to the ownership of
Units is exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax,
the income derived by such a Unitholder from his pro rata portion of the
Virginia Bonds held by the Virginia Trust may affect the determination of such
Unitholder's Bank Franchise Tax. Prospective investors subject to the Virginia
Bank Franchise Tax should consult their tax advisors. Chapman and Cutler has
expressed no opinion with respect to taxation under any other provisions of
Virginia law. Ownership of the Units may result in collateral Virginia tax
consequences to certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral consequences.
WASHINGTON RISK FACTORS. The financial condition of the State of
Washington is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economy consists of
manufacturing, aerospace, government and agriculture. These industries tend to
be highly cyclical and there is no assurance that growth in these industries
will continue. One of Washington's major employers, Boeing Company has had
several years of downsizing and only recently began hiring. Fluctuation in this
industry can have an adverse effect on the state's economy. Washington could be
impacted by problems in the agricultural sector, including crop failures, severe
weather conditions or other agricultural-related problems.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa1, AA+ and AA+ from Moody's,
Standard & Poor's and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.),
respectively, on its general obligation indebtedness.
Further information concerning Washington risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
TAX STATUS. At the time of closing for each Washington Trust, Special
Counsel to the Fund for Washington tax matters, rendered an opinion under then
existing Washington law substantially to the effect that:
(1) Neither the State of Washington nor any of its political
subdivisions imposes an income tax.
(2) The State imposes a business and occupation tax on the gross
receipts of all business activities conducted within the State, with certain
exceptions. The Washington Trust will not be subject to this tax. Distributions
of the Washington Trust income paid to Unit holders who are not engaged in a
banking, loan, securities, or other financial business in the State (which
businesses have been broadly defined) will not be subject to the tax. Unit
holders that are engaged in any of such financial businesses will be subject to
the tax. Currently, the business and occupation tax rate is 1.5%. Several cities
impose comparable business and occupation taxes or financial businesses
conducted within such cities. The current rate in Seattle is .415%.
(3) The Units will not be subject to the State's ad valorem property
tax, nor will any sale, transfer or possession of the Units be subject to State
or local sales or use taxes.
(4) Persons considering the purchase of Units should be aware that
proposals have recently been suggested by the Governor and other officials of
the State that would, if enacted, subject interest income received by persons
resident in (or doing business within) the State to the business and occupation
tax, whether or not such persons are engaged in a banking, loan, securities, or
other financial business. It is unclear whether such proposals would exclude
interest income derived from obligations of the State and its political
subdivisions.
The foregoing is an abbreviated summary of certain of the provisions of
Washington statutes and administrative rules presently in effect, with respect
to the taxation of Unit holders of the Washington Trust. These provisions are
subject to change by legislative or administrative actions, or by court
decisions, and any such change may be retroactive with respect to Washington
Trust transactions. Unit holders are advised to consult with their own tax
advisors for more detailed information concerning Washington State and local tax
matters. The foregoing summary assumes that the Washington Trust will not
conduct business activities within Washington.
WEST VIRGINIA RISK FACTORS. The financial condition of the State of
West Virginia is affected by various national, economic, social and
environmental policies and conditions. Additionally, Constitutional and
statutory limitations imposed on the State and its local governments concerning
taxes, bond indebtedness and other matters may constrain the revenue-generating
capacity of the State and its local governments and, therefore, the ability of
the issuers of the Bonds to satisfy their obligations.
<PAGE>
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. West Virginia's primary employment is
in the services, trade and government. These sectors tend to be cyclical and can
cause problems for the economy. West Virginia has historically had a higher
unemployment rate than the U.S. which also affects the economy.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of West Virginia currently maintains a "AA-" and "A1" bond
rating from Standard & Poor's and Moody's, respectively, on its general
obligation indebtedness.
Further information concerning West Virginia risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
TAX STATUS. The assets of the West Virginia Trust will consist of
interest-bearing obligations issued by or on behalf of the State of West
Virginia ("West Virginia") or counties, municipalities, authorities or political
subdivisions thereof the interest on which is expected to qualify as exempt from
West Virginia income taxes (the "West Virginia Bonds") or by the Commonwealth of
Puerto Rico, Guam or the United States Virgin Islands (the "Possession Bonds")
(collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
federal income tax purposes and (iii) interest on the Bonds, if received
directly by a Unitholder would be exempt from the West Virginia personal income
tax applicable to individuals (the "West Virginia Personal Income Tax"). At the
respective times of issuance of the Bonds, opinions relating to the validity
thereof and to the exemption of interest thereon from Federal income tax were
rendered by bond counsel to the respective issuing authorities. In addition,
with respect to the West Virginia Bonds, bond counsel to the issuing authorities
rendered opinions as to the exemption of interest from the West Virginia
Personal Income Tax and, with respect to the Possession Bonds, bond counsel to
the issuing authorities rendered opinions as to the exemption from all state and
local income taxation. Neither the Sponsor nor its counsel has made any review
for the West Virginia Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith. The
opinion set forth below does not address the taxation of persons other than
full-time residents of West Virginia.
At the time of closing for each West Virginia Trust, Special Counsel to
the Fund for West Virginia tax matters rendered an opinion, based upon the
assumptions set forth above, under then existing West Virginia law substantially
to the effect that:
(1) The West Virginia Trust will not be subject to tax under the West
Virginia Corporation Net Income Tax, the West Virginia Business Franchise Tax,
or the West Virginia Personal Income Tax.
(2) Interest on the Bonds which is exempt from the West Virginia
Personal Income Tax when received by the West Virginia Trust, and which would be
exempt from the West Virginia Personal Income Tax if received directly by a
Unitholder, will retain its status as exempt from such tax when received by the
West Virginia Trust and distributed to such Unitholder.
(3) For Unitholders subject to the West Virginia Corporation Net Income
Tax, income of the West Virginia Trust received by them (except interest income
with respect to Possession Bonds, as to which no opinion is expressed) is not
exempt from the West Virginia Corporation Net Income Tax. However, such
Unitholders may be entitled to a credit against the tax imposed under the West
Virginia Corporation Net Income Tax Law based on their ownership of Units in the
West Virginia Trust. Unitholders should consult their own advisors regarding the
applicability and computation of any such credit.
(4) Each Unitholder will recognize gain or loss for West Virginia
Personal Income Tax purposes if the Trustee disposes of a bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the West Virginia Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax purposes.
(5) Insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income for
federal income tax purposes should be excludable from the West Virginia Personal
Income Tax to the same extent as such interest would have been if paid by the
issuer of such Bonds held by the West Virginia Trust.
(6) The West Virginia Personal Income Tax does not permit a deduction
of interest paid on indebtedness incurred or continued to purchase or carry
Units in the West Virginia Trust to the extent that interest income related to
the ownership of Units is exempt from the West Virginia Personal Income Tax.
We have not examined any of the Bonds to be deposited and held in the
West Virginia Trust or the proceedings for the issuance thereof or the opinions
of bond counsel with respect thereto, and therefore express no opinion as to the
exemption from federal or state income taxation of interest on the Bonds if
interest thereon had been received directly by a Unitholder. We have assumed
that at the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exemption of interest thereon from Federal income
tax were rendered by bond counsel to the respective issuing authorities. In
addition, we have assumed that, with respect to the West Virginia Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest from the West Virginia Income Tax and, with respect to the Possession
Bonds, bond counsel to the issuing authorities rendered opinions as to the
exemption from all state and local income taxation of the Possession Bonds and
the interest thereon. Neither the Sponsor nor its counsel has made any review
for the Trust of the proceedings relating to the issuance of the Bonds or of the
bases for the opinions rendered in connection therewith.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of West Virginia law. Ownership of the Units
may result in collateral West Virginia tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences. We have been informally advised by the
Legal Division of the West Virginia Department of Tax and Revenue that Units may
be subject to the West Virginia property tax (regardless of whether the Bonds
held by the West Virginia Trust would be exempt from such tax if held directly
by a Unitholder).
<PAGE>
EXPENSES
- --------------------------------------------------------------------------------
The Sponsor will not receive any fees in connection with its activities
relating to the Fund. However, American Portfolio Evaluation Services, a
division of Van Kampen Investment Advisory Corp., which is an affiliate of the
Sponsor, will receive the annual supervisory fee indicated under "Summary of
Essential Financial Information" in Prospectus Part I for providing portfolio
supervisory services for the Fund. In addition, the Evaluator will receive the
annual evaluation fee indicated under "Summary of Essential Financial
Information" in Prospectus Part I for evaluating each Trust's portfolio. These
fees may exceed the actual costs of providing these services for a Trust but the
total amount received by the Evaluator for providing these services to all Van
Kampen unit investment trusts will not exceed the total cost of providing the
services in any calendar year. For its services the Trustee will receive the fee
indicated under "Summary of Essential Financial Information" in Prospectus Part
I (which may be reduced as described therein). Part of the Trustee's
compensation for its services is expected to result from the use of the funds
being held in the Principal and Interest Accounts for future distributions,
payment of expenses and redemptions since these Accounts are non-interest
bearing to Unitholders. These fees are based on the outstanding principal amount
of Bonds and Units on the Date of Deposit for the first year and as of the close
of business on January 1 for each year thereafter.
Premiums for any portfolio insurance are obligations of each Insured
Trust and are payable monthly by the Trustee on behalf of the Trust. As Bonds in
an Insured Trust are redeemed by their respective issuers or are sold by the
Trustee, the amount of the premium will be reduced in respect of those Bonds. If
the Trustee exercises the right to obtain permanent insurance, the premiums
payable for such permanent insurance will be paid solely from the proceeds of
the sale of the related Bonds.
The following additional charges are or may be incurred by the Trusts:
(a) fees of the Trustee for extraordinary services, (b) expenses of the Trustee
(including legal and auditing expenses) and of counsel designated by the
Sponsor, (c) various governmental charges, (d) expenses and costs of any action
taken by the Trustee to protect the Trusts and the rights and interests of
Unitholders, (e) indemnification of the Trustee for any loss, liability or
expenses incurred by it in the administration of the Fund without negligence,
bad faith or willful misconduct on its part, (f) any special custodial fees
payable in connection with the sale of any of the Bonds in a Trust, (g)
expenditures incurred in contacting Unitholders upon termination of the Trusts
and (h) costs incurred to reimburse the Trustee for advancing funds to the
Trusts to meet scheduled distributions (which costs may be adjusted periodically
in response to fluctuations in short-term interest rates). The fees and expenses
set forth herein are payable out of the Trusts. When such fees and expenses are
paid by or owing to the Trustee, they are secured by a lien on the portfolio of
the applicable Trust. If the balances in the Interest and Principal Accounts are
insufficient to provide for amounts payable by a Trust, the Trustee has the
power to sell Bonds to pay such amounts.
On or before the twenty-fifth day of each month, the Trustee will
deduct from the Interest Account and, to the extent funds are not sufficient
therein, from the Principal Account, amounts necessary to pay the expenses of
the Fund. The Trustee also may withdraw from these Accounts such amounts, if
any, as it deems necessary to establish a reserve for any governmental charges
payable out of the Fund. Amounts so withdrawn shall not be considered a part of
the Fund's assets until such time as the Trustee shall return all or any part of
such amounts to the appropriate Accounts. All costs and expenses incurred in
creating and establishing the Fund, including the cost of the initial
preparation, printing and execution of the Trust Agreement and the certificates,
legal and accounting expenses, advertising and selling expenses, expenses of the
Trustee, initial evaluation fees and other out-of-pocket expenses have been
borne by the Sponsor at no cost to the Fund.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
This Prospectus does not contain all the information set forth in the
Registration Statement filed by the Fund with the SEC. The Information
Supplement, which has been filed with the SEC, includes more detailed
information concerning the Bonds, investment risks and general information about
the Fund. This Prospectus incorporates by reference the entire Information
Supplement. The Information Supplement may be obtained by contacting the Trustee
or is available along with other related materials at the SEC's Internet site
(http://www.sec.gov).
OTHER MATTERS
- --------------------------------------------------------------------------------
LEGAL MATTERS. The legality of the Units offered hereby and certain
matters relating to Federal tax law have been passed upon by Chapman and Cutler,
111 West Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
Winston & Strawn has acted as counsel to the Trustee and special counsel to the
Fund for New York tax matters.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. The statement of condition
and the related portfolio included in Prospectus Part I have been audited by
Grant Thornton LLP, independent certified public accountants, as set forth in
their report in Prospectus Part I, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
<PAGE>
FOCUS ON . . .
, YOUR PROSPECTUS PART II
The Trusts........................................2
Estimated Current and Long-Term Returns...........5
Public Offering...................................5
Rights of Unitholders.............................8
Insurance on the Bonds in the Insured Trusts......9
Fund Administration..............................10
Federal Tax Status...............................11
Expenses.........................................46
Additional Information...........................46
Other Matters....................................46
, DAILY PRICES
(diamond) Call our 24-Hour Pricing Line
(800) 953-6785
(diamond) Visit our Focus Portfolios Internet Pricing Page
http://www.vankampen.com
, ACCOUNT QUESTIONS
(diamond) Contact the Trustee
(800) 221-7668
, LEARNING MORE ABOUT UNIT TRUSTS
(diamond) Contact Van Kampen
(630) 684-6000
(diamond) Visit our Focus Portfolios Internet Product Page
http://www.vankampen.com
, ADDITIONAL INFORMATION
You may obtain an Information Supplement that
provides more details about your trust and its policies.
(diamond) Visit the SEC Internet Site
http://www.sec.gov
(diamond) Contact the Trustee
(800) 221-7668
<PAGE>
VAN KAMPEN
FOCUS PORTFOLIOS
A DIVISION OF
VAN KAMPEN FUNDS INC.
PROSPECTUS PART II
SEPTEMBER 1999
INSURED MUNICIPALS INCOME TRUST
AND
INVESTORS' QUALITY TAX-EXEMPT TRUST
AND
VAN KAMPEN FOCUS PORTFOLIOS
MUNICIPAL SERIES
VAN KAMPEN FUNDS INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
2800 Post Oak Boulevard
Houston, Texas 77056
VAN KAMPEN
INFORMATION SUPPLEMENT
INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST
AND VAN KAMPEN FOCUS PORTFOLIOS, MUNICIPAL SERIES
================================================================================
This Information Supplement provides additional information concerning the
risks and operations of the Fund which is not described in the Prospectus for
the Fund. This Information Supplement should be read in conjunction with the
Fund's prospectus. This Information Supplement is not a prospectus (but is
incorporated into the Prospectus by reference), does not include all of the
information that an investor should consider before investing in a Trust and may
not be used to offer or sell Units without the Prospectus. Copies of the
Prospectus can be obtained by contacting the Sponsor at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 or by contacting your broker. This Information
Supplement is dated as of the date of Prospectus Part I and all capitalized
terms have been defined in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C>
Municipal Bond Risk Factors...................... 2 Maryland Risk Factors........................... 51
Insurance on the Bonds in the Insured Trusts..... 6 Massachusetts Risk Factors...................... 53
Portfolio Administration......................... 12 Michigan Risk Factors........................... 55
Sponsor Information.............................. 13 Minnesota Risk Factors.......................... 57
Trustee Information.............................. 14 Missouri Risk Factors........................... 59
Termination of the Trust Agreement............... 15 Nebraska Risk Factors........................... 61
Description of Ratings........................... 15 New Jersey Risk Factors......................... 62
Alabama Risk Factors............................. 17 New Mexico Risk Factors......................... 64
Arizona Risk Factors............................. 19 New York Risk Factors........................... 66
Arkansas Risk Factors............................ 21 North Carolina Risk Factors..................... 73
California Risk Factors.......................... 22 Ohio Risk Factors............................... 76
Colorado Risk Factors............................ 28 Oklahoma Risk Factors........................... 80
Connecticut Risk Factors......................... 31 Oregon Risk Factors............................. 82
Delaware Risk Factors............................ 34 Pennsylvania Risk Factors....................... 83
Florida Risk Factors............................. 46 South Carolina Risk Factors..................... 85
Georgia Risk Factors............................. 40 Tennessee Risk Factors.......................... 87
Hawaii Risk Factors.............................. 42 Texas Risk Factors.............................. 89
Kansas Risk Factors.............................. 43 Virginia Risk Factors........................... 93
Kentucky Risk Factors............................ 44 Washington Risk Factors......................... 95
Louisiana Risk Factors........................... 46 West Virginia Risk Factors...................... 99
Maine Risk Factors............................... 49
</TABLE>
<PAGE>
MUNICIPAL BOND RISK FACTORS
The Trusts include certain types of bonds described below. Accordingly, an
investment in a Trust should be made with an understanding of the
characteristics of and risks associated with such bonds. The types of bonds
included in each Trust are described either on the cover of the related
Prospectus Part I or under "Portfolio Diversification" under the "Summary of
Essential Financial Information" of the related Part I. Neither the Sponsor nor
the Trustee shall be liable in any way for any default, failure or defect in any
of the Bonds.
Certain of the Bonds may be general obligations of a governmental entity that
are backed by the taxing power of such entity. All other Bonds in the Trusts are
revenue bonds payable from the income of a specific project or authority and are
not supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds, on the other hand, are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source. There are, of course, variations in the security of the
different Bonds in the Fund, both within a particular classification and between
classifications, depending on numerous factors.
Certain of the Bonds may be obligations which derive their payments from
mortgage loans. Certain of such housing bonds may be FHA insured or may be
single family mortgage revenue bonds issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on residences
located within the issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these bonds are
subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such bonds will probably
be redeemed prior to their scheduled maturities or even prior to their ordinary
call dates. Extraordinary mandatory redemption without premium could also result
from the failure of the originating financial institutions to make mortgage
loans in sufficient amounts within a specified time period. Additionally,
unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage
revenue bonds. These bonds were issued under Section 103A of the Internal
Revenue Code, which Section contains certain requirements relating to the use of
the proceeds of such bonds in order for the interest on such bonds to retain its
tax-exempt status. In each case the issuer of the bonds has covenanted to comply
with applicable requirements and bond counsel to such issuer has issued an
opinion that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have considered
various ways to redeem bonds they have issued prior to the stated first
redemption dates for such bonds. In connection with the housing bonds held by
the Fund, the Sponsor at the Date of Deposit is not aware that any of the
respective issuers of such bonds are actively considering the redemption of such
bonds prior to their respective stated initial call dates.
Certain of the Bonds may be health care revenue bonds. Ratings of bonds
issued for health care facilities are often based on feasibility studies that
contain projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service may be affected by
future events and conditions including, among other things, demand for services
and the ability of the facility to provide the services required, physicians'
confidence in the facility, management capabilities, competition with other
health care facilities, efforts by insurers and governmental agencies to limit
rates, legislation establishing state rate-setting agencies, expenses, the cost
and possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, government regulation and
the termination or restriction of governmental financial assistance, including
that associated with Medicare, Medicaid and other similar third party payor
programs.
Certain of the Bonds may be obligations of public utility issuers, including
those selling wholesale and retail electric power and gas. General problems of
such issuers would include the difficulty in financing large construction
programs in an inflationary period, the limitations on operations and increased
costs and delays attributable to environmental considerations, the difficulty of
the capital market in absorbing utility debt, the difficulty in obtaining fuel
at reasonable prices and the effect of energy conservation. 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 to make payments of principal
and/or interest on such Bonds.
Certain of the Bonds 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 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.
Certain of the Bonds may be industrial revenue bonds ("IRBs"). IRBs have
generally been issued under bond resolutions pursuant to which the revenues and
receipts payable under the arrangements with the operator of a particular
project have been assigned and pledged to purchasers. In some cases, a mortgage
on the underlying project may have been granted as security for the IRBs.
Regardless of the structure, payment of IRBs is solely dependent upon the
creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors may be affected by many factors
which may have an adverse impact on the credit quality of the particular company
or industry. These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition and financial
deterioration resulting from a corporate restructuring pursuant to a leveraged
buy-out, takeover or otherwise. Such a restructuring may result in the operator
of a project becoming highly leveraged which may impact on such operator's
creditworthiness which in turn would have an adverse impact on the rating and/or
market value of such bonds. Further, the possibility of such a restructuring may
have an adverse impact on the market for and consequently the value of such
bonds, even though no actual takeover or other action is ever contemplated or
effected.
Certain of the Bonds may be obligations that are secured by lease payments of
a governmental entity (hereinafter called "lease obligations"). Lease
obligations are often in the form of certificates of participation. Although the
lease obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to appropriate for and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. A governmental entity that enters into such
a lease agreement cannot obligate future governments to appropriate for and make
lease payments but covenants to take such action as is necessary to include any
lease payments due in its budgets and to make the appropriations therefor. A
governmental entity's failure to appropriate for and to make payments under its
lease obligation could result in insufficient funds available for payment of the
obligations secured thereby. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult.
Certain of the Bonds may be obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from ad valorem taxes or for higher education systems, from
tuition, dormitory revenues, grants and endowments. General problems relating to
school bonds include litigation contesting the state constitutionality of
financing public education in part from ad valorem taxes, thereby creating a
disparity in educational funds available to schools in wealthy areas and schools
in poor areas. Litigation or legislation on this issue may affect the sources of
funds available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college" age individuals,
possible inability to raise tuitions and fees sufficiently to cover increased
operating costs, the uncertainty of continued receipt of Federal grants and
state funding, and government legislation or regulations which may adversely
affect the revenues or costs of such issuers.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation of
facilities such as airports, bridges, turnpikes, port authorities, convention
centers and arenas. The major portion of an airport's gross operating income is
generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for leases, occupancy of certain
terminal space and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under the use
agreements. From time to time the air transport industry has experienced
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines have experienced severe financial difficulties.
Similarly, payment on bonds related to other facilities is dependent on revenues
from the projects, such as user fees from ports, tolls on turnpikes and bridges
and rents from buildings. Therefore, payment may be adversely affected by
reduction in revenues due to such factors as increased cost of maintenance,
decreased use of a facility, lower cost of alternative modes of transportation,
scarcity of fuel and reduction or loss of rents.
Certain of the Bonds may be obligations which are payable from and secured by
revenues derived from the operation of resource recovery facilities. Resource
recovery facilities are designed to process solid waste, generate steam and
convert steam to electricity. Resource recovery bonds may be subject to
extraordinary optional redemption at par upon the occurrence of certain
circumstances, including but not limited to: destruction or condemnation of a
project; contracts relating to a project becoming void, unenforceable or
impossible to perform; changes in the economic availability of raw materials,
operating supplies or facilities necessary for the operation of a project or
technological or other unavoidable changes adversely affecting the operation of
a project; and administrative or judicial actions which render contracts
relating to the projects void, unenforceable or impossible to perform or impose
unreasonable burdens or excessive liabilities. The Sponsor cannot predict the
causes or likelihood of the redemption of resource recovery bonds in a Trust
prior to the stated maturity of the Bonds.
Certain of the Bonds may have been acquired at a market discount from par
value at maturity. The coupon interest rates on discount bonds at the time they
were purchased and deposited in a Trust were lower than the current market
interest rates for newly issued bonds of comparable rating and type. If such
interest rates for newly issued comparable bonds increase, the market discount
of previously issued bonds will become greater, and if such interest rates for
newly issued comparable bonds decline, the market discount of previously issued
bonds will be reduced, other things being equal. Investors should also note that
the value of bonds purchased at a market discount will increase in value faster
than bonds purchased at a market premium if interest rates decrease. Conversely,
if interest rates increase, the value of bonds purchased at a market discount
will decrease faster than bonds purchased at a market premium. In addition, if
interest rates rise, the prepayment risk of higher yielding, premium Securities
and the prepayment benefit for lower yielding, discount bonds will be reduced. A
bond purchased at a market discount and held to maturity will have a larger
portion of its total return in the form of taxable income and capital gain and
less in the form of tax-exempt interest income than a comparable bond newly
issued at current market rates. See "Federal Tax Status" in Prospectus Part II.
Market discount attributable to interest changes does not indicate a lack of
market confidence in the issue.
Certain of the Bonds may be "zero coupon" bonds. Zero coupon bonds are
purchased at a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not receive any
periodic interest payments. The effect of owning deep discount bonds which do
not make current interest payments (such as the zero coupon bonds) is that a
fixed yield is earned not only on the original investment but also, in effect,
on all discount earned during the life of such obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest the income on such obligation at a rate as high as the implicit yield
on the discount obligation, but at the same time eliminates the holder's ability
to reinvest at higher rates in the future. For this reason, zero coupon bonds
are subject to substantially greater price fluctuations during periods of
changing market interest rates than are securities of comparable quality which
pay interest.
Certain of the Bonds may have been purchased on a "when, as and if issued" or
"delayed delivery" basis. See "Notes to Portfolio" in Prospectus Part I. The
delivery of any such Bonds may be delayed or may not occur. Interest on these
Bonds begins accruing to the benefit of Unitholders on their respective dates of
delivery. To the extent any Bonds are actually delivered to the Fund after their
respective expected dates of delivery, Unitholders who purchase their Units
prior to the date such Bonds are actually delivered to the Trustee would be
required to adjust their tax basis in their Units for a portion of the interest
accruing on such Bonds during the interval between their purchase of Units and
the actual delivery of such Bonds. As a result of any such adjustment, the
Estimated Current Returns during the first year would be slightly lower than
those stated in the Prospectus which would be the returns after the first year,
assuming the portfolio of a Trust and estimated annual expenses other than that
of the Trustee (which may be reduced in the first year only) do not vary from
that set forth in Prospectus Part I. Unitholders will be "at risk" with respect
to all Bonds in the portfolios including "when, as and if issued" and "delayed
delivery" Bonds (i.e., may derive either gain or loss from fluctuations in the
evaluation of such Bonds) from the date they commit for Units.
Certain of the Bonds may be subject to redemption prior to their stated
maturity date pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or otherwise. A
sinking fund is a reserve fund accumulated over a period of time for retirement
of debt. A callable debt obligation is one which is subject to redemption or
refunding prior to maturity at the option of the issuer. A refunding is a method
by which a debt obligation is redeemed, at or before maturity, by the proceeds
of a new debt obligation. In general, call provisions are more likely to be
exercised when the offering side valuation is at a premium over par than when it
is at a discount from par. The exercise of redemption or call provisions will
(except to the extent the proceeds of the called bonds are used to pay for Unit
redemptions) result in the distribution of principal and may result in a
reduction in the amount of subsequent interest distributions; it may also affect
the current return on Units of the Trust involved. Each Trust portfolio contains
a listing of the sinking fund and call provisions, if any, with respect to each
of the debt obligations. Extraordinary optional redemptions and mandatory
redemptions result from the happening of certain events. Generally, events that
may permit the extraordinary optional redemption of bonds or may require the
mandatory redemption of bonds include, among others: a final determination that
the interest on the bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the bonds were
used; an exercise by a local, state or Federal governmental unit of its power of
eminent domain to take all or substantially all of the project for which the
proceeds of the bonds were used; changes in the economic availability of raw
materials, operating supplies or facilities or technological or other changes
which render the operation of the project for which the proceeds of the bonds
were used uneconomic; changes in law or an administrative or judicial decree
which renders the performance of the agreement under which the proceeds of the
bonds were made available to finance the project impossible or which creates
unreasonable burdens or which imposes excessive liabilities, such as taxes, not
imposed on the date the bonds are issued on the issuer of the bonds or the user
of the proceeds of the bonds; an administrative or judicial decree which
requires the cessation of a substantial part of the operations of the project
financed with the proceeds of the bonds; an overestimate of the costs of the
project to be financed with the proceeds of the bonds resulting in excess
proceeds of the bonds which may be applied to redeem bonds; or an underestimate
of a source of funds securing the bonds resulting in excess funds which may be
applied to redeem bonds. The issuer of certain bonds in a Trust may have sold or
reserved the right to sell, upon the satisfaction of certain conditions, to
third parties all or any portion of its rights to call bonds in accordance with
the stated redemption provisions of such bonds. In such a case the issuer no
longer has the right to call the bonds for redemption unless it reacquires the
rights from such third party. A third party pursuant to these rights may
exercise the redemption provisions with respect to a bond at a time when the
issuer of the bond might not have called a bond for redemption had it not sold
such rights. The Sponsor is unable to predict all of the circumstances which may
result in such redemption of an issue of Bonds. See also the discussion of
single family mortgage and multi-family revenue bonds above for more information
on the call provisions of such bonds.
<PAGE>
To the best knowledge of the Sponsor, there is no litigation pending as of
the Date of Deposit in respect of any Bonds which might reasonably be expected
to have a material adverse effect upon the Fund or any of the Trusts. At any
time after the Date of Deposit, litigation may be initiated on a variety of
grounds with respect to Bonds in the Fund. Such litigation, as, for example,
suits challenging the issuance of pollution control revenue bonds under
environmental protection statutes, may affect the validity of such Bonds or the
tax-free nature of the interest thereon. While the outcome of litigation of such
nature can never be entirely predicted, the Fund has received or will receive
opinions of bond counsel to the issuing authorities of each Bond on the date of
issuance to the effect that such Bonds have been validly issued and that the
interest thereon is exempt from Federal income tax. In addition, other factors
may arise from time to time which potentially may impair the ability of issuers
to meet obligations undertaken with respect to the Bonds.
INSURANCE ON THE BONDS IN THE INSURED TRUSTS
Insurance has been obtained by each Insured Trust, by the issuer of Bonds in an
Insured Trust, by a prior owner of such Bonds, or by the Sponsor prior to the
deposit of such Bonds in a Trust guaranteeing prompt payment of interest and
principal, when due, in respect of the bonds in such Trust. See Settlement of
Bonds in "The Trusts--Objectives and Bond Selection" in Prospectus Part II. The
Portfolio Insurers and the Preinsured Bond Insurers are described under
"Portfolio" and "Notes to Portfolio" in Prospectus Part I. The Portfolio
Insurers are either AMBAC Assurance Corporation or Financial Guaranty Insurance
Company. An insurance policy obtained by an Insured Trust, if any, is
non-cancellable and will continue in force so long as such Trust is in
existence, the respective Portfolio Insurer is still in business and the Bonds
described in such policy continue to be held by such Trust (see "Portfolio" for
the respective Insured Trust in Prospectus Part I). Any portfolio insurance
premium for an Insured Trust, which is an obligation of such Trust, is paid by
such Trust on a monthly basis. Non-payment of premiums on a policy obtained by
an Insured Trust will not result in the cancellation of insurance but will force
the insurer to take action against the Trustee to recover premium payments due
it. The Trustee in turn will be entitled to recover such payments from such
Trust. Premium rates for each issue of Bonds protected by a policy obtained by
an Insured Trust, if any, are fixed for the life of the Trust. The premium for
any Preinsured Bond insurance has been paid by such issuer, by a prior owner of
such Bonds or the Sponsor and any such policy or policies are non-cancellable
and will continue in force so long as the Bonds so insured are outstanding and
the respective Preinsured Bond Insurer remains in business. If the provider of
an original issuance insurance policy is unable to meet its obligations under
such policy or if the rating assigned to the claims-paying ability of any such
insurer deteriorates, the Portfolio Insurers have no obligation to insure any
issue adversely affected by either of the above described events.
The aforementioned portfolio insurance obtained by an Insured Trust, if any,
guarantees the timely payment of principal and interest on the Bonds when they
fall due. For the purposes of insurance obtained by an Insured Trust, "when due"
generally means the stated payment or maturity date for the payment of principal
and interest. However, in the event (a) an issuer of a Bond defaults in the
payment of principal or interest on such Bond, (b) such issuer enters into a
bankruptcy proceeding or (c) the maturity of such Bond is accelerated, the
affected Portfolio Insurer has the option, in its sole discretion, after
receiving notice of the earliest to occur of such a default, bankruptcy
proceeding or acceleration to pay the outstanding principal amount of such Bond
plus accrued interest to the date of such payment and thereby retire the Bond
from the affected Trust prior to such Bond's stated maturity date. The insurance
does not guarantee the market value of the Bonds or the value of the Units.
Insurance obtained by an Insured Trust, if any, is only effective as to Bonds
owned by and held in such Trust. In the event of a sale of any such Bond by the
Trustee, such insurance terminates as to such Bond on the date of sale.
Pursuant to an irrevocable commitment of the Portfolio Insurers, the Trustee,
upon the sale of a Bond covered under a portfolio insurance policy obtained by
an Insured Trust, has the right to obtain permanent insurance with respect to
such Bond (i.e., insurance to maturity of the Bond regardless of the identity of
the holder thereof) (the "Permanent Insurance") upon the payment of a single
predetermined insurance premium and any expenses related thereto from the
proceeds of the sale of such Bond. Accordingly, any Bond in an Insured Trust is
eligible to be sold on an insured basis. It is expected that the Trustee would
exercise the right to obtain Permanent Insurance only if upon such exercise the
affected Trust would receive net proceeds (sale of Bond proceeds less the
insurance premium and related expenses attributable to the Permanent Insurance)
from such sale in excess of the sale proceeds if such Bonds were sold on an
uninsured basis. The insurance premium with respect to each Bond eligible for
Permanent Insurance would be determined based upon the insurability of each Bond
as of the Date of Deposit and would not be increased or decreased for any change
in the creditworthiness of each Bond.
The Sponsor believes that the Permanent Insurance option provides an
advantage to an Insured Trust in that each Bond insured by a Trust insurance
policy may be sold out of the affected Trust with the benefits of the insurance
attaching thereto. Thus, the value of the insurance, if any, at the time of
sale, can be realized in the market value of the Bond so sold (which is not the
case in connection with any value attributable to an Insured Trust's portfolio
insurance). See Public Offering--Offering Price" in Prospectus Part II. Because
any such insurance value may be realized in the market value of the Bond upon
the sale thereof upon exercise of the Permanent Insurance option, the Sponsor
anticipates that (a) in the event an Insured Trust were to be comprised of a
substantial percentage of Bonds in default or significant risk of default, it is
much less likely that such Trust would need at some point in time to seek a
suspension of redemptions of Units than if such Trust were to have no such
option (see "Rights of Unitholders--Redemption of Units" in Prospectus Part II)
and (b) at the time of termination of an Insured Trust, if such Trust were
holding defaulted Bonds or Bonds in significant risk of default such Trust would
not need to hold such Securities until their respective maturities in order to
realize the benefits of such Trust's portfolio insurance (see "Fund
Administration--Termination of Trust Agreement" in Prospectus Part II).
Except as indicated below, insurance obtained by an Insured Trust has no
effect on the price or redemption value of Units. It is the present intention of
the Evaluator to attribute a value for such insurance (including the right to
obtain Permanent Insurance) for the purpose of computing the price or redemption
value of Units if the Bonds covered by such insurance are in default in payment
of principal or interest or in significant risk of such default. The value of
the insurance will be the difference between (i) the market value of a bond
which is in default in payment of principal or interest or in significant risk
of such default assuming the exercise of the right to obtain Permanent Insurance
(less the insurance premium and related expenses attributable to the purchase of
Permanent Insurance) and (ii) the market value of such Bonds not covered by
Permanent Insurance. See "Public Offering--Offering Price" in Prospectus Part
II. It is also the present intention of the Trustee not to sell such Bonds to
effect redemptions or for any other reason but rather to retain them in the
portfolio because value attributable to the insurance cannot be realized upon
sale. See "Public Offering--Offering Price" in Prospectus Part II for a more
complete description of an Insured Trust's method of valuing defaulted Bonds and
Bonds which have a significant risk of default. Insurance obtained by the issuer
of a Bond is effective so long as such Bond is outstanding. Therefore, any such
insurance may be considered to represent an element of market value in regard to
the Bonds thus insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
The portfolio insurance policy or policies obtained by an Insured Trust, if
any, with respect to the Bonds in such Trust were issued by one or more of the
Portfolio Insurers. Any other Preinsured Bond insurance policy (or commitment
therefor) was issued by one of the Preinsured Bond Insurers. See "The
Trusts--Objectives and Bond Selection" in Prospectus Part II.
Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled
monoline stock insurance company which engages only in the business of financial
guaranty and surety insurance. CapMAC is licensed in all 50 states in addition
to the District of Columbia, the Commonwealth of Puerto Rico and the territory
of Guam. CapMAC insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets. CapMAC also
provides financial guarantee reinsurance for structured asset-backed, corporate,
municipal and other financial obligations written by other major insurance
companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by Standard & Poor's, "AAA" by Duff & Phelps Credit
Rating Co. ("Duff & Phelps") and "AAA" by Nippon Investors Service, Inc. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
Pursuant to a merger of a subsidiary of MBIA Inc. with and into CapMAC
Holdings Inc., CapMAC became an indirect wholly-owned subsidiary of MBIA Inc. on
February 17, 1998. MBIA Inc., through its wholly-owned subsidiary, MBIA
Insurance Corporation, is a financial guaranty insurer of municipal bonds and
structured finance transactions. MBIA Insurance Corporation has a claims paying
rating of triple-A from Moody's Investor Service, Inc., Standard & Poor's
Ratings Services and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.).
Pursuant to a reinsurance agreement, it is anticipated that CapMAC will cede all
of its net insured risks, as well as its unearned premiums and contingency
reserves, to MBIA Insurance Corporation and that MBIA Insurance Corporation will
reinsure CapMAC's net outstanding exposure. NEITHER MBIA INC. NOR ANY OF ITS
STOCKHOLDERS IS OBLIGATED TO PAY ANY CLAIMS UNDER ANY POLICY ISSUED BY CAPMAC OR
ANY DEBTS OF CAPMAC OR TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS TO CAPMAC.
CapMAC is regulated by the Superintendent of Insurance of the State of New
York. In addition, CapMAC is subject to regulation by the insurance laws and
regulations of the other jurisdictions in which it is licensed. Such insurance
laws regulate, among other things, the amount of net exposure per risk that
CapMAC may retain, capital transfers, dividends, investment of assets, changes
in control, transactions with affiliates and consolidations and acquisitions.
CapMAC is subject to periodic regulatory examinations by the same regulatory
authorities.
CapMAC's obligations under the Policy(s) may be reinsured. Such reinsurance
does not relieve CapMAC of any of its obligations under the Policy(s).
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As of December 31, 1995 and 1996, CapMAC had qualified statutory
capital (which consists of policyholders' surplus, statutory capital, and
contingency reserves) of approximately $260 million and $240 million,
respectively, and had not incurred any debt obligations. As of September 30,
1997, CapMAC had qualified statutory capital of $278.6 million and had not
incurred any debt obligations. Article 69 of the New York State Insurance Law
requires CapMAC to establish and maintain the contingency reserve, which is
available to cover claims under policies issued by CapMAC.
Copies of CapMAC's financial statements prepared in accordance with
statutory accounting standards, which differ from generally accepted accounting
principles, are filed with the Insurance Department of the State of New York and
are available upon request. CapMAC is located at 885 Third Avenue, New York, New
York 10022, and its telephone is (212) 755-1155.
Effective July 14, 1997, AMBAC Indemnity Corporation changed its name to
AMBAC Assurance Corporation ("AMBAC Assurance"). AMBAC Assurance is a
Wisconsin-domiciled stock insurance corporation regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin and licensed to do business
in 50 states, the District of Columbia and the Commonwealth of Puerto Rico, with
admitted assets of approximately $2,967,246,831 (unaudited) and statutory
capital of approximately $1,715,481,691 (unaudited) as of March 31, 1998.
Statutory capital consists of AMBAC Assurance's policyholders' surplus and
statutory contingency reserve. AMBAC Assurance is a wholly owned subsidiary of
AMBAC Financial Group, Inc., a 100% publicly-held company. Moody's Investors
Service, Inc. and Standard & Poor's have both assigned a triple-A claims-paying
ability rating to AMBAC Assurance.
Copies of its financial statements prepared in accordance with statutory
accounting standards are available from AMBAC Assurance. The address of AMBAC
Assurance's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York, 10004 and (212) 668-0340.
AMBAC Assurance has entered into quota share reinsurance agreements under
which a percentage of the insurance underwritten pursuant to certain municipal
bond insurance programs of AMBAC Assurance has been and will be assumed by a
number of foreign and domestic unaffiliated reinsurers.
MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary of
MBIA Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated
to pay the debts of or claims against MBIA. MBIA is domiciled in the State of
New York and licensed to do business in and subject to regulation under the laws
of all fifty states, the District of Columbia, the Commonwealth of the Northern
Mariana Islands, the Commonwealth of Puerto Rico, the Virgin Islands of the
United States and the Territory of Guam. MBIA 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 Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
Effective February 17, 1998, MBIA, Inc. acquired all of the outstanding
stock of CapMAC, through a merger with its parent, CapMAC Holdings, Inc.
Pursuant to a reinsurance agreement, CapMAC has ceded all of its net insured
risks (including any amounts due but unpaid from third party reinsurers), as
well as its unearned premiums and contingency reserves to MBIA. MBIA, Inc. is
not obligated to pay debts of or claims against CapMAC.
As of December 31, 1998, the insurer had admitted assets of $6.5 billion
(audited), total liabilities of $4.2 billion (audited), and total capital and
surplus of $2.3 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of June 30, 1999, MBIA had admitted assets of $6.8 billion
(unaudited), total liabilities of $4.5 billion (unaudited), and total capital
and surplus of $2.3 billion (unaudited), determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. Copies of MBIA's financial statements prepared in accordance with
statutory accounting practices are available from MBIA. The address of MBIA is
113 King Street, Armonk, New York 10504.
Effective December 31, 1989, MBIA, Inc. acquired Bond Investors Group, Inc.
On January 5, 1990, MBIA acquired all of the outstanding stock of Bond Investors
Group, Inc., the parent of Bond Investors Guaranty Insurance Company (BIG), now
known as MBIA Insurance Corp. of Illinois. Through a reinsurance agreement, BIG
has ceded all of its net insured risks, as well as its unearned premium and
contingency reserves, to MBIA and MBIA has reinsured BIG's net outstanding
exposure.
YEAR 2000 READINESS DISCLOSURE
MBIA Inc. is actively managing a high-priority Year 2000 (Y2K) program. The
company has establilshed an independent Y2K testing lab in its Armonk
headquarters, with a committee of business unit managers overseeing the project.
MBIA has a budget of $1.13 million for its 1998-2000 Y2K efforts. Expenditures
are proceeding as anticipated, and MBIA does not expect the project budget to
materially exceed this amount. MBIA has initiated a comprehensive Y2K plan that
includes assessment, remediation, testing and contingency planning. This plan
covers "mission-critical" internally developed systems, vendor software,
hardware and certain third-party entities through which we conduct our business.
Testing to date indicates that functions critical to the financial guarantee
business, both domestic and international, were Y2K-ready as of December 31,
1998. Additional testing will continue throughout 1999.
Moody's Investors Service, Inc. rates all bond issues insured by MBIA "Aaa"
and short-term loans "MIG-1," both designated to be of the highest quality.
Standard & Poor's rates all new issues insured by MBIA "AAA" Prime Grade.
Moody's, Standard & Poor's and Fitch IBCA, Inc. (formerly Fitch Investors
Service, L.P.), all rate the claims paying ability of MBIA as "Triple A."
The Moody's Investors Service, Inc. rating of MBIA should be evaluated
independently of the Standard & Poor's rating of MBIA. No application has been
made to any other rating agency in order to obtain additional ratings on the
Obligations. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of MBIA and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Obligations and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of either or
both ratings may have an adverse effect on the market price of the Obligations.
Financial Guaranty Insurance Company ("Financial Guaranty" or "FGIC") is a
wholly-owned subsidiary of FGIC Corporation (the "Corporation"), a Delaware
holding company. The Corporation is a subsidiary of General Electric Capital
Corporation ("GE Capital"). Neither the Corporation nor GE Capital is obligated
to pay the debts of or the claims against Financial Guaranty. Financial Guaranty
is a monoline financial guaranty insurer domiciled in the State of New York and
subject to regulation by the State of New York Insurance Department. As of June
30, 1999, the total capital and surplus of Financial Guaranty was
$1,285,559,848. Financial Guaranty prepares financial statements on the basis of
both statutory accounting principles, and generally accepted accounting
principles. Copies of such financial statements may be obtained by writing to
Financial Guaranty at 115 Broadway, New York, New York 10006, Attention:
Communications Department, telephone number: (212) 312-3000 or to the New York
State Insurance Department at 25 Beaver Street, New York, New York 10004-2319,
Attention: Financial Condition Property/Casualty Bureau, telephone number: (212)
480-5187.
In addition, Financial Guaranty is currently licensed to write insurance in
all 50 states and the District of Columbia.
Financial Security Assurance Inc. ("Financial Security" or "FSA") is a
monoline insurance company incorporated in 1984 under the laws of the State of
New York. Financial Security is licensed to engage in the financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities, thereby enhancing the credit rating of those securities, in
consideration for payment of a premium to the insurer. Financial Security and
its subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are generally supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments.
Financial Security insures both newly issued securities sold in the primary
market and outstanding securities sold in the secondary market that satisfy
Financial Security's underwriting criteria.
Financial Security is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
U S WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Financial Security is obligated to pay any debt of Financial
Security or its subsidiaries or any claim under any insurance policy issued by
Financial Security or its subsidiaries or to make any additional contribution to
the capital of Financial Security or its subsidiaries. As of September 30, 1998,
the total policyholders' surplus and contingency reserves and the total unearned
premium reserve, respectively, of Financial Security and its consolidated
subsidiaries were, in accordance with statutory accounting principles,
approximately $843,099,000 (unaudited) and $567,000,000 (unaudited), and the
total shareholders' equity and the total unearned premium reserve, respectively,
of Financial Security and its consolidated subsidiaries were, in accordance with
generally accepted accounting principles, approximately $965,441,000 (unaudited)
and $448,500,000 (unaudited). Copies of Financial Security's financial
statements may be obtained by writing to Financial Security at 350 Park Avenue,
New York, New York, 10022, Attention: Communications Department.
Its telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by Financial Security or any
of its domestic operating insurance company subsidiaries (including FSA
Maryland) are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, Financial
Security and FSA Maryland reinsure a portion of their liabilities under certain
of their financial guaranty insurance policies with other reinsurers under
various quota share treaties and on a transaction-by-transaction basis. Such
reinsurance is utilized as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
obligations of Financial Security or FSA Maryland under any financial guaranty
insurance policy.
The claims-paying ability of Financial Security and FSA Maryland is rated
"Aaa" by Moody's Investors Service, Inc., and "AAA" by Standard & Poor's Ratings
Services, Nippon Investors Service Inc. and Standard & Poor's (Australia) Pty.
Ltd. Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by such rating agencies.
Capital Guaranty Insurance Company was involved in a merger in 1995. On
December 20, 1995, Capital Guaranty Corporation ("CGC") merged with a subsidiary
of Financial Security Assurance Holdings Ltd. and Capital Guaranty Insurance
Company, CGC's principal operating subsidiary, changed its name to Financial
Security Assurance of Maryland Inc. ("FSA Maryland") and became a wholly owned
subsidiary of Financial Security Assurance Inc. For further description, see
"Financial Security Assurance Inc." herein.
The address of FSA Maryland and its telephone number are Steuart Tower, One
Market Plaza, San Francisco, CA 94105-1413 and (415) 995-8000.
In order to be in an Insured Trust, Bonds must be insured by one of the
Preinsured Bond Insurers or be eligible for the insurance being obtained by such
Trust. In determining eligibility for insurance, the Preinsured Bond Insurers
and the Portfolio Insurers have applied their own standards which correspond
generally to the standards they normally use in establishing the insurability of
new issues of municipal bonds and which are not necessarily the criteria used in
the selection of Bonds by the Sponsor. To the extent the standards of the
Preinsured Bond Insurers and the Portfolio Insurers are more restrictive than
those of the Sponsor, the previously stated Trust investment criteria have been
limited with respect to the Bonds. This decision is made prior to the Date of
Deposit, as debt obligations not eligible for insurance are not deposited in an
Insured Trust. Thus, all of the Bonds in the portfolios of the Insured Trusts in
the Fund are insured either by the respective Trust or by the issuer of the
Bonds, by a prior owner of such Bonds or by the Sponsor prior to the deposit of
such Bonds in a Trust.
Because the Bonds are insured by one of the Portfolio Insurers or one of the
Preinsured Bond Insurers as to the timely payment of principal and interest,
when due, and on the basis of the various reinsurance agreements in effect,
Standard & Poor's has assigned to the Units of each Insured Trust its "AAA"
investment rating. Such rating will be in effect for a period of thirteen months
from the Date of Deposit and will, unless renewed, terminate at the end of such
period. See "Description of Ratings". The obtaining of this rating by an Insured
Trust should not be construed as an approval of the offering of the Units by
Standard & Poor's or as a guarantee of the market value of such Trust or of the
Units.
An objective of portfolio insurance obtained by an Insured Trust is to obtain
a higher yield on the portfolio of such Trust than would be available if all the
Bonds in such portfolio had Standard & Poor's "AAA" rating and yet at the same
time to have the protection of insurance of prompt payment of interest and
principal, when due, on the Bonds. There is, of course, no certainty that this
result will be achieved. Preinsured Bonds in an Insured Trust (all of which are
rated "AAA" by Standard & Poor's) may or may not have a higher yield than
uninsured bonds rated "AAA" by Standard & Poor's. In selecting such Bonds for an
Insured Trust, the Sponsor has applied the criteria hereinbefore described.
In the event of nonpayment of interest or principal, when due, in respect of
a Bond, AMBAC Indemnity shall make such payment not later than 30 days and
Financial Guaranty shall make such payment within one business day after the
respective insurer has been notified that such nonpayment has occurred or is
threatened (but not earlier than the date such payment is due). The insurer, as
regards any payment it may make, will succeed to the rights of the Trustee in
respect thereof. All policies issued by the Portfolio Insurers and the
Preinsured Bond Insurers are substantially identical insofar as obligations to
an Insured Trust are concerned.
The Internal Revenue Service has issued a letter ruling which holds in effect
that insurance proceeds representing maturing interest on defaulted municipal
obligations paid to holders of insured bonds, under policy provisions
substantially identical to the policies described herein, will be excludable
from Federal gross income under Section 103(a)(1) of the Internal Revenue Code
to the same extent as if such payments were made by the issuer of the municipal
obligations. Holders of Units in an Insured Trust should discuss with their tax
advisers the degree of reliance which they may place on this letter ruling.
However, Chapman and Cutler, counsel for the Sponsor, has given an opinion to
the effect such payment of proceeds would be excludable from Federal gross
income to the extent described under "Federal Tax Status" in Prospectus Part II.
Each Portfolio Insurer is subject to regulation by the department of
insurance in the state in which it is qualified to do business. Such regulation,
however, is no guarantee that each Portfolio Insurer will be able to perform on
its contract of insurance in the event a claim should be made thereunder at some
time in the future. At the date hereof, it is reported that no claims have been
submitted or are expected to be submitted to any of the Portfolio Insurers which
would materially impair the ability of any such company to meet its commitment
pursuant to any contract of bond or portfolio insurance.
The information relating to each Portfolio Insurer has been furnished by such
companies. The financial information with respect to each Portfolio Insurer
appears in reports filed with state insurance regulatory authorities and is
subject to audit and review by such authorities. No representation is made
herein as to the accuracy or adequacy of such information or as to the absence
of material adverse changes in such information subsequent to the dates thereof.
PORTFOLIO ADMINISTRATION
The Trustee is empowered to sell, for the purpose of redeeming Units tendered
by any Unitholder, and for the payment of expenses for which funds may not be
available, such of the Bonds designated by the Evaluator as the Trustee in its
sole discretion may deem necessary. The Evaluator, in designating such Bonds,
will consider a variety of factors including (a) interest rates, (b) market
value and (c) marketability. The Sponsor, in connection with the Quality Trusts,
may direct the Trustee to dispose of Bonds upon default in payment of principal
or interest, institution of certain legal proceedings, default under other
documents adversely affecting debt service, default in payment of principal or
interest or other obligations of the same issuer, decline in projected income
pledged for debt service on revenue bonds or decline in price or the occurrence
of other market or credit factors, including advance refunding (i.e., the
issuance of refunding securities and the deposit of the proceeds thereof in
trust or escrow to retire the refunded securities on their respective redemption
dates), so that in the opinion of the Sponsor the retention of such Bonds would
be detrimental to the interest of the Unitholders. In connection with the
Insured Trusts to the extent that Bonds are sold which are current in payment of
principal and interest in order to meet redemption requests and defaulted Bonds
are retained in the portfolio in order to preserve the related insurance
protection applicable to said Bonds, the overall quality of the Bonds remaining
in such Trust's portfolio will tend to diminish. Except as described in this
section and in certain other unusual circumstances for which it is determined by
the Trustee to be in the best interests of the Unitholders or if there is no
alternative, the Trustee is not empowered to sell Bonds from an Insured Trust
which are in default in payment of principal or interest or in significant risk
of such default and for which value has been attributed for the insurance
obtained by such Insured Trust. Because of restrictions on the Trustee under
certain circumstances, the Sponsor may seek a full or partial suspension of the
right of Unitholders to redeem their Units in an Insured Trust. See "Rights of
Unitholders--Redemption of Units" in Prospectus Part II. The Sponsor is
empowered, but not obligated, to direct the Trustee to dispose of Bonds in the
event of an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by
an issuer of any of the Bonds to issue new obligations in exchange or
substitution for any Bond pursuant to a refunding or refinancing plan, except
that the Sponsor may instruct the Trustee to accept or reject such an offer or
to take any other action with respect thereto as the Sponsor may deem proper if
(1) the issuer is in default with respect to such Bond or (2) in the written
opinion of the Sponsor the issuer will probably default with respect to such
Bond in the reasonably foreseeable future. Any obligation so received in
exchange or substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as Bonds originally
deposited thereunder. Within five days after the deposit of obligations in
exchange or substitution for underlying Bonds, the Trustee is required to give
notice thereof to each Unitholder of the Trust thereby affected, identifying the
Bonds eliminated and the Bonds substituted therefor. Except as stated herein and
under "Fund Administration--Replacement Bonds" in Prospectus Part II regarding
the substitution of Replacement Bonds for Failed Bonds, the acquisition by the
Fund of any securities other than the Bonds initially deposited is not
permitted.
If any default in the payment of principal or interest on any Bonds occurs
and no provision for payment is made therefor within 30 days, the Trustee is
required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Bonds within 30 days after notification by the
Trustee to the Sponsor of such default, the Trustee may in its discretion sell
the defaulted Bond and not be liable for any depreciation or loss thereby
incurred.
SPONSOR INFORMATION
Van Kampen Funds Inc., a Delaware corporation, is the Sponsor of the Trust.
The Sponsor is an indirect subsidiary of Van Kampen Investments Inc. Van Kampen
Investments Inc. is a wholly owned subsidiary of MSAM Holdings II, Inc., which
in turn is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co.
("MSDW").
MSDW, together with various of its directly and indirectly owned
subsidiaries, is engaged in a wide range of financial services through three
primary businesses: securities, asset management and credit services. These
principal businesses include securities underwriting, distribution and trading;
merger, acquisition, restructuring and other corporate finance advisory
activities; merchant banking; stock brokerage and research services; asset
management; trading of futures, options, foreign exchange commodities and swaps
(involving foreign exchange, commodities, indices and interest rates); real
estate advice, financing and investing; global custody, securities clearance
services and securities lending; and credit card services.
Van Kampen Funds Inc. specializes in the underwriting and distribution of
unit investment trusts and mutual funds with roots in money management dating
back to 1926. The Sponsor is a member of the National Association of Securities
Dealers, Inc. and has offices at One Parkview Plaza, Oakbrook Terrace, Illinois
60181, (630) 684-6000 and 2800 Post Oak Boulevard, Houston, Texas 77056, (713)
993-0500. As of November 30, 1998, the total stockholders' equity of Van Kampen
Funds Inc. was $135,236,000 (audited). (This paragraph relates only to the
Sponsor and not to the Trust or to any other Series thereof. The information is
included herein only for the purpose of informing investors as to the financial
responsibility of the Sponsor and its ability to carry out its contractual
obligations. More detailed financial information will be made available by the
Sponsor upon request.)
As of March 31, 1999, the Sponsor and its Van Kampen affiliates managed or
supervised approximately $75 billion of investment products. The Sponsor and its
Van Kampen affiliates managed $64 billion of assets, consisting of $36.6 billion
for 50 open-end mutual funds, $19.5 billion for 39 closed-end funds and $8.2
billion for 106 institutional accounts. The Sponsor has also deposited more than
3,200 unit trusts amounting to approximately $35.4 billion of assets. All of Van
Kampen's open-end funds, closed-ended funds and unit investment trusts are
professionally distributed by leading financial firms nationwide. Based on
cumulative assets deposited, the Sponsor believes that it is the largest sponsor
of insured municipal unit investment trusts, primarily through the success of
its Insured Municipals Income Trust(R) or the IM-IT(R) trust. The Sponsor also
provides surveillance or evaluation services at cost for approximately $13.4
billion of unit investment trust assets outstanding. Since 1976, the Sponsor has
serviced over two million investor accounts, opened through retail distribution
firms.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or shall become bankrupt or its affairs
are taken over by public authorities, then the Trustee may (i) appoint a
successor Sponsor at rates of compensation deemed by the Trustee to be
reasonable and not exceeding amounts prescribed by the Securities and Exchange
Commission, (ii) terminate the Trust Agreement and liquidate the Trusts as
provided therein or (iii) continue to act as Trustee without terminating the
Trust Agreement.
TRUSTEE INFORMATION
The Trustee is The Bank of New York, a trust company organized under the laws
of New York. The Bank of New York has its unit investment trust division offices
at 101 Barclay Street, New York, New York 10286, telephone (800) 221-7668. The
Bank of New York is subject to supervision and examination by the Superintendent
of Banks of the State of New York and the Board of Governors of the Federal
Reserve System, and its deposits are insured by the Federal Deposit Insurance
Corporation to the extent permitted by law.
The duties of the Trustee are primarily ministerial in nature. It did not
participate in the selection of Bonds for the portfolios of any of the Trusts.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Fund. Such records
shall include the name and address of, and the certificates issued by the Fund
to, every Unitholder of the Fund. Such books and records shall be open to
inspection by any Unitholder at all reasonable times during the usual business
hours. The Trustee shall make such annual or other reports as may from time to
time be required under any applicable state or Federal statute, rule or
regulation. The Trustee is required to keep a certified copy or duplicate
original of the Trust Agreement on file in its office available for inspection
at all reasonable times during the usual business hours by any Unitholder,
together with a current list of the Bonds held in the Fund.
Under the Trust Agreement, the Trustee or any successor trustee may resign
and be discharged of the trusts created by the Trust Agreement by executing an
instrument in writing and filing the same with the Sponsor. The Trustee or
successor trustee must mail a copy of the notice of resignation to all Fund
Unitholders then of record, not less than 60 days before the date specified in
such notice when such resignation is to take effect. The Sponsor upon receiving
notice of such resignation is obligated to appoint a successor trustee promptly.
If, upon such resignation, no successor trustee has been appointed and has
accepted the appointment within 30 days after notification, the retiring Trustee
may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may remove the Trustee and appoint a successor trustee as
provided in the Trust Agreement at any time with or without cause. Notice of
such removal and appointment shall be mailed to each Unitholder by the Sponsor.
Upon execution of a written acceptance of such appointment by such successor
trustee, all the rights, powers, duties and obligations of the original trustee
shall vest in the successor. The resignation or removal of a Trustee becomes
effective only when the successor trustee accepts its appointment as such or
when a court of competent jurisdiction appoints a successor trustee. Any
corporation into which a Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a banking corporation organized under the laws of the United States or
any state and having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
TERMINATION OF THE TRUST AGREEMENT
A Trust may be terminated at any time by consent of Unitholders of 51% of the
Units of such Trust then outstanding or by the Trustee when the value of such
Trust, as shown by any semi-annual evaluation, is less than 20% of the original
principal amount of Bonds. A Trust will be liquidated by the Trustee in the
event that a sufficient number of Units not yet sold are tendered for redemption
by the Underwriters, including the Sponsor, so that the net worth of such Trust
would be reduced to less than 40% of the initial principal amount of such Trust.
If a Trust is liquidated because of the redemption of unsold Units by the
Underwriters, the Sponsor will refund to each purchaser of Units the entire
sales charge paid by such purchaser. The Trust Agreement provides that each
Trust shall terminate upon the redemption, sale or other disposition of the last
Bond held in such Trust, but in no event shall it continue beyond the end of the
year preceding the fiftieth anniversary of the Trust Agreement in the case of an
IM-IT Discount, a U.S. Territorial IM-IT, a Long-Term State or a National
Quality Trust, or beyond the end of the year preceding the twentieth anniversary
of the Trust Agreement in the case of IM-IT Limited Maturity, IM-IT
Intermediate, State Intermediate Laddered Maturity and IM-IT Short Intermediate
Trusts. In the event of termination of any Trust, written notice thereof will be
sent by the Trustee to each Unitholder of such Trust at his address appearing on
the registration books of the Fund maintained by the Trustee. Within a
reasonable time thereafter the Trustee shall liquidate any Bond then held in
such Trust and shall deduct from the funds of such Trust any accrued costs,
expenses or indemnities provided by the Trust Agreement, including estimated
compensation of the Trustee and costs of liquidation and any amounts required as
a reserve to provide for payment of any applicable taxes or other government
charges. The sale of Bonds in the Trust upon termination may result in a lower
amount than might otherwise be realized if such sale were not required at such
time. For this reason, among others, the amount realized by a Unitholder upon
termination may be less than the principal amount or par amount of Bonds
represented by the Units held by such Unitholder. The Trustee shall then
distribute to each Unitholder his share of the balance of the Interest and
Principal Accounts. With such distribution the Unitholder shall be furnished a
final distribution statement of the amount distributable. At such time as the
Trustee in its sole discretion shall determine that any amounts held in reserve
are no longer necessary, it shall make distribution thereof to Unitholders in
the same manner.
Notwithstanding the foregoing, in connection with final distributions to
Unitholders of an Insured Trust, it should be noted that because the portfolio
insurance obtained by an Insured Trust is applicable only while Bonds so insured
are held by such Trust, the price to be received by such Trust upon the
disposition of any such Bond which is in default, by reason of nonpayment of
principal or interest, will not reflect any value based on such insurance.
Therefore, in connection with any liquidation, it shall not be necessary for the
Trustee to, and the Trustee does not currently intend to, dispose of any Bond or
Bonds if retention of such Bond or Bonds, until due, shall be deemed to be in
the best interest of Unitholders, including, but not limited to, situations in
which a Bond or Bonds so insured have deteriorated market prices resulting from
a significant risk of default. Since the Preinsured Bonds will reflect the value
of the related insurance, it is the present intention of the Sponsor not to
direct the Trustee to hold any of such Preinsured Bonds after the date of
termination. All proceeds received, less applicable expenses, from insurance on
defaulted Bonds not disposed of at the date of termination will ultimately be
distributed to Unitholders of record as of such date of termination as soon as
practicable after the date such defaulted Bond or Bonds become due and
applicable insurance proceeds have been received by the Trustee.
DESCRIPTION OF RATINGS
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES. A Standard &
Poor's municipal bond rating is a current assessment of the creditworthiness of
an obligor with respect to a specific debt obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price.
<PAGE>
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
II. Nature of and provisions of the obligation.
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangements under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest. AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BBB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Provisional Ratings: A provisional rating ("p") assumes the successful
completion of the project being financed by the issuance of the bonds being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion,
makes no comment on the likelihood of, or the risk of default upon failure of,
such completion. Accordingly, the investor should exercise his own judgment with
respect to such likelihood and risk.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable
Moody's 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. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that their market value is affected solely by money
market fluctuations.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of oversupply
in a few specific instances.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as higher medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. The market
value of A-rated bonds may be influenced to some degree by credit circumstances
during a sustained period of depressed business conditions. During periods of
normalcy, bonds of this quality frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few specific
instances.
Baa--Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at the high
end of its category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Con--Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
ALABAMA RISK FACTORS
ALABAMA ECONOMY. Alabama's economy has experienced a major trend toward
industrialization over the past three decades. 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. And by 1990,
manufacturing accounted for only 26.7% of Alabama's real Gross State Product
(the total value of goods and services produced in Alabama).
The state's leading manufacturing industries have been pulp and papers and
chemicals. In recent years, Alabama has ranked as the fifth largest producer of
timber in the nation. The State's growing chemical industry has been the natural
complement of production of wood pulp and paper. Mining, oil and gas production
and service industries are also important to Alabama's economy, with coal mining
by far the most important mining activity.
Of enormous benefit to the state's growing manufacturing industries are
Alabama's waterways, which include one of the largest networks of inland river
systems in the nation. In addition, the Port of Mobile is one of the nation's
busiest ports in tons of cargo handled. It has traditionally 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 timbers, dry milk, iron, steel and iron and steel
products.
Despite gains in expanding its non-farm sectors of its economy, Alabama is
still strongly reliant on agriculture. According to the 1997 Census of
Agriculture, the state generates more than $3.1 billion annually in crop and
livestock products. Leading agricultural commodities in Alabama are poultry;
cattle and calves; cotton; nursery, sod and greenhouse products; and peanuts.
Combined, they accounted for approximately 85% of the total receipts, though
poultry made up nearly 60% of this amount.
Preliminary data show total nonagricultural employment as of March 1999 was
1.93 million, an increase of 2.9% from March 1998. This growth rate is higher
than the historically low 2.1% average employment growth rate since 1993. The
slow performance during the early 1990s in Alabama was due to two main factors.
First, job losses, particularly in the non-durable (especially apparel)
industries, offset job gains in other sectors. Secondly, the state's low
unemployment rate (4.2% compared to 4.5% nationally in 1998) and the slow growth
rate of its civilian labor force (-0.7% in 1998) makes it difficult for
companies to find people with the skills needed to fill the jobs. In addition,
Alabama has a very slow population growth rate (0.7% in 1998). Labor shortages
are not expected to end soon in the state.
Given the above constraints, Alabama is expected to add about 19,000 net new
nonagricultural jobs in 1999. These jobs will occur primarily in the services,
trade and construction sectors. While durable goods-producing industries should
add about 900 net new jobs, non-durable goods industries are expected to lose
about 2,500 jobs, resulting in a net decline in manufacturing employment.
Income growth in Alabama has not kept pace with that of the United States,
with Alabama ranking low among all states on income growth. After increasing
about 4.2% in 1997, per capita personal income in Alabama increased by 3.7% in
1998 to $21,442. This figure represents about 81% of the national per capita
personal income level ($26,412), ranking Alabama 40th among all the states.
REVENUES AND EXPENDITURES. Political subdivisions of the State of Alabama
have limited taxing authority. In addition, the Alabama Supreme Court has held
that a governmental unit may first use its taxes and other revenues to pay the
expenses of providing 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.
Alabama operates using income designated into five major funds: General Fund,
Education Trust Fund, Public Road and Bridge Fund, Special Mental Health Trust
Fund and Public Welfare Fund. General governmental operations are specific to
the General Fund, monies from which are used for ordinary expenses of the
executive, legislative and judicial branches, for other functions of government,
for capital outlay and for debt service on certain general obligation bond
issues. The General Fund supports state programs such as child development and
protection, criminal justice, conservation, economic development, public health
and safety, mental health, Medicaid, legislative activities and the court
system. The General Fund also provides funding for non-state entities that
provide services to residents in areas such as child protection and development,
assistance for the elderly, disease research and business development.
Taxes from approximately 36 sources are deposited into the General Fund, with
the largest sources being insurance company premium taxes, interest on state
deposits, interest earnings, the oil and gas lease and production tax,
corporation taxes, the cigarette and ad valorem taxes, and profits from the
Alabama Alcoholic Beverage Control Board. Most income and sales tax revenues,
however, are "earmarked" for the Education Trust Fund.
Revenues received by the State of Alabama for Fiscal Year 1998 totaled $10.58
billion (on a GAAP basis), with the General Fund decreasing 11% to $77.1
million. Taxes, accounting for more than half of all receipts, increased by 5%
over Fiscal 1997 collections. The gain was lead by strong growth in corporate
tax income, offsetting significant losses in oil and gas production taxes. Total
appropriations during Fiscal 1998 reached $9.75 billion, up 2.8% from the
previous year. General Fund spending represented $981.5 million of this amount,
including $12.2 million in distributions to local governments which were
introduced during this fiscal year. The final, unobligated cash balance carried
forward from the 1998 General Fund is $31.8 million, compared to $47.2 million
in Fiscal 1997.
On a cash basis, total General Fund revenues totaled $984.0 million during
Fiscal 1998, with appropriations amounting to $981.5 million. Fiscal Year 1999
total appropriations (on a cash basis) from the General Fund are set to reach
just over $988 million. Conditional appropriations for Fiscal 1999 are scheduled
to total $26.4 million, although actual funding of these projects is not
guaranteed.
The governor's budget estimates that state spending for Fiscal Year 2000 will
total $7.19 billion (on a cash basis), plus an additional $74.2 million in
conditional spending. This budget was introduced to the State House as HB 155,
and it is anticipated that it will be adjusted before Fiscal Year 1999 ends on
September 30.
DEBT MANAGEMENT. Various authorities of the State of Alabama have been given
statutory power to issue bonds. Records of bond issues are maintained by the
Alabama Treasurer's Office and are included in the bonded indebtedness report,
as compiled annually by the State Examiner. As of March 1, 1999, the Treasurer
is responsible for paying debt service on 45 issues and is the paying agent on
43 of those issues.
Total bonded indebtedness for the State of Alabama is $1.270 billion for the
fiscal year ended September 30, 1998. The annual payment for Fiscal 1998 on
these bonds is $180 million.
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 an
Alabama Trust and thereby adversely affect Unitholders.
RATINGS. State of Alabama general obligation bonds have been assigned the
following ratings: Standard & Poor's Ratings Services, AA; Moody's Investors
Service, Inc., Aa3; and Fitch IBCA, Inc., AA.
ARIZONA RISK FACTORS
GENERAL ECONOMIC CONDITIONS. Progressing from its traditional reliance on a
cyclical construction industry, Arizona's economic base is maturing and
diversifying. One of the nation's leaders in employment growth, Arizona has been
among the top five employment growth states for more than four years, and it
should remain there through 1999. After climbing by 6.2% in 1994, during which
the State's economy produced the second-highest number of jobs of any year in
Arizona history, job creation in Arizona is leveling off with employment growth
of 5.6% in 1996-97, and growth of 4.7% through November 1998 which ranked
Arizona #1 in the nation for nonagricultural job growth through that period.
Arizona's wage and salary employment grew 5.6% in 1996, 4.5% in 1997 and 4.6% in
1998. The unemployment rate was around 4.0% for 1998 and has remained around
3.6% in early 1999, but is expected to increase throughout 1999.
Arizona ranked third in the nation in personal income growth during 1991-96.
Personal income grew 7.2% in 1997 and 1998 and is expected to grow by 7.8% in
1999.
Overall, Arizona's forecast is for continued but moderate rates of growth in
employment and personal income. Employment growth will continue to be stronger
in the Phoenix area than in the balance of the State. Housing has probably
peaked and is likely to decline after seven extremely strong years.
Retail sales should also continue to slow.
Population, because of continued employment growth, will record
above-average growth rates. Population grew 3.2% in 1996, 3% in 1997 and 2.8% in
1998.
BUDGETARY PROCESS. The Budget Reform Act of 1997 made significant changes to
the State's planning and budgeting systems. Beginning with the Fiscal biennium
2000-01, all State agencies, including capital improvement budgeting, will be
moved to a biennial budgeting system. From Fiscal Year 2000 to 2006, all State
agencies will move to a budget format that reflects the program structure in the
"Master List of State Government Programs."
The Budget Reform Act of 1993 established the current budgeting system of
one- and two-year budget reviews. Agencies selected for annual review and
appropriation are designated as Major Budget Units (MBUs). The 18 MBUs account
for over 90% of the total General Fund expenditures. Agencies selected for
biennial review and appropriation are designated as Other Budget Units (OBUs).
REVENUES AND EXPENDITURES. The General Fund closed fiscal year 1998 with a
$525.8 million ending balance, and the Executive plan for fiscal year 1999
anticipates a $60.8 million balance. Overall, fiscal year 1998 revenues totaled
$5.745 billion. Corporate income tax revenue declined by 10%, from $600 million
in fiscal year 1997 to $528 million in fiscal year 1998. Individual income tax
revenues grew by 8.2% from fiscal year 1997 to fiscal year 1998. Expenditures
for fiscal year 1998 totaled $5.219 billion. Revertments totaled $99.2 million
in fiscal year 1998.
The current Executive forecast for fiscal year 1999 revenue is $5.960
billion. The major revenue source, transaction privilege taxes, is forecast to
produce $2.547 billion for fiscal year 1999. Overall, General Fund revenues will
grow modestly, including 4% in fiscal year 1999 and 5.7% in fiscal year 2000,
which compares to . The 1999 rate of growth reflects the impact of the $120
million tax reduction program passed in 1998, and the 2000 revenue estimate
includes an incremental reduction to account for an additional $60 million of
tax reductions already enacted.
The Executive fiscal plan for Fiscal Year 1999 is based on revenue estimates
of $5.43 billion ($5.75 billion including the $525 million balance forward) and
expenditures of $5.90 billion, leaving a balance of $60 million. After spending
$2.926 billion on education in Fiscal Year 1998, the Executive fiscal plan for
Fiscal Year 1999 includes spending $3.405 billion.
For fiscal biennium 2000-2001, the Executive is recommending a base operating
budget of $5.7 billion and $6.03 billion, respectively. The majority of
recommended expenditures for fiscal biennium are in education. A projected
ending balance of $26.9 million and $4.7 million is expected for Fiscal Biennium
2000-01. By the end of Fiscal Year 2001, the Budget Stabilization Fund balance
is estimated to reach $425 million, or 7.08% of revenues. The Medical Services
Stabilization Fund, by the end of Fiscal Year 2001 is estimated to reach $100.8
million, and the Temporary Assistance Stabilization Fund $59.7 million.
LITIGATION. In response to the court's ruling in Roosevelt v. Bishop in 1994,
the Executive recommended $30 million for the first-year implementation of a
capital assistance program for Arizona's schools. The program is designed to
help school districts that lack bonding capacity due to low value or rapid
growth. Income is provided for in a Capital Equity Fund which contains monies
appropriated by the Legislature and $30 million annually from the Common School
Land Fund (Permanent State School Fund). The Permanent State School Fund
consists of revenues from the proceeds of the sale of natural resources or
property from lands that have been granted by the United States to the State of
Arizona for the support of common schools. In future years, the Capital Equity
Fund may contain monies remitted by school districts for the repayment of loans.
Funds are used to assist school districts with capital needs. For fiscal year
1999, the Governor recommends $40.5 million be appropriated from the Permanent
State School Fund, which includes the $30 million appropriated to the Capital
Equity Fund.
DEBT ADMINISTRATION AND LIMITATION. The State is not permitted to issue
general obligation debt. The particular source of payment and security for each
of the Arizona Obligations is detailed in the debt instruments themselves and in
related offering materials. There can be no assurances with respect to whether
the market value or marketability of any of the Arizona Obligations issued by an
entity other than the State of Arizona will be affected by financial or other
conditions 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.
Although most of the Bonds in an 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.
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 Arizona 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 Arizona Trusts to pay interest on or principal of the Bonds.
<PAGE>
ARKANSAS RISK FACTORS
Information regarding the financial condition of the State of Arkansas is
included for the purpose of providing information about general economic
conditions that may affect issuers of the Bonds in Arkansas.
ECONOMIC OUTLOOK. During the past two decades, Arkansas' economic base has
shifted from agriculture to light manufacturing. Agriculture has traditionally
been a significant component of Arkansas' economy, but total income from this
sector continues to decrease. Over 40% of the land in Arkansas is devoted to
agriculture, and the state is a leading producer of rice, commercial broiler and
cotton, generating over $5.5 billion in overall farm income each year.
The state is now moving toward a heavier manufacturing base involving more
sophisticated processes and products such as electrical machinery,
transportation equipment, fabricated metals and electronics. In fact, Arkansas
now has a higher percentage of workers involved in manufacturing than the
national average. In addition, the services sector in the state's economy is
growing more rapidly than any other area. The diversification of economic
interests has lessened the state's cyclical sensitivity to impact by any single
sector.
During 1998, Arkansas' real Gross State Product (GSP) growth slowed to 3.3%,
down from several years of exceptional growth (4%) between 1994 and 1997. The
outlook for GSP in 1999 is another downslide to 2.4% growth, although GSP growth
should remain in the 2-2.5% range through 2001 without much further decline.
Non-farm payroll growth increased by 1.9% in 1998, fractionally better than
1996 and 1997. Job growth continues to be restrained by a tight labor market,
which expanded by only 0.1% during 1998. In 1999, employment gains will be held
at about 1.6% primarily due to national growth conditions. Further deceleration
is predicted for the following two years, followed by a modest rebound in 2002.
Wage and salary growth will remain near 6% in 1999 as the prospects for
recession decrease but the tight labor market persists. Arkansas' per capita
personal income climbed to $20,346 in 1998, showing slowing growth in the 3.8%
range. This figure is 77% of the national average ($26,412), placing Arkansas
near the bottom of all states in per capita personal income.
The state's average unemployment rate during 1998 rose from 5.3% to 5.5%,
making Arkansas one of few states in which this rate increased that year.
Nationally, unemployment averaged 4.5% in 1998. During the first three months of
1999, however, the state's unemployment rate dropped from 5.9% to 4.6%. The
Arkansas unemployment rate is estimated to stay in the 5-5.5% range for the next
two years. Periodic layoffs in labor intensive manufacturing categories such as
apparel will continue, while growth in technology-related activities and
domestic consumer markets will be stable.
Overall, the Arkansas economy will enjoy moderate growth during 1999, with a
possible slowdown coming in 2000. This growth will pale in comparison to the
lengthy expansion that marked most of the 1990s and produced above-average
growth.
REVENUES AND EXPENDITURES. Deficit spending has been prohibited by statute in
Arkansas since 1945. The Revenue Stabilization Act controls spending by state
agencies and prohibits deficit spending. This Act requires that, before any
state spending can take place, the General Assembly must make an appropriation
and funds must be available in the fund from which the appropriation has been
made. The state is prohibited from borrowing money to put into any state fund
from which appropriations can be paid.
Revenues available for Fiscal Year 1998 were forecasted at $3.426 billion, an
increase of $135.4 million or 4.1% above Fiscal Year 1997 receipts. Net
available general revenues of $2.847 billion were projected for Fiscal 1998, an
increase of $161.9 million or 6.0% over the previous year. The revenue impact of
tax legislation passed by the 81st General Assembly amounted to a decrease of
$17.2 million from the original projection.
Total appropriations for Fiscal Year 1999 are slated to be $12.6 billion. Of
this amount, $3.0 billion is spending from the General Government Fund.
Collections in this Fund are projected to net $3.7 billion, with the individual
income tax and sales and use taxes representing about 51% and 42% of this
amount, respectively. Income during Fiscal 1999 also includes $17.3 million from
the State Balanced Budget Reserve Account. Year-to-date revenues as of March
1999 indicate that collections are 0.5% ahead of projections for this period,
and 5.4% above collections for the same period a year ago.
DEBT MANAGEMENT. The Constitution of Arkansas specifically prohibits the
creation of any state general obligation debt unless authorized in a statewide
general election. Although the State of Arkansas defaulted on some of its
general obligation debt during the depression in the late 1930s, it has not
failed to pay the principal and interest on any of its general obligations when
due since that time.
Act 496 of 1981, as amended, the Arkansas Water Resources Development Act of
1981 ("Act 496"), authorizes the issuance of State Water Resources Development
General Obligation Bonds by the State of Arkansas, acting by and through the
Arkansas Soil and Water Conservation Commission. The issuance of bonds pursuant
to Act 496 was approved by the electors of the state at the general election on
November 2, 1982. The total principal amount of bonds issued during any fiscal
biennium may not exceed $15,000,000, and the total principal of all bonds issued
under Act 496 may not exceed $100,000,000. All bonds to be issued under Act 496
shall be direct general obligations of the state, the principal and interest of
which are payable from the general revenues of the state.
Act 686 of 1987, the Arkansas Waste Disposal and Pollution Abatement
Facilities Financing Act of 1987 ("Act 686"), authorizes the issuance of
Arkansas Waste Disposal and Pollution Abatement Facilities General Obligation
Bonds by the State of Arkansas, acting by and through the Arkansas Soil and
Water Conservation Commission. The issuance of bonds pursuant to Act 686 was
approved by the electors of the state at the general election on November 8,
1988. The total principal amount of bonds issued during any fiscal biennium may
not exceed $50,000,000, and the total principal of all bonds issued under Act
686 may not exceed $250,000,000. All bonds to be issued under Act 686 shall be
direct general obligations of the state, the principal and interest of which are
payable from the general revenues of the state.
Act 683 of 1989, the Arkansas College Savings Bond Act of 1989 ("Act 683"),
authorizes the issuance of Arkansas College Savings General Obligation Bonds by
the State of Arkansas, acting by and through the Arkansas Development Finance
Authority. The issuance of bonds pursuant to Act 683 was approved by the
electors of the state at the general election on November 6, 1990. The total
principal amount of bonds issued during any fiscal biennium may not exceed
$100,000,000, and the total principal of all bonds issued under Act 683 may not
exceed $300,000,000. All bonds to be issued under Act 683 shall be direct
general obligations of the state, the principal and interest of which are
payable from the general revenues of the state.
Counties and municipalities may issue general obligation bonds (pledging an
ad valorem tax), special obligation bonds (pledging other specific tax revenues)
and revenue bonds (pledging only specific revenues from sources other than tax
revenues). School districts may issue general obligation bonds (pledging ad
valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but, as
in all cases of revenue bonds, neither the full faith and credit nor the taxing
power of the State of Arkansas or any municipality or county thereof is pledged
to the repayment of those bonds. Revenue bonds can be issued only for public
purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
BOND RATINGS. State of Arkansas general obligation bonds hold the following
ratings: Standard & Poor's Ratings Services, AA; and Moody's Investors Service,
Inc., Aa3 (refined from Aa on April 14, 1997).
CALIFORNIA RISK FACTORS
ECONOMIC FACTORS. Each California Trust is susceptible to political, economic
or regulatory factors affecting issuers of California municipal obligations (the
"California Municipal Obligations"). These include the possible adverse effects
of certain California constitutional amendments, legislative measures, voter
initiatives and other matters that are described below. The following
information provides only a brief summary of the complex factors affecting the
financial situation in California (the "State") and is derived from sources that
are generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any of
the following information. It is based in part on information obtained from
various State and local agencies in California or contained in Official
Statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California Municipal
Obligations held in the portfolio of a Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
Since the recession in California in the early 1990's, California has made a
significant recovery. Deep cuts in the nation's defense budget were the main
reason that California's downturn was so severe. By 1996, nearly 60% of
California's more than 385,000 aerospace jobs had been eliminated. In addition,
California suffered more than two-thirds of all of the nation's job losses
resulting from military base closures.
As 1998 unfolded, the impact of Asia's recession on California began to
emerge. High-technology manufacturing employment--aerospace and
electronics--peaked in March 1998, and by November 1998, had lost almost 15,000
jobs, or nearly 3% of the industries' workforce. Total nonfarm employment
started 1998 with annual growth above 3%, but more recently, the year-to-year
pace has slowed to around 2.7%.
Overall, however, California's economy continued to expand in 1998. Nonfarm
employment growth averaged 3.2% and personal income was up more than 6%. The
jobless rate was below 6% most of the year. Nonresidential construction activity
remained strong, with building permit value up almost 18%. Homebuilding
continued on a moderate recovery path, with permits for new houses reaching
126,000 units, a 13% increase over 1997. The construction industry led
California's employment growth in 1998. From October 1997 to October 1998,
construction jobs increased by more than 9%.
Although weak export demand is likely to persist through at least 1999, there
are other elements in the California economy that will help partially offset the
Asia-related problems. Demand for computer services and software remains
extremely strong, buoyed by the demand to fix Year 2000 problems, the continued
explosive growth of the Internet, and by financial sector needs related to the
new Euro currency. The strength in construction activity will continue to boost
prospects for related manufacturing industries. Although California economic
growth will slow from the pace of 1997 and 1998, gains in employment and income
should continue to outpace the nation.
California's population grew by 574,000 people in 1997 to a total of 32.96
million. This reflects a 1.8% increase of population for the year, compared to
1.0% growth posted in calendar year 1996. California's population is
concentrated in metropolitan areas specifically located in the Los Angeles and
San Diego counties.
California enjoys a large and diverse labor force. For calendar year 1997,
the total civilian labor force was 15,971,000 with 14,965,000 individuals
employed and 1,006,000, or 6.3%, unemployed. In comparison, the unemployment
rate for the United States during the same time was 4.9%.
During 1997, several tax reform and business measures were enacted.
California's Workers' Compensation system which previously had some of the
highest premiums and lowest benefits in the nation, was reformed with a 40%
premium reduction, saving employers more than $4 billion per year. The Bank and
Corporation tax was cut by 5% to 8.84%, thus lowering the cost of doing business
in California by $300 million per year. The tax rate on Subchapter "S"
corporations was reduced from 2.5% to 1.5%, and the requirements for
qualification for Subchapter "S" status were conformed to recent federal law
changes. Personal income taxes were reduced by $1.1 billion in 1997 and when the
tax package is fully implemented in 1999-2000, the personal income tax cut will
total $800 million.
CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS
LIMITATION ON TAXES. 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, except upon new construction or change of ownership (subject
to a number of exemptions). Taxing entities may, however, raise ad valorem taxes
above the 1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of March
1, 1975, if acquired earlier), subject to certain adjustments. This system has
resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13 and on June 18, 1992, the U.S. Supreme Court announced
a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use. In response to these decisions, the voters
of the State in 1986 adopted an initiative statute which imposed significant new
limits on the ability of local entities to raise or levy general taxes, except
by receiving majority local voter approval. Significant elements of this
initiative, "Proposition 62," have been overturned in recent court cases. An
initiative proposed to re-enact the provisions of Proposition 62 as a
constitutional amendment was defeated by the voters in November 1990, but such a
proposal may be renewed in the future.
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
consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January 1,
1979 or subsequently authorized by the voters, (2) appropriations arising from
certain emergencies declared by the Governor, (3) appropriations for certain
capital outlay projects, (4) appropriations by the State of post-1989 increases
in gasoline taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 by Proposition 111 to follow more closely growth in
California's economy.
"Excess" revenues are measured over a two-year cycle. With respect to local
governments, excess revenues must be returned by a revision of tax rates or fee
schedules within the two subsequent fiscal years. The appropriations limit for a
local government may be overridden by referendum under certain conditions for up
to four years at a time. With respect to the State, 50% of any excess revenues
is to be distributed to K-12 school districts and community college districts
(collectively, "K-14 districts") and the other 50% is to be refunded to
taxpayers. With more liberal annual adjustment factors since 1988, and depressed
revenues since 1990 because of the recession, few governments, including the
State, are currently operating near their spending limits, but this condition
may change over time. Local governments may by voter approval exceed their
spending limits for up to four years.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or Article
XIIIB on California Municipal Obligations or 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 initiatives 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 $19.3 billion aggregate principal amount of
general obligation bonds outstanding, and $14.3 billion authorized and unissued,
as of December 31, 1998. Outstanding lease revenue bonds totaled $6.7 billion as
of December 31, 1998, and are estimated to total $6.6 billion as of June 30,
1999.
From July 1, 1997 to July 1, 1998, the State issued approximately $2.6
billion in non-self liquidating general obligation bonds and $1.0 billion in
revenue bonds. Refunding bonds, which are used to refinance existing long-term
debt, accounted for $1.0 billion of the general obligation bonds and $514
million of the revenue bonds.
General Fund general obligation debt service expenditures for fiscal year
1997-98 were $1.865 billion, and are estimated at $1.926 billion for fiscal year
1998-99.
RECENT FINANCIAL RESULTS. 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. As of December
31, 1998, the General Fund had outstanding internal loans from Special Funds of
$1.1 billion (in addition, there are $1.7 billion of external loans represented
by the 1998-99 Revenue Anticipation Notes, which mature on June 30, 1999). The
revised projected 1997-98 fiscal year balance in the General Fund Reserve for
Economic Uncertainties was $2,594.6 million. The Special Fund for Economic
Uncertainties was $74.6 million as of June 30, 1998.
THE BUDGET. California's solid economic performance during 1998 led to
healthy revenue growth. General Fund collections grew by 11.7% in fiscal year
1997-98 to reach $55.0 billion, an increase of $5.8 billion from the prior year.
For fiscal year 1998-99, the Governor's Budget assumes total General Fund
revenues of $56.3 billion, a 2.4% net increase from 1997-98. This revised
estimate reflects the impact of the tax relief legislation which reduces current
year collections $851 million from the baseline estimate, with a more moderate
revenue loss in the budget year. After accounting for non-economic factors,
underlying General Fund revenue growth for 1998-99 is estimated at 4.0%.
Overall, General Fund revenues and transfers represent nearly 80% of total
revenues. The remaining 20% are special funds dedicated to specific programs.
The three largest revenue sources (personal income, sales, and bank and
corporation) account for about 75% of total revenues with personal income
comprising 50% of the total. The personal income tax in fiscal year 1998 was
$27,859 million, an increase of $4,681 million from fiscal year 1997.
Expenditures for the 1997-98 fiscal year were $53.1 billion, an 8% increase.
As of June 30, 1998, the General Fund balance was $2.8 billion. The estimate for
June 30, 1999 is $1.1 billion. The General Fund ended the 1997-98 fiscal year
with a cash surplus of $935 million, the first time the State has recorded a
surplus without short-term borrowing in the last nine years.
PROPOSED 1998-99 BUDGET. The Governor's proposed budget for fiscal year
1998-99 is designed to further economic growth, educational reform, public
safety, and maintain government and environmental quality. K-12 education
remains the State's top funding priority. The Budget includes $350 million to
lengthen the school year to 180 days. The Budget fully funds the fourth and
final year of the Governor's "Compact with Higher Education" and calls for the
development of a new compact with UC and CSU. The Budget provides $50 million in
General Fund and $200 million in a proposed bond to capitalize the
Infrastructure and Development Bank, while will help businesses locate and
expand in California. The Budget also proposes a $7 billion investment plan to
maintain and build the State's school system, water supply, prisons, natural
resources, and other important infrastructure.
BOND RATING. The State's general obligation bonds have received ratings of
"A1" by Moody's Investors Service, "A+" by Standard & Poor's Ratings Group and
"AA+" by Fitch IBCA, Inc. 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.
CASH MANAGEMENT POLICIES. Cash temporarily idle during each fiscal year is
invested in the Pooled Money Investment Account (PMIA). The investment of PIMA
is restricted by law to the following categories: U.S. Government securities,
securities of federally sponsored agencies, domestic corporate bonds, bank
notes, interest-bearing time deposits in California banks and savings and loan
associations, prime commercial paper, repurchase and reverse repurchase
agreements, security loans, bankers' acceptances, negotiable certificates of
deposit, and loans to various bond funds. The average daily investment balance
for the year ended June 30, 1998, amounted to $29.3 billion, with an average
effective yield of 5.7%. For the year ended June 30, 1997, the average daily
investment was $28.3 billion and the average effective yield was 5.6%. Total
earnings of the PMIA for fiscal year 1997-98 amounted to $1.7 billion.
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 January of 1997, California experienced major
flooding in six different areas with current estimates of property damage to be
approximately $1.6 to $2 billion. One lawsuit has been filed by 500 homeowners
and more lawsuits are expected. Exposure from all of the anticipated cases
arising from these floods could total approximately $2 billion.
The primary government is a defendant in Ceridian Corporation v. Franchise
Tax Board, a suit which challenges the validity of two sections of the
California tax laws. The first relates to deduction from corporate taxes for
dividends received for insurance companies to the extent the insurance companies
have California activities. The second relates to corporate deduction of
dividends to the extent the earnings of the dividend paying corporation have
already been included in the measure of their California tax. If both sections
of the California Tax law are invalidated, and all dividends become deductible,
then the General fund can become liable for approximately $200-$250 million
annually.
OBLIGATIONS OF OTHER ISSUERS
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.
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 further 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 were 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 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 cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g., due to earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.
Several years ago, the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the District's lease. The trial court has
upheld the validity of the lease and the case has been settled. Any judgment in
a 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.
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 Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California, in 1989, and southern
California, in 1994, experienced major earthquakes causing billions of dollars
in damages. The federal government provided more than $13 billion in aid for
both earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in a California Trust could
be affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage at
reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the Federal or State government to
appropriate sufficient funds within their respective budget limitations.
On December 7, 1994, Orange County, California (the "County"), together with
its pooled investment fund (the "County Pooled Fund") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the County Pooled
Fund had suffered significant market losses in its investments caused a
liquidity crisis for the County Pooled Fund and the County. More than 180 other
public entities, most but not all located in the County, were depositors in the
County Pooled Fund. As of mid-January 1995, the County estimated that the County
Pooled Fund had lost about $1.64 billion, or 23%, of its initial deposits of
around $7.5 billion. The Pooled Fund has been almost completely restructured to
reduce its exposure to changes in County interest rates. Many of the entities
which kept moneys in the County Pooled Fund, including the County, faced cash
flow difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. The County and some of these entities have, and
others may in the future, default in payment of their obligations. At that time,
Moody's and Standard & Poor's 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.
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.
COLORADO RISK FACTORS
ECONOMIC OUTLOOK. Based on data published by the Colorado Department of Labor
and Employment, total wage and salary employment in 1997 was 1,977,000
(seasonally adjusted). This was an increase of 76,600 from 1996. Services and
trade were the number one and two largest growing industries in Colorado in
1997, followed by the finance, insurance, and real estate sector. Construction
was the fourth largest source of employment growth in 1997.
The annual average unemployment rate in Colorado from 1994 to 1996 remained
stable at 4.2%. In 1997, the unemployment rate in Colorado dropped to 3.3% while
the nation's unemployment rate was 5.0%. Colorado's job growth rate increased
4.0% in 1997, an increase from the 3.6% growth rate in 1996. In comparison, the
job growth rate for the United States in 1996 and 1997 was 2.0% and 2.3%,
respectively. Total nonagricultural employment in Colorado is expected to
increase 3.9% in 1998.
Personal income rose 7.2% in Colorado during 1997 as compared with 5.8% for
the nation as a whole. In 1998, Colorado's personal income is expected to
increase 6.7%, outpacing the nation's 1998 estimated rate of 5.4%.
The year 1998 will look much like 1997. There will be some slowing of
population, housing starts and employment, but the outlook is still strong.
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 year 1991, 1992 and 1993 was set at 3% of total appropriations from the
General Fund. For fiscal years 1994 and thereafter, the Unappropriated Reserve
requirement is set at 4%. In addition to the Unappropriated Reserve, a
constitutional amendment approved by Colorado voters in 1992 requires the State
and local government to reserve a certain percentage of its fiscal year spending
(excluding bonded debt service) for emergency use (the "Emergency Reserve"). The
minimum Emergency Reserve is set at 2% for 1994 and 3% for 1995 and later years.
For fiscal year 1992 and thereafter, General Fund appropriations are also
limited by statute to an amount equal to the cost of performing certain required
reappraisals of taxable property plus an amount equal to the lesser of (i) 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 1997 fiscal year ending General Fund balance was $375.1 million prior to
legislative change HB 98-1414. The restated 1997 ending fund balance is $514.1
million or $347.4 million over the combined Unappropriated Reserve and Emergency
Reserve requirement. As required by the new law, the revised ending fund balance
does not net out the state's first TABOR rebate. The new measure directs the
state controller's office to show TABOR refunds in the year they are to be
refunded, rather than the year they were incurred. Based on June 12, 1998
estimates, the 1998 fiscal year ending General Fund balance is expected to be
$823.6 million, or $646.6 million over the required Unappropriated Reserve and
Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "Amendment") authorized to issue revenue bonds and receiving under 10% of
of annual revenue in grants from all Colorado state and local governments
combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also limits
increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield no
more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to the
Amendment, local government spending is to be limited by the same formula as the
limitation for property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in state population in the
prior calendar year. The basis for spending and revenue limits for each fiscal
year is the prior fiscal year's spending and property taxes collected in the
prior calendar year. Debt service changes, reductions and voter-approved revenue
changes are excluded from the calculation bases. The Amendment also prohibits
new or increased real property transfer tax rates, new state real property taxes
and local district income taxes.
Litigation concerning several issues relating to the Amendment 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. Litigation in the "enterprise" arena may be filed in the future
to clarify these issues.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1997-98,
June 12, 1998 (the "Economic Report"), inflation for 1996 was 3.5% and
population grew at the rate of 2.0% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1998 fiscal year are
limited to 5.5% over expenditures during the 1997 fiscal year. The 1997 fiscal
year is the base year for calculating the limitation for the 1998 fiscal year.
The limitation for the 1999 fiscal year is 5.3%, based on inflation of 3.3% and
population growth of 2.0% during 1997. For the 1997 fiscal year, General Fund
revenues totaled $4,639.9 million and program revenues (cash funds) totaled
$2,007.7 million, resulting in total base revenues of $6,647.6 million.
Expenditures for the 1998 fiscal year, therefore, cannot exceed $6,866.6
million. The 1998 fiscal year General Fund and program revenues (cash funds) are
expected to total $7,395.4 million, or $528.8 million more than expenditures
allowed under the spending limitation. This will be the second time the state
has breached the limit since its implementation in 1992. The first breach was in
1997 and the excess revenue of $139.0 million was refunded to Colorado taxpayers
during the 1998 tax filing season. A measure was placed on the November 1998
ballot to deal with the excess revenue in fiscal year 1998. The measure proposed
spending the excess revenue either $200 million per year or $1 billion for five
years for highway construction and repair, K-12, safety needs, and higher
education building. The Economic Report estimates that the limit will be
breached by $494.1 million in fiscal year 1998-99.
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.
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 General Fund balances (before reserves) at June 30 of
approximately $405.1 million in fiscal year 1994, $486.7 million in fiscal year
1995, $368.5 million in fiscal year 1996 and $514.1 million in fiscal year 1997.
The fiscal year 1998 ending General Fund balance (before reserves) is projected
at $823.6 million.
Revenues for the fiscal year ending June 30, 1997, showed Colorado's general
fund increasing after a slowdown in 1996. Revenues grew by $410.7 million to
$4,679.4 million, a 9.6% increase from 1996. This figure was higher than the
fiscal year 1996 pace of 6.8%. General Fund revenues exceeded expenditures by
$145.0 million. The turnaround in fiscal year 1997 came as a result of surging
corporate, use and individual income taxes, which rose 15.3%, 11.0% and 12.6%,
respectively.
For fiscal year 1997, the following tax categories generated the following
respective revenue percentages of the State's $4,679.4 million total gross
receipts: individual income taxes represented 55% of gross fiscal year 1997
receipts; sales, use and excise taxes represented 30.5% of gross fiscal year
1997 receipts; and corporate income taxes represented 5.1% of gross fiscal year
1997 receipts. The percentages of General Fund revenue generated by type of tax
for fiscal year 1998 are not expected to be significantly different from fiscal
year 1997 percentages.
<PAGE>
For fiscal year 1998, General Fund revenues are projected at $5,339.7
million. Revenue growth is expected to increase 14.1% over FY 1997 actual
revenues. General fund expenditures are estimated at $4,733.7 million. The
ending General Fund balance for fiscal year 1998, after reserve set-asides, is
$646.6 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.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
CONNECTICUT RISK FACTORS
ECONOMIC OUTLOOK. Connecticut's economy has been slow to emerge from a
recession that began in early 1989 and ended in late 1992. While its recovery
lags behind most of the New England region, Connecticut has regained over 80% of
the jobs lost during the recession, unemployment rates are down, retail sales
are picking up, and the state has posted the strongest income gains in the
nation. Business indicators suggest that the economy is growing at a respectable
pace, although growth rates may slow through 2004 in response to rising interest
rates and wage pressures resulting from tight labor markets.
During the recession, Connecticut lost 158,200 jobs or about 9.5% of the
state's total workforce, with the largest losses in the manufacturing sector.
Investors should be aware that manufacturing was historically the most important
economic activity in Connecticut. Yet in terms of number of persons employed,
this sector lost about 20% of its job base between 1989 and 1992, and losses in
this sector still persist. In addition, job losses which started during the
recession have continued in the finance, insurance and real estate sector until
only the last quarter of 1998.
After four years of slow recovery, the state's economy is beginning to gain
momentum, and forecasters expect a return to the late 1980s levels of employment
within the next few years. Since 1992, Connecticut has recreated over 114,000
jobs. During the early part of the recovery, Connecticut job gains were running
well below the national average. During the past three years, however, the
state's job growth has been consistent with national trends. Small business is
fueling much of the state's job growth; businesses with fewer than 100 employees
have contributed over 60% of Connecticut's net job gain over the last 20 years,
as compared with 50% nationally. During 1998, Connecticut's total employment
increased by about 19,000 jobs or 1.2%. For 1999, however, NEEP (the New England
Economic Project) projections indicate that Connecticut will gain only about
2,000 jobs.
The composition of employment in the state has changed significantly over the
past decade as high paying manufacturing jobs were replaced by lower paying
service sector jobs. Most of the decline in the manufacturing sector results
from reductions in federal defense spending, including a 65% decrease between
1985 and 1995. Between 1989 and 1997, manufacturing slipped from 18.6% of the
state's total employment to 14.1%, while the finance, insurance and real estate
sector dipped from 11.6% to 9.5%. By contrast, declines in these industries have
been offset by growth in the service sector, which increased from 27.2% of the
state's total employment in 1988 to 34.4% in 1997. The strongest job gains
within the service sector have been in security services, recreational services,
hotel and lodging, social services and general building contracting.
Unemployment in Connecticut finally dipped below the national average during
1998. The state's unemployment rate dropped significantly from 5.1% in 1997 to
only 3.7% in 1998 (the December 1998 rate was as low as 2.8%). Nationally, the
average unemployment rate has decreased steadily, from 4.9% in 1997 to 4.5% in
1998. Although they have shown some improvement, unemployment rates in
Connecticut's major cities still remain considerably higher than the statewide
average. Moreover, high rates of urban unemployment contribute to growing income
inequality within the state, so much so that Connecticut families in the top 20%
have incomes nearly 15 times higher than those in the bottom 20%. In fact,
Connecticut continues to be one of the country's worst states in terms of income
inequality. Strong economic growth in conjunction with state policies sensitive
to these issues could help to reverse these trends.
Despite the recent positive overall economic growth in Connecticut, some
disturbing trends persist. Inflation-adjusted median household income in the
state is still 25% lower than it was in 1989, due largely to the fact that the
jobs gained during the recovery pay approximately 30% less than the jobs that
were lost during the recession. The current positive growth in wages and
earnings has been insufficient to compensate for the lower wage bases of the
newly-created jobs, particularly with reference to the transfer of jobs from
manufacturing to the service sector. Even with solid wage growth, it will take
time before the service sector wage base reaches the present wage and salary
level of the manufacturing sector.
Other factors contributing to the negative growth trend in real median family
income are the aging of the Connecticut labor force and its slow population
growth. The state's population continues to increase in age faster than the
national trend. In 1997, the national median age was 34.9, while Connecticut's
was 36.6. As the labor force ages, less income is derived from salary and wages
and more comes from transfer payments (such as social security and government
pensions). In addition, Connecticut's overall population growth has been
stagnant during the past five years, with annual rates in the -0.1% to 0.1%
range. Furthermore, a substantial portion of the state's negative domestic
migration rate (accounting for a population loss of 6,500 in 1998) is
represented by young families and residents under 45.
Connecticut's per capita income for 1997 was $35,954, a substantial increase
of 6.3% from the previous year, making it the highest among the fifty states.
This figure is 42.1% higher than the 1997 nationwide per capita income of
$25,298 and 18.1% higher than the New England regional average. To put these
numbers in perspective, however, it should be noted that prices for goods and
services in Connecticut are 22% higher than the national average.
Although all parts of society are not benefiting equally, Connecticut is in
the midst of a solid, sustained economic recovery. Net real income is expected
to grow in 1999 and 2000, though at a slower rate than during the prior two
years. At the same time, housing starts should follow a slow upward trend, and
the retail sales rate is expected to accelerate to the end of 2000.
Nevertheless, the population loss from outmigration as well as the failure to
attract new workers from nearby regions are depleting the volume and quality of
the State's workforce..
REVENUES AND EXPENDITURES. Fiscal Year 1998 saw the deterioration of
Connecticut's financial condition slow to the point where an operating surplus
was realized for the first time after nine consecutive years of operating
deficits--highlighting the state's continual reliance on debt-financing.
Traditionally, Connecticut borrows money to cover its annual operating expenses,
but for the first time since the recession, the state's resources were at a
level sufficient to cover all operating outlays. The total government operating
surplus equaled $7 million or 0.06% of total revenues.
The State Comptroller reported in the Comprehensive Annual Financial Report
(for the fiscal year ending June 30, 1998) that Connecticut's General Fund
closed FY 1998 with a surplus of $389 million, its largest surplus in more than
a decade, while the Transportation Fund generated a $25 million deficit. The
surplus is primarily the result of exceptionally strong revenue growth. During
FY 1998, Connecticut's General Fund revenues increased 6.2% over the previous
year to $7.6 billion, lead mainly by 14% growth in state income tax receipts.
The state derives over 70% of its revenues from taxes, the most important of
which have been the income and sales and use taxes, representing 42.2% and
36.4%, respectively, of FY 1998 General Fund revenues.
Connecticut's total expenditures in Fiscal Year 1998 grew by 4%--about twice
the rate of inflation--to reach $12.3 billion. This figure exceeds the state's
constitutional cap on expenditures by $194.1 million. Fixed costs (entitlement
programs, grant commitments, court mandates and debt service) continue to
consume the largest share of state spending, while Medicaid expenditures, which
represent about 20% of General Fund spending, showed modest growth. During FY
1998, the largest increases in overall state expenditures were for health and
hospital services, up 6.7% or $60 million; general government, up 9.5% or $68
million; and debt service, up 13.8% or $160 million to total $1.32 billion
during that year alone.
Projected tax revenues for Fiscal Year 1999 include changes in the state's
corporate tax rate, which was lowered by 1993 legislation after the rate had
reached the highest level in the nation. The rate cut is being phased in between
January 1996 and January 2000 to decrease the corporate tax from 10.75% to 7.5%.
Total General Fund revenues for FY 1998 are estimated at $9.99 billion, $7.96
billion of which are tax receipts. According to the State Comptroller's January
1999 revised estimates, the income tax will exceed the budgetary estimate by
$210 million, and the corporate and sales taxes will generate an unexpected $54
million and $21 million, respectively, for FY 1999.
Nevertheless, General Fund spending for FY 1999 is also expected to exceed
budgeted levels. The state budgeted $9.97 billion for appropriations, but in
January 1999 this amount was increased by $112 million to $10.03 billion. This
level of spending, however, only exceeds the statutory spending cap by $29.5
million, compared to last year's excess appropriations totaling $194.1 million.
The largest portion of the overspending represents the $80 million appropriation
for construction of a new sports stadium in Hartford (Special Session PA 98-1).
This new expense is largely offset by decreased spending within the Department
of Social Services due to lower than anticipated expenditures for Medicaid,
Child Care Services and a medical coverage plan for uninsured children.
Revised projected General Fund revenues will be sufficient to cover the
additional spending and to generate a surplus. It is estimated that General Fund
receipts will produce a year-end General Fund surplus of $193 million, down from
FY 1998's $389 million balance. The State Comptroller's Office anticipates
another General Fund surplus in FY 2000 totaling $68.4 million, but the
following two fiscal years are projected to generate a General Fund deficit of
$102 million and $138 million.
GAAP BUDGETING. Very strong revenue growth, despite a jump in state spending,
improved Connecticut's overall financial position in FY 1998. The state's
operating balance dropped from a $191 million deficit in FY 1996 to a $95
million deficit in FY 1997 and then to a $7 million surplus in FY 1998.
According to Generally Accepted Accounting Principles (GAAP), however, the
General Fund balance sheet displayed a cumulative deficit of $694.3 million
during FY 1998. Over the past six years, the cumulative General Fund balance
sheet deficit has increased by about 33%. The rate of growth in the deficit is
slowing, but it is currently 50% higher than in 1993. Deficits will continue to
result from the operation of state programs, but some progress is being made in
reducing those deficits.
In 1993, the Connecticut General Assembly enacted Public Act 93-402, which
authorized the use of Generally Accepted Accounting Principles (GAAP) for the
preparation and maintenance of the state's annual financial statements and the
preparation of the state's biennial budget. Originally, conversion to GAAP from
the modified cash basis of accounting was scheduled for Fiscal Year 1996. That
implementation has been postponed twice and is now currently planned for FY 2000
or 2001.
DEBT MANAGEMENT. Connecticut ranks first in the nation in state tax-supported
debt burden per capita. Debt per capita reached $2,820 during FY 1998, compared
to $1,204 in FY 1990. Despite the state's high resident income, Connecticut's
debt-to-income ratio is 19.7%, more than three times the national average of
5.9%. Moreover, nearly 11% of all state spending is applied to the state's debt
service.
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Outstanding debt and the related debt service requirements have more than
doubled during the past decade. Outstanding bonded debt, which consists of
unpaid bond issues, increased from $9.229 billion in FY 1997 to $9.299 billion
in FY 1998. In addition to bonded debt, the state has unpaid pension debt,
workers' compensation claims, employee compensation accumulations and capital
leases. When these long-term obligations are added to the state's bonded debt,
Connecticut's total debt for FY 1998 rises to $16.651 billion.
Connecticut issued approximately $951 million of new general obligation bonds
in FY 1998, a 5.7% increase over the prior year's issuance. In addition, another
$828 million of bonds are authorized but unissued. The state's total debt
service, as a percentage of government operations, increased to 11% in FY 1998,
as compared to 7.2% in FY 1994. No new debt burden was created in FY 1998 for
General Obligation Economic Recovery Notes. During FY 1998, $79 million in
outstanding Economic Recovery Notes were retired, leaving a balance for final
payment during FY 1999 of $78 million.
General obligation bonds issued by Connecticut municipalities are payable
primarily from ad valorem taxes on property subject to taxation by the
municipality. Certain Connecticut municipalities have experienced severe fiscal
difficulties and have reported operating and accumulated deficits in recent
years. The most notable of these is the City of Bridgeport, which filed a
bankruptcy petition on June 7, 1991. The state opposed the petition. The United
States Bankruptcy Court for the District of Connecticut has held that Bridgeport
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 increased expenses
could lead to further fiscal problems for the state and its political
subdivisions, authorities and agencies. Difficulty in payment of debt service on
borrowings could result in declines, possibly severe, in the value of their
outstanding obligations and increases in their future borrowing costs.
There can be no assurance that general economic difficulties or the financial
circumstances of the state or its towns and cities will not adversely affect the
market value of the Bonds in the Connecticut Trusts or the ability of the
obligors to pay debt service on such Bonds.
RATINGS. The State of Connecticut's general obligation bonds are rated AA by
Standard & Poor's Ratings Services. On March 9, 1997, Moody's Investors Service,
Inc. refined the state's rating from Aa to Aa3. On March 17, 1995, Fitch IBCA,
Inc. (formerly known as Fitch Investors Service, L.P.) reduced its rating of the
state's general obligation bonds from AA+ to AA.
DELAWARE RISK FACTORS
ECONOMIC OUTLOOK. The growth experienced in most sectors of Delaware's
economy was considerably greater than in the other states of the mid-Atlantic
region (Maryland, New Jersey, New York, Pennsylvania) and the nation since the
1980s. More than 50,000 jobs were created in the State since 1993, and Delaware
is seeking innovative ways to create additional jobs and diversify its economy.
Dominated by the chemical and automotive industries, manufacturing is the
largest source of State income and third largest employer, closely following
services and trade. Financial services, construction and tourism continue to be
important factors in the State's economy. Agriculture also plays a vital part in
Delaware's economy, with poultry accounting for over two-thirds of agricultural
receipts in 1997. Soybeans, corn and dairy products are also primary farm
products, and one-half of the State's land acreage is used for farming.
The role of the finance, insurance and real estate and services sectors in
Delaware's economy is increasing and the role of the manufacturing sector is
decreasing as the State's employment base becomes more diversified. Yet
employment in Delaware is still heavily concentrated in manufacturing, compared
to regional averages. Employment in the manufacturing sector averaged 57,800 as
of July 1999, a decline of 300 from July 1998. Manufacturing represented 14% of
total jobs for the State as of July 1999. The majority of the jobs were in the
nondurable goods sector.
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Delaware's two largest employment sectors, services and trade, provide a
smaller percentage of employment than the national average. Services numbered
116,700 jobs as of July 1999, with an increase of 3,100 from July 1998; and the
wholesale and retail trade sectors employed 92,700 as of July 1999, an increase
of 3,400 from July 1998. Also as of July 1999, there were 51,200 jobs in the
finance, insurance and real estate sector, an increase of 2,000 from July 1998.
The State's total employment as of July 1999 was 414,600 compared to 402,200
as of July 1998. Employment has improved steadily in Delaware since the 1990-92
recession, during which the State lost over 500 jobs. During 1997, a total of
14,400 new nonfarm jobs were created, including every major sector of the
economy.
Delaware's labor force has kept pace with its growing job market by expanding
faster than the national average. During the past ten years, the State's labor
force has grown by 18%, compared to only 13.7% for the nation. During 1997, the
State's labor force averaged 379,700. Delaware's labor force participation rate
exceeds national levels, at 69.7% and 66.6%, respectively. Delaware's
non-agricultural employment represents 98% of the State's workers.
The State's unemployment rate for 1997 averaged 4.0%, down from 5.2% in
1996, while the United States averaged 5.4% in 1996 and 4.9% in 1997. During the
first three months of 1998, Delaware has averaged 3.4% unemployment,
significantly lower than the 4.7% average for nation.
Delaware's per capita personal income reached $29,022 in 1997, up from
$27,782 in 1996. This gain represents 4.5% growth, compared to the State's 5.9%
gains in 1995 and 1996. The State's per capita personal income is currently
113.5% of the national average ($25,598), up from 113.2% in 1996. In 1997,
Delaware's growth rate slowed slightly as compared to the nation as a whole
(4.8%), but the State retained its 5th place ranking among all the states in
terms of per capita personal income. In terms of total personal income, however,
Delaware ranked 44th in the nation, with a 5.6% gain during 1997. The national
growth rate in total personal income during 1997 was 5.7%.
The U.S. Census Bureau reports that Delaware's population was recorded at
666,168 during the 1990 Census. The population is estimated to have reached
731,581 during July 1997 and is estimated to grow to 739,337 during 1998.
Between 1990 and 1997, Delaware's population has increased at a higher rate than
the nation as a whole, with gains of 9.8% and 7.6%, respectively. Between July
1996 and July 1997, the State's population grew by 8,106 people, a 1.1%
increase. Net in-migration accounted for approximately 38.2% of Delaware's
growth in 1997, down from 51.1% in 1996. The State is the fifth least populated
in the country. With an average population of 369 persons per square mile,
however, only six states were more densely populated in 1997.
REVENUES AND EXPENDITURES. Delaware has actively sought to control
expenditures and set funds aside for future economic downturns. The State has
enacted a spending limit based upon actual receipts from previous fiscal years
which automatically guarantees a continuing surplus. The State Constitution
requires that a budgetary reserve fund be maintained, equal to 5% of estimated
revenue for the next fiscal year. Access to this fund is possible only when
there are unexpected revenue shortfalls or if there is a legislative reduction
in tax rates. The cumulative cash balance in the combined Budget Reserve (or
"Rainy Day Fund") and the Excess Reserve totaled $392.8 million at the end of
Fiscal Year 1997, up from $379.3 million at the end of Fiscal 1996.
Total General fund revenue for fiscal year 1998 was $2,046.2 million. Total
ordinary expenditures were $1,900.0 million, leaving an unencumbered cash
balance in the general fund of $214.2 million.
The Delaware Economic and Financial Advisory (DEFAC) has projected net
revenue collections for Fiscal Year 1999 at $2,133.9 million and $2,178.5
million for fiscal year 2000. Personal income tax accounts for approximately
34.7% of net Fiscal Year 2000 General fund revenues. Net collections (after
refunds) are projected to total $762.2 million for Fiscal Year 1999 and $755.0
million for Fiscal Year 2000.
The franchise tax accounts for 21.4% of net fiscal year 2000 General Fund
revenues. Collections are projected to be $432.0 million for fiscal year 1999
and $466.6 million for fiscal year 2000.
The Governor's Recommended Fiscal Year 2000 total General Fund operating
budget is $1,992.7 million. In addition, the Governor has set aside $33.5
million for Grants-in-Aid. Total recommended Fiscal Year 2000 General Fund
appropriations are more than $2,194.7 million, including $168.5 million in
General Funds allocated to the Bond and Capital Improvements Act. Total
appropriations represent less than 98% of projected net Fiscal Year 2000 revenue
plus carryover funds.
DEBT MANAGEMENT. Recognizing the critical importance of controlling its debt,
Delaware initiated a series of policies designed to centralize debt issuance and
foster fiscal responsibility, including the elimination of short-term borrowing,
provisions to prevent delaying or backloading debt obligations and debt
authorization and issuance limits. Effective July 1, 1991, new tax-supported
debt authorizations are limited to 5% of estimated General Fund revenue.
BOND RATINGS. State of Delaware general obligations bonds are rated as
follows: Standard & Poor's Ratings Services, AA+; and Moody's Investors Service,
Inc., Aa1.
FLORIDA RISK FACTORS
ECONOMIC OUTLOOK. 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, 1997, ranks
fourth with an estimated population of 14.7 million. Florida's attraction, as
both a growth and retirement state, has kept net migration at an average of
224,240 new residents a year from 1987 through 1996, with a low of 138,000 in
1992. The U.S. average population increase since 1984 is about 1% annually,
while Florida's average annual rate of increase is about 1.8%. Florida continues
to be the one of the fastest growing of the large 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 1987, the prime working age population (18-44)
has grown at an average annual rate of more than 2.0%. The share of Florida's
total working age population (18-64) to total state population is approximately
60%. This share is not expected to change appreciably into the twenty-first
century.
The state's personal income has been growing strongly the last several years
and has generally 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 surpassed the southeast. From 1992 to 1997, Florida's total
nominal personal income grew by 36.6% and per capita income expanded
approximately 25.9%. For the nation, total and per capita personal income
increased by 30.2% and 24.1%, respectively.
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. Transfer payments are typically less sensitive
to the business cycle than employment income and, therefore, act as stabilizing
forces in weak economic periods.
Personal income is frequently used to make comparisons among the states.
However, using personal income to compare Florida to other states can be
misleading, because Florida's personal income is systematically underestimated.
Current contributions by employers to pension plans are included in personal
income, while payments from pension plans are excluded to avoid double
accounting. Because Florida retirees are more likely to be collecting on
benefits earned in another state, Florida personal income is underestimated as a
result.
The state's per capita personal income in 1997 of $24,795 was slightly below
the national average of $25,298 and significantly ahead of that for the
southeast United States, which was $22,776. Real personal income in the state is
forecasted to increase 4.9% in 1998-99 and 3.5% in 1999-00. Real personal income
per capita in the state is projected to grow at 3.1% in 1998-99 and 1.8% in
1999-00. The Florida economy appears to be growing in line with, but stronger
than, the U.S. economy and is expected to experience steady if unspectacular
growth over the next couple years.
Since 1991, the state's population has increased an estimated 11.5%, while
the number of employed persons increased 13.3%. In that same period, Florida's
total non-farm employment has grown approximately 21.2%. Since 1991, the
non-farm job creation rate in the state is more than twice that of the nation as
a whole. Contributing to the state's rapid rate of growth in employment and
income is international trade. Overall changes to its economy have also
contributed to the state's strong performance. The state is gradually becoming
less dependent on employment related to construction, agriculture, or
manufacturing and more dependent on employment related to trade and services.
Presently, services constitute 34.9% and trade 25.6% of the state's total
non-farm jobs. 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 1980's tracked below or about the same as the nation's. In the
1990s, the trend was reversed, until 1995, when the state's unemployment rate
again tracked below the nation's. 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 4.8% during 1997, while the national average was
4.9%. As of October 1997, the Organization estimates that the unemployment rate
will be 4.5% in 1998-99 and 4.7% in 1999-00.
The state's economy is expected to grow at a moderate rate along with the
nation, but is expected to outperform the nation as a whole. Total non-farm
employment in Florida is expected to increase 3.4% in 1998-99 and 2.9% in
1999-00. 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 5.5% in 1998-99, while growing 4.4% in 1999-00. Trade is expected
to expand 2.8% in 1999 and 2.8% in 2000. The service sector is now the state's
largest employment category.
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 1997,
the share had edged downward to 5.7%. 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 9.2% of total U.S. housing starts in 1997 while the state's population
is 5.5% of the nations. Florida's housing starts in 1997 were 132,813.
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 average 257,000 a
year throughout the 1990s. This population trend should provide fuel for
business and home builders to keep construction activity lively in Florida in
the new few years. 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 1989-99 are projected to reach a
combined level of 144,000, decreasing slightly to 143,000 next year. Total
construction expenditures are forecasted to increase 8.6% this year and increase
2.5% next year.
Tourism is one of state's most important industries. Approximately 47 million
tourists visited the state in 1997, as reported by the Florida Department of
Commerce. In terms of business activities and state tax revenues, tourists in
Florida in 1996 represented an estimated 4.8 million additional residents.
Visitors to the state tend to arrive slightly more by air than by auto. 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 forecasted to increase by 2.0% in 1998-99 and 1.7% the next
fiscal year. Tourist arrivals to Florida by air are expected to increase by 4.1%
this year and increase by 3.9% next year, while arrivals by car are expected to
increase by 0.6% this year and decrease 1.0% next year. By the end of the
state's current fiscal year, 49.7 million domestic and international tourists
are expected to have visited the state. In 1990-00, tourist arrivals should
approximate 50.6 million.
REVENUES AND EXPENDITURES. Estimated fiscal year 1998-99 General Revenue plus
Working Capital and Budget Stabilization funds available to the state total
$19.46 billion, a 5.1% increase over 1997-98. Of the total General Revenue plus
Working Capital and Budget Stabilization funds available to the state, $17.69
billion is Estimated Revenues representing an increase of 4.4% over the previous
year's Estimated Revenues. With effective General Revenues plus Working Capital
Fund and Budget Stabilization appropriations at $18.19 billion, including a
$100.9 million transfer to the Budget Stabilization Fund, unencumbered reserves
at the end of 1998-99 are estimated at $1.38 billion. Estimated fiscal year
1999-00 General Revenue plus Working Capital and Budget Stabilization funds
available total $19.92 billion, a 2.4% increase over 1998-99. The $18.39 billion
in Estimated Revenues represents an increase of 3.9% over the previous year's
Estimated Revenues.
In fiscal year 1996-97, approximately 67% of the state's total direct revenue
to its three operating funds were 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, beverage
tax, and estate tax amounted to 68%, 8%, 4%, 3% and 3%, respectively, of total
General Revenue Funds available during fiscal 1996-97. In that same year,
expenditures for education, health and welfare, and public safety amounted to
approximately 53%, 26%, and 14%, respectively, of total expenditures from the
General Revenue Fund.
The state's sales and use tax (6%) currently accounts for the state's single
largest source of tax receipts. Slightly less than 10% of the state's sales and
use tax is designated for local governments and is distributed to the respective
counties in which it is collected for use by the counties and the municipalities
therein. In addition to this distribution, local government may (by referendum)
assess a 0.5% or a 1.0% discretionary sales surtax within their county. Proceeds
from this local option sales tax are earmarked for funding local infrastructure
programs and acquiring land for public recreation or conservation or protection
of natural resources as provided under applicable Florida law. Certain charter
counties have other taxing powers in addition, and non-consolidated counties
with a population in excess of 800,000 may levy a local option sales tax to fund
indigent health care. It alone cannot exceed 0.5% and when combined with the
infrastructure surtax cannot exceed 1.0%. For the fiscal year ended June 30,
1997, sales and use tax receipts (exclusive of the tax on gasoline and special
fuels) totalled $12.1 billion, an increase of 5.5% over fiscal year 1995-96.
The second largest source of state tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for specific
purposes and are not included in the state's General Revenue Fund.
The state imposes an alcoholic beverage, wholesale tax (excise tax) on beer,
wine and liquor. This tax is one of the state's major tax sources, with revenues
totalling $447.2 million in the fiscal year ending June 30, 1997. 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, 1997, receipts from this source were $1.36 billion, an increase of
17.2% from fiscal year 1995-96.
The state imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments and retail charge accounts. The documentary
stamp tax collections totalled $844.2 million during fiscal year 1996-97, an
8.9% increase from the previous fiscal year. For fiscal year 1996-97, 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 1996-97, this amounted to $575.7 million, an increase of
6.0% 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 (a mil is $1.00 of tax per $1,000.00
of property value). Second, the state imposes a non-recurring 2 mil tax on
mortgage and other obligations secured by liens on Florida real property. In
fiscal year 1996-97, total intangible personal property tax collections were
$952.4 million, a 6.3% increase from the prior year. Of the net tax proceeds,
66.5% are distributed to the General Revenue Fund.
The state imposes an estate tax on the estate of a decedent for the privilege
of transferring property at death. All receipts of the estate tax are credited
to the General Revenue Fund. For the fiscal year that ended June 30, 1997,
receipts from this source were $546.9 million, an increase of 30% from fiscal
year 1995-96.
The state began its own lottery in 1988. State law requires that lottery
revenues be distributed 50% to the public in prizes, 38.0% for use in enhancing
education, and the balance, 12.0%, for costs of administering the lottery.
Fiscal year 1996-97 lottery ticket sales totalled $2.09 billion, providing
education with approximately $792.3 million.
DEBT MANAGEMENT. At the end of fiscal 1997, approximately $7.89 billion in
principal amount of debt secured by the full faith and credit of the state was
outstanding. In addition, since July 1, 1997, the state issued about $1.65
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 a portion of General Revenue Fund
monies. 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. A brief summary of these matters follows.
NATHAN M. HAMEROFF, M.D., ET AL. V. AGENCY FOR HEALTHCARE ADMINISTRATION, ET
AL. The plaintiff challenged the constitutionality of Florida's Public Medical
Assistance Trust Fund annual assessment on net operating revenue of free
standing outpatient facilities offering sophisticated radiology services. The
trial has not been scheduled. If the state is unsuccessful in its action, the
potential refund liability could approximate $70 million.
The Florida Casualty Insurance Risk Management Trust Fund has deficit
retained earnings of approximately $567 million. These represent long term
liabilities of the state as a whole. These liabilities include claims pertaining
to state employee Workers' Compensation, federal civil rights, and general and
automotive liability.
RATINGS. The state maintains a bond rating of Aa, AA, and AA from Moody's
Investors Service, Standard & Poors Corporation, 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 Fund will not be adversely affected by any such
changes.
The sources for the information presented above include official statements
and financial statements of the State of Florida. While the Sponsor has not
independently verified this information, the Sponsor has no reason to believe
that the information is not correct in all material respects.
<PAGE>
GEORGIA RISK FACTORS
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.
ECONOMIC OUTLOOK. Georgia's recovery from the economic recession of the early
1990s has been steady and is better than regional trends. The nation's economy
expanded by 3.7% in 1998, while Georgia's economy increased considerably more,
with the state's real Gross State Product ("GSP", inflation adjusted) jumping by
5.8%. The 1999 forecast anticipates that Georgia's real GSP will grow by 3.5%,
significantly less than in 1998, but higher than the expected rate of growth in
the national Gross Domestic Product (2.4%). While this recovery does not meet
the explosive patterns set in past cycles, recent data reveal that Georgia ranks
among the top six states in the nation in employment and total population
growth.
The state's personal income rose by 6.9% last year, compared with the 1997
increase of 6.5%. Higher employment was the most important factor in 1998 income
gains, but a tight labor market ensured that wage and salary increases also
contributed substantially to income growth. This reverses the pattern of the
first five years of the current expansion, when wages and salaries lagged behind
increases in the number of jobs, causing personal income to rise less rapidly
than expected. Georgia's above-average gain in personal income, at a rate even
higher than the state's above-average rate of population growth, will help
lessen the diminishing gap between the state's per capita personal income and
that of the nation.
Total employment in Georgia grew by 3.3% in 1998, compared with the 34.6%
gain in 1997. In contrast, the state's labor force increased by only 2.9% this
year, indicating further tightening of the labor market. During 1998, the
state's total employment averaged 3.85 million, up from 3.73 million in 1997.
Preliminary figures for March 1999 indicate that employment reached 3.87 million
and growth is expected to be above average again through the rest of the year.
Although prospects are best for services, the outlook for the other sectors
of the Georgia economy varies. Growth in the transportation, communications and
public utilities sector will come from cyclical gains, the stimulative effects
of deregulation and the opening of new markets by technological advances.
Wholesale and retail trade will see above-average growth, and finance, insurance
and real estate will expand moderately. Slow growth is forecast for
manufacturing and government, and activity in construction and mining will
decline moderately.
The 1997 and 1998 annual average unemployment rates (not seasonally adjusted)
for Georgia were 4.5% and 4.2%, respectively, as compared to the national
unemployment rates of 4.9% and 4.5%. Georgia's unemployment rate has decreased
every year since 1992 and averaged 4.0% during the first three months of 1999.
Because labor markets will remain stable, wages are not expected to climb
faster in Georgia than in the nation as a whole. Georgia's per capita personal
income grew by 4.8% to $25,020 in 1998, compared to the 4.3% increase the
previous year. The state currently ranks twenty-third in the nation in per
capita personal income and third among the twelve states of the Southeast region
after Virginia and Florida. The national average increase in per capita personal
income was 4.4% during 1998, down from 4.7% in 1997.
The State's annual rate of population growth is dipping slightly--from 2.1%
in 1996, to 2% in 1997, to 1.9% in 1998. Georgia's total population, however,
will continue to grow faster than any state outside of the Rocky Mountain
region, at almost twice the national rate of about 1% annually. The State's
population has risen by 18.0% since 1990, more than twice the rate of the nation
as a whole. The Census Bureau estimates that in July 1998 Georgia's population
reached 7.46 million and will exceed 7.8 million by the end of 1999, a gain of
145,000 over the previous year.
REVENUES AND EXPENDITURES. Total revenues in Fiscal Year 1998 (ended June 30)
reached $23.20 billion, including $1.46 billion carried over from Fiscal 1997.
The state General Fund accounted for $13.15 billion of these collections, an
increase of 4.3% over Fiscal 1997. The top revenue producers were the personal
income tax and the general sales tax, together accounting for about 75% of state
income. All other categories of income showed increases during Fiscal 1998
except for non-business licenses and permits and lottery proceeds. General Fund
revenues were offset by $12.47 billion in General Fund spending (up 4.8%),
leaving a $676.8 million balance at the end of Fiscal 1998. Overall governmental
expenditures totaled $21.75 billion, generating a surplus of $1.45 billion for
use the next fiscal year.
State income growth estimates during Fiscal 1999 are based upon cyclical
gains, an expected loss from the elimination of the State's sales tax on
eligible food and beverages (effective October 1, 1998), and an expected boost
from changes in the federal capital gains tax. Total revenue collections in
Fiscal 1999 are projected to rise by 4.8%. Through March 1999, the Georgia
Department of Revenue has collected $7.76 billion in their major tax categories,
up $685 million over the same period in Fiscal 1998. The largest increases
occurred in the estate tax and the individual income tax, up 59.5% and 13.3%,
respectively.
DEBT MANAGEMENT. 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.
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.
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 1998, the Governor 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 was $8,189,495,000. Georgia has no direct
obligations authorized but unissued during that period.
Georgia's total outstanding debt as of October 31, 1996 was $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.
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. An adverse final decision could materially affect
the State's governmental operations and, consequently, its ability to pay debt
service on its obligations.
BOND RATINGS. State of Georgia general obligation bonds are currently rated
as follows: Standard & Poor's Ratings Services, AAA (upgraded from AA+ on July
29, 1997); Moody's Investors Service, Inc., Aaa; and Fitch IBCA, Inc., AAA.
<PAGE>
HAWAII RISK FACTORS
Hawaii's labor markets continued to improve in 1998. Civilian employment
expanded by 1.2% in the first eleven months of 1998 over the same period in
1997. Civilian employment has been growing steadily for the last four quarters.
Unemployment has declined. As of November 1998, the monthly number of those
employed had declined by 650 or 9.5% from the same time in 1997. Hawaii's
average unemployment rate of 5.9% was down from 6.5% experienced in the first
eleven months of 1997.
Although overall the labor market has improved, nonagricultural wage and
salary jobs continue to fall. As of November 1998, nonagricultural wage and
salary jobs were 0.9% lower than in the same period in 1997. This has continued
for about three years. It appears that the number of self-employed may be rising
as those laid off start their own businesses. There was a 2.8% growth in the
number of self-employed from 1996 through 1997. The largest declines of
employment occurred in construction (-4.7%), manufacturing (-3.0%), and finance,
insurance and real estate (-2.8%).
In the public sector, federal government jobs fell by 1.0% through November
1998 relative to the same period in 1997. At 30,350, the number of third quarter
federal government jobs was just slightly above the level last seen in 1980. In
contrast, state and local government jobs both increased over the period by
about 1.0%.
Agricultural wage and salary jobs increased 7.0% from November 1997 to
November 1998. This brings the total number of jobs in this sector to 7,650. The
largest growth has been in the City and County of Honolulu. Agricultural wage
and salary jobs in sugar and pineapple remained relatively flat; most of the
growth occurred in diversified agriculture.
Personal income has been one of the bright spots in Hawaii's economy because
growth has remained strong at above 2.0%. Annual personal income growth was at
2.2% during the first half of 1998 compared to the same period in 1997. This is
a somewhat slower rate of growth than the 2.6% growth in 1997 as a whole.
General Fund revenue grew by 5.8% from November 1997 to November 1998. For
fiscal year 1999, general fund revenues have increased by 4.6%. The single
largest source of general fund revenue, general excise tax receipts, grew by
1.3% during 1998. This is an improvement from the 1997 decline of 2.5%. In early
1999, general excise tax receipts were growing 4.2%.
Growth in general fund revenue has been largely due to increased in net
individual income tax receipts, which grew by 12.1% from the January-November
1997 period to the same period in 1998. Much of the growth in early 1998
reflected lower refunds as a result of a reduction in maximum withholding rates
that applied in 1997. Refunds fell by 15.4% in the first eleven months of 1998.
During the first quarter of fiscal year 1999, net individual income tax
revenues grew by 1.8% over the same period in 1998. Declaration of estimated
taxes during this period grew by 23.4%. This strong growth seems consistent with
growth in the proprietors' income portion of personal income and the suggestion
that self-employment is rising in Hawaii.
TOURISM IS A BIG PART OF HAWAII'S ECONOMY. Visitor arrivals in 1998 declined
for the first time since 1993. The total number of visitor arrivals fell by 2.0%
from November 1997 to November 1998. There was a drop of 10.4% in eastbound
arrivals.
Total general obligation bonds outstanding as of July 1, 1998 was $3.369
billion. The State's total principal amount of outstanding indebtedness as of
July 1, 1998 was $7.189 billion. General obligation bond per capita debt for
fiscal year 1999 is estimated at $3,164 million.
General obligation bonds are rated A+ by Standard & Poor's.
<PAGE>
KANSAS RISK FACTORS
ECONOMIC OUTLOOK. Kansas, a largely rural state with a population of 2.6
million, experienced another year of strong economic growth in 1998. Stability
in durable goods manufacturing, coupled with healthy performance in the service,
construction and trade industries, sustained the state's economic growth
throughout the year. Data available for 1998 suggest that the Kansas economy
continued its expansion, with job growth and personal income falling only
slightly below 1997 figures.
With more than 90% of Kansas' land area dedicated to crop and livestock
production, agriculture is one of the most important sectors of the state
economy. Kansas leads the nation in wheat and sorghum production, generates
about 20% of the nation's cattle for slaughter, and is a major producer of
sunflowers, hay and soybeans. During 1997, however, crop prices were down from
previous years, agricultural production was valued at only $2.7 billion
(dropping from $3.1 billion in both 1996 and 1995), and farm employment fell
11.7%. Despite these setbacks, total farm earnings grew by 0.6% in 1997, and
farmers set new records for wheat, corn and soybeans. During 1998, agricultural
employment estimates show a 12.0% decline, and personal income from farming is
projected to have fallen 15%. In 1999, the farm economy is expected to remain
soft, but production should continue to increase slowly and farm income is
expected to turn around and post 2.0% growth.
Other key components of the Kansas economy are manufacturing,
telecommunications and health services. No single industry experienced large
employment gains during 1998, but all sectors did exhibit stable, modest growth.
The greatest percentage gains occurred in Kansas' aircraft industry (including
Boeing, Raytheon, Cessna and Learjet), which increased by 5.6%, despite summer
layoffs at Boeing's Wichita plant (manufacturing in general grew 2.7%). Services
and trade, the two largest areas of employment in Kansas, experienced 4.0% and
3.2% growth during 1998, enabling the state to create over 53,000 new jobs.
During 1999, nonfarm employment is expected to increase by only 2.0%, about half
of the 1998 increase.
Kansas lead the Great Plains region in per capita personal income growth
during 1998 with a 5.3% gain. Bolstered by the strength of the construction and
durable goods manufacturing industries, per capita personal income rose to
$24,014 or 95% of the national average ($25,298). Although its 5.3% growth rate
outpaced the 4.7% national growth rate during 1998, the state's per capita
personal income gain is expected to be somewhat lower at 4.1% during 1999.
Slow population growth (1.1% in 1998), combined with steady employment
growth, has continued to push the state's unemployment rate lower each year,
leaving many sectors to battle for workers. During 1998, Kansas' average
unemployment rate fell to 3.6%, down slightly from 3.8% in 1997. Nationally, the
average unemployment rate was a percentage point higher, at 4.5% and 4.9% in
1998 and 1997, respectively. Projections for 1999 unemployment rates range from
3.8% to 4.0%, when labor force growth is expected to exceed employment growth
for the first time in several years.
During 1999, a slowdown of national economic growth will tend to dampen the
growth rate of the Kansas economy. Although the U.S. economy is expected to
remain relatively healthy with modest growth, low inflation and low
unemployment, the continuing Asian economic crisis is expected to have a
substantial negative impact on U.S. exports, especially large capital goods.
Most significantly, Boeing is anticipating large-scale layoffs during the year
because of an eroding order base and ongoing manufacturing bottlenecks resulting
from a major corporate restructuring following the merger with McDonnell-Douglas
Aerospace. Overall, however, the state's growth rate will be buoyed by continued
strength of the construction, trade and services sectors.
REVENUES AND EXPENDITURES. During 1990, the Kansas legislature enacted
legislation establishing minimum ending balances for the State General Fund to
ensure financial solvency for the state. The act established targeted year-end
State General Fund balances as a percentage of state expenditures for the
forthcoming fiscal year. This act was phased in over several years and currently
requires an ending balance of at least 7.5% of expenditures and demand
transfers. The act also provides that the Governor's budget recommendations and
legislative-approved budget must adhere to the balance targets.
Fiscal Year 1998 began with a $527.8 million balance in the General Fund.
General Fund revenues totaled $4.02 billion, up 9.2% over the prior year. The
largest single contributor to the General Fund is the income tax, with over $2
billion in receipts, followed closely by excise taxes, totaling $1.7 billion.
Total General Fund expenditures amounted to $3.8 billion for the year, leaving
an ending balance of $756.3 million. This balance represents 19.2% of
expenditures and demand transfers, more than double the targeted amount. Among
the factors which impacted this higher-than-expected surplus are $52.6 million
in revenues above estimated receipts.
The Fiscal Year 1999 budget anticipates net General Fund receipts of $4.1
billion, a 1.4% increase over FY 1998. This amount reflects a slight decrease in
income taxes and a slight increase in excise taxes. FY 1999 General Fund
expenditures are expected to rise by 11.1% to $4.2 billion. Despite the large
increase in expenses, the General Fund ending balance for Fiscal Year 1999 is
expected to equal 14.5% of expenditures and demand transfers or $611.8 million.
This large surplus estimate anticipates receipt of the first installment of
proceeds from the tobacco companies lawsuit settlement.
The Governor's revised Fiscal Year 2000 budget projects moderate increases in
revenues and expenditures. General Fund receipts from income tax are estimated
at $1.9 billion, while excise taxes are expected to bring in $1.8 billion. Total
receipts in the General Fund are projected to be $4.2 billion, up 3.7%. In
conjunction with $15.1 million in planned tax reductions and another payment
from the expected tobacco settlement, $4.8 billion in total revenues are
expected to be available during FY 2000. Recommended expenditures total $4.4
billion (up 4.6%), leaving the state a projected $423.1 million (9.6%) surplus
at the end of the fiscal year.
The State of Kansas finances a portion of its capital expenditures with
various debt instruments. Revenue bonds and loans from the Pooled Money
Investment Board finance most debt-financed capital improvements for buildings,
while "master lease" and "third-party" financing pays for most capital
equipment. The Kansas Constitution provides for the issuance of general
obligation bonds subject to certain restrictions, but no bonds have been issued
under this provision for many years. No other provision of the Constitution or
state statute limits the amount of debt that can be issued. As of June 30, 1997,
the state had authorized but unissued debt of $155,015,000, and again during
1998, Kansas had the lowest per capita debt among the 50 states.
RATINGS. Although the State of Kansas has no general obligation debt rating,
it seeks an underlying rating on specific issues of at least AA- from Standard &
Poor's Ratings Services and A1 from Moody's Investors Service, Inc. In October
1997, Standard & Poor's assigned an issuer credit rating of AA+ to Kansas. This
credit rating reflects the state's credit quality in the absence of general
obligation debt. The underlying ratings for the most recently issued revenue
bonds were A1 and AA- from Moody's and Fitch, respectively.
KENTUCKY RISK FACTORS
ECONOMIC OUTLOOK. The Commonwealth of Kentucky is a modern industrial state,
with manufacturing accounting for about one-fourth of the Commonwealth's total
gross product. The Commonwealth has a strong industrial base of steel, aluminum,
chemicals and machinery production, driven by massive water resources, low cost
electric power and extensive barge transportation. Kentucky is located within
600 miles of two-thirds of the nation's population. The Commonwealth is a rail
center for mainline services of several railroads, with service between the
Great Lakes gateways and the Gulf of Mexico. In addition, Western Kentucky is at
the heart of the nation's inland waterways and riverport system, standing at the
junction of the Upper and Lower Mississippi, the Ohio River, and the
Tennessee-Tombigbee navigation corridors.
During 1998, the Kentucky and national economies made a strong showing.
Employment in the Commonwealth grew 2.2% that year, mirroring national growth.
To achieve this growth rate, Kentucky added roughly 37,000 jobs, matching its
1997 job growth rate.
The strong performance in the Kentucky economy in 1998 was due in part to a
growing manufacturing sector. Manufacturing employment increased by 1,700 jobs
in 1998. The more rapidly growing manufacturing industries included wood and
furniture products and plastic products. Large declines were also experienced in
this sector, especially in the apparel and textile industries, which tend to be
volatile because they are low-wage industries and their jobs often migrate to
regions with low-cost labor. During 1998, both of these industries relocated
many of their jobs to the Caribbean.
Other major industry groups also posted employment gains during 1998. The
services and retail trade sectors, Kentucky's largest employers, accounted for
the most job growth again this year. Services industry employment increased by
3.1%, accounting for 13,400 new jobs, with business and health services leading
the way. The retail trade industry grew at a rapid 2.5% rate, adding 8,400 jobs.
Kentucky has led the U.S. in coal production in recent decades and exceeds
the total production of all but seven countries around the world. Principal
minerals produced in order of value are coal, crushed stone, natural gas and
petroleum. Other minerals produced in Kentucky include sand and gravel, cement,
ball clay, natural gas liquids and lime. The mining sector of the Commonwealth's
economy provides only about 1% of total nonfarm employment, however, and coal
mining employment did not grow at all during 1998.
The Commonwealth's unemployment rate for 1998 averaged 4.6%, down from 5.4%
in 1997, while the United States averaged 4.5% in 1998 and 4.9% in 1997. During
the first four months of 1999, Kentucky has averaged 4.5% unemployment.
In addition to its employment gains in 1998, Kentucky's economy performed
well in terms of income. Total personal income rose by 5.0% compared to the U.S.
average of 5.2%. In terms of per capita personal income, however, Kentucky rose
to $21,506 in 1998, up from $20,657 in 1997. This gain represents 4.6% growth,
compared to the Commonwealth's 4.0% gain in 1997 and the nation's 4.4% growth.
Kentucky's per capita personal income is currently 81% of the national average
($26,412), enabling the Commonwealth to retain its 26th place ranking among the
fifty states.
The University of Kentucky Center for Business and Economic Research projects
that the rate of growth in the Kentucky economy will exceed the national growth
rate slightly during 1999-2001, mainly because the Commonwealth is expected to
experience only a small job loss in its manufacturing sector, while
manufacturing jobs nationally are forecast to decline sharply. Growth in gross
state product, which is a measure of the value of all the Commonwealth's goods
and services, is projected to average 2.2% annually over this period, while
employment growth is forecast to average 1.6% annually. All major industry
groups besides manufacturing and mining are expected to add jobs between 1999
and 2001.
Moderate job growth is forecast to lead to wage and salary income gains of
1.8% per year for the forecast period, with a total income growth rate of 1.4%
annually. Employment and income growth is projected to encourage net migration
into Kentucky and yield an expected yearly population increase in the
Commonwealth of 0.7%. Overall, job growth in Kentucky is expected to exceed
national job growth, while population growth should be slower in Kentucky than
in the United States as a whole.
REVENUES AND EXPENDITURES. Total General Fund revenues for Fiscal Year 1998
(ended June 30, 1998) were $6.15 billion, $14 million more than the budgeted
estimate. General Fund revenues increased by 8.5% over FY 1997 revenues. This
amount includes $6.0 billion in tax and non-tax receipts and $138 million in
Operating Transfers. Receipts increased during FY 1998 despite the effects of an
increase in the standard deduction from the individual income tax from $900 in
1997 to $1,200 in 1998. The deduction will increase again to $1,500 in 1999 and
$1,700 in 2000.
Sales and use tax receipts continued to perform well during Fiscal Year 1998,
jumping 9.7% over the previous year's revenues. Receipts in this category
totaled 35% of all General Fund revenues or $2.16 billion. Revenues from the
individual income tax (almost 40% of total General Fund collections) grew by
9.7% to $2.42 billion in FY 1998, compared to 6.3% growth during FY 1997.
Corporate income tax receipts improved by 14.0% during FY 1998, after falling
16.5% two years earlier. Property taxes experienced a loss in FY 1998 (-13%)
after only small gains during FY 1997. On a GAAP basis, Kentucky's General Fund
revenues totaled $11.60 billion during the past fiscal year.
<PAGE>
Growth in Kentucky's Road Fund has been fairly consistent for the past
several years. During Fiscal Year 1998, receipts in the Road Fund grew by 7.5%
to $1.01 billion. The majority of this Fund is composed of the motor fuels tax
at $396.1 million (1.4% growth) and the motor vehicle usage and rental tax at
$366.8 million (7.4% growth).
Appropriations and expenditures from the General Fund during Fiscal Year 1998
totaled $5.96 billion, a 5.5% increase over FY 1997. Of these appropriations,
$2.69 billion or 45% was spent on education and humanities, $1.37 billion or 23%
on general government and $1.12 billion or 19% on human resources. On a GAAP
basis, Kentucky's General Fund expenditures totaled $10.64 billion during the
past fiscal year, leaving a $960 million balance.
The Kentucky Auditor of Public Accounts has published the following adjusted
revenue estimates for Fiscal Years 1999-2000. General Fund revenues are expected
to reach $6.22 billion in FY 1999, up 3.8%; and $6.49 billion in FY 2000, up
4.4%. General Fund expenditures during the same years are expected to total:
$6.18 billion in FY 1999, up 1.8%; and $6.50 billion in FY 2000, up 5.1%. Of
these appropriations, approximately 60% will be used for education (general and
post-secondary), 10% for Medicaid, 9% for human services and 4% for corrections.
DEBT MANAGEMENT. General obligation bonds are issued through the State
Property and Buildings Commission, subject to general referendum approval (for
bonds over $500,000), as required by the Kentucky Constitution. General
obligation bonds pledge the full faith, credit and taxing power of the
Commonwealth and denote application of specific or general tax revenues to
provide payment of principal and interest requirements on the debt. No new bonds
of this type have been issued since 1965, and none are outstanding or authorized
but unissued as of June 30, 1998.
BOND RATINGS. Because it currently has no general obligation debt
outstanding, the Commonwealth of Kentucky is not rated by Moody's Investors
Service, Inc. or Fitch IBCA, Inc. Standard & Poor's Ratings Services has awarded
Kentucky an implied credit rating of AA.
LOUISIANA RISK FACTORS
ECONOMIC OUTLOOK. Louisiana has experienced more than ten consecutive years
of employment growth and, during the 1990s, employment has grown faster than the
national average. Louisiana's economy started 1998 at a good pace, largely
because of a boost in income from the oil and gas extraction. In these
industries, technological innovation has lowered production costs, spurring a
surge in higher-paying jobs in these sectors and in related sectors, including
industrial construction, shipbuilding, fabricated metals and machinery
manufacturing. Late in 1998, however, oil prices fell, offsetting some of the
gains from the early part of the year and causing the overall pace of the
state's economic growth to slow.
Louisiana's services sector is substantially larger than the energy sector,
accounting for the largest number of jobs in the state. This sector continues to
expand at a rapid pace, pushed substantially by tourism-related businesses of
hotel/motel, amusement and recreation, and gaming, as well as healthcare
services. These areas employ more than 27% of the state's nonfarm workers, and
they added approximately 2.4% more employees (about 12,000 workers) during 1998,
only marginally slower than the previous year's growth. Louisiana's services
sector should continue to experience moderate growth for the next few years.
Tourism, however, may begin to suffer if major improvements are not made to the
New Orleans airport, enabling more direct flights to keep pace with expanding
convention and hotel facilities. According to Louisiana's Department of Tourism
and Trade, the state is expected to attract almost 27 million visitors in 1999,
continuing 1998's 3% growth rate.
Although factories employ only about 10% of Louisiana's nonfarm workers, the
state's manufacturing sector is important because many of its industries are
capital intensive and thus high-value-added and high-wage. More than 30% of
Louisiana's nondurables employment is in the chemical industry. Although this
industry showed little employment growth during 1998, 1999 promises new
expansion. Currently, the state's chemical industry is reaping the benefits of
the low prices for oil and natural gas. Employment should grow during 1999 as
four chemical companies plan to invest $639 million to build three new plants
and expand an existing plant.
<PAGE>
Employment growth weakened during 1998 in the state's transportation
equipment industry, which makes up about 28% of Louisiana's durables factory
jobs. The outlook is brighter in 1999 because large projects, particularly those
that service offshore energy extraction and the military, will be coming on
line. Avondale Industries, a Louisiana shipbuilder, was recently awarded a
contract to design an upgrade of U.S. Coast Guard ships, aircraft, and command
and control systems. In the long term, this contract will be very beneficial to
the state. A critical shortage of skilled workers has constrained growth in this
industry, but transportation equipment manufacturers are addressing the problem
by, for example, building training centers to create more skilled workers.
Looking ahead through the end of 1999, manufacturing--especially
capital-intensive industries, should perform well if labor problems can be
solved.
The state's total employment during April 1999 is estimated at approximately
1,950,000, growing 0.6% over the previous twelve months. The state's labor force
tends to grow more slowly than its employment, but for the year through April
1999 it decreased by nearly 4%. Louisiana ranks near the bottom among all states
in terms of total labor force participation, with only about 56% of the civilian
population employed.
The state's unemployment rate for 1998 averaged 5.7%, down from 6.1% in
1997, while the United States averaged 4.5% in 1998 and 4.9% in 1997. During the
first few months of 1999, the state's unemployment has been falling, averaging
4.6% in April.
Louisiana's per capita personal income reached $21,346 in 1998. This gain
represents its second year of 4.3% growth. The state's per capita personal
income is currently 81% of the national average ($26,412). In 1998, Louisiana's
growth rate was comparable to the nation as a whole (4.4%), and the state
retained its 41st place ranking among all the states in terms of per capita
personal income.
REVENUE AND EXPENDITURES. The Louisiana Revenue Estimating Conference (the
"Conference") was established by Act No. 814 of the 1987 Regular Session of the
Legislature and given constitutional status in 1990 (Article VII, Section 10 of
the State Constitution). The Conference was established to provide an official
forecast of anticipated state revenues upon which the executive budget shall be
based, to provide for a more stable and accurate method of financial planning
and budgeting and to facilitate the adoption of a balanced budget as is required
by Article VII, Section 10(E) of the State Constitution. In developing the
official forecast, the Conference can only consider revenues that are projected
to accrue to the state as a result of laws and rules enacted and in effect
during the forecast period. The Conference is prohibited from including revenues
which would be raised by proposed legislation or rules. During the 1990 Regular
Session of the Louisiana Legislature, a constitutional amendment was approved
(Act No. 1096), granting constitutional status to the existence of the Revenue
Estimating Conference without altering its structure, powers, duties or
responsibilities which are currently provided by statute.
The Conference is required to prepare and publish initial and revised
estimates of money to be received by the General Fund and dedicated funds for
the current and next fiscal years which are available for appropriation. All
Conference decisions to adopt these estimates must be by unanimous vote of its
members who meet four times annually: October 15, January 1, the third Monday in
March and August 15. The most recently adopted estimate of money available for
appropriation shall be the official forecast. Appropriations by the Legislature
from the General Fund shall not exceed the official forecast in effect at the
time the appropriations are made.
Fiscal Year 1998 General Fund revenues totaled $4.27 billion, a 5.8% or $265
million decrease from FY 1997 receipts. Total collections for all governmental
fund types (General, special revenue, debt service and capital projects) reached
$12.48 billion during FY 1998, a 0.2% decrease from the previous year. The
largest source of these receipts was the federal government, at 36% of the
total. Sales tax collections amounted to 18% or $2.24 billion of all receipts,
up 1.2% over FY 1997 income. Individual income tax revenues increased
substantially again in FY 1998, due mainly to Louisiana's improving economy and
the growth of personal income. Income taxes accounted for 14.3% of the state's
total revenues, gaining 8.1% over the previous year. Additional sources of
revenues include motor vehicle fuel taxes (3.7%), gaming taxes (3.4%) and
corporate and public utility taxes (2%).
Total expenditures for the governmental fund types reached $11.36 billion
during Fiscal Year 1998. Decreases in the health and welfare category, which
dropped by 11.6% from FY 1997 spending to $4.09 billion, reflect the continuing
decrease in Medicaid funding. More important for FY 1998, however, is a large
decrease due to moving the state's charity hospitals from the General Fund to
another non-governmental fund type (the College and University Fund type),
effective July 1, 1997.
Other expenditures for the governmental fund types include the following:
education, $3.05 billion (up 7% over FY 1997 expenditures); capital outlay, $833
million (up 30%); general government, $805 million (up 11%); corrections, $437
million (up 7%); debt service, $427 million (down 58%); and transportation and
development, $277 million (up 13%). The unreserved/undesignated general fund
ending balance for Fiscal Year 1998 (ended June 30, 1998) was $94.2 million.
Only local governmental units levy ad valorem taxes at present. Under the
1921 State Constitution, a 5.75 mills ad valorem tax was being levied by the
state until January 1, 1973, at which time a constitutional amendment to the
1921 Constitution abolished the ad valorem tax. Under the 1974 State
Constitution, a state ad valorem tax of up to 5.75 mills was provided for but is
not presently being levied. The property tax is underutilized at the parish
level due to a constitutional homestead exemption from the property tax
applicable to the first $75,000 of the full market value of single family
residences. Homestead exemptions do not apply to ad valorem property taxes
levied by municipalities, with the exception of the City of New Orleans. Since
local governments are also prohibited from levying an individual income tax by
the Constitution, their reliance on state government is increased under the
existing tax structure.
DEBT MANAGEMENT. The Louisiana Constitution of 1974 provides that the state
shall have no power, directly or indirectly, through any state board, agency,
commission or otherwise to incur debt or issue bonds except by law enacted by
two-thirds of the elected members of each house of the legislature.
LRS 39:1365(25) limits the legislative authorization of general obligation
bonds and other general obligations secured by the full faith and credit of the
state by prohibiting total authorized bonds from exceeding an amount equal to
two times the average annual revenues of the Bond Security and Redemption Fund
for the last three fiscal years prior to such authorization.
LRS 39:1402(D) also limits issuance by the Louisiana State Bond Commission of
general obligation bonds or other general obligations secured by the full faith
and credit of the state. The highest annual debt service requirement for the
current or any subsequent fiscal years for general obligation debt, including
the debt service on any bonds or other obligations that are proposed to be sold
by the Louisiana State Bond Commission, may not exceed 10.20% of the average
annual revenues of the Bond Security and Redemption Fund for the last three
fiscal years completed prior to the issuance being proposed. As of June 30,
1998, total net state tax-supported debt was $301,183,212, which represents
4.62% of the debt issuance limitation.
During Fiscal Year 1998, Louisiana's debt service expenditures accounted for
3.8% of general governmental expenditures, compared to 5.57% during FY 1997.
Total general obligation bond and note principal balances on June 30, 1998 are
as follows: general long term debt, $1,834,894 in principal (3.5-10.7% interest
rates, maturing 2018); higher education, $767,000 in principal (3-6% interest
rates, maturing 2003); and Charity Hospital of New Orleans, $100,000 in
principal (3.6-5.0% interest rates, maturing 1999).
The Omnibus Bond Authorization Act of 1996 provides for the repeal of state
general obligation bond authorizations for projects no longer found feasible or
desirable. As a result, there were no authorized but unissued bonds outstanding
on June 30, 1998.
BOND RATING: State of Louisiana general obligation bonds have been given the
following ratings: Standard & Poor's Ratings Services, A-; Moody's Investors
Service, Inc., A2; and Fitch IBCA, Inc., A. There can be no assurance that the
economic conditions on which these ratings were based will continue or that
particular bond issues may not be adversely affected by changes in economic or
political conditions.
MAINE RISK FACTORS
ECONOMIC OUTLOOK. The State of Maine, which includes nearly one-half of the
total land area of the six New England states, has a population of approximately
1,242,000. One of Maine's greatest impediments to faster economic growth is slow
population gains (0.3% in 1997, 0.2% in 1998 and similar gains expected through
2001). Furthermore, Maine's economy is based in large part on the its natural
resources--fishing, farming, forestry and tourism. The nature of these
industries has meant that a significant portion of the state's employment
opportunities are seasonal and overall earnings lag behind national averages. If
migration patterns change over the next few years, as expected by the Census
Bureau, combined with low unemployment rates, the Maine economy will show
increased expansion over the next few years.
The largest industries in Maine in 1998 were services (164,000 jobs) and
retail and wholesale trade (141,900 jobs), followed by government (92,200 jobs)
and manufacturing (87,000 jobs). Maine's overall employment growth remained
steady at 2.0% during 1998 and 1997, despite slower population growth. As
measured by employment as a percentage of working age population, Maine's labor
participation rate is very close to the record high 69% measured in 1989, at the
peak of the eighties economic boom.
Nonfarm employment has risen consistently in the past three years, gaining
about 11,500 jobs each year since 1996. During 1998 there were 553,500 nonfarm
jobs, with gains largely in services (especially social services, business
services and health services) and with moderate growth in wholesale and retail
trade and in the financial, insurance and real estate sector. Employment in
government and manufacturing, however, lost a combined 1,200 jobs. Although
manufacturing represented around half of all nonfarm jobs in the middle of the
century, this sector currently holds only about 15% of total employment and has
been losing jobs steadily since 1989. Loss of manufacturing jobs will continue
to be a significant problem for the state, particularly in the western region,
where 25-35% of all employment is in the leather, textiles, apparel and wood
products industries.
Maine's unemployment rate has continued to stay near or below the national
average for several years. The state averaged 4.4% in 1998, up from 5.4% in 1997
and 5.1% in 1996. Nationally, unemployment averaged 4.5% during 1998, with 4.9%
and 5.4% unemployment rates in 1997 and 1996, respectively. Maine's unemployment
rate is projected to hold steady at about 5.0% through 2001.
According to the Maine State Planning Office, average per capita personal
income in Maine increased by 4.7% to $21,928 in 1997, down from 4.9% growth in
1996. Although Maine's per capita personal income is 86.7% of the national
average ($25,298), it ranks lowest among the six-state New England region. The
state's personal income is expected to have increased by 5.7% in 1998 and then
level off at 5.3% for the following three years.
Despite limited economic growth and loss of employment in some sectors, Maine
anticipates to continue its recent performance during 1999. Employment is
expected to increase by 1.0%, personal income is projected to rise 5.1%, retail
sales will continue to be strong with 4.8% growth, and unemployment is expected
to average 4.6%.
REVENUES AND EXPENDITURES. Maine closed Fiscal Year 1998 with a $78.9 million
surplus in general fund revenues, $18.9 million more than the FY 1997 surplus.
In accordance with state law, a portion of this surplus will be transferred to
the Retirement Allowance Fund to decrease the unfunded liability of the state
pension system. In addition, $63.0 million of the surplus will be set aside for
a final payment to the state's Tax Relief Fund for return to taxpayers. This
Fund has been repealed effective December 31, 1998.
Fiscal Year 1998 undedicated general fund revenues totaled $1.93 billion, up
7.2% from the FY 1997 figure. The two largest sources of revenue were the sales
and use tax with 40.3% and the individual income tax with 37.6%. The remaining
revenues were generated from the corporate income tax (5.3%), cigarette and
tobacco tax (2.3%), lottery (2.0%), inheritance and estate taxes (1.6%) and
other (10.9%).
The state operates under a biennial budget which is formulated in
even-numbered years and presented for approval to the Legislature in
odd-numbered years. The Fiscal Year 1999 budget was presented by the Governor
and adopted by the legislature in 1997 but has been adjusted in light of actual
FY 1997 and FY 1998 receipts.
Maine projects Fiscal Year 1999 general fund revenues to total $2.0 billion,
up $81 million or 4% over FY 1998 revenues. Revenues will be obtained from the
following sources: sales and use tax (38.7%), individual income tax (39.1%),
corporate income tax (5.0%), cigarette tax (3.7%), lottery (2.0%), inheritance
and estate taxes (0.8%) and other (10.7%). It should be noted that the dramatic
increase in cigarette tax revenues ($28.5 million more than the FY 1998 figure)
is due to a state law effective November 1, 1997 which was intended to double
cigarette and tobacco related revenues for use in health care and smoking
prevention projects.
Fiscal Year 1998 appropriations reached $1.89 billion, $58 million above the
budgeted expenses. Appropriations were made in the following areas: education
(49.2%), health and human services (30.2%), general government (13.9%), natural
resources (2.2%), economic development (1.7%), public protection (1.0%),
transportation (0.8%) and other (1.0%).
Budgeted FY 1999 appropriations are similar to FY 1998 appropriations, with
the following notable changes: capital construction will decrease by $5.6
million to $2.2 million; property tax program costs will increase from $2.2
million to $57.2 million due in part to a new Homestead Property Tax Exemption;
total education appropriations will grow by $76.1 million to $1.0 billion;
appropriations for medical care will increase 47% to $205.9 million, causing
total heath and human services expenses to grow to $703.9 million; and
transportation appropriations were slashed $12.1 million to $3.3 million.
Total Fiscal Year 1999 appropriations are projected to be $278.6 million or
14.8% greater than FY 1998 appropriations. Even with a 4% increase in revenues,
Maine projects a $78.6 million deficit in FY 1999. When combined with the FY
1998 surplus of $78.9 million, the state expects to finish the FY 1998-99 budget
biennium with a positive balance of $330,700. FY 1999 and the current budget
biennium will end on June 30, 1999.
DEBT MANAGEMENT. The Constitution of the State of Maine provides that the
Legislature shall not create any debt which exceeds $2,000,000 except to
suppress insurrection, to repel invasion or for purposes of war except when
two-thirds of the Legislature and a majority of the voters authorize the
issuance of debt. The Constitution also provides that tax anticipation loans
must be repaid during the fiscal year of issuance. Constitutional amendments
have been adopted which also allow the Legislature to authorize the issuance of
bonds to insure payments on revenue bonds of up to $4,800,000 for local public
school building projects; in the amount of up to $4,000,000 to guarantee student
loans; to insure payments on up to $1,000,000 of mortgage loans for Indian
housing; to insure payments on up to $4,000,000 of mortgage loans or small
business loans to war veterans; and to insure payments on up to $90,000,000 of
mortgage loans for industrial, manufacturing, fishing, agricultural, and
recreational enterprises. This last authorization has been limited statutorily
to a maximum of $87,500,000 available for issue through the Finance Authority of
Maine.
Revenue bonds are issued by the Maine Health and Higher Education Facilities
Authority to finance hospitals and other health care facilities. The revenues of
such facilities consist, in varying but typically material amounts, of payment
from insurers and third-party reimbursement programs, including Medicaid,
Medicare and Blue Cross. The health care industry in Maine is becoming
increasingly competitive. The utilization of new programs and modified benefits
by third-party reimbursement programs and the advent of alternative health care
delivery systems such as health maintenance organizations contribute to the
increasingly competitive nature of the health care industry. This increase in
competition could adversely impact the ability of health care facilities in
Maine to satisfy their financial obligations.
Further, health care providers are subject to regulatory actions, changes in
law and policy changes by agencies that administer third-party reimbursement
programs and regulate the health care industry. Any such changes could adversely
impact the financial condition of such facilities.
BOND RATINGS. The State of Maine's general obligation bonds are currently
rated as AA+ by Standard & Poor's Ratings Services and AA by Fitch IBCA, Inc.
(formerly known as Fitch Investors Service, L.P.). During 1998, Moody's
Investors Service, Inc. raised its rating for Maine from Aa3 to Aa2.
<PAGE>
MARYLAND RISK FACTORS
ECONOMIC OUTLOOK. Since 1989, the State of Maryland has been negatively
impacted by structural changes in the nation's economy, most importantly in
terms of decreased defense spending and defense subcontract work, as well as
reductions in federal employment. Through the mid-1990s, Maryland was
consistently ranked among the bottom states in job creation. Sluggish employment
growth followed severe job losses during the most recent recession, with losses
in 1991-1992 of nearly 100,000 positions. During 1997, however, the state's
employment situation turned around when job creation increased by 2.6%--more
than the previous three years combined. During 1998, another 57,000 jobs were
added to Maryland's employment base, reflecting a 2.5% annual increase, and
unemployment dropped to 4.6% (the national rate was 4.5%).
The strongest areas of new employment growth have been business services,
construction and brokerages, while the weakest have been banks, utilities,
government and several manufacturing industries. The service sector as a whole
has been the fastest growing part of the Maryland economy, in addition to being
the largest sector in terms of number of employees. During 1998, this sector
accounted for 33.9% of total employment in the state but provided more than 56%
of new jobs. It is expected to continue as the leading area for employment
gains, with 2.6% growth projected for 1999.
Construction employment has been strong since 1994. An important factor in
this growth has been the development of the region around Baltimore Washington
International Airport. This area, closely surrounded by almost 90% of Maryland's
population (5.1 million in 1998), has boomed since the arrival of Southwest
Airlines in 1993, with new construction at the airport itself and nearby retail
and general business expansions. In addition, a growing residential market,
fueled in part by generally declining interest rates and increased
affordability, as well as the overall increase in office and industrial
construction, has resulted in labor shortages in this sector over the past few
years. Despite the labor shortages, construction employment increased by 2.3% in
1998 and should grow by at least 1.3% in 1999.
Because of its proximity to Washington, DC, Maryland's government sector has
traditionally been among the largest in the country. After two years of decline
attributable to tight budgets and early retirement programs, combined local,
state and federal governmental employment jumped 3.3% in 1998, totaling over
430,000 of Maryland's workers. Growth in this sector during 1999 is also
expected to be strong, particularly in local governments due to increased hiring
of teachers.
During 1997, the state ranked fifth in the nation in terms of per capita
personal income, averaging $28,671. This amount includes 5.0% growth for the
year, the largest gain in the six state region, bringing Maryland to 113% of the
national per capital personal income level of $25,298. The state's General
Assembly enacted new laws during 1997 and 1998 providing for several personal
income tax reductions, which should allow for continued increases in the level
of per capita personal income. The Maryland Comptroller's Office anticipates
4.9% growth in 1999 and 5.2% growth in 2000.
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, even with the
recent reduction from 4.95% to 4.85%. 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.
Despite these setbacks, the state's healthy consumer confidence, a solid
economy and robust gains in the stock market have translated into steady
increases in consumer spending in Maryland. Drawn by the high per capita wealth
of the area, new retailers continue to enter this market. Employment gains are
expected to be moderate during the next three years, constrained in part by a
lack of workers, but overall income growth is expected to continue.
Revenue and Expenditures. Income and sales taxes comprise about 80% of the
Maryland's general fund receipts. These taxes, along with transportation
revenues, make up over 57% of the state's total revenue. 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.
Maryland's State Comptroller has reported that overall revenues totaled $14.1
billion for the fiscal year ending June 30, 1998. This figure represents an
increase of 3.9% over revenues for FY 1997, substantially less than the 5.9%
revenue growth of the prior fiscal year. During FY 1998, the individual income
tax, the largest source of revenue, produced an additional 10.8% in receipts
over the previous year, due to continued gains in employment, personal income
and capital gains. Corporate income tax revenues increased by only 1.0% in FY
1998, after a 10.3% rise in FY 1997 that had reflected strong gains in total
corporate profitability.
The state's total expenditures reached $13.13 billion in FY 1998. This figure
represents a $210 million or 1.6% increase over FY 1997 spending. Revenues
exceeded expenditures by $920 million, producing only the second positive
balance since 1994. The actual fund balance for the state's general fund on June
30, 1998 was $1.9 billion, an increase of $536 million over the FY 1997 general
fund balance.
Maryland's State Reserve Fund contains funds set aside to protect against
unexpected revenue declines and to finance future expenses. In addition,
Maryland law establishes a target of 5% of annual general fund revenues for its
Revenue Stabilization Account to protect against revenue downturns and maintain
the state's bond ratings. At the close of FY 1998, Maryland set aside $699
million for the State Reserve Fund, equaling 6.1% of general fund receipts.
Fiscal Year 1998 represented the first full year of the income tax reduction
enacted in 1997. This tax cut, Maryland's first in over thirty years, will be
phased-in over several years beginning in tax year 1998, reducing the state's
income tax rate by 5% in FY 1997 and 6% in FY 1999. In addition, personal
exemptions have been mandated to increase from $1,400 in 1997 to $1,750 in 1998
to $1,850 in 1999. These tax cuts are projected to impact the general fund by
$306 million in FY 1999 and $274 million in FY 2000. A proposed cigarette tax
increase would add $99 million for allocation to the Reserve Fund to help pay
for future years of these tax reductions, and an additional $54.3 million from a
recent tobacco settlement is expected to be deposited in this fund during FY
2000 to help offset the cuts.
Maryland's Board of Revenue Estimates expects general fund revenues, which
represent approximately 55-60% of each year's total budget, to reach $8.8
billion during Fiscal Year 1999. With general fund spending set at $8.5 billion,
the state projects that it will finish FY 1999 with a general fund surplus of
$249 million. The FY 1999 budget estimates that $636 million or 7.2% of general
fund revenues will be set aside for the State Reserve Fund.
During Fiscal Year 2000, the Board projects general fund revenues of $9.0
billion, a 2.9% increase. General fund appropriations of $9.0 billion are
anticipated, leaving a $9 million ending balance in the general fund.
Approximately $622 million or 6.7% of general fund revenues are slated for the
State Reserve Fund. The Maryland budget is balanced though FY 2001, and small
shortfalls are projected for FY 2002 and FY 2003. These shortfalls have been
reduced from previous estimates and represent only about 0.6% of the state's
yearly budget.
STATE DEBT. The public indebtedness of the State of Maryland and its
instrumentalities is divided into three general types. The state itself issues
general obligation bonds for capital improvements and for various state
projects, for which the state ad valorem property tax is exclusively pledged for
payment. In addition, for transportation purposes the Maryland Department of
Transportation issues limited, special obligation bonds payable primarily from
specific, fixed-rate excise taxes and other revenues related mainly to highway
use. Certain authorities issue obligations payable solely from specific non-tax,
enterprise fund revenues and for which the state has no liability and has given
no moral obligation assurance.
In 1978, the Capital Debt Affordability Committee was created to study the
state's debt structure and to recommend maximum limitations on annual debt
authorizations so that the state's bond ratings can be maintained. Although the
recommendations of the Committee are not binding on Maryland's General Assembly,
the amounts of annual general obligation bond authorization effective for 1998
were within the limits established by the Committee.
During Fiscal Year 1998, the following new general obligation bonds were
issued by the State of Maryland: $250 million on August 14, 1997 and $250
million on March 5, 1998. Outstanding general obligation bonds totaled $3.03
billion in 1997 and $3.27 billion in 1998. In addition, the State Department of
Transportation and the Maryland Transportation Authority had $850 million and
$375 million, respectively, in outstanding limited obligation bonds at the close
of FY 1998.
The Committee has authorized $430 million in new general obligation bonds for
Fiscal Year 1999. An additional $11.6 million from projects that have been
completed, canceled or rescheduled is expected to be deauthorized and used for
other purposes.
Ratings. The general obligation bonds of the State of Maryland are rated by
Moody's Investors Service, Inc. as Aaa; by Standard & Poor's Rating Services as
AAA; and by Fitch IBCA, Inc. as AAA, making Maryland one of only a few states
with three triple-A ratings.
MASSACHUSETTS RISK FACTORS
ECONOMIC OUTLOOK. The fiscal health of the Commonwealth of Massachusetts remains
strong following its recovery from recession and excessive government spending
in the late 1980s. The improved business climate, bolstered by substantially
reduced taxes over the past few years, is in a much better position to withstand
economic shocks than it was eight years ago. The economic base of the state has
also diversified as reliance on traditional manufacturing and defense
contracting has waned in favor of emerging technologies, high tech
manufacturing, financial services and health care industries. On the whole, the
Massachusetts economy is expected to continue to outperform those of the New
England region and the nation into the foreseeable future.
Economic growth at the national level has been mirrored in Massachusetts,
where over 397,000 jobs have been created since the low point of the recession
in 1991. The unemployment rate in the Commonwealth has fallen almost
consistently from its peak of 9.6% in early 1991 to an average of 3.3% for 1998,
one of the lowest rates for any large industrial state. The unemployment rate in
1998 was 4.5% for the nation as a whole. Total nonfarm employment is also at an
all-time high, growing by 61,000 during Fiscal 1998 to 3.23 billion.
Massachusetts' unemployment is projected to average slightly above 3% during
1999 and rise by up to a half of a percentage point in 2000.
Improvements in the employment picture have had a positive impact on personal
income for Massachusetts residents. On average, personal income growth has been
almost the highest in the nation, outpacing the rate of growth in the national
economy in most quarters since 1991. During 1997, Massachusetts per capita
personal income grew by 5.6% to $31,207 (the national average is $25,298),
giving the state the third highest personal income level in the country. Annual
growth in this area is expected to drop in 1999 to 4.5% and remain at that level
through the next few years.
The Commonwealth is the third most densely populated state according to the
1990 census, but it experienced only a modest increase in population from 1980
to 1990, growing at a rate which is less than one-half the rate of increase in
the United States population as a whole. Economic risks for Massachusetts
include a shortage of skilled labor, low net population growth that may
constrain job creation, as well as the prominence of the financial services
industry coupled with a relatively high proportion of non-wage income, both of
which are sensitive to the performance of the financial markets.
Massachusetts has a diversified economic base which includes traditional
manufacturing, high technology and service industries, served by an extensive
transportation system and related facilities. Services, at approximately 36.4%
of the state work force, was the largest employment sector in the Massachusetts
economy during 1998. The greatest employment gain, however, was in construction
(8.6% growth), while trade and services enjoyed growth in the 2.5-3.5% range.
Employment in the finance, insurance and real estate sector has experienced
strong growth since the mid-1990s, especially within the finance industry. This
area of the workforce is expected to continue to expand through 2002. In fact,
Massachusetts dominates the mutual fund industry with its investment companies
managing more assets than in any other state.
Through 2000, the Massachusetts economy is expected again to mirror the
national economy, with moderate growth in personal income, stabilization of the
unemployment rate, and a rate of inflation which is anticipated to outpace the
nation by about 0.5%. The state will also continue to face risks including: a
shortage of skilled labor coupled with low net population growth that will
constrain job creation, and the prominence of the financial services industry
such that Massachusetts could be impacted more than any other state if the
financial markets suffer.
REVENUES AND EXPENDITURES. The financial condition of Massachusetts during
Fiscal Year 1998 reflects the recovery which began early this decade. The
state's revenues exceeded expenditures for the eighth consecutive year, leaving
Massachusetts with a $1.84 billion surplus. Furthermore, the last of the state's
fiscal recovery bonds issued from the late 1980s and early 1990s to finance
budgetary deficits was retired during FY 1998.
During 1997, the Massachusetts Legislature enacted a law to raise the
statutory ceiling on the Commonwealth's Stabilization (or "rainy day") Fund from
5% of tax revenues to 5% of total budgetary revenue. During 1998, this ceiling
was raised to 7.5% of total budgetary revenue to further protect against the
fiscal pressures of an economic downturn. Including the FY 1998 deposit of
$317.4 million, the fund's balance stands at $1.16 billion, the third largest in
the nation and in marked contrast to the zero balance carried in the fund during
FY 1990. In addition, the state has created a Caseload Increase Mitigation Fund
($128 million) as a buffer against any future rise in welfare caseloads and an
Unemployment Insurance Fund ($1.7 billion) for use in case of an economic
decline.
An expanding economy translates directly into a broader tax revenue base.
Increased employment, income, housing starts and business activity directly
impact income, sales, corporate, deeds and other tax collections. In Fiscal Year
1998, sales tax collections were up by more than 7%, and income tax revenues
increased by 11.8% or $850 million over FY 1997. In the aggregate, tax revenues
totaled $14.0 billion in FY 1998, up $1.16 billion or 9% from FY 1997, while
general fund expenditures dropped to $11.2 billion, down $359 million or 3.1%
from FY 1997.
Through January 31, 1999, FY 1999 tax revenue collections totaled $8.28
billion, up 9.1% from the same period in FY 1998. Massachusetts' Department of
Revenue projects that total tax receipts for FY 1999 will reach $14.0 billion, a
net decrease of 0.2% over FY 1998 actual collections. The net change is due in
large part to recent tax law changes, including the doubling of personal income
tax exemptions and the reduction of the tax rate on interest and dividend income
(described below).
FY 2000 total revenues are projected to be $20.24 billion. Non-tax revenues
are expected to reach $5.79 billion, a 1% increase from FY 1999. For the tax
revenue base, the Department of Revenue figures are based upon a slowing in the
growth rate based upon the assumption of moderate economic growth and low
inflation. In FY 2000, the tax revenue base is expected to increase 3.9%, as
compared to 5.6% in FY 1999 and 12% in FY 1998. Total tax revenues for FY 2000
are estimated at $14.46 billion, which represents a 3.3% increase over projected
FY 1999 revenues and a reduction of $226 million for recent tax cuts. Proposed
spending reflects a modest increase of 2.5% in FY 2000, directed largely to
increased funding for local aid, education and health care. FY 2000 total
expenditures are projected to be $20.4 billion.
Among the issues which will affect revenues in FY 1999 and later years is the
free renewals of driver's licenses and lifetime vehicle registrations. Beginning
in 1998, licenses and registrations for non-commercial passenger vehicles are
renewable automatically and free of charge. During FY 1999, revenues are
projected to decline by approximately $55 million due to this legislation. An
important proposal for Fiscal Year 2000 is the reduction of the tax rate for
"earned" income from 5.95% to 5% over three years beginning in tax year 2000,
generating an estimated $226.0 million reduction in tax collections during FY
2000.
DEBT MANAGEMENT. Much of the Commonwealth's fiscal difficulties in the late
1980's stemmed from an escalation in state borrowing to balance operating
shortfalls with bonded debt. Massachusetts' current debt-management policy has
resulted in a drop in the percentage growth of outstanding general obligation
debt from 29% in Fiscal Year 1991 to 2% in FY 1998. This debt-management policy
included the institution of an administrative cap on capital expenditures.
Strict adherence to the capital cap has reduced the annual increase in
debt-service expenditures from 20% between FY 1987 and FY 1991 to 4% in FY 1998.
The average annual increase in the growth of debt is projected to remain at
about 4% through FY 2002, despite the burden of finishing construction of the
Central Artery/Tunnel Project, scheduled for completion in 2004.
RATINGS. Standard & Poor's Ratings Services raised its rating of general
obligation bonds of the Commonwealth of Massachusetts from A+ to AA- in October
1997. The Moody's Investors Service, Inc. rating gives the state a Aa3 rating,
and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.) raised its rating
from A+ to AA- in January 1998.
MICHIGAN RISK FACTORS
ECONOMIC OUTLOOK. The recession of 1989-1992, like the recessions in the
early 1980s, affected the State of Michigan more severely than the nation as a
whole. Much of the state's past sensitivity to business cycles can be attributed
to its concentration in and dependence upon a few core industries--most notably
motor vehicle manufacturing. In 1991 alone, for example, Michigan lost more than
60,000 jobs, with about 19% of them directly attributable to losses in the motor
vehicle manufacturing industry.
Since the mid-1990's, however, Michigan has made an effort to diversify its
economy and expand sectors other than durable goods manufacturing, allowing the
state to experience its best economic performance in a generation. Since 1994,
the state unemployment rate has remained below the national average, overall
employment has risen steadily, and business relocations and expansions in the
state have increased dramatically.
While Michigan's efforts to diversify its economy have proven successful, as
reflected by the fact that durable goods sector employment has fallen from 33.1%
of total employment in 1969 to less than 19% in 1998, durable goods
manufacturing still represents a sizable portion of the state's economy. As a
result, any substantial national economic downturn is likely to have an adverse
effect on the economy and revenues of the state and some of its local
governmental units. Investors should be aware that the economy of the State of
Michigan has, in the past, proven to be cyclical, due primarily to the fact that
the leading sector of the state's economy is the manufacturing of durable goods.
Since 1990, total employment in Michigan has climbed by about 660,000 jobs,
and employment in the state reached an all-time high of 4.8 million in January
1999, with the work force also reaching a record 5.1 million. During 1998,
approximately 85% of new jobs were created in private nonmanufacturing
industries, especially business services, health care, construction and
professional services. The distribution of employment growth during 1998 favored
the construction, transportation and trade sectors, with 3.6%, 2.7% and 2.0%
increases, respectively. And, as a signal that Michigan's economy is becoming
more like the nation's, the health care industry overtook the motor vehicle
manufacturing industry as the largest single contributor to the state's
employment base.
The manufacturing sector lost jobs again in 1998, showing a 0.1% decline. The
composition of this sector, however, has experienced some shifting from durable
to nondurable goods manufacturing, as Michigan's share of domestic motor vehicle
production fell from 36% in 1982 to about 25% in 1996. Nationally, sales of cars
and light trucks grew 2.9% during 1998, and vehicles produced in the United
States gained an additional 2.5% of the market. Despite diversification, the
Michigan economy could continue to be affected by changes in the auto industry,
notably consolidation and plant closings resulting from competitive pressures
and over-capacity. Such actions could adversely affect state revenues, and the
financial impact on local units of government could be more severe in the areas
where plants are closed.
Along with the shifting emphasis away from manufacturing, Michigan has
experienced a decline in personal income growth for the past few years as
high-income manufacturing jobs are replaced by lower-income jobs in sectors such
as services and trade. Although wages are generally lower in these industries,
service and trade employment is generally more robust during economic downturns.
Thus, Michigan's personal income growth is not expected to increase as
dramatically as it has in the past, but it will also not suffer the accompanying
income volatility. This transition should enable the state to weather future
recessions better than during the 1980s and early 1990s. During 1998, the
state's per capita personal income increased by 4.1% to average $24,998, while
nationally the average increased 4.7% to $25,298.
Michigan's unemployment rate dropped to 3.9% in 1998, a dramatic decrease
from 10% in 1990 and the state's lowest average unemployment rate since 1969.
The national average was 4.5%. In addition, low unemployment rates and job
growth have caused renewed population growth for Michigan. During 1997, the
state gained over 37,000 new residents, a 0.4% increase. Michigan's recent
population gains reflect a steady growth which the state has not experienced in
over 25 years.
Although the job market is expected to remain somewhat tight, job growth in
Michigan is projected to be between 2.0% to 2.6% during 1999 and 2000. This
growth will be fueled by large gains in the service, construction and trade
sectors, while manufacturing's recent declines are expected to be replaced with
a 0.2% gain (despite losses in the motor vehicle industry). In addition, the
state's unemployment rate is expected to hold steady at about 4.0% through 2000,
while personal income is projected to experience slow to moderate increases.
REVENUES AND EXPENDITURES. In recent years, Michigan has reduced its state
governmental workforce and at the close of Fiscal Year 1998, for the sixth
consecutive year, every state department finished the year under budget.
Michigan's General Fund/General Purpose (GF/GP) revenues totaled $19.0 billion
during Fiscal Year 1998 (ended September 30, 1998). Taxes represented
approximately 56% of this amount, with revenues from the federal government
(mainly the Department of Health and Human Services), adding another $6.9
billion. GF/GP spending reached $17.6 billion, leaving a year-end GF/GP balance
of $1.4 billion. When adjusted to account for other funding sources and
operating transfers, the state's final FY 1998 operating balance totaled $1.3
billion.
Michigan's Budget Stabilization Fund (BSF), also known as the "Rainy Day
Fund," was established in 1977 to assist in stabilizing revenue and employment
during economic downturns and to maintain the state's credit rating. At the end
of FY 1998, the BSF contained $1.05 billion, including a $49 million deposit and
$65 million interest earned. This total, however, represents an 8.5% decrease
from the FY 1997 balance because of a $212 million transfer to the School Aid
Fund. This transfer is a result of the Durant settlement, stemming from a
lawsuit in which 84 Michigan school districts successfully sued the state in
response to inadequate educational funding with respect to State Constitutional
mandates. Additional transfers of $32 million will be made annually from the BSF
to the School Aid Fund during FY 2000 and each of the subsequent nine years.
Also as a part of the Durant settlement, GF/GP balances for FY 1998 and
subsequent years will be deposited directly into the BSF (1997 PA 142, 123 and
144).
The State of Michigan develops its yearly budget by projecting a future
available revenue baseline using a consensus revenue estimating process. Each
two-year baseline is reached by agreement between the Michigan Department of
Treasury and the State Senate and House Fiscal Agencies. When a fiscal year's
budget is developed, this general fund revenue baseline is adjusted to reflect
actual revenues from the previous and current fiscal years, as well as any
expected changes in projected revenues.
The Michigan Constitution of 1963 limits the amount of total revenues raised
from taxes and certain other sources to a level for each fiscal year equal to a
percentage of the state's personal income for the prior calendar year. In the
event that the state's total revenues exceed the limit by 1% or more, the
Constitution requires that the excess be refunded to taxpayers.
Preliminary baseline tax receipts are projected to grow by 4.1% during FY
1999, with total revenues growing by 3.9% to $9.15 billion. In the FY 1999
budget, however, projected overall GF/GP revenues were reduced to 2.1% growth
(or $8.99 billion) in order to accommodate phased-in tax cuts and adjustments
based upon actual FY 1998 receipts. The state has budgeted GF/GP spending to
grow by 1.9% during FY 1999, compared to FY 1998's 2.7% increase. Gross
appropriations (including capital outlay and transportation) for FY 1999 are
expected to reach $32.1 billion, a 3.0% increase over the prior year's spending.
The preliminary Fiscal Year 2000 revenue baseline projected 2.7% growth. The
FY 2000 budget has since been adjusted to reflect the impact of the proposed
reduction of the Michigan personal income tax rate from 4.4% to 3.9%. The impact
of this adjustment to the General Fund in FY 2000 is the loss of $126 million of
what would otherwise have been new revenue. Of this amount, $34 million could be
recouped by the proposed repeal of the Tuition Tax Credit. Based on these
assumptions, the budget's adjusted FY 2000 GF/GP revenues are now expected to
total $9.07 billion. Combined with an estimated $9.07 billion in GF/GP spending,
the state expects a GF/GP surplus of $200,000. The net balance from all funds,
however, is projected to produce a $261.4 million operating surplus.
DEBT MANAGEMENT. Michigan's borrowings fall into two main categories: general
obligation debt and revenue dedicated debt. This second type is issued with the
provision that repayment will only be made from specific dedicated revenue
sources and is not a general obligation of the state. The state's long-term
general obligation debt can only be issued with the approval of the voters or
for the purpose of making loans to school districts. Short-term general
obligation debt, which must be repaid within the fiscal year it is borrowed, may
be issued with the approval of the legislature but may not exceed 15% of
undedicated revenues in the prior year. As of September 30, 1997, the state's
outstanding general obligation debt was $677.3 million, and the state's revenue
dedicated debt was $2.7 billion. During FY 1998, $250 million in new general
obligation debt was issued ($90 million in Environmental Protection Bonds and
$160 million in School Bond Loans).
RATINGS. On January 21, 1998, Standard & Poor's Ratings Service increased
its rating for State of Michigan general obligation bonds to AA+. In March 1997,
Moody's Investors Service, Inc. refined its rating from Aa to Aa2, which it then
upgraded to Aa1 on October 16, 1998. Fitch IBCA, Inc. also upgraded its rating
of AA to AA+ on April 15, 1998.
MINNESOTA RISK FACTORS
Economic Outlook, The State of Minnesota economy is one of the strongest and
most diverse in the nation, exhibiting a balance of industries and solid
expansion. In fact, the state's job growth in nonfarm employment outpaced the
nation's by about 60% between 1989 and 1998. Rapidly growing industries
including business services, motion pictures and air transportation, as well as
continued expansion in the state's more traditional industries, have contributed
to this performance.
Minnesota's economy continued to outperform national averages during 1998.
Overall payroll employment increased 2.9% in 1998, up from 1997's 1.6% growth,
to total over 2.6 million jobs. High technology industries, including printing
and publishing, health and medical devices, and computer components and software
are flourishing. Manufacturing, transportation, trade and services experienced
moderate growth, in the 2% to 3.5% range, as Minnesota's manufactured exports
increased rapidly. During 1997 the state's top three export
industries--industrial machinery, scientific instrument and electronic
equipment--accounted for about 60% ($5.8 billion) of Minnesota's total
manufactured exports. The fastest growing sectors in terms of employment,
however, were construction with 8.6% growth and the finance, insurance and real
estate (FIRE) sector, which enjoyed employment gains of 6.0% during 1998. During
the 1990s, Minnesota's FIRE sector has grown approximately six times faster than
the national average.
Agriculture is another important factor of the Minnesota economy. During
1997, the state exported over $2.6 billion worth of agricultural products. Among
the state's most important products are sugar beets, soybeans, corn, wheat,
oats, peas, turkeys and cheese. During 1998, reduced Asian demand and good
harvests sent farm prices below the break-even point for many crop and livestock
farmers, causing farm income for Minnesota grain producers to hit the lowest
levels since the mid-1980s. The state's farmers are expected to face another
difficult year in 1999. Problems in Brazil will allow Minnesota to take a larger
share of the world soybean market, but soybean prices are likely to remain at or
near their 20-year lows. Livestock and poultry farmers will benefit from lower
grain prices, but current market prices for hogs and turkeys will continue to be
depressed.
The annual unemployment rate in Minnesota has been below the national rate
every year since 1985. During 1998, the state's average unemployment rate
dropped to 2.5% from 3.3% a year earlier, resting two full percentage points
below the U.S. rate. Nationally, the average unemployment rate during 1998 was
4.5%. In conjunction with its low unemployment rate, Minnesota boasts the
highest labor participation rate (75%) in the nation. Accordingly, investors
should note that future economic growth may be hampered by shortages in skilled
workers.
Minnesota's per capita income growth has also outpaced the nation's during
the 1990s. While population has been stable in 1998 with less than 1% growth
(4.7 million), personal income has risen rapidly. The state averaged 4.1% gains
in per capita personal income during 1998, following 6.3% growth in 1997.
Minnesota's per capita personal income level is now $26,295, almost 104% of the
U.S. rate ($25,298).
Personal income in Minnesota is forecast to grow by 4.7% during 1999,
slightly above the average rate forecast for the nation. Wage and salary income
growth, however, is projected to lag behind the national average rate as states
outside the Midwest also begin to feel labor market pressures and part-time
workers elsewhere increase their hours to, or beyond, the levels they desire.
Forecasts for 1999 show Minnesota experiencing continued growth, particularly in
high-tech industries and business services. Despite a projected national slump
in manufacturing, the state's manufacturing sector is expected to rise much as
it has in the past when national manufacturing employment shrinks. Overall
nonfarm employment is projected to rise 2.1% during 1999.
REVENUES AND EXPENDITURES. Minnesota operates on a two-year budget cycle (a
biennium). The 1998-99 biennium began on July 1, 1997. Net general fund revenues
for the current biennium are expected to total $22.5 billion, 1.3% more than the
amount forecast shortly after the mid-point of the biennium. Of this amount,
$10.7 billion in receipts were collected during Fiscal Year 1998. The individual
income tax represents the largest portion of these collections (44%), while the
state sales tax generates another 30%.
During Fiscal Year 1999, income tax revenues are expected to grow 8.2% and
sales tax revenues are projected to increase by 5.0%, bringing total projected
revenues to $11.9 billion. The larger than expected increase in income tax
revenues are due to strong wage gains, as well as rapidly increasing capital
gains payments. The $22.5 billion in estimated revenues for the FY 1998-99
biennium represents 14.9% growth over the previous biennium's revenues.
The February 1999 expenditure forecast for the FY 1998-99 biennium totals
$21.7 billion. Minor decreases in K-12 education, health care, family support
and other major local assistance estimates, combined with slightly higher costs
for property tax aid and state agency spending, account for the increases in
spending over originally budgeted amounts. The largest area for appropriations
continues to be education, representing 31.9% of overall spending (or 43% when
post-secondary education is included). Another 14.4% is spent on health care,
while 11.9% is used for property tax credits.
The ending balance for FY 1998-99 is projected to be $910 million. As of the
end of FY 1998, Minnesota had nearly $1 billion in general fund reserves,
including a $350 million Cash Flow Account and a Budget Reserve Fund of $613
million. Minnesota's Budget Reserve is the 6th largest in the nation, while the
reserve as a percentage of expenditures ranks 10th largest. At the end of the
current biennium, the Budget Reserve Fund is projected to reach $963 million or
5.4% of appropriations.
On May 8, 1998, Minnesota settled its lawsuit with the tobacco industry,
resulting in estimated revenues to the state of $6.1 billion over the next 25
years. A small portion ($202 million) of the settlement has been set aside by
the courts for specific purposes, but the balance is to be deposited into the
state's general fund as non-dedicated revenues. The payments have the following
components: (1) Annual payments to the state's general reserve fund start with a
$114.8 million deposit in FY 2000. This amount increases annually, will reach
$204 million during FY 2004, and will continue in perpetuity; and (2) One-time
settlement payments begin in FY 1999 and will end in FY 2003. Those payments,
totaling $1.3 billion, will be $461 million during FY 1999, $242 million during
FY 2001-03, and $121 million in FY 2003.
Total current resources for the FY 2000-01 biennium are forecast to reach
$25.4 billion, 11.1% higher than the current biennium. Of this amount, the
income tax is expected to generate $5.8 million (up 13%) and $6.1 million (up
5.7%) during FY 2000 and FY 2001, respectively. The unusually high growth rate
in the income tax during the first part of the biennium is attributable to the
impact of the property tax rebate program on net income tax receipts during the
FY 1998-99 biennium. Those rebates have reduced that biennium's income tax by a
total of $886 million. Without the rebates, the total increase in FY 2000-01
receipts would be only 10.9%. Total expenditures for the biennium are projected
at $22.5 million, a 4.1% increase over the FY 1998-99 biennium.
DEBT MANAGEMENT. 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.
For the FY 1998-99 biennium, operating transfers to the Debt Service Fund
total $545 million. The state issued $531 million of new general obligation
bonds during FY 1998, and $184.8 million of general obligation bonds were
redeemed, leaving an outstanding balance of $2.51 billion in general obligation
debt as of June 30, 1998. General obligation bonds authorized but unissued as of
June 30, 1998 were $940.2 million.
RATINGS. Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates State of Minnesota general obligation bonds as AAA. In May 1996, Moody's
Investor Services upgraded Minnesota's general obligation bond rating to Aaa. In
August 1997, Standard & Poor's raised the state's general obligation bond rating
from AA+ to AAA.
MISSOURI RISK FACTORS
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.
ECONOMIC OUTLOOK. As a major manufacturing, financial, and agricultural
state, Missouri's economic health is tied closely to that of the nation. The
state's residents have enjoyed a vibrant and growing economy over the last five
years demonstrated by low unemployment, large job gains and significant income
growth. Among the factors that contributed to the strength of the state economy
is the competitiveness of Missouri businesses. During 1997, more than $7.6
billion in products and services were exported from the state to 181 countries,
directly supporting more than 150,000 jobs, while business expansions nearly
doubled during 1998.
Total employment in Missouri at the end of 1998 reached 2.74 million, down
1.1% from the previous year. By March 1999, however, employment had grown enough
to surpass the 1996 peak of 2.78 million. Most annual job growth stems from the
expansion of the services sector, with the largest portion of its 2.9% increase
in business services, health services and social services. The finance,
insurance and real estate sector and the retail trade sector also enjoyed
significant gains.
Although manufacturing jobs--generally among the highest paying in the
economy--have been disappearing around the country, Missouri's manufacturing
employment remained stable in 1998. Losses in transportation equipment, textiles
and leather products manufacturing were offset by gains primarily in electronic
and electrical equipment as well as chemical and allied products manufacturing.
And despite unusually harsh weather conditions during 1998, the construction
industry added jobs and recorded an 8.7% annual increase in employment.
Missouri's annual average unemployment rate for both 1997 and 1998 was 4.2%,
comparing favorably to national averages of 4.9% and 4.5% for those years.
Despite the fact that unemployment generally peaks for the year during the first
three months, the state's unemployment rate dropped substantially at the
beginning of 1999 and has averaged 3.1% for the first three months.
Per capita personal income in Missouri grew to $24,247 in 1998, a 3.4%
yearly gain compared to 4.4% national growth. This figure equals about 92% of
the U.S. per capita personal income ($26,412), ranking Missouri 28th among all
the states.
<PAGE>
The economic outlook is for continued improvement in 1999 with steady growth
coupled with strong employment gains. The Asian and Latin American financial
crises, however, may negatively impact exports and, in turn, the continued
growth of the Missouri economy.
REVENUES AND EXPENDITURES. The State of Missouri finished Fiscal Year 1998 in
sound financial condition due to strong revenue collections and efficient
management of state programs. Net general revenue collections increased slightly
over Fiscal 1997 due to the strength of the national and state economies, and
expenditures were lower than anticipated. Due to these positive results,
Missouri enjoyed a modest fund balance which will be employed for one-time uses.
Total revenues available for all government fund types during Fiscal Year
1998 totaled $18.47 billion, reflecting a 5.0% gain from the previous year. This
increase was caused by continued growth in Missouri's core revenue sources, with
the individual income tax rising 10.4% and the inheritance tax jumping 21.8%.
The state's corporate income tax revenues, however, dropped by 4.9%, while sales
and tax income remained level compared with Fiscal 1997.
The state General Fund accounted for $6.88 billion of these collections (up
5.6%), offset by $6.31 billion in General Fund spending. During Fiscal 1998,
every category of appropriations increased over the previous year except capital
improvements, which dropped by about one-fourth. Desegregation payments
represented the largest single increase in spending during Fiscal 1998. Among
the issues which affected Fiscal 1998 revenues were the elimination of the 3%
grocery tax (effective October 1, 1997) and the tripling of the dependent
deduction for income taxes. The General Fund balance as of June 30, 1998 was
$197.5 million, compared to $24.8 million at the end of Fiscal 1997. Overall
governmental expenditures totaled $17.1 billion, leaving a $484.2 million
surplus.
The Fiscal Year 1999 budget increases include nearly $798 million in
desegregation costs and one-time tax refunds. Article X of the Missouri
Constitution requires that excess state revenues be refunded to state income
taxpayers, amounting to $548 million in payments to be returned to its citizens
during Fiscal 1999. In addition, tax cuts enacted in 1997 lowered revenues by
$120 million. After these expenses, total General Fund income for Fiscal 1999 is
estimated to reach $6.67 billion, with overall government resources amounting to
$15.4 billion after these costs.
Proposed tax cuts which may be enacted during Fiscal 1999 include an increase
in the personal exemption on the individual income tax (the first since 1946), a
new deduction on health insurance premiums for the self-employed, and a
reduction in the corporate income tax for small businesses. If passed, these
proposals would have $191 million impact on revenues for the first year after
enactment.
As of April 30, 1999, year-to-date Fiscal 1999 revenues have reached $5.53
billion, showing a 3.1% gain over Fiscal 1998 collections through that date.
Appropriations during this period total $6.23 billion, 12.2% higher than the
previous year's spending to date.
DESEGREGATION COSTS. Fiscal Year 2000 may mark the end of the desegregation
spending in Missouri. The Kansas City desegregation lawsuit was settled on March
25, 1997, after which the 1998 legislature passed SB 781 to establish a
framework for settling the St. Louis desegregation case. A settlement agreement
was reached in the latter suit in January 1999 to end court-ordered supervision
in St. Louis. This settlement is contingent upon voter approval of local
matching funds for the SB 781 formula revenues and approval by a federal judge.
Federal court-ordered payments for the St. Louis and Kansas City
desegregation plans were $279.8 million in Fiscal 1998, amounting to about 4% of
state General Fund revenues. Total estimated payments during Fiscal 1999 are
$250.6 million, including a final payment for Kansas City. If approved, the
final settlement payment for St. Louis will total $157 million during Fiscal
2000.
As of December 31, 1998, Missouri has spent $3.3 billion on the desegregation
cases in St. Louis and Kansas City. By the end of Fiscal 1999, that total will
have reached an estimated $3.4 billion. With the suits having been settled, the
state stands to experience substantial savings which must, by law, be used to
boost aid to all Missouri schools. For Fiscal 2000, ongoing savings totaling
$187.4 million and cumulative one-time savings of $81.5 million have been
redirected to school districts.
DEBT MANAGEMENT. Missouri voters have approved constitutional amendments
providing for the issuance of general obligation bonds used for a number of
purposes. The amount of general obligation debt that can be issued by the state
is limited to the amount approved by popular vote plus $1 million.
Total general obligation bonds issued as of June 30, 1998 reached $1.23
billion, of which $1.06 billion was outstanding. These funds are used for
environmental protection from water pollution and for improvements of state
buildings and property. As of the same date, revenue bonds issued for special
building projects totaled $148.5 million, of which $108.3 million was
outstanding. Overall state indebtedness as of June 30, 1998 was $1.71 billion,
with $1.37 billion outstanding.
RATINGS. State of Missouri general obligation bond issues are currently rated
as follows: Standard & Poor's Rating Services, AAA; Moody's Investors Service,
Inc., Aaa; and Fitch IBCA, Inc., AAA. Missouri is one of only eight states that
have this highest rating from all three organizations. Although these ratings
indicate that the State of Missouri is in relatively good economic health, there
can be 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.
NEBRASKA RISK FACTORS
Economic Outlook. The State of Nebraska, located at the heart of the Great
Plains, has a population of about 1,662,700. During the 1970s and 1980s, the
state suffered increasingly rapid outward migration, but this trend has reversed
over the past decade. Along with positive population growth, the state has
enjoyed regular economic growth during the past few years. Historically, the
state's economy is less cyclical than the national economy; that is, it
typically does not grow as quickly as the national economy during periods of
expansion but also does not contract as much during periods of recession.
Nebraska's economy expanded during 1997 and 1998 with steady growth in labor
force, employment, retail sales, income and tourism.
With more than 44 million of the state's 49 million acres used for farming
and ranching, agriculture is a leading component of the Nebraska economy. During
1997, the state ranked third in the nation in livestock and livestock products
with $5.5 billion in cash receipts and sixth in crop production at $4.6 billion.
Nebraska is a leader in the production of corn, sorghum, hay, soybeans and other
dry edible beans, as well as cattle production, in which it ranks second only to
Texas. During 1997, agricultural and food exports totaled about $3.3 billion or
about 52% of the state's total exports, with Japan, Canada, Mexico and South
Korea as the state's leading trade partners. Although the value of the state's
farm land and buildings has increased, average crop and livestock prices have
dropped for two years in a row. Any changes in agriculture and in the
agricultural economy will continue to have significant consequences for the
overall Nebraska economy.
In terms of revenue and earnings, manufacturing is the other leading
component of Nebraska's economy. Job growth in manufacturing averaged just over
2% during 1997 and 1998, while the nation as a whole has experienced declining
employment in this sector. Total nonfarm employment increased by 15,400 jobs
(1.8%) during 1998, with the largest percentage gains in construction, the
finance, insurance and real estate sector, transportation/utilities, and the
services sector, the state's largest employer. And although it employs only
about 37,000 workers, the tourism sector has become increasingly important to
Nebraska's economy, following only agriculture and manufacturing in total
revenue.
The Nebraska unemployment rate has been among the lowest in the nation
throughout the 1990s. The state's average unemployment rate was 2.1% during
1998, although it dropped as low as 1.6% during the course of the year. The
nation as a whole recorded 4.5% unemployment during 1998. Since 1993, Nebraska's
unemployment rate has been near or less than half of the average national rate
and is often the lowest in the nation.
Nebraska's per capita personal income has historically been below the
national average, although the gap has been closing. In 1991, the state's per
capita income was 92% of the U.S. average; in 1997, it was 94%. Per capita
personal income grew 3.3% to $23,656 during 1997 (the national average was
$25,298), compared to the state's phenomenal 8.8% growth in 1996. Nationally,
per capita personal income growth has averaged 4.7% over the past decade, while
Nebraska's growth rate has been somewhat higher at 4.9%.
According to the January 1999 Business in Nebraska newsletter from the Bureau
of Business Research at the University of Nebraska-Lincoln, overall the state's
economy remained strong through the third quarter of 1998 and will continue to
do so through 1999. Signs of weakness, however, have appeared in a few sectors
and in non-metropolitan counties. With the exception of mining, the businesses
that have indicated weakness are directly tied to the agriculture sector. The
plunge in agriculture prices to levels not seen in ten or more years has
impacted at least two non-metropolitan industries--agricultural services and
wholesale trade, including farm implement dealers and handlers of farm raw
products. The full impact of the depressed agriculture sector probably will not
be realized until mid-1999. In addition, the state's small crude oil industry
has been "hammered" by the recent slide in crude oil prices. Nevertheless,
little of the current weakness is expected to impact business in Nebraska's
metropolitan areas. Further prosperity for these businesses and the depression
of the agricultural economy could increase migration from Nebraska's rural areas
to its cities.
The Bureau of Business Research projects that nonfarm employment in Nebraska
will grow 2.4% in 1999 and 2.2% in 2000; nonfarm personal income will increase
by 6.0% in 1999 and 6.1% in 2000; and retail sales will gain 5.7% in 1999 and
6.2% in 2000.
REVENUES AND EXPENDITURES. Nebraska's Fiscal Year 1998 net general fund
receipts reached $2.11 billion, 5.6% over the projected level of revenue. Of
this total, the individual income tax represents the largest amount, with $981.6
million in receipts. The sales and use tax created $803.8 million in revenue for
the state, and the corporate income tax generated $142.2 million. FY 1998
appropriations totaled $1.93 billion, up 3.3% over FY 1997 appropriations.
Revenues for Fiscal Year 1999 will be impacted by a temporary tax reduction
enacted by the 1998 Legislature. The state sales and use tax rate was 5.0% from
July 1990 through June 1998. For one year beginning on July 1, 1998, the
Nebraska sales and use tax rate is reduced to 4.5% (LB1104). Moreover, the
income tax cut enacted in 1997 was made permanent during 1998 (LB1028). The
initiative established a permanent reduction in tax rates, an on-going deduction
for health insurance premiums for the self-employed and a permanent increase in
personal exemption credits. In addition, the 1998 Legislature further increased
the personal exemption credit (LB1028) for years beyond the 1998 tax year. These
legislative changes are expected to result in a $24 million revenue reduction
during Fiscal Year 1999 and a $70 million reduction annually thereafter.
For the first seven months of FY 1999 (July 1998 through January 1999),
Nebraska's general fund gross revenue surpassed estimates by 2.1%, but net
receipts are below projections by 1.1%. For the year to date, net receipts total
$1.17 billion, with individual and corporate income tax revenues up 1.7% and
1.4%, respectively. Sales and use tax revenues are currently 3.6% below
year-to-date projections. Total FY 1999 revenues are projected to reach $2.10
billion, slightly below FY 1998 revenues.
FY 1999 appropriations are estimated to rise 15.4% to $2.23 billion.
Appropriations are designated for the following areas: local tax relief (39.2%),
aid to individuals including Medicaid and tuition assistance (19.1%), general
government operations (18.8%), post-secondary education (16.3%), capital
construction (2.7%) and other (3.9%).
Despite the general fund deficit in FY 1999, FY 2000 is expected to begin
with a $166.1 million cash balance and FY 2001 with a $127.2 million cash
balance. Estimated revenues for FY 2000 and FY 2001 are projected to grow 7.9%
and 5.3%, respectively. Appropriations for these two years are also expected to
increase by 2.2% and 3.4%, respectively.
NEW JERSEY RISK FACTORS
ECONOMIC OUTLOOK. The New Jersey economy enjoyed another outstanding year in
1998, making 1997-1998 the best two year period since 1987-1988. Strong
employment growth drove employment to a new high, personal income grew at a
substantial rate, and the real Gross State Product (GSP) increased by 3.5%, the
highest growth in a decade.
New Jersey is the ninth most populous state but the fifth smallest in land
area, making it 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.
Employment growth has been strong since mid-1996, with growth for the past
eight quarters ranging between 1.7% and 2.4%--the best growth in the
mid-Atlantic region. Although New Jersey employment gains have been below the
national rate since 1987, the gap substantially narrowed in 1997 and 1998.
Moreover, the state has regained the nearly 260,000 jobs lost during the
recession of the early 1990s and has created an additional 126,000 jobs. During
1998, New Jersey's employment growth of 2.1% drove employment to a level of 3.82
million, about 3% more than the 1989 pre-recession high.
The New Jersey Economic Policy Council reported in New Jersey Economic
Indicators 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. So while the incomes of New Jersey
residents are relatively high, the state's business sector has become more
vulnerable to competitive pressures. The tight labor market situation is
expected to continue during the next five years, as its labor force is projected
to growth at a faster rate (7.3%) than the state's population (5.6%).
In 1998, New Jersey's per capita personal income growth continued to outpace
the nation. The state's per capita personal income reached $33,937, reflecting
3.9% annual growth, compared to 4.4% growth on the national level. New Jersey's
average is currently 128% of the national per capita personal income ($26,412),
ranking it second only to Connecticut among the fifty states in terms of this
indicator.
The strong employment and income picture, supplemented by the continuing boom
in the financial markets, has fueled a resurgence in the New Jersey economy. The
state's economy is expected to parallel the national trend to slower growth in
1999 and beyond. Employment gains are projected to decline to 1.4% in 1999 and
1.1% in 2000, while personal income growth is expected to remain in the 4.5%
range for the next two years.
REVENUES AND EXPENDITURES. The State of New Jersey operates on a fiscal year
beginning July 1 and ending June 30. The state's Surplus Revenue ("Rainy Day")
Fund was created by legislation enacted in 1990 as an inclusion in the annual
budget for excess revenues. The Fund receives 50% of the amount by which the
General Fund revenues in a given fiscal year exceed the amount of revenues
certified by the Governor in the annual Appropriations Act for the same fiscal
year. If the Fund grows larger than 5% of the General Fund and Property Tax
Relief Fund, the excess may be appropriated for the retirement of bonds, for
capital projects and to offset property taxes.
At the end of Fiscal Year 1998, total General Fund revenues reached $18.18
billion, reflecting a 1.9% increase over budgeted General Fund collections.
Receipts during this fiscal year were affected by the repeal of several state
taxes, including the business personal property tax, three environmental taxes
and the public utility (municipal) excise tax, which together generated about
$1.0 billion during Fiscal 1997. Expenditures from this Fund totaled $18.05
billion which, in combination with the $1.65 billion balance left at the end of
Fiscal 1997, created a significant General Fund surplus of $1.8 billion at the
end of Fiscal 1998.
State revenues during Fiscal Year 1999 are estimated to total $18.7 billion.
Income to the General Fund represents $11.4 billion of this total, with the
major tax categories, lead by the individual income and sales taxes,
representing the largest part of the collections. Approximately $197 million of
this income is from the Fiscal 1998 General Fund surplus. Spending from the
General Fund is anticipated to reach $11.5 billion during Fiscal 1998, leaving
an estimated ending balance of $311 million for future use. Total state spending
is expected to reach $18.4 billion at the end of this fiscal year, with the
total undesignated fund balances totaling $1.05 billion. The Rainy Day Fund
deposit during Fiscal 1999 is projected to be $534 million, bringing the balance
to $634 million.
<PAGE>
The total budget recommendation for Fiscal Year 2000 is $19.61 billion, an
increase of $797 million or 4.3% over the current year. In prior years under the
Whitman administration, however, annual spending growth averaged 3.6%, compared
to 6.3% during the previous administration. With the Fiscal 2000 spending plan,
New Jersey's structural deficit has been reduced from $1.6 billion in Fiscal
1994 to $352 million in Fiscal 2000. Total resources in Fiscal 2000 are
projected to be $19.9 billion, including more than $1 billion in fund balances
carried over from Fiscal 1999. Appropriations are estimated to total $19.2
billion, leaving $112.9 million and $634.2 million, respectively, as surplus in
the General Fund and Surplus Revenue Fund.
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 hospital assessment authorized by the
Health Care Reform Act of 1992; the state's role in a consent order concerning
the construction of a resource facility in Passaic County; the state's actions
regarding alleged chromium contamination of state-owned property in Hudson
County; the constitutionality of annual A-901 hazardous and solid waste
licensure renewal fees collected by the Department of Environmental Protection
and Energy; the state's funding formula that attempts to close the spending gap
between poor urban school districts and wealthy suburban districts; the use by
the state of assessments on certain insurers to retire debt of the Market
Transition Fund, the manner in which mental health services are provided to
inmates with serious mental disorders who are confined within the facilities of
the Department of Corrections; the spousal impoverishment provisions of the
Medicare Catastrophic Coverage Act; Medicaid hospital reimbursements since
February, 1995; and the efforts to revitalize Atlantic City through the design
and construction of a highway and tunnel. Adverse judgments in these and other
matters could have the potential for either a significant loss of revenue or a
significant unanticipated expenditure by the state.
At any given time, there are various numbers of claims and cases pending
against the state, state agencies and employees, seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the state and state agencies seeking recovery
of monetary damages. The state is unable to estimate its exposure for these
claims.
DEBT MANAGEMENT. 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, 1998, New Jersey had total authorized bond indebtedness of
approximately $19 billion, of which $3.6 billion was issued and outstanding and
$1.86 billion was authorized but unissued. The appropriations for principal and
interest payments on general obligations bonds for Fiscal 2000 are recommended
at $518.7 million, including $479.7 million for principal and interest on bonds
outstanding and additional funding of $39 million for proposed bond sales. This
recommendation is an increase of $17.6 million from Fiscal 1999 appropriations.
RATINGS. For many years prior to 1991, State of New Jersey general obligation
bonds were rated as triple-A by Standard & Poor's Ratings Services and Moody's
Investors Services. Currently, however, these bonds are rated as follows:
Standard & Poor's Ratings Services, AA+; Moody's Investors Service, Inc., Aa1;
and Fitch IBCA, Inc., AA+.
NEW MEXICO RISK FACTORS
ECONOMIC OUTLOOK. New Mexico's economy in 1998 struggled to maintain the
modest job and income growth rates recorded in 1996 and 1997. New Mexico has
been affected by the troubles of the Asian economies; as a consequence, economic
growth has slowed considerably, shaving off about one percent of the state's
growth rate in 1998. However, the state should see moderately strong income
growth during 1999, while nonagricultural employment growth should average 2%
during 1999. Current dollar personal income should increase by a moderately
strong 5% in 1999 and 2000. Personal income, adjusted for inflation, should
increase by 2.5% as should employment growth by 2000. Manufacturing employment
should increase by 1.5% and may increase during 2000. Construction employment is
expected to remain more or less flat.
New Mexico economic growth has slowed. Nonagricultural employment growth was
only 1.3% in from February 1998 to February 1999, a loss of .1% from the 1.8%
growth in 1997, and .9% below the national average. This is a significant slow
down following growth rates of 3.8% in 1995, 5.0% in 1994 and 4.1% in 1993.
Causes for the slowdown can be traced to developments in several sectors of the
economy, including the Asian "flu." After an increase of 6.0% in 1995,
construction employment declined 3.2% in 1996 and 1.2% in 1997, but has
rebounded slightly with an increase of 2.2 for the period of February 1998 to
February 1999. This increase in construction employment, though positive, is
well below the 5.8% growth for the nation and the 11.4% increase seen by
neighbor-state Arizona. The finance, insurance and real estate sector lost 0.3%
of its jobs during 1997, but it too saw a slight increase of 1.6% for the
February 1998-1999 period. New Mexico's manufacturing suffered the largest
decreases in the country during the February 1998-1999 period, with a 4.6% drop
in employment. In the trade sector, the State saw slight growth of 1.8%.
Finally, New Mexico has seen a loss of government jobs, as during the period of
February 1998-1999, the State lost 0.7% of its government jobs. In all of the
above categories, New Mexico fell in the bottom quarter of all states.
In 1997, employment in services increased by 2.6% and continued its growth
during the February 1998-1999 period with a 4.6% increase. According to the New
Mexico Department of Labor, service occupations will continue to experience the
highest growth rates through 2006, with food service and preparation occupations
accounting for almost half of all new jobs in this sector.
In comparison to other states, New Mexico continues to rank low in terms of
per capita personal income, despite rapid growth in this area. The rapid growth
of the State's population, at 14.2% from 1990-97 compared to only 7.6% for the
nation, has had a negative impact on per capita personal income. New Mexico's
1996 per capita personal income of $18,814 was approximately 77% of the national
figure ($24,436), and the State ranked 49th out of the fifty states and the
District of Columbia. During 1997, per capita personal income in the State
climbed by 4.1% to $19,587, moving New Mexico to a 48th place ranking. However,
this gain is substantially lower than the increases in the 6.0% to 8.5% range
from 1993 to 1995. The national growth rate in total personal income during 1997
was 5.7%. The 1998 personal income numbers did not change much for the State, as
it saw only a 3.7% increase.
After remaining stable at 6.3% in 1994 and 1995, New Mexico's unemployment
rate was a very high 8.1% in 1996. During 1997, however, the State's
unemployment rate averaged 6.2%. In comparison, the average national
unemployment rate during 1997 was 4.9%. In March 1998, New Mexico's unemployment
rate was recorded at 6.4%, the third highest in the nation. The unemployment
rate for the year ending 1998 was 6.2%, where it has remained through June 1999.
The national average for the year ending 1998 was 4.5%, though it has been
slightly lower at 4.3% through June 1999.
Revenues and Expenditures. The State derives the bulk of its recurring
General Fund revenues from five major sources: general and selective sales
taxes, income taxes, the emergency school tax on oil and gas production, rents
and royalties from State and federal land, and interest earnings from its two
Permanent Funds. Effective July 1, 1981, the Legislature abolished all property
taxes for State operating purposes.
For the Fiscal Year ending June 30, 1998, recurring revenue totaled $3.158
billion, an increase of 6.5% over the previous fiscal year. Total General Fund
Revenue was $3.206 billion, up 6.0% from fiscal year 1997.
Preliminary results for fiscal year 1999 show recurring appropriations at
$3.182 billion, up 0.8% from the previous fiscal year. Nonrecurring
appropriations for fiscal year 1998 were $51.8 million, and are estimated at
$46.5 million for fiscal year 1998. The net transfer to the operating reserve
was $145.2 million.
The 1996 legislature also established the risk reserve fund within the
general fund. General fund balances including the risk reserve fund are
projected to total $377.9 million. Without the risk reserve, balances would be
$237.4 million. The fiscal year 1998 balance in the operating reserve was $225.3
million, or 7.0% of fiscal year 1998 total revenue.
Disaster allotments from the appropriation contingency fund totaled $3.9
million, and the ending balance in the appropriation contingency fund is $6.9
million for 1998 and is expected to be around $3.6 million in 1999.
DEBT ADMINISTRATION. The principal sources of funding for capital projects by
the State are surplus general fund balances, general obligation bonds, and
Severance Tax Bonds. The 1994 Legislature authorized the largest capital program
in the State's history, $383 million. The Executive Capital outlay
recommendation for the 1998 session totals $265.9 million. These authorizations
fund a broad range of State and local capital needs for various public school
and higher education acquisitions as well as correction facilities, museum and
cultural facilities, health facilities, State building repairs, water rights,
wastewater and water systems, State parks, local roads, and senior citizens
facilities projects.
GENERAL OBLIGATION BONDS. General obligation bonds of the State are issued
and the proceeds thereof appropriated to various purposes pursuant to an act of
the Legislature of the State. The State Constitution requires that any law which
authorizes general obligation debt of the State shall provide for an annual tax
levy sufficient to pay the interest and to provide a sinking fund to pay the
principal of the debts. General obligation bonds are general obligations of the
State for the payment of which the full faith and credit of the State are
pledged. The general obligation bonds are payable from "ad valorem" taxes levied
without limit as to rate or amount on all property in the State subject to
taxation for State purposes. As of June 30, 1999, the total amount outstanding
on General Obligation Bonds was $188,440,106.
SEVERANCE TAX BONDS. Severance Tax Bonds are not general obligations of the
State and the State is prohibited by law from using the proceeds of property
taxes as a source of payment of revenue bonds, including Severance Tax Bonds.
The State Treasurer keeps separate accounts for all money collected as Severance
Taxes, and is directed by State statute to pay Severance Tax Bonds from monies
on deposit in the Bonding Fund. For the fiscal year ended June 30, 1998, the
total amount outstanding on Severance Tax Bonds was $376,888,806.
Severance taxes have been collected by the State since the adoption of the
Severance Tax Act in 1937. Since 1959, certain severance tax receipts and
certain other monies determined by the Legislature have been deposited into the
Bonding Fund and used, in part, to retire bond issues which have funded a
variety of capital improvements in the State. The main minerals extracted from
the State which contribute the largest portion of Severance Tax revenues are
natural gas, oil and coal. Severance tax collections totaled $183.9 million in
fiscal year 1998 and are projected at $139.4 million for 1998.
BOND RATINGS. Moody's Investors Service, Inc. and Standard & Poor's Ratings
Services have assigned the bond ratings of "Aa1" and "AA+," respectively, to
State of New Mexico general obligation bonds and "Aa2" and "AA."
NEW YORK RISK FACTORS
ECONOMIC OUTLOOK. The State of New York 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. The economic recovery from the national
recession of the early 1990s started considerably later in New York than in the
nation. Several factors were attributed to the state's slow recovery, including
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. During the last few years, however, New York has
shown signs of economic resurgence.
To a great extent, the current economic improvement for both the state and
New York City is heavily dependent on Wall Street. Using some of the broadest
measures of the state's economic performance, it appears that the Wall Street
investment banking and securities brokerage firms have dominated New York's
economic picture throughout the 1990's expansion. From 1992 to 1997, Wall Street
accounted for half of the state's $27 billion increase in real earnings, and the
same result holds true for growth in New York's Gross State Product.
Considering that the securities industry represents only 2% of statewide
employment, Wall Street's lucrative bonus pay-outs, which soared an estimated
60% in 1996 and another 25% in 1997 and heavily impacted the state's personal
income levels and tax revenues, reflect the concentration of wage gains in the
1990s among a small group of high earners. The economic important of Wall Street
to the state and to New York City has been much greater in the 1990s than it was
in the 1980s. The October 1987 Wall Street crash was the watershed developing in
ending New York's 1980's economic expansion. The effects of the crash related
directly to the fact that the state's 1989-1992 recession was much steeper and
longer-lasting than in the rest of the nation.
While New York income growth continues to follow U.S. personal income growth
for 1998, employment growth in the state still lags behind the nation. After
adding jobs at about half the national rate in 1997, New York job gains during
1998 improved to nearly two-thirds of the national pace. Led by the acceleration
of job gains in New York City, the pace of statewide job growth improved in the
first half of 1998, although the state still trails most urban industrial states
such as New Jersey, Massachusetts and California. During the period from
December 1994 and May 1998, the state ranked 48th among the 50 states in terms
of total job growth.
Within New York, recent job growth remains concentrated in New York City and
the downstate counties. Between 1995 and 1998, job growth averaged 1.4% annually
in New York City, 1.3% in the other downstate counties, but only 0.4% annually
for the four large upstate metropolitan areas (Buffalo, Rochester, Syracuse and
Albany). The state's unemployment rate has also improved from 1997's 6.4% rate,
but it still averaged 5.6% during 1998 (U.S. unemployment averaged 4.5%).
During between 1992 and 1998, New York's largest employment gains were in
services and construction, with growth of 18.7% and 8.8%, respectively. Payrolls
in the finance, insurance and real estate sector as well as the government
sector declined during this period, with losses of 1.4% and 3.9%, respectively.
Manufacturing, however, suffered the largest drop in employment, with more than
100,000 jobs lost (representing 10% of overall manufacturing employment). Total
employment in the state at the end of 1998 reached 8.23 million, up 0.6% over
1997 figures. Nationally, employment grew 2.7%.
New York's unemployment rate is improving faster than the U.S. rate, although
it is still much higher than the national average. During 1998 the state's
unemployment rate averaged 5.6% (down from 6.4% in 1997), but it is still nearly
a percentage higher than the U.S. unemployment rate of 4.5% (4.9% in 1997).
Since 1994, New York has ranked 48th among the fifty states in job creation and
unemployment.
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 experienced in
attracting people and business. New York 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.
New York City accounts for approximately 41% of the state's population and
personal income, and the its financial health affects the state in numerous
ways. From 1993 to 1996, the rate of economic growth in the City slowed
substantially. The City's economic improvement significantly accelerated during
1997 and 1998, resulting in an unusually high, across-the-board increase in tax
receipts. Much of the increase can be traced to the performance of the
securities industry, but the City's economy has produced gains in retail trade,
tourism, and in business services. During 1998, the City experienced the largest
private sector job growth in the last 13 years.
The extraordinary earnings growth on Wall Street along with trends such as
corporate downsizing and the reduction in well-paying manufacturing jobs upstate
have widened the income gap between the highest earners and those in the middle
or at the bottom of the spectrum. Those gaps are now greater in New York than in
any other state. The income gap between the top fifth of families and the middle
fifth increased the third fastest of all states between the mid-1980s and the
mid-1990s. During this period, the average income of the middle fifth of
families declined by $1,200 while the average income of the richest fifth of
families grew by $24,700. And while the nation's poverty rate has decreased
since 1993, New York's has increased. In 1996, New York's poverty rate stood at
16.7%, much higher than the 13.7% rate for the country as a whole.
Per capita personal income in New York increased by 4.3% during 1997,
compared with the 5.4% gain during 1996. The state's per capita personal income
level is now $30,299, which is nearly 20% higher than the U.S. average
($25,298). Nationally, per capita personal income grew 4.7% in 1997. Since 1994,
however, total New York personal income has increased 23%, compared to a 25%
increase nationwide.
Over the near term, the New York's economy is vulnerable to the risk of a
slow-down on Wall Street or further weakening in the national economy. On Wall
Street, the continued weakness in corporate profits could upset the prevailing
investor sentiment that has permitted historically high stock valuations. A
serious Wall Street setback would jeopardize state revenue collections, and
though a powerful multiplier effect, would dampen consumption and housing
spending and ultimately, job growth in other sectors.
During 1999, overall employment in New York is projected to grow by 1.4%,
with the largest percentage gains in the construction and services industries.
Much like 1998, manufacturing will continue to lose jobs, while the finance,
insurance and real estate and government sectors remain stagnant. Personal
income will increase more slowly, with an estimated 4.5% gain, and the
unemployment rate is projected to drop nearly half a percent to 5.2%. During
2000, New York's economy is expected to expand more slowly with the state
average unemployment rate estimated to be 5.3%, overall employment growing 1.1%,
and personal income rising 4.2%
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.
STATE REVENUES AND EXPENDITURES. The State of New York completed is fiscal
year ended March 31, 1998 with a combined Governmental Fund operating surplus of
$1.8 billion, compared with the balance from the preceding fiscal year of $2.6
billion. The FY 1998 operating surplus included operating surpluses in the
General Fund of $1.56 billion, Special Revenues Funds of $49 million, Capital
Project Funds of $233 million, and offset by an operating deficit in the Debt
Service Funds of $43 million. As a result of the $1.56 billion surplus in the
General Fund during FY 1998, New York has managed to generate an accumulated
General Fund surplus of $567 million. Without the benefit of $4.4 billion of New
York Local Government Assistance Corporation net bond proceeds (1991-95),
however, as well as the decision to issue $292 of Dormitory Authority bond
proceeds in 1996, the General Fund accumulated deficit would have been $4.2
billion.
Revenues and other financing sources of the Governmental Funds totaled $70.46
billion during FY 1998, an increase of $1.32 billion (1.9%) over the previous
fiscal year. The largest source of revenues are from tax receipts, representing
about half of all overall revenues. The personal income tax, which generates
about 26.5% of all revenues, grew by 4.2% during 1998, due to a combination of
strong employment, wage growth and increased in tax payments due to the strong
performance by the financial markets. The consumption and use taxes, generating
13.8% of revenues, increased by 4.9%, primarily because of increased sales tax
receipts caused by increased consumer confidence and related spending. New York
relies heavily on federal funding, with grants reaching $22.27 billion in 1998
or a third of all Governmental Funds revenues.
Expenditures and other financing uses totaled $68.67 billion during FY 1998,
which represents an increase of $1.59 billion (2.4%) over FY 1997. Social
services is the single largest use of state funds at $25.6 billion or 37% of all
spending, with a 3.7% increase over the previous fiscal year. Education, the
second largest category of expenditures, grew by 4.4% to $14.3 billion. Debt
service payment increased by $338 during FY 1998.
The General Fund closing balance at the end of FY 1998 was $465 million. Of
this amount, $400 million was deposited in the Tax Stabilization Reserve Fund
(TSRF), while another $65 million was deposited in the Contingency Reserve Fund
(CRF). The TSRF had an opening balance of $317 million, supplemented by a
required payment of $15 million and an extraordinary maximum deposit of $68
million from surplus FY 1998 monies.
The fiscal year 1999 budget is balanced, with most of the spending increases
driven by state law, rather than by program expansions. No significant spending
reductions are included because (1) a significant portion of the $2 billion FY
98 budget surplus was carried over and used in the FY 1999 budget; (2) a boom in
incomes led by strong financial market performance anticipates expanding tax
collections; and (3) spending growth for entitlement program continues to be
moderate, with public assistance caseloads declining and moderate Medicaid
growth.
The FY 1999 enacted budget anticipates spending from all Governmental Funds
to total $7.15 billion, an increase of $5.5 billion or 8.3% over FY 1998
expenditures. Of this amount, state funds are expected to grew by 9.8%, while
General Fund spending increases by only 7.1%. This spending growth is higher
than it has been during the previous three fiscal years, representing a reversal
of the state's recent trend to keep spending growth near or below inflation.
For many years, New York has 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. New York combined state and local taxes are 30% above
the national average per share of person income, primarily because local taxes
are 72% higher than the national average (state taxes along are only 4% above
the national average).
General Fund tax receipts are forecast to grow 5.5% during FY 1999, with
growth almost entirely attributable to the personal income tax and collections
association with capital gains. The receipts also reflect the initial phases of
the STAR property tax reduction program, as well as the continuing impact of
other 1997 and earlier tax reduction legislation. In addition, the FY 1999
budget reflects several additional tax reduction proposals that will reduce
receipts available to the General Fund by about $700 million during the fiscal
year. Total General Fund revenues are estimated to increase by $3 billion or
8.7% during FY 1999. Spending within the General Fund is projected to increase
by $2.43 billion over the previous fiscal year, so that the projected surplus
for FY 1999 is expected to surpass $1 billion.
One major uncertainty to the FY 1999 state financial plan continues to be
risks related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year. It is
possible that recent changes could produce slower economic growth and a
deterioration in state receipts. An additional risk to the enacted budget arises
from the potential impact of certain litigation now pending against the state,
which could produce adverse effects on the state's projections of receipts and
disbursements.
In recent years, state actions affecting the level of receipts and
disbursements, as well as the relative strength of the state and regional
economy, actions of the federal government and other factors, have created
structural gaps for the state. These gaps resulted from a significant disparity
between recurring revenues and the costs of maintaining or increasing the level
of support for state programs. As noted, the FY 1999 enacted budget combines
significant tax and program reductions which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in state
program spending. Notwithstanding these changes, the state can expect to
continue to confront structural deficits in future years.
For example, the budget enacted for FY 1999 will increase debt service by
more than 40% through FY 2003, when total debt service will be more than $4.5
billion annually. New York's outstanding debt will total more than $40 billion
in FY 2003, compared to $23.4 billion in FY 1993. At that point, taxpayers will
pay more the debt service (8.4% as a percent of revenue) than for planned
capital projects. In addition, even if the economy continues modest growth, New
York will still face a budget gap of $5.5 billion in FY 2001, the highest
projected gap in history. The last time New York faced budget gaps of that
magnitude was during the recession of the late 1980s and early 1990s.
There can be no assurance that the State of New York 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.
NEW YORK CITY. In response to the fiscal crisis in New York City (the "City")
during 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 the
Municipal assistant Corporation ("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")).
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 FY 1999
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 Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan. 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 condition of the regional and local
economies, the absence of wage increases in excess of the increases assumed in
its financial plan, employment growth, provision of state and Federal aid and
mandate relief, State legislative approval of future state budgets, levels of
education expenditures as may be required by state law, adoption of future City
budgets by the New York City Council, and approval by the Governor or the State
Legislature and the cooperation of MAC with respect to various other actions
proposed in such financial plan.
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 work 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.
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.
In January, 1998, the New York City mayor announced the City's Financial Plan
for Fiscal Years 1998-2002. For the second year in a row, the New York City
four-year financial plan contains a record surplus of more than $1 billion.
Since the adoption of the FY 1998 budget, the City is now forecasting additional
resources of $3.1 billion. Approximately 73% will be used to reduce the out-year
gaps, 19% will fund targeted educational, public safety and other initiatives,
and 8% will be used to reduce taxes further.
To reduce the out-year gaps, the City has imposed fiscal discipline on the
rate of growth of City spending which has, over the last four years, been held
below the rate of inflation. For fiscal year 1999, the proposed City-funded
spending increase will be held to 0.6%. The budget stabilization account,
established for the first time in 1997, will be maintained in fiscal year 1999
at $210 million with an additional $210 million created for fiscal year 2000. As
a result of this fiscal planning, the out-year gaps have been cut in half
compared to six years ago: fiscal year 1993 was $13.3 billion and fiscal year
1998 is $6.75 billion.
According to recent staff reports, while economic recovery in New York City
has been slower than in other regions of the country, a surge in Wall Street
profitability resulted in increased tax revenues and generated a substantial
surplus for the City in City fiscal year 1996-97. Although several sectors of
the City's economy have expanded recently, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industry and the course of the
national economy. These reports have also indicated that recent City budgets
have been balanced in part through the use of non-recurring resources; that the
City's Financial Plan tends to rely on actions outside its direct control; that
the City has not yet brought its long-term expenditure growth in line with
recurring revenue growth; and that the City is therefore likely to continue to
face substantial gaps between forecast revenues and expenditures in future years
that must be closed with reduced expenditures and/or increased revenues.
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.
OTHER MUNICIPALITIES. Certain localities in addition to New York City could
have financial problems leading to requests for additional state assistance and
the need to reduce their spending or increase their revenues. The potential
impact on the state of such actions by localities is not included in projections
of state receipts and expenditures in the New York's FY 1999 budget.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment 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 increased state
expenditures for extraordinary local assistance.
In addition, beginning in 1990, the City of Troy experienced a series of
budgetary deficits that resulted in the establishment of a Supervisory Board for
the City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, aid that was largely continued in 1997. Twenty-eight
municipalities were scheduled to share the more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97% increase in General
Purpose State Aid.
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 New
York City and MAC obligations and could thus jeopardize the City's long-term
financing plans.
From time to time, 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, any of its agencies, New York City or any other municipality were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the state, including notes or bonds in the New York Trust,
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions, and
long-range economic trends. The long 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.
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. In 1997, a civil rights claim alleging intentional school
segregation in Yonkers has resulted in a $9 million judgment for plaintiffs that
the state must pay. Adverse developments in the foregoing proceedings or new
proceedings could adversely affect the financial condition of the state in the
future.
The City is also 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. 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.
DEBT MANAGEMENT. There are a number of methods by which the State of New York
may incur debt. The state may issue general obligation bonds approved by the
voters and notes in anticipation of such bonds. The state, with voter approval,
may also directly guarantee obligations of public benefit corporations.
(Presently, the Job Development Authority is the only public benefit corporation
authorized to issue state-guaranteed bonds.) Payments for debt service on state
general obligation and state-guaranteed bonds or notes are legally enforceable
obligations of the state. New York has never been called upon to make any direct
payment pursuant to its guarantee.
As of March 31, 1998, New York had approximately $34 billion in outstanding
state-supported debt. Of this amount, $4.74 billion were for outstanding general
obligation bonds, $29 billion in state-supported debt issued by public
authorities and Albany County (to finance Empire State Plaza), $429 million
issued as certificates of participation (COPs), the proceeds of which are used
to finance equipment and real property acquisitions. New York is ranked fourth
among the fifty states in state-supported debt per capita, at $1,596 per
resident.
During FY 1998, the state issued $487 million in general obligation bonds and
redeemed $482 million. The total amount of general obligation bonded debt
authorized but not yet issued at year-end was $2.29 billion. Notes payable
(issued in the form of commercial paper) had a year end-balance of $294 million.
Although New York generally incurs debt to pay for the state's long-term
capital needs, the state also incurred debt to eliminate its annual spring
borrowing through the Local Government Assistance Corporation (LGAC). In June
1990, legislation was enacted creating the LGAC, a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the state's annual seasonal borrowing.
As of March 31, 1998, $5.2 billion remained outstanding for the LGAC. In
addition, that the end of FY 1997, New York public authorities had $56.1 billion
in debt outstanding not supported by state funds. This debt is paid back through
authority revenues such as Thruway tolls. Total non-general obligation debt was
$33.95 billion at the end of FY 1998.
The state anticipates that its state-supported debt outstanding will grow to
$36.5 billion by the end of FY 1999, a 7.4% increase. Debt outstanding is
forecast to grow another 4.7% to $38.2 billion in FY 2000, with annual rates of
increase around 3% for the three following fiscal years.
In addition to the state, a number of New York's local governments, agencies,
instrumentalities and political subdivisions 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.
The total of such debt incurred by counties, cities (including New York
City), towns, villages, school districts and fire districts, was $44.7 billion
in outstanding debt as of the fiscal year ending in 1996. A portion of that
indebtedness represented borrowing to finance budgetary deficits and was issued
pursuant to state enabling legislation. State law requires the State 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. Eighteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1997.
RATINGS. In August, 1998, Moody's Investors Service, Inc. lowered its rating
for State of New York general obligation bonds from A1 to A2, its lowest state
rating (Louisiana is the only other state to receive this rating). Standard &
Poor's Ratings Services gives the state an A rating, which it has retained since
improving from A- in January, 1992. Fitch IBCA, Inc. (formerly known as Fitch
Investors Service, L.P.) rates the state's general obligation bonds as A+.
New York City general obligation bonds are currently rated A- by Standard &
Poor's; Baa1 by Moody's; and A by Fitch IBCA (upgraded from A- on March 8,
1999).
NORTH CAROLINA RISK FACTORS
ECONOMIC OUTLOOK. During 1998, for the seventh straight year, the North
Carolina economy expanded. Although the U.S. economy has also grown, the pace of
economic activity in North Carolina exceeded the national economy. The Gross
State Product rose over 5%, more than 40,000 new jobs were created, and the
unemployment rate remained a percentage point lower than the national average.
The state's economic growth during 1998 was widespread across most economic
sectors, with the exception of nondurable manufacturing. Slower growth is
projected for North Carolina during the next year, but recent foreign economic
crises are not expected to play much of a role in the state's continuing
economic performance.
During the 1990s, the state's diversification from a manufacturing and
farm-based economy to a knowledge-based economy has been fueled largely by new
technology and science. In particular, the presence of large universities and
the Research Triangle Park have generated much of the state's economic success,
as have recent relocations of corporate headquarters and foreign-based
high-technology industrial plants within the state. Overall, however, the
current economic profile of North Carolina remains a combination of industry,
agriculture and tourism.
North Carolina's economy continues to benefit from a vibrant manufacturing
sector. Manufacturing firms employ approximately 23% of the total
non-agricultural workforce, making North Carolina first in the nation in
percentage of manufacturing workers. North Carolina leads the nation in the
production of textiles, tobacco products, furniture and fiberoptic cable, and is
among the largest producers of pharmaceuticals, electronics and
telecommunications equipment. More than 700 international firms have established
a presence in the state. In addition, the finance industry has proven to be one
of North Carolina's strongest areas. In terms of bank assets, Charlotte is now
the second largest financial sector in the country.
The state's 1997 gross agricultural income of $8.3 billion is also among the
highest in the nation. While the U.S. average per farm net income was $24,210 in
1997, in North Carolina per farm net income was $61,598, more than 250% higher
than the national average. According to the State Commissioner of Agriculture,
during 1997 the state ranked first in the nation in the production of tobacco,
turkeys and sweet potatoes; second in hog production, pickling cucumbers, trout
and Christmas trees; third in poultry and egg products; and fourth in peanuts,
blueberries and strawberries. This wide variety of agricultural products and a
continuing push in marketing efforts have protected North Carolina farm income
from some of the wide variations experienced in other states where most of the
agricultural economy is dependent on a small number of agricultural commodities.
North Carolina is among the most diversified agricultural states in the nation.
After a small decline in 1996, the production of tobacco, the leading crop in
the state, grew by 17% to $1.2 billion during 1997. 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 in general.
With the exception of continued declines in many nondurable manufacturing
industries such as textiles, every sector of the North Carolina economy
increased its payrolls during 1998. Services grew 7.3%; the finance, insurance
and real estate sector gained 6.5%; construction increased by 5.0%; and the
transportation and trade sectors grew in the 1-1.5% range. Lead by losses of
11,000 jobs in the textiles and apparel industries, however, manufacturing as a
whole declined 1.0% during 1998, following two years of similar losses. Despite
40,000 newly created jobs in 1998, the decline in this sector played such a
large role in total employment, North Carolina's overall employment dropped by
1.1% during 1998, after gains of 2.4% and 4.2% in 1997 and 1996, respectively.
Despite declines in total employment, the state's unemployment rate fell
again during 1998. North Carolina's unemployment rate has been lower than the
national average for the past four years. In 1997, the rate declined to 3.6% and
dropped again during 1998 to 3.5%, with rates as low as 2.5% in the state's
metropolitan areas. Nationally, the unemployment rate during these two years was
4.9% and 4.5%, respectively.
The state's ability to retain its low unemployment rate is related directly
to decreases in the labor force comparable to those in total employment. During
recent years, North Carolina's labor force has undergone significant change 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 also been
able to maintain, to a large extent, their rural residences. During 1998, the
labor force declined by 1.3%, 0.2% faster than overall employment. The state's
population, on the other hand, grew by 1.6% in 1998. This growth did not
directly affect the current labor force because about 92% of this gain was due
to births, while in-migration was almost completely offset by deaths. Over the
ten-year period since 1989, however, the state labor force has grown 11.9% to
nearly 3.9 million workers and overall employment has increased by 12.0% to
about 3.7 million.
Low unemployment combined with strong job growth has put pressure on North
Carolina's economic performance due to quickly rising labor costs. Because the
labor market in the state is tight, labor costs have been rising at increased
rates during the late 1990s. Thus far, improved productivity has offset the
additional labor costs, but difficulties could arise in the future, possibly
causing higher general inflation or reduced profitability for North Carolina
businesses.
Per capita personal income in North Carolina has risen steadily for the past
four decades. In 1960, per capita income in North Carolina averaged only 71.2%
of the national average, then stabilized at about 80% during the 1970s and
1980s. In 1998, per capita personal income grew 5.1% to $23,174 or 91.6% of the
national average ($25,298). North Carolina's per capita personal income is
expected to increase by about 5% through 2001.
The year 2000 is expected to look much like 1999, as economic growth slows in
North Carolina. The Gross State Product is projected to increase by 3.5%, and
job growth will be around 1.5%. As the economy slows, businesses making durable
goods, like manufacturing and construction, will be the most adversely affected.
Although projected growth is slower than in previous years, no recession is
expected for the state.
REVENUES AND EXPENDITURES. The North Carolina State Constitution requires
that the total expenditures of the state for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and a portion
of the surplus remaining in the State Treasury at the beginning of the period.
State law requires 25% of surplus funds from the previous fiscal period to be
placed in the Savings Reserve Account; an amount of the funds equal to 3% of the
value of state-owned facilities to be placed in the Reserve for Repairs and
Renovations; and 6.5% of the surplus funds to be placed in the Clean Water
Management Trust Funds. The remainder of the surplus may be used for
expenditures during the following fiscal period.
Total revenues for general governmental functions (general fund, special
revenue funds and capital projects) amounted to $23.4 billion for the fiscal
year ended June 30, 1998. Tax revenues, representing 56.8% of all revenues,
increased by $1.1 billion during FY 1998, reflecting the favorable economic
climate in North Carolina. Income tax collections increased by 12.7% over FY
1997, while sales tax receipts experienced a 4.4% increase. Federal funds, the
second largest portion of the state's total income at 25.6%, grew by only 2.1%
during FY 1998.
Expenditures and other financing uses for general governmental purposes
totaled $22.9 billion in FY 1998. Of this amount, 31.9% was used for health and
human services, 23.7% for education, 10.4% for transportation and 4.9% for
general government expenses. Total expenditures increased by $1.6 billion (7.5%)
during FY 1998, with the largest increases directly related to education and
health and human services.
Since 1994, the state has had a budgetary surplus, due in part to new taxes
and fees, as well as spending reductions put into place in the early 1990s. In
addition, like the nation, the state has experienced an economic recovery during
the 1990s. The general fund surplus at the end of Fiscal Year 1998 was reported
at $1.665 million, compared with the balance of $1.704 million at the end of FY
1997.
According to 1991 legislation, a portion of the state's general fund balance
is reserved for deposit in the Savings Reserve Account (SRA), which was
established at the end of FY 1992. Under this legislation, 25% of any unreserved
credit balance is transferred in the SRA until the account equals 5% of general
fund appropriations for the prior year. During FY 1997, no deposit was made to
the SRA. At the end of FY 1998, however, $21.6 million was transferred into the
SRA, bringing the total reserve to the 5% level of $522.5 million.
Consistent with the expected growth in the state's economy, tax collections
were projected to increase by 5.7% during Fiscal Year 1999. Growth in individual
income tax receipts was estimated to be 6.7% on the basis of gains in employment
and wages, while the sales and use tax income was projected to grow by 5.8%.
According to the revised budget, however, actual gains in general fund tax
collections will be lower due to tax law changes enacted by the 1996 and 1997
sessions of the North Carolina General Assembly. Among the changes expected to
affect FY 1999 revenues are: a reduction of the sales tax on food from 4% to 2%;
the phased-in reduction of the corporate income tax from 7.75% to 6.90% by the
year 2000; and the elimination of the soft drink tax. The impact of these
changes will reduce tax income by $93.9 million during FY 1999, reducing overall
growth of tax collections from 5.7% to 4.6%.
Adjusted general fund revenues are expected to reach $12.3 billion during FY
1999, up 5.9% over the prior fiscal year. Total general fund expenditures are
projected to be $12.5 billion, a 9.4% increase. After transfers and deposits in
the budget stabilization reserve, the total general fund balance is projected to
be $522 million.
The greatest impact on FY 1999 and FY 2000 revenues results from the Bailey
and Patton lawsuits. In the Bailey cases, state and local government retirees
filed a class action suit as a result of the 1989 repeal of income tax
exemptions for state and local government retirement benefits. In Patton v.
State of North Carolina (filed May 1995), federal retirees filed a lawsuit in
state court for tax refunds for the years 1989 through 1994 alleging that
adjustments made in response to the 1989 repeal of the tax exemption for state
retirees constituted unlawful discrimination against federal retirees. On June
9, 1998, the state and the various retirees involved in the Bailey and Patton
cases settled their respective cases in the amount of $799 million. Of this
amount, $400 million will be disbursed as tax refunds during FY 1999, and $399
million will be paid in refunds during FY 2000.
Projected FY 2000 general fund revenues total $13.07 billion, with spending
estimates of $13.06 billion. During FY 2000, a general fund balance of $6.9
million is expected. During FY 2001, general fund revenues are expected to be
$13.84 billion, with appropriations of $13.83 billion. The general fund balance
in FY 2001 is expected to be $3.5 million.
DEBT MANAGEMENT. The State of North Carolina had a number of debt issues
outstanding. These issues include $2.1 billion in general obligation bonds, $1.3
billion in revenue bonds in the component unit proprietary funds and $839
million in revenue bonds in the university funds. During 1998, general
obligation debt for the state increased by 40%, but the general obligation debt
per capita remained below $300. Debt service represented 0.7% of overall
spending during FY 1998.
BOND RATINGS. Moody's Investors Service, Inc., Standard & Poor's Rating
Services and Fitch IBCA, Inc. all rate State of North Carolina general
obligation bonds as AAA, making North Carolina one of only a few states to
maintain three triple-A ratings. In addition, approximately 25% of all AAA
ratings for state and local governmental units nationwide are located in North
Carolina.
OHIO RISK FACTORS
The Ohio Trust will invest most of its net assets in securities issued by or
on behalf of (or in certificates of participation in lease-purchase obligations
of) the State of Ohio, political subdivisions of the state, or agencies or
instrumentalities of the state or its political subdivisions ("Ohio
Obligations"). The Ohio Trust is therefore susceptible to general or particular
economic, political or regulatory factors that may affect issuers of Ohio
Obligations. The following information constitutes only a brief summary of some
of the many complex factors that may have an effect. The information does not
apply to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available information, and is believed to be
accurate.
No independent verification has been made of any of the following
information.
Generally, creditworthiness of Ohio Obligations of local issuers is unrelated
to that of obligations of the state itself, and the state has no responsibility
to make payments on those local obligations. There may be specific factors that
at particular times apply in connection with investment in particular Ohio
Obligations or in those obligations of particular Ohio issuers. 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 Trust or other
parties.
ECONOMIC OUTLOOK. While seeking diversification by expanding services and
other non-manufacturing sectors, the Ohio economy continues to rely on durable
goods manufacturing, concentrated largely in the production of motor vehicles
and equipment, steel, rubber products and household appliances. As a result,
general economic activity tends to be more cyclical than in more economically
diversified states and in the nation as a whole.
During 1998, Ohio's total payroll employment dropped by 0.1% (7,900 jobs),
compared with growth in the 1% to 1.5% range during 1995-97. Services and trade,
the state's largest areas of employment, created over 53,000 new jobs combined.
Among all sectors, however, the finance, real estate and insurance sector showed
the highest percentage gains, at 3.5% or 10,200 new positions. Yet one of the
most important areas of the state's economy exhibited very slow growth again in
1998. With nearly 1.1 million residents employed in this area, Ohio is the third
largest manufacturing state in the nation. The state's factories lead the nation
in the production of steel, plastics and fabricated metals, as well as autos and
trucks. Like manufacturing sectors across the country, Ohio's manufacturing
sector experienced very slow growth, generating only 2,800 jobs in 1998
(following a loss of 2,100 jobs in 1997). Despite slowing employment growth,
manufacturing still leads all Ohio industries in terms of total income, with
$27.2 billion in durable and nondurable manufactured exports during 1997.
Agriculture is another important segment of the economy, with over half the
state's land devoted to farming and with approximately 16% of total employment
in farming and agribusiness. The state's most important agricultural products
are chickens, eggs, and dairy products.
Before the 1990s, Ohio's unemployment rate was commonly higher than the
national average. For the past eight years, however, the state's rates were
below the national rates. During 1998, Ohio's average unemployment rate was 4.3%
(down from 4.6% in 1997), while nationally the average was 4.5%. The state's
drop in unemployment is affected in part by its slow rate of population growth.
Ohio's population of 11.2 million managed to grow only 0.1% during 1998.
As high-paying manufacturing jobs are replaced by lower-paying service sector
positions, Ohio's personal income growth is slowing. During 1997, the state's
per capita personal income grew 3.9% to $24,203, but it is still only 96% of the
national figure ($25,298). Nevertheless, Ohio's per capita personal income is at
a comparable level to three of the other four states in the Great Lakes region
(Illinois is about $3,500 higher).
Calendar 1999 should see Ohio experience continued but slowing economic
growth. Personal income in the state and the nation is projected to increase by
5.2%, and Ohio's unemployment rate is expected to be approximately 5.0%. Slight
declines in the sales of cars and trucks will impact durable goods
manufacturing, but growth in services and trade should offset employment losses
in those industries.
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.
REVENUES AND EXPENDITURES. The State of Ohio 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 or fiscal biennium in a deficit
position. Most state operations are financed through the General Revenue Fund
("GRF"), for which personal income and sales and use taxes are the major
sources. Growth and depletion of GRF ending balances show a consistent pattern
related to national economic conditions, with the ending balances reduced during
less favorable and increased during more favorable economic periods. The state
has well-established procedures for, and has taken in a timely manner, necessary
actions to ensure positive balances during less favorable economic periods.
Those procedures include general and selected reductions in appropriations
spending.
The current biennial budget includes fiscal years 1998 and 1999. During FY
1998, total GRF revenues reached $17.8 billion, with the individual income tax
generating $5.6 billion (32.7%) and sales and use taxes generating $5.2 billion
(29.2%) of this amount. GRF spending in FY 1998 totaled $17.6 billion, 7.4%
higher than FY 1997. Of this amount, Medicaid and primary and secondary
education appropriations were $5.2 billion and $4.3 billion, respectively.
Because revenues were higher than anticipated, Ohio tax payers received an
"economic performance and good management" bonus in the form of a one-time
income tax reduction of 3.98%. This reduction was paid for using $262.9 million
deposited into the Income Tax Reduction Fund at the end of FY 1997. Another
issue which impacted state revenues was the continued phasing-in of personal
exemption increases. During tax year 1998, the state personal exemption was
increased from $850 to $950, and the exemption for dependents was raised from
$850 to $1,050. At the end of FY 1998, Ohio's Budget Stabilization ("rainy day")
Fund, targeted to be 5% of the previous year's GRF revenues, grew by 2.9% to
$887.9 million.
GRF revenues for the final year of the biennium, FY 1999, are projected to
total $18.4 billion, a 3.8% increase over FY 1998 receipts. Income tax
collections are expected to grow by 10.0%, while the sales and use tax will
generate an additional 4.6% in revenue. Total GRF appropriations for FY 1999 are
estimated at $18.5 billion, up 5.2%. At the end of FY 1999, the Budget
Stabilization Fund balance is projected to be $922.1 million (up 3.9%).
DEBT MANAGEMENT. Ohio'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 to taxes or excises to its payment. As of May 6, 1998, $1.06 billion
(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 ($28.2 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 ($945.5 million
outstanding); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time ($88.6 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), 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 $5.1 billion of
which were outstanding as of May 6, 1998.
The state's aggregate FY 1998 rental payments under various capital lease and
lease purchase agreements were approximately $9.1 million. In recent years,
state agencies have also participated in transportation and office building
projects that may have some local as well as state use and benefit, in
connection with which the state enters into lease purchase agreements with terms
ranging from 7 to 20 years. Certificates of participation, or special obligation
bonds of the state or a local agency, are issued that represent fractionalized
interests in or are payable from the state's anticipated payments. The state
estimates highest future fiscal year payments under those agreements (as of May
6, 1998) to be approximately $30.7 million (of which $27.2 million is payable
from sources other than the GRF, such as federal highway money distributions).
State payments under all those agreements are subject to biennial
appropriations, with the lease terms being two years subject to renewal if
appropriations are made.
A 1990 constitutional amendment authorizes greater state and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of state
obligations secured by a pledge of all or such portion as it authorizes of state
revenues or receipts (but not by a pledge of the state's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the state to meeting certain guarantees under the state's tuition
credit program which provides for purchase of tuition credits, for the benefit
of state residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available state moneys has never
been implemented, apart from a "guarantee fund" approach funded especially from
program revenues.)
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 (statewide aggregate
approximately 44% in recent years) of their operating moneys from state
subsidies but are dependent on local property taxes, and in 119 districts (as of
May 6, 1998) from voter-authorized income taxes, for significant portions of
their budgets. Litigation similar to that in other states has been pending
questioning the constitutionality of Ohio's system of school funding. The Ohio
Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional and ordered the state to provide for and fund a system
complying with the Ohio Constitution, staying its order for a year (to March
1998) to permit time for responsive corrective actions. A small number of the
state's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A program has provided 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
totaled $41.1 million for 28 districts in FY 1994, $71.1 million for 29
districts in FY 1995 (including $29.5 million for one), $87.2 million for 20
districts in FY 1996 (including $42.1 million for one), and $113.2 million for
12 districts in 1997 (including $90 million to one for restructuring its prior
loans).
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 and school districts 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. (Similar
procedures have recently been extended to counties and townships.) Since
inception for municipalities in 1979, these "fiscal emergency" procedures have
been applied to 24 cities and villages; for 18 of them, the fiscal situation was
resolved and the procedures terminated (two villages and two cities are in
preliminary "fiscal watch status"). As of May 6, 1998, the 1996 school district
"fiscal emergency" provision was applied to five districts and 11 were on
preliminary "fiscal watch" status.
At present, the state itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
RATINGS. Standard & Poor's Ratings Services and Fitch IBCA, Inc. both rate
State of Ohio general obligation bonds as AA. Moody's Investors Service, Inc.
gives these bonds a Aa3 rating.
<PAGE>
OKLAHOMA RISK FACTORS
ECONOMIC OUTLOOK. Oklahoma's economy has undergone significant
diversification over the past two decades. Since the oil bust of the early
eighties, the state has broadened its economic base to rely less on petroleum
and agriculture. Energy dependency has given way to an economic structure,
including manufacturing-driven growth, which more closely resembles other state
economies. There have been sizable employment increases in the state's
manufacturing and service sectors over the past ten years, resulting in a
production mix very similar to that of the nation as a whole.
Mirroring the national economy, Oklahoma has been experiencing one of the
longest expansionary phases in recent history. Current economic performance is
much better than that experienced during the mid-1980s. As measured by
Oklahoma's Gross State Product (GSP), the oil bust of the 1980s is over. The
1998 estimated real GSP (inflation-adjusted) is expected to have surpassed the
1982 pre-bust level to reach $70.1 billion, reflecting 2.5% rise over 1997,
compared with the national rate of 2.3%. According to 1997 statistics,
agriculture adds more than $4.2 billion to the state's GSP. All major sectors of
the state's economy, with the exception of mining, improved during 1998.
For the past several years, Oklahoma has enjoyed favorable economic gains,
especially in employment. Based upon data through First Quarter 1999, the
state's employment has grown to 1.57 million, reflecting 1.2% annual growth
during 1998. Although manufacturing employment has lead job growth in recent
years, especially in electrical and electronic equipment, during 1998 it
increased by only 0.5%. In 1999, the state's nonagricultural employment is
expected to increase by 2.0% or 30,000 jobs, again outpacing the national growth
rate. Half of the new jobs are expected to be in services, with another 4,900 in
retail and wholesale trade, 3,700 in state government and 3,000 in
manufacturing.
Oklahoma boasts the lowest unemployment rate among its neighboring states
(Arkansas, Colorado, Kansas, Louisiana, Missouri, New Mexico and Texas). The
state's unemployment rate dropped from 4.5% (not seasonally adjusted) in March
1998 to 4.2% during March 1999, while the Southwest average for the same months
was 5.0% and 4.6%, respectively. Oklahoma's annual unemployment rate during 1998
was 4.5%, compared to 4.5% for the nation.
In step with the growth in employment, personal income growth in Oklahoma has
continued to be strong. Per capita personal income in the state grew to $21,072
in 1998, up from $18,544 in 1995. Oklahoma dropped from 43rd to 44th among the
states in terms of average per capita personal income, which is currently 80% of
the national average ($26,412) and less than the other states in the Southwest
region, which average $22,256. According to the Oklahoma Department of Commerce,
per capita income in Oklahoma's two most populous counties, Oklahoma and Tulsa,
have averaged 92.2% and 99.6% of the national figure, respectively. In other
counties, however, the comparable figure is less than 72%, showing the disparity
between the metropolitan and non-metropolitan areas.
Oklahoma's population has increased from 3,145,576 in 1990 to 3,347,000 in
1998, a growth rate of 6.4% compared to the national average of 8.7%. Of the six
neighboring states, only Kansas and Louisiana had slower population growth, at
6.1% and 3.5%, respectively. In comparison, the rates of population growth since
1990 in Arkansas, New Mexico, Texas and Colorado have been 8.0%, 14.6%, 16.3%
and 20.5%, respectively. Because employment growth currently outpaces annual
population growth in Oklahoma, the state is facing a tight labor market and
could see significant wage pressures as well as labor shortages.
REVENUES AND EXPENDITURES. Governmental expense budgeting provisions in
Oklahoma are conservative, basically requiring a balanced budget each fiscal
year unless a debt is approved by a vote of the people providing for the
collection of a direct annual tax to pay the debt. Certain limited exceptions
include: deficiency certificates issued at the discretion of the Governor (which
may not exceed $500,000 in any fiscal year); and debts to repel invasion,
suppress insurrection or to defend the state in the event of war.
<PAGE>
To ensure a balanced annual budget, the State Constitution provides
procedures for certification by the State Board of Equalization of revenues
received in the previous fiscal year and amounts available for appropriation
based on a determination of revenues to be received by the state in the General
Revenue Fund in the next ensuing fiscal year. In addition, the legislature
cannot appropriate more than 95% of the general revenue expected to be collected
in a given year.
The impact of these fiscally conservative rules, however, has been to some
extent offset by the practice of granting pension benefits and incurring other
liabilities without providing the long range funding required to assure that the
state will be able to make these payments when they become due. The Teachers and
Firefighters pension plans and the state's Special Indemnity Fund will all
require future funding to meet existing liabilities.
Beginning July 1, 1985, surplus funds were placed in a Constitutional Reserve
("Rainy Day") Fund until the Reserve Fund equaled 10% of the General Revenue
Fund certification for the preceding fiscal year. At the end of Fiscal Year 1998
(ended June 30, 1998) this Fund balance totaled $297.4 million, half of which
may be appropriated under restricted conditions. This deposit to the Rainy Day
Fund marked the third consecutive year in which the state made a contribution.
Oklahoma's budgetary General Revenue Fund collections totaled $3.87 billion
during Fiscal Year 1998, demonstrating 2.4% growth, compared to 1.9% growth the
previous fiscal year. State tax dollars accounted for the largest increase in
state income, lead by strong growth in individual income tax receipts. Oil and
gas collections, however, decreased by nearly 20%. Actual Fiscal Year 1998
appropriations totaled $4.52 billion, reflecting 9% growth. Spending for Fiscal
1999 is estimated to reach $4.89 billion, up 8% over the previous year.
The Fiscal Year 1999 budget includes significant tax relief for the purpose
of enhancing the state's rate of economic growth. This package, which is
estimated to have a fiscal impact of just over $100 million over the next
several years, provides relief from individual income taxes, sales taxes and
estate taxes. And for the first time in its history, Oklahoma reduced its
personal income tax rate. Effective January 1, 1999, a new top rate of 6.75%
will replace the existing 7% rate.
One problem that remains is the large unfunded liability of the Teachers'
Retirement System (TRS). Due in large part to the collapse of the oil industry
in the mid-1980s and the consequent decline in revenue growth, the unfunded
liability was created when the legislature continued to provide additional
benefits without adequate funding. A major education initiative made the
situation worse by adding thousands of new teachers at a time when contributions
to TRS failed to cover normal costs. As a result the TRS now has an actuarially
estimated unfunded liability of $4.8 billion.
DEBT MANAGEMENT. In 1987, the state created the Executive Bond Oversight
Commission and the Legislative Bond Oversight Commission, which meet jointly to
review all proposed debt issuances and which must both approve each financing
plan before obligations are issued.
General obligation bonds are backed by the full faith and credit of the
state, including the state's power to levy additional taxes to ensure repayment
of the debt. Accordingly, all general obligation debt currently outstanding was
approved by a vote of the citizens. Prior to a 1993 general obligation bond
program, the state last issued general obligation bonds in 1968.
As of June 30, 1998, the outstanding general obligation net debt of the State
of Oklahoma was $318 million, down from $327 million in 1997. This figure
excludes the self-supporting taxable bonds of the Oklahoma Industrial Finance
Authority, which are secured by the repayment of loans made to private
businesses.
BOND RATINGS. The general obligation bonds for the State of Oklahoma are
rated as follows: Standard & Poor's Ratings Services, AA; Moody's Investors
Service, Inc., Aa3 (refined from Aa on February 7, 1997); and Fitch IBCA, Inc.,
AA.
<PAGE>
OREGON RISK FACTORS
Oregon's May 1999 forecast issued by the Department of Administrative
Services states that Oregon's economy grew briskly in the first quarter of 1999.
The pattern for growth was once again similar to the U.S., with consumer
spending leading the way. The mild recovery in the Asian crisis alleviated some
of the pain experienced by the manufacturing sector throughout the second half
of 1998.
The preliminary estimate of first quarter 1999 Oregon job growth is 3.9%.
This is the fastest quarterly growth since the fourth quarter of 1996. It
compares with 2.3% for the U.S. as a whole. The first quarter was a marked
improvement over the fourth quarter of 1998, when jobs grew 2.4%.
Over the past year, Oregon's economy slowed relative to its western
neighbors. Oregon ranks 32nd among states for job growth between February 1998
and February 1999. California and Washington had much faster job growth during
the period, ranking 7th and 12th, respectively.
The forecast for Oregon's economy is that it will grow faster than the U.S.
economy over the next two years. The growth will be mild and well below the fast
pace of 1995 through 1997. No decline in employment is expected unless the U.S.
economy falls into recession. Job losses to manufacturing should lessen in 1999
with slight gains in 2000, following the recovery of the Asian economies.
Oregon's economy has grown relatively faster than the nation throughout the
1990s. Oregon is expected to remain a high growth state.
The major risk to Oregon's economy is a change in consumer spending patterns.
A stock market correction that adversely impacts wealth and shakes consumer
confidence, will slow down spending. The risk to businesses is further turmoil
in world economic markets. Both consumers and businesses would be directly
impacted if oil prices keep spiraling higher. If all these risks come to play,
the reduction in growth would be widespread across all industries and consumer
groups.
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.
Ballot Measure 50, passed by Oregon voters in May of 1997, limits the taxes a
property owner must pay. It limits taxes on each property by rolling back the
1997-98 assessed value of each property to 90% of its 1995-96 value. The measure
also limits future growth on taxable value to 3% a year, with exceptions for
items such as new construction, remodeling, subdivisions, and rezoning. It
establishes permanent tax rates for Oregon's local taxing districts, yet allows
voters to approve new, short-term option levies outside the permanent rate limit
if approved by a majority of a 50% voter turnout.
Actual General Fund revenue for the 1995-97 biennium was $7,731.58 million.
As of May 1999, General Fund revenue is projected to be $8,260.3 million for the
1997-1999 biennium. Th ending balance is estimated to be $329.6 million. The
1997-99 General Fund revenue estimate is $76.0 million lower than the March 9
forecast. It is $35.2 million higher than the Close of Session (COS) estimate.
All non-corporate income tax revenue is now projected to exceed the 1997-99
COS forecast by $153.9 million. This is 2.03% above the COS forecast. While this
means that a surplus kicker refund for individuals is projected for the
1999-2001 biennium, revenues exceed the threshold by only $2.6 million. The
corporate income tax forecast is $118.7 million below the COS estimate. This
makes a surplus kicker credit next biennium highly unlikely.
General Fund revenue is forecast to total $9,827.4 million in 1999-2001, a
19% increase from the prior biennium. The beginning balance is forecast to be
$329.6 million. Combined, they provide total General Fund resources of $10,157.0
million for the biennium. This is an increase in resources of $43.8 million from
March 1999.
As of June 30, 1998, total outstanding general obligation bonds was $3.0
billion. The debt service requirements for general obligation bonds were $4.87
billion. Also, as of June 30, 1998, the certificates of participation debt
totaled $665.1 million.
Each of Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.) Moody's
Investors Service and Standard & Poor's Ratings Group had assigned their
municipal bond ratings of "AA," "Aa2," and "AA," respectively.
PENNSYLVANIA RISK FACTORS
ECONOMIC OUTLOOK. The Commonwealth of Pennsylvania historically has been
identified as a heavy industry state, although that reputation has been changing
as the industrial composition of the Commonwealth's economy diversified as the
coal, steel and railroad industries began to decline. A more diversified economy
is necessary as the traditionally strong industries in the Commonwealth decline
due to a long-term shift in jobs, investment and workers away from the northeast
part of the nation. The major sources of growth in Pennsylvania are in the
service sector, including trade, medical and health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, particularly in
crop and livestock products as well as agribusiness and food related industries.
The strong growth experienced in Pennsylvania in 1997 was unanticipated and
did not continue at such a high level during 1998. Nevertheless, the
Commonwealth is still enjoying its longest period of economic growth, most
sectors have created new jobs, and unemployment rates are comparable to the
national average.
Although service producing employment is gaining ground in Pennsylvania,
goods producing employment is declining steadily. The combination of these two
factors resulted in a 1.1% drop in overall employment during 1998, after a 1.4%
gain in 1997. The service sector gained about 60,000 in 1998, further increasing
the share of non-manufacturing employment in the state to approximately 83%.
Construction employment also experienced strong growth, due in part to
unseasonably mild weather conditions during the year. Manufacturing payrolls as
a whole grew by 0.9% in 1998, but several large durable and nondurable goods
producing industries continued to suffer losses, including metal production,
industrial machinery, transportation equipment, apparel and textiles, and paper
products. Despite employment losses, Pennsylvania's unemployment rate dropped
during 1998, due in part to a 0.1% decline in the state's population of 12
million. The population loss is almost wholly depended on rapid outward
migration by Pennsylvania's residents to other states. During 1998, Pennsylvania
posted an annual unemployment rate of 4.6% (4.5% in the U.S. as a whole), with
the state's unemployment rate recorded as low as 3.8% during the course of the
year. The 1998 rate is the first time unemployment in Pennsylvania has fallen
below 5.0% since 1989.
Personal income growth in Pennsylvania slowed a bit in 1997 but still equals
the national growth rate. The state's per capita personal income rose 4.7% to
$25,678. This average is 102% of the U.S. average of $25,298, giving
Pennsylvania a 17th place ranking among all the states.
Pennsylvania's economy is projected to continue its expansion during 1999,
but at a slower rate than the national economy. Gains in the stock market will
cause personal income to continue rising, but overall employment will be
stagnant, with continued losses in durable and nondurable manufacturing.
REVENUES AND EXPENDITURES. Financial information for the principal operating
funds of the Commonwealth of Pennsylvania is maintained on a budgetary basis of
accounting. A budgetary basis of accounting is used for the purpose of ensuring
compliance with the enacted operating budget and is governed by applicable
statutes of the Commonwealth and by administrative procedures. The Commonwealth
also prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). The budgetary basis financial information
maintained by the Commonwealth to monitor and enforce budgetary control is
adjusted at fiscal year-end to reflect appropriate accruals for financial
reporting in conformity with GAAP.
At the end of fiscal year 1998 (ending June 30, 1998), the Commonwealth
reported an unreserved/ undesignated fund balance (budgetary basis) of $488.7
million in the General Fund, up 21.4% from a budgetary basis fund balance of
$402.7 million in FY 1997. The FY 1998 fund balance resulted from total revenue
collections of $27.8 billion less appropriation authorizations totaling $25.9
billion, less other net financing uses equaling $1.3 billion. The appropriation
authorizations, which grew only 0.1% in FY 1998, include $13.6 billion for
public health and welfare and $7.7 billion for education. General Fund revenues,
more than 70% of which are generated from taxes, increased by 6.3% over FY 1997
figures.
Like most other states, Pennsylvania maintains a Tax Stabilization ("rainy
day") Fund to ensure against depressed revenues during future economic crises.
During FY 1998, a record $209.5 million was transferred into the fund, including
a one time $150 million transfer above the annual deposit. Currently, the
minimum annual contribution to the Tax Stabilization Fund is 15% of the General
Fund's closing balance. At the end of FY 1998, the Tax Stabilization Fund's
balance surpassed $675 million.
Although Pennsylvania ranks 49th among the 50 states in the number of state
employees per capita, the Commonwealth plans to reduce salaried positions by
approximately 1,000 during 1999 in order to hold down the cost of government
operations. Total General Fund spending of $17.99 billion is budgeted for FY
1999, up 4.4% from the prior fiscal year. Also included in the FY 1999 enacted
budget is $221.8 million in tax reductions, including a drop in the capital
stock and franchise tax as well as an increase in the income limit for
eligibility for tax forgiveness which is expected to benefit about 400,000
residents.
General Fund revenues are projected to grow more slowly than FY 1999
appropriations, gaining 4.2% to total $17.95 billion. Pennsylvania's
unreserved/undesignated General Fund balance at the end of FY 1999 is estimated
to be $52.2 million. With the $54 million projected transfer at the end of FY
99, the reserve balance in the Commonwealth's Rainy Day Fund will exceed $725
million, more than eleven times the $66 million balance at the end of FY 95.
More than $273 million in tax reductions are proposed in the FY 2000 budget.
Including the reductions, General Fund revenues are estimated to grow to $18.65
billion, while appropriations of $18.63 billion are anticipated. A General Fund
closing balance of $22 million is anticipated for the end of FY 2000, leaving $3
million for transfer to the Tax Stabilization Fund.
DEBT MANAGEMENT. The Constitution of the Commonwealth of Pennsylvania permits
the incurrence of debt, without approval of the electorate, for capital projects
specifically authorized in a capital budget. Capital project debt outstanding
cannot exceed one and three quarters (1.75) times the average of the annual tax
revenues deposited in all funds during the previous five fiscal years. The
certified constitutional debt limit at August 29, 1997 was $34.3 billion.
Outstanding capital project debt at August 29, 1997 amounted to $3.7 billion.
In addition to constitutionally authorized capital project debt, the
Commonwealth may incur debt for electorate approved programs, such as economic
revitalization, land and water development, and water facilities restoration;
and for special purposes approved by the General Assembly, such as disaster
relief. The total general obligation bond indebtedness outstanding at June 30,
1997 was $4.8 billion. Total debt service transfers paid from General Fund and
Motor License Fund appropriations during the fiscal year ended June 30, 1997
amounted to $781.5 million.
In addition to general obligation bonds, the Commonwealth issues tax
anticipation notes ("TANS") to meet operating cash needs during certain months
of the fiscal year. The Commonwealth anticipates issuance of $225 million in
General Fund TANS during the 1997-98 fiscal year. During fiscal year 1996-97,
$550 million TANS were issued.
The City of Philadelphia ("Philadelphia") is the largest city in the
Commonwealth, with an estimated 1997 population of 1.48 million according to the
U.S. Bureau of the Census. Philadelphia functions both as a city of the first
class and a county for the purpose of administering various governmental
programs.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class cities in
remedying fiscal emergencies was enacted by the General Assembly and approved by
the Governor in June 1991. PICA is designed to provide assistance through the
issuance of funding debt to liquidate budget deficits and to make factual
findings and recommendations to the assisted city concerning its budgetary and
fiscal affairs. An intergovernmental cooperation agreement between Philadelphia
and PICA was approved by City Council on January 3, 1992, and approved by the
PICA Board and signed by the Mayor on January 8, 1992. At this time,
Philadelphia is operating under a five-year fiscal plan approved by PICA on
April 30, 1996.
As of February 28, 1997, PICA has issued approximately $1,761.7 million of
its Special Tax Revenue Bonds to provide financial assistance to Philadelphia,
to liquidate the cumulative General Fund balance deficit, to refund certain
general obligation bonds of the City and to fund additional capital projects. 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 $1,102.4 million in Special Tax
Revenue Bonds outstanding as of June 30, 1997.
The audited General fund balance of the City as of June 30, 1995, 1996, and
1997 showed a surplus of approximately $80.5 million, $118.5 million, and $128.8
million, respectively.
RATINGS. All outstanding general obligation bonds of the Commonwealth of
Pennsylvania are rated AA by Standard & Poor's Ratings Services; Aa3 by Moody's
Investor's Service, Inc.; and AA by Fitch IBCA, Inc. Standard & Poor's rating on
City of Philadelphia general obligation bonds is BBB, and Moody's rating is
Baa2. Any explanation concerning the significance of such ratings must be
obtained from the rating agencies. There is no assurance that any ratings will
continue for any period of time or that they will not be revised or withdrawn.
It should be noted that the creditworthiness of obligations issued by local
Pennsylvania issuers may be unrelated to the creditworthiness of obligations
issued by the Commonwealth of Pennsylvania, and there is no obligation on the
part of the Commonwealth to make payment on such local obligations in the event
of default.
SOUTH CAROLINA RISK FACTORS
ECONOMIC OUTLOOK. In 1995, South Carolina unveiled its Approaching 2000 plan,
the State's first comprehensive strategic plan for economic development. South
Carolina is primarily a manufacturing state, with 24% of all jobs in 1996 in the
manufacturing industry, exceeding the U.S. average of 15.5% and making the State
the fifth highest manufacturing employment concentration in the nation. The
Approaching 2000 plan emphasizes economic diversification, moving away from
traditional manufacturing such as the textile industry and toward attracting
industries with high manufacturing content. Most of South Carolina's growth in
1997 occurred in emerging, high value-added manufacturing sectors such as
chemicals, metals and equipment, rubber and plastics, and paper and printing.
Approaching 2000 has also promoted a rural development strategy, seeking to
increase rural investment and job growth outside the major cities. In the three
years since the introduction of the plan, South Carolina has experienced a
record $16.5 billion capital investment by industry (a 200% increase over
1992-94), including $4.4 billion for rural areas, a 32-year high in job growth,
and a record high average wage for new jobs.
Per capita personal income in South Carolina increased 4.7% in 1996 and 4.6%
in 1997, compared to national income growth of 4.8% in 1996 and 4.7% in 1997 and
regional growth of 4.5% during those two years. In 1997, South Carolina's per
capita personal income reached $20,651, 81.6% of the national average ($25,298),
raising the State from 40th to 39th among the fifty states. South Carolina's
total personal income, however, increased 5.8% in 1997, surpassing the nation's
5.6% growth and ranking South Carolina 28th among the fifty states. During 1998,
total personal income for the State remained the same during the first quarter
and grew by 1.7% during the second quarter. Corresponding national rates for the
same periods were 1.4% and 1.1% growth, respectively, and in the Southeast
region, 1.2% and 1.1%, respectively.
Employment in South Carolina over the last two decades has grown one-third
faster than the United States as a whole. In 1997, the State's economy added
29,303 new jobs in the non-agricultural sector (including 9,077 in non-urban
areas), 13% more than in 1996 and 11% more than the previous record set in 1965.
Between October 1995 and October 1996, South Carolina experienced the largest
unemployment rate increase (0.9%) in the nation. However, South Carolina's
unemployment rate decreased dramatically in the last year, from an average of
6.0% in 1996 to 4.5% in 1997. The national unemployment rate decreased from 5.4%
in 1996 to 4.9% in 1997. During the first eleven months of 1998, the State's
unemployment rate has averaged 3.4%.
REVENUE AND EXPENDITURES. The State Constitution requires the General
Assembly to provide a balanced budget and requires that any deficit be corrected
in the succeeding fiscal year. The State Constitution also provides that the
State Budget and Control Board may, if a deficit appears likely, put into place
reductions in appropriations in order to prevent a deficit. A constitutional
amendment was approved in the November 6, 1984 general election providing that
annual increases in State appropriations may not exceed the average growth rate
of the State's economy and that the annual increase in the number of State
employees may not exceed the average growth of the State's population. The State
Constitution also establishes a General Reserve Fund and a Capital Reserve Fund
for the purposes of covering budgetary deficits.
The General Reserve Fund balance must equal 3% (reduced from 5% to 4% in 1984
and from 4% to 3% in 1988) of the General Fund revenue as of the latest
completed fiscal year. Funds may be withdrawn from the reserve only for the
purpose of covering operating deficits. The amount withdrawn must be restored to
the account within three years out of future revenues until the 3% requirement
is again reached. The General Reserve Fund balance at the end of fiscal years
1996, 1997 and 1998 was $121 million, $127 million and $130.4 million,
respectively. The projected General Reserve Fund balance for fiscal year 1999 is
$137.6 million.
The Capital Reserve Fund is a recurring appropriation that must equal 2% of
the General Fund revenue as of the latest completed fiscal year. If the current
year's revenue forecast projects a year-end deficit by March 1, then the Capital
Reserve Fund appropriation must be reduced to the extent necessary before
mandating any operating appropriation reductions. If no year-end deficit is
projected by March 1, the Capital Reserve Fund may be appropriated in separate
legislation by a two-thirds majority of each house. Allowed expenditures are:
(1) to finance in cash previously authorized capital improvement bond projects;
(2) to retire interest or principal on bonds previously issued; or (3) for
capital improvements or other nonrecurring projects. The Capital Reserve Fund
had a balance at the end of fiscal years 1996, 1997 and 1998 of $80.49 million,
$84.67 million and $84 million, respectively. The estimated amount in the
Capital Reserve Fund for fiscal year 1998 is $91.77 million.
The State of South Carolina's Budgetary General Fund ended its 1997-98 fiscal
year with a budgetary surplus of $254.9 million. Actual General Fund revenue at
the end of fiscal year 1998 was $4.846 billion, a 5.62% increase over the
previous year and $170 million above the legislative revenue estimate. Total
appropriations at the end of fiscal year 1998 were $4.977 billion. Of this
amount, the State spent $4.754 billion, set aside $86.9 million from the Capital
Reserve for expenditures in 1998-99, and carried forward $131 million. The
remaining balance of $4.8 million represents net lapses of unspent
appropriations.
The State General Assembly's budget for fiscal year 1998-99 projects a total
State budget of $12.72 billion. Appropriations totaling $4.735 billion were
anticipated from recurring and non-recurring funding sources, 3.5% less than
fiscal 1998's legislative estimate. The General Appropriation Act provides for
$4.9 billion in General Fund revenue, an increase of 4.3% over the General Fund
revenue estimate contained in the 1997-98 Appropriation Act. This estimate
includes $257.0 million in "new" recurring revenue. The spending plan contains
no new general tax or fee increases, but does account for the ban on video poker
(effective June 1999), eliminating $52.4 million in General Fund revenue. The
statutorily- and constitutionally-mandated General Reserve Fund, Capital Reserve
Fund, Debt Service, and Local Government Fund accounts were funded at the
required levels, totaling $45.9 million.
Responding to recurrent operating deficits of the early 1990's, Standard &
Poor's placed the State's AAA-rated general obligation debt on its CreditWatch
and reduced its rating to AA+ on January 29, 1993. Because South Carolina's
economy has improved dramatically since 1993, the State regained its AAA rating
on general obligation debt from Standard & Poor's on July 9, 1996. Both Moody's
Investor Services and Fitch IBCA, Inc. have also published AAA ratings on
general obligation debt for South Carolina.
Prospective investors should study with care the portfolio of Bonds in a
South Carolina Trust and should consult with their investment advisers as to the
merits of particular issues in a portfolio.
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 South Carolina 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 South Carolina Trusts to pay interest on or principal of
the Bonds.
TENNESSEE RISK FACTORS
ECONOMIC OUTLOOK. The Tennessee economy continued its healthy pace of
economic expansion through 1998. Some concerns have been voiced over the
seemingly slower pace of growth that has characterized the state in the last
couple of years, compared to earlier years in the current economic expansion.
Rather than indicating weaknesses in the foundation of the Tennessee economy,
this trend reflects an economy operating at its full employment potential; there
is simply less room for growth given the currently high level of overall
economic activity.
The close of 1998 brought with it the relief that international events had
not successfully conspired to seriously weaken the national and state economies.
Tennessee is expected to close out 1998 with overall nonagricultural job growth
of 1.7 percent (44 thousand new jobs), compared to 2.5 percent growth for the
nation. The single-largest problem confronting the state's job situation is
weakness in the manufacturing sector, where job losses have hurt the overall job
picture. There is, however, ample strength elsewhere in the state economy, most
notably in construction, trade and services. Moreover, the state unemployment
rate for 1998 is expected to be at a remarkable 4.2 percent. So all in all, the
state's job picture remains strong. Other indicators also point to a strong
state economy. For example, personal income is expected to advance 4.3 percent
in 1998.
Tennessee's pace of job creation slipped below that of the nation in 1996,
but remained at a healthy 1.4 percent. Job growth accelerated to percent in
1997, but the nation showed stronger acceleration, racking up 2.6 percent job
growth. Relative to the southeast, the state's pace of job growth surpasses only
three other states in the region (West Virginia, Alabama and Mississippi). South
Carolina and Florida have enjoyed exceptionally strong job growth over the
quarter ending October 1997 to the quarter ending October 1998.
A primary explanation for Tennessee's relatively slow growth is the
performance of the manufacturing sector. The rate of job decay in the state's
manufacturing sector is exceeded only by Alabama. The relatively large job
losses in the Tennessee manufacturing sector have outweighed good job gains in
other sectors of the state's economy yielding only modest overall job growth.
The strongest growth rate has been recorded in the construction sector, with
gains in excess of 4 percent.
As with job growth, Tennessee has fared well against the nation and its
regional counterparts in the rate of income creation. State growth in personal
income during the current economic expansion exceeded growth in personal income
for the national economy--up until 1996, when the tables were turned and the
U.S. showed its dominance. Tennessee's longer-term performance has been
instrumental in moving the state closer to national norms, with Tennessee's per
capita personal income in 1998 expected to be about 89 percent of the national
average. Out of the southeastern states, Tennessee leads seven states and trails
only four states (Virginia, Florida, Georgia and North Carolina).
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The State's nonagricultural job growth for 1998 was 1.70%. At the same time,
Tennessee's growth lagged behind the nation, which experienced a 2.46% gain in
1997. However, it is forecasted that Tennessee should expect the same 1.70%
growth for 1999 while the national growth will slow to 1.13%.
Consistent with long-term trends, job growth in the service sector will
outpace job growth in other broad sectors of the state economy in both 1999 and
2000, advancing 2.8 percent and 3.2 percent, respectively. By 2000 the service
sector will account for 744 thousand jobs, which is 27.3 percent of all
nonagricultural jobs in the state. Job growth in services has been remarkable:
as recently as 1990, services represented 22.2 percent of state nonagricultural
jobs. Together jobs in the wholesale and retail trade sectors will enjoy strong
growth of 2.7 percent in 1999 and 2.4 percent in 2000. Job growth in 1999 alone
will lead to the creation of well over 16 thousand new job opportunities in this
sector for Tennesseans. By 2000 the trade sector will account for 24.1 percent
of all nonagricultural jobs in the state. Job contraction in the manufacturing
sector will accelerate in 1999, with jobs expected to decline by 1.0 percent.
Slight improvement will take place in 2000 as job erosion slows to 0.6 percent.
The net losses in manufacturing reflect weakness in the nondurable goods sector
and modest strength in the durable goods sector. Following a setback in 1996,
the state's durable goods sector has been able to engineer a decent rate of job
creation.
Tourism is rapidly becoming a more prominent sector in the Tennessee economy,
and it enjoyed growth rates averaging 5.8% from 1990 to 1995. The growth has
been sparked by the rapid development of music theaters in Pigeon Forge, the
Tennessee Aquarium in Chattanooga, the revitalization of downtown Nashville, as
well as the increased interest in outdoor activities such as camping and hiking.
Tennessee has a diverse agricultural sector. Cattle, cotton, soybeans, dairy
products, broilers, corn and tobacco are the largest products, respectively, in
terms of cash receipts for Tennessee farmers. Other important crops include
wheat, floriculture, hay, vegetables and other livestock. Cattle operations,
however, 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 the State's farmers. Farm profit, however, has
fluctuated sharply in recent years from a $799 million peak in net cash income
for 1992's record production year to $614.7 million in 1995. Total agricultural
earnings increased by $37 million during 1997. For 1998, farmers will be
concerned about the potential impacts of the El Nino weather phenomenon on crop
yields.
In addition, 1997 was 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. 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.
Nominal Tennessee personal income is projected to rise 4.5 percent in 1999,
up slightly from the 4.3 percent pace expected for 1998. Tennessee's expected
growth will surpass the 3.9 percent pace of growth expected for U.S. personal
income in 1999. Inflation-adjusted personal income, however, will be up 3.0
percent in 1999 versus 3.5 percent growth in 1998 (see Figure 2.9). Nominal per
capita income in 1999 is forecast to grow 3.4 percent, rising to 4.2 percent
growth in 2000. Per capita income for the U.S. will come in at the lower rate of
3.0 percent in 1999, rising to 4.1 percent in 2000. Wage and salary income will
be the strongest growing component of personal income in 1999, increasing5.0
percent. Proprietors' income is expected to rise 4.8 percent in 1999, while
rent, interest and dividend income will be up 2.9 percent. For fiscal year
1998/1999, nominal personal income is forecast to grow 4.6, accelerating to 5.0
percent growth in fiscal year 1999/2000.
The U.S. Census Bureau reports that Tennessee's population was recorded at
4,877,203 during the 1990 Census. The population is estimated to have reached
5,368,198 during July 1997. Between 1990 and 1997, Tennessee's population has
increased at a higher rate than the nation as a whole, with gains of 10.1% and
7.6%, respectively. Between July 1996 and July 1997, the State's population grew
by 348,130 people, a 1.8% increase ranking the sixth highest in the nation.
Although its population has grown in general, Tennessee experienced a 1.3%
decline in the civilian labor force in 1997. The State's unemployment rate for
1997 averaged 5.4%, up from 5.2% in 1996, while the United States averaged 5.4%
in 1996 and 4.9% in 1997. During the first three months of 1998, Tennessee has
averaged 4.6% unemployment, slightly lower than the 4.7% average for nation. The
unemployment rate is expected to move into the 5.2% range during late 1998 and
1999.
REVENUES AND EXPENDITURES. The actual State expenditures for Fiscal Year 1997
was $12.47 billion. Actual General Fund revenue for Fiscal 1997 was $11.436
billion. The actual General Fund revenues for 1998 were $8.42 billion with
General Fund expenditures of $7.85 billion. Overall revenues for 1998 were
$13.82 billion with expenditures of $13.09 billion, which are increases of 5.6%
and 5.4% over Fiscal Year 1997 expenditures and revenues, respectively.
Tennessee's Rainy Day Fund remains at $101 million. During 1997, the State
passed a law to earmark 10% of the State's future revenue growth to build up
these reserves.
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 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.
DEBT ADMINISTRATION. 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.
BOND RATINGS. State of Tennessee general obligation bonds have been assigned
the following ratings: Standard & Poor's Ratings Services, AAA; Moody's
Investors Service, Inc., Aaa; and Fitch IBCA, Inc. (formerly known as Fitch
Investors Service, L.P.), AAA. 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.
TEXAS RISK FACTORS
ECONOMIC OUTLOOK. Texas's economic growth in general has paralleled U.S.
growth since 1995. The State's Comptroller has forecasted slower economic
expansion in 1999, but it should continue to outpace the growth of the national
economy. Although the U.S. economy shows signs of renewed strength, a
retrenchment in the high-technology industry has restrained vigorous economic
recovery in Texas. Nevertheless, a growing State economy, healthy gains in
employment and personal income, and unspent cash from the 1996-97 biennium
should combine to increase the amount of State revenue available for general
spending through the 1998-99 fiscal biennium.
Texas's real gross state product has outpaced national economic growth in
every year of the 1990s, with average annual growth rates exceeding the nation's
by nearly one percentage point each year. In fiscal 1995, Texas's gross state
product grew by 5.3%. In fiscal 1996, the gross product grew by only 3.5%, but
it picked back up to 5.2% growth in 1997. The United States experienced 2.0%,
2.8% and 3.8% growth during those years. This pattern should continue throughout
the 1998-99 biennium, with the State's gross state product increasing at an
annual rate of 5.2% during 1998 (compared to 2.7% for national gross domestic
product), but then dropping to 4.3% growth in 1999.
The three industries in Texas with the highest employment concentration are
oil and gas extraction, pipelines, and petroleum production. However, Bureau of
Economic Analysis data for 1970, 1980 and 1990 show a decreasing concentration
in these industries, indicating that the State's economy has become more like
the country's. Increasing economic diversity helps protect Texas from business
cycles associated with the energy industry, but concentration in these
industries allows the State to reap greater rewards when they prosper, as oil
and gas extraction did in 1996 and 1997.
Texas's largest industries in terms of employment have traditionally been
services, trade and government. In September 1997, they represented 28.0%,
23.7%, and 17.1% of all employment, respectively. In the eleven months following
September 1997, the major industries experiencing the greatest employment growth
are construction (5.1%), transportation (4.8%) and services (4.1%). Trade and
manufacturing were stable, but mining and production suffered a small loss in
jobs (1.0%). During 1999, the electronic equipment and industrial machinery
industries will become more important to the Texas economy. In 1997, exports of
high-tech items such as semiconductors, communications equipment and computers
reached more than 40% of the State's total exports. High-tech firms with
established plants in Texas, such as Dell Computer, Texas Instruments, Compaq,
Intel and Motorola, have driven much of this growth.
Mexico is Texas's largest market, thanks in part to its proximity, trade
liberalization and the peso recovery. Beginning in 1997, the economic picture
for border areas has brightened in the aftermath of the 1994 peso devaluation.
Mexico's fiscal crisis had spilled over to Texas border retailers. With Mexico's
economy continuing to improve, retail activity along the border is increasing
and feeding job growth and construction. Texas has also increased its
investments in basic infrastructure along the Mexican border in order to take
advantage of its location and further increase exports. The State's exports
totaled $84 billion in 1997 and are expected to reach $90 billion in 1998, $98
billion in 1999 and $107 billion in 2000.
Over the past ten years, per capita personal income growth in Texas has
trailed behind the United States as a whole. Since 1986, Texas has experienced
an average of 4.7% annual income growth, compared to the national average annual
increase of 4.9%. In 1997, per capita personal income in the State reached
$23,647 or 93.5% of the national average ($25,298). Texas ranked 28th among the
fifty states in per capita personal income in both 1996 and 1997. Total personal
income in the State increased 8.0% in 1997 (the national change was 5.6%),
following a 6.7% rise in 1996. The State Comptroller's Office estimates that
personal income will increase by 5.6% in 1999, with about half of the growth
attributable to inflation.
During fiscal 1997, Texas nonfarm employment registered 2.6% annual growth
and reached a record 8.45 million, including over 200,000 new jobs. In the
twelve months ending in September 1998, Texas added about 258,000 new jobs for
an increase of 3.0%. The service sector experienced the bulk of these gains
(228,000 jobs) with a 3.3% increase from September 1997. Construction employment
grew at an annualized rate of 5.4%, an increase of roughly 25,000 new jobs in
1998. Manufacturing employment has increased by only about 9,000 jobs or 0.8%.
The State Comptroller's economic forecast estimates 2.2% total employment growth
in fiscal 1998 and again in fiscal 1999. Currently, the service-producing
sectors (i.e., transportation and public utilities, insurance and real estate,
government, and 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. In 1997, Texas experienced its lowest unemployment rate in ten years,
reaching 5.4%. This rate has further decreased to 4.3% in April and May 1998 and
has risen only slightly through November 1998. The unemployment rate for the
United States in 1997 was 4.9%, decreasing to 4.6% in April and May 1998 (and
4.6% in November 1998).
<PAGE>
REVENUE AND EXPENDITURES. Historically, the primary sources of the State's
revenues have been sales taxes, mineral severance taxes and federal grants. Due
to the State's expansion in Medicaid spending and other Health and Human
Services programs requiring federal matching revenues, federal receipts were the
State's largest source of income in fiscal 1998, increasing 2.7% compared to
1997 and totaling 29.0% of total revenue. Federal income is expected to increase
by 3.8% in fiscal 1999. Sales tax, which had been the main source of revenue
between 1981 and 1993, was second, accounting for 27.5% of total revenues in
fiscal 1998 (up 4.1%). For the past 11 years, the sales tax has produced more
revenue each year than all other taxes combined. Total sales tax collections for
the fiscal 1999 are expected to grow by 4.0% and reach $12.3 billion, an
increase of $474 million over fiscal 1998. While the growth in sales tax
collections slackened in 1996-97, a jump in consumer confidence and spending has
enabled a moderate increase in 1998 receipts.
Oil production and regulation tax receipts in fiscal 1998 are expected to
reach $366.5 million, down 14.6% from collections in fiscal 1997. Even though
1997 collections were bolstered by a spike in prices, the long-term price
outlook is relatively flat, and taxable production is expected to continue to
fall, including an additional 4.2% estimated drop in fiscal 1999. Natural gas
tax receipts in fiscal 1998 are expected to reach $500.9 million, down
dramatically (29.7%) from $712.2 million in fiscal 1997. Like oil, the strong
fiscal 1997 collections is attributable to a sustained rise in prices. However,
long-term natural gas prices are expected to remain flat in response to supply
increases from Canada and the Gulf of Mexico.
Heavy reliance on the energy and agricultural sectors for jobs and income
resulted in a general downturn in the Texas economy beginning in 1982 when those
industries suffered significantly. The effects of this downturn continued to
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 that grew to
a $745 million cash deficit by the end of that fiscal year. After 1987, the
Texas economy did begin to move toward a period of recovery. Expansion has
continued, and the State ended fiscal 1997 with a general revenue fund cash
surplus of $2.4 billion.
Net revenues for general and special funds at the end of fiscal 1998 totaled
$42.9 billion, or 0.6% over fiscal 1997. The two largest increases in revenue
were a $2.7 million (42.5%) rise in claims settlements, and a $273.7 million
(14.7%) increase in lottery proceeds. Expenditures at the end of fiscal 1998
increased by $1.76 billion, or 4.3% over fiscal 1997. Capital outlay experienced
the largest expenditure increase, $187 million or 32.3% over 1997, while health
and human services expenses were down by $326.7 million or 2.2% from 1997.
The State's Comptroller's Office estimates that revenues in 1999 are expected
to total $44.35 billion. The State of Texas will have $22.54 billion in funds
available to finance general revenue-related operations during fiscal 1999
(estimated general fund appropriations are $21.58 billion). Available funds will
come from three main sources. The ending balance available for certification
carried forward from fiscal 1998 is expected to be $2.4 billion. Total tax
revenue will be $22.1 billion, and total non-tax revenue will contribute an
additional $10.8 billion. Of the non-tax revenue, the single largest portion
will be $12.9 billion in federal revenue. The revenue estimate for fiscal 1999
is based on an assumption that the Texas economy will show a steady growth.
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 a
Texas Trust is limited to 15%. 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.
The same economic and other factors affecting the State of Texas and its
agencies also have affected cities, counties, school districts and other issuers
of bonds located throughout the State. Declining revenues caused by the downturn
in the Texas economy in the mid-1980s forced these various other issuers to
raise taxes and cut services to achieve the balanced budget mandated by their
respective charters or applicable State law requirements. Standard & Poor's and
Moody's Investors Service, Inc. assign separate ratings to each issue of bonds
sold by these other issuers. Such ratings may be significantly lower than the
ratings assigned by such rating agencies to Texas general obligation bonds.
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, including, among others, laws and regulations which limit the amount
of fees, rates or other charges which may be imposed for use of the facility or
which increase competition among facilities of that type or which limit or
otherwise have the effect of reducing the use of such facilities generally,
thereby reducing the revenues generated by the particular facility. Bonds in 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.
From the time Standard & Poor's began rating Texas general obligation bonds
in 1956 until early 1986, that firm gave these bonds its highest rating, AAA. In
April 1986, in response to the State's economic problems, Standard & Poor's
downgraded its rating of Texas general obligation bonds to AA+. Standard &
Poor's further downgraded the general obligation debt rating in July 1987 to its
current AA rating. 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 and currently publishes a Aa2 rating for Texas
general obligation bonds. Fitch IBCA, Inc. rates Texas general obligation bonds
AA+. No prediction can be made concerning future changes in ratings by national
rating agencies for Texas general obligation bonds or concerning the effect of
such ratings changes on the market for such issues.
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.
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 Texas 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 Texas Trusts to pay interest on or principal of the Bonds.
VIRGINIA RISK FACTORS
A Virginia Trust is 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
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 a Virginia Trust or the ability of particular obligors
to make timely payments of debt service on (or relating to) those obligations.
ECONOMIC OUTLOOK. 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 is also an important
component of Virginia's economy.
The Virginia economy has experienced a significant and sustained period of
economic growth since 1991. During 1998, Virginia continued to outpace national
growth rates in most measures of economic activity. While the Commonwealth's
labor market remained tight, its citizens have received benefits from increased
job growth and higher real wages and salaries. In 1998, the Virginia economy
surpassed national growth rates in personal income, total wages and salaries,
total non-agricultural employment and retail sales.
Virginia nonagricultural employment grew by 3.2% or 108,600 jobs during 1998,
doubling the amount of new jobs created in 1996. The service sector accounted
for 64% of this growth, with the majority of these jobs in high technology
services. In addition, the strength of the Commonwealth's retail sales and
housing market was reflected in employment growth in the retail trade and
construction sectors. Although job losses continued in the manufacturing and
federal government sectors, they were less severe than forecast.
The magnitude of job losses from federal government downsizing on the
Virginia economy is considerably smaller than it has been in the past six fiscal
years. From 1991 to 1998, job losses from federal government downsizing numbered
more than 60,000, nearly a typical year's job growth. In 1999 and 2000, job
losses in the federal sector are expected to total only 4,000. Most job losses
resulted from continued defense downsizing and federal government cutbacks in
Northern Virginia and Hampton Roads.
Strong job growth pushed Virginia's unemployment rate down to a record low
2.9% in 1998, falling further to 2.6% in March 1999. The Commonwealth's
population, however, grew by only 0.8%, causing additional pressures on the
labor market. Because of the tight labor market, Virginia companies have been
raising wages and salaries in order to attract new workers. For the second
straight year, Virginia's wage growth (7.7%) outpaced the national rate (7.3%).
Per capita personal income in the state grew 4.9% to $27,385, the highest in the
twelve-state Southeast region and 104% of the national per capita personal
income level ($26,412). Increases in income also translated into increases in
spending. Virginia retail sales grew by $2.7 billion to reach $58.4 billion in
1998. This increase amounts to 4.9% for the Commonwealth, while national retail
sales grew 4.6%.
With $11 billion in exports in 1997, Virginia ranks 17th among the states in
terms of total foreign exports. Its exports accounted for about 5% of Virginia's
Gross State Product (GSP). Canada and Japan are its most important trade
partners, followed by Belgium, South Korea, Germany and Mexico. Of course,
sagging Asian markets have begun to slow export growth in the United States.
Given that approximately 20% of Virginia's exports are to Japan and South Korea,
it is likely that Virginia will experience some of the impact of the Asian
crisis. However, the relatively small share of GSP that could be affected and
the strength of other sectors in Virginia's economic base should temper such
concerns.
REVENUES AND EXPENDITURES. Virginia uses a cash basis of accounting for
budgetary purposes. Revenues and expenditures are recorded at the time cash is
actually received or disbursed according to the provisions of the Appropriation
Act. The Commonwealth's total revenue comprises two major resources: the General
Fund and non-general funds. More than half of the state's revenues (53%) are
"non-general funds" or funds earmarked by law for specific purposes. For
example, motor vehicle and gasoline taxes must pay for transportation programs,
student tuition and fees must support higher education, and federal grants are
designated for specific activities. General Fund revenues are derived from
general taxes paid by citizens and businesses in Virginia. At the end of Fiscal
Year 1998 (ended June 30), Virginia's General Fund ending balance totaled $1.44
billion, nearly double the Fiscal 1997 balance. Of this amount, $1.41 billion
was reserved or designated, including $542 million for the Revenue Stabilization
Reserve ("Rainy Day") Fund, and $743.3 million designated for other
appropriation or reappropriation in Fiscal 1999. After all 1998 designations,
there is an undesignated fund balance of $33 million available for future uses.
During Fiscal 1998, General Fund revenues totaled $9.20 billion. The overall
revenue increase of 8.3% is attributable to favorable individual income and sale
and use tax revenue collections, which reported 14.3% and 5.1% growth,
respectively. Individual income taxes accounted for 59% of General Fund
resources, while sales taxes made up 21%. These revenues plus other direct
revenues from outside sources totaled $8.8 billion or 96% of all resources. The
remaining monies totaling $391 million came through transfers from other funds,
including alcoholic beverage sales and lottery profits.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. General Fund disbursements including transfers for Fiscal 1998
totaled $8.7 billion, up 7.3% from the previous fiscal year. Expenditures
totaled $7.3 billion and transfers to other funds were $1.4 billion. Education
accounted for 44%, while social services, Medicaid, public health and mental
health accounted for 27% of the General Fund. Expenditures, not including
transfers, increased by $431 million over the prior year. Of the total increase,
justice administration and economic development both accounted for about 10%.
When the General Fund was accounted for on a GAAP basis, the Fund had a
positive balance of $1.01 billion in Fiscal Year 1998, compared to a balance of
$491.8 million in Fiscal 1997 and $180.4 million in Fiscal 1996. Virginia fully
adopted GAAP financial reporting in Fiscal Year 1983 and experienced GAAP
deficits from Fiscal 1990-92 as a result of a recession. The deficit in Fiscal
1995 was primarily the result of the federal retiree lawsuit Harper v.
Department of Taxation. GAAP deficits may occur in Virginia without violating
the state Constitution or statutes which prohibit deficit spending. However, if
a General Fund GAAP deficit were to continue over time, agencies that rate state
debt would view this issue as a problem for state finances.
The Revenue Stabilization Reserve ("Rainy Day") Fund is required by an
amendment to the State Constitution approved by the voters on November 7, 1992.
This Fund is a reserve of fund balances which can only be used if state revenues
decline sharply from the previous year. Reserved funds must be appropriated by
the General Assembly when revenue collections are strong compared to the average
for the previous six years. The total amount reserved in Fiscal Year 1998 was
$542.2 million, compared to $214.9 million at the end of Fiscal 1997.
DEBT MANAGEMENT. The total outstanding debt of the Commonwealth as of the end
of Fiscal Year 1998 was $11.75 billion. Long term bonds and notes represent 96%
of all debt, while the remaining 4% consists of capital leases, installment
purchase contracts and various other payables. A total of $1.14 billion, or 9.7%
of all debt, is a general obligation of Virginia taxpayers and supported by a
pledge of all tax revenues and other monies of the Commonwealth. Other
tax-supported debt (limited obligations) totaled $2.6 billion and was
outstanding at the end of Fiscal 1998. This accounted for 21.9% of all debt on
the books of the Commonwealth. Non-tax supported debt makes up 68.4% of all debt
in the Commonwealth. The majority of this debt is issued by various authorities
that are created under state law to issue bonds to finance various programs
considered to provide a benefit to the public. Total debt in this category at
the end of Fiscal 1998 was $8.04 billion.
RATINGS. The Commonwealth of Virginia maintains a "triple-A" bond rating from
Standard & Poor's Ratings Services, Moody's Investors Service, Inc. and Fitch
IBCA, Inc. 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 the economic risks or
uncertainties peculiar to the issuers of such securities or to the sources from
which they are to be paid.
WASHINGTON RISK FACTORS
ECONOMIC OUTLOOK. The State of Washington was created by an enabling act of
Congress in 1889. The State, which comprises 68,139 square miles and currently a
population of 5.7 million, is located on the Pacific Coast in the northwestern
corner of the continental United States. The mild moist climate in western
Washington makes this region excellent for dairy farming and the production of
flower bulbs. Washington's location makes it a gateway for land, sea, and air
travel to Alaska and the Pacific Rim countries. Its coastline has hundreds of
bays and inlets that make excellent harbors. East of the Cascade Mountain Range,
farmers raise livestock and wheat on large ranches. Washington leads the nation
in apple production, and the State produces large amounts of lumber, pulp,
paper, and other wood products.
The City of Seattle, located in northwestern Washington, is the largest city
in the Pacific Northwest and serves as the King County seat. King County and the
adjacent counties to the north, Snohomish and Island Counties, comprise the
Seattle Primary Metropolitan Statistical Area (PMSA), which is the fourth
largest metropolitan center on the Pacific Coast and biggest single component of
the State's economy.
Fiscal Year 1998 proved to be almost as exceptional a year for Washington
State's economy as Fiscal Year 1997. Employment grew slightly slower than in
Fiscal Year 1997 but real personal income grew faster. However, Fiscal Year 1998
marks a turning point in the state's economy. Both employment growth and real
personal income growth are predicted to slow substantially, falling to rates
much closer to U.S. growth rates. The slowdown in the state's economy is
expected to reduce the growth rate of General Fund-State revenues, especially in
fiscal years 2000 and 2001.
Aerospace employment was a major factor in the year's strong employment
growth. After adding more than 18,000 employees in Fiscal Year 1997, the
aerospace industry added another 15,000 in Fiscal Year 1998. Led by aerospace
employment, manufacturing employment in Washington increased by more than 21,000
jobs in Fiscal Year 1998, an increase of 5.9 percent. Non-manufacturing
employment grew at a steady pace of 3.4 percent, contributing another 71,000
jobs to the state's economy.
Employment in durable manufacturing other than aerospace grew by 4.7 percent
in Fiscal Year 1998, significantly outpacing the national average of 2.1
percent. Within this sector of the economy, the strongest employment growth
occurred in electrical machinery (11.0 percent), which includes electronic and
electrical equipment. Non-electrical equipment employment, which includes
computers, grew by 4.7 percent. Much of this growth was attributable to tax
incentives adopted by the Legislature in the past five years to encourage the
manufacturing and high-tech industries in the state. Furniture and fixtures
employment also grew rapidly at a rate of 9.2 percent, while employment in
fabricated metals grew by 6.2 percent.
<PAGE>
Non-manufacturing employment increased by 3.4 percent during Fiscal Year
1998, led by employment growth of 4.9 percent in services and 4.7 percent in
construction. Employment in wholesale trade grew by 3.8 percent, while
employment in transportation, communications and public utilities increased by
3.1 percent. The remaining non-manufacturing sectors experienced employment
growth in excess of 2.0 percent, except for federal government civilian
employment, which declined by 0.4 percent.
On a combined basis, employment in the government sector represents
approximately 17% of all wage and salary employment in the State. Seattle is the
regional headquarters of a number of federal government agencies, and the State
receives an above-average share of defense expenditures. Major federal
installations include Navy bases at Bremerton, Whidbey Island and Bangor;
Everett is the site of a new Naval home port; and an Air Force base (McChord)
and an Army base (Fort Lewis) are located in the Tacoma area. Recent declines of
naval and civilian personnel in Kitsap County have been offset by increases in
army personnel in Pierce County. At present no major additions or reductions to
troop strength at Fort Lewis have been made. The long-term outlook is for
relative stability, but federal government civilian employment will continue its
trend of steady decline.
Washington's wage and salary employment increased at a fast pace for the
second year in a row, with a growth rate of 3.7 percent, compared to 2.6 percent
for the nation as a whole. This is only slightly less than the 4.0 percent
growth in Washington's wage and salary employment in Fiscal Year 1997. This
accelerated rate of growth translated into more than 94,000 new jobs in
Washington State in Fiscal Year 1997 and another 92,000 new jobs during the past
fiscal year.
Reflecting this trend in employment gains, personal income in Washington grew
by 7.5 percent compared to the national average of 5.2 percent in Fiscal Year
1998. Real per capita income rose by 4.5 percent over the same period as
compared to 3.0 percent for the nation as a whole.
The State's unemployment rate for 1997 averaged 4.8% and in 1998 as well,
which down from 6.5% in 1996. The United States had an average unemployment rate
of 5.4% in 1996, 4.9% in 1997 and 4.5% in 1998 . During the first four months of
1999, Washington's unemployment rate has averaged 5.2%.
Financial instability in Asia and other parts of the world have cast a cloud
over the three-year economic outlook for Washington State and the rest of the
nation. According to the September 1998 forecast by the state Economic and
Revenue Forecast Council (ERFC), growth in Washington's wage and salary
employment is expected to fall to 2.7 percent in Fiscal Year 1999, then to 1.3
percent in Fiscal Year 2000, before rising to 1.7 percent in Fiscal Year 2001.
These employment forecasts compare to nationwide projections of 2.2 percent
growth in Fiscal Year 1999, 1.5 percent growth in Fiscal Year 2000 and 1.3
percent in Fiscal Year 2001.
Personal income growth in Washington State is expected to slow until it
reaches the national average for those years. The ERFC economic forecast
indicates that personal income in Washington will grow by 5.8 percent in Fiscal
Year 1999, 3.8 percent in Fiscal Year 2000, and 4.6 percent in Fiscal Year 2001.
This compares nationwide projections of 4.6 percent, 4.0 percent and 4.5 percent
growth in personal income for those respective years.
During the next three fiscal years manufacturing employment in Washington is
projected to decline, due in large part to reductions in aerospace employment.
The ERFC suggests that aerospace employment will decline by 2,300 workers in
Fiscal Year 1999, followed by a further reduction of 8,800 in Fiscal Year 2000,
and 6,200 in Fiscal Year 2001. Other manufacturing sectors are expected to add
1,000 employees in Fiscal Year 1999, then decline by 1,400 in Fiscal Year 2000.
Employment in all other sectors except aerospace are forecast to rebound and
grow by 3,700 in Fiscal Year 2001, an increase of 2.3 percent. The strongest and
most consistent growth in non-aerospace manufacturing employment for the next
three years is expected to occur in the electrical machinery and non-electrical
machinery manufacturing sectors.
In the non-manufacturing sectors, the strongest growth is expected to occur
in services and trade. Services employment is forecast to expand by 4.4 percent
in Fiscal Year 1998, 2.4 percent in Fiscal Year 2000 and 3.4 percent in Fiscal
year 2001. Wholesale trade employment should increase by 3.5 percent, 2.1
percent and 1.2 percent in those fiscal years, respectively. Retail trade
employment is predicted to expand by 4.1 percent in Fiscal Year 1998, 1.9
percent in Fiscal Year 2000 and 1.6 percent in Fiscal year 2001. Employment
growth in transportation, communications and public utilities employment,
construction and finance, insurance and real estate are expected to fall to
around 1.0 percent Fiscal Years 2000 and 2001. State and local government
employment will grow by approximately 2 percent in the following three fiscal
years. Federal government civilian employment will continue its trend of steady
decline.
The U.S. Census Bureau reports that Washington's population was recorded at
4,866,669 during the 1990 Census. The population is estimated to have reached
5,610,362 during July 1997. Between 1990 and 1997, Washington's population has
increased at more than twice the rate of the nation as a whole, with gains of
15.3% and 7.6%, respectively. Between July 1996 and July 1997, the State's
population grew by 90,837 people, a 1.6% increase. Population growth slowed
somewhat in 1998; the State added 75,000 people, or a 1.30% increase. Net
in-migration accounted for approximately 47.3% of Washington's growth since
1990. Washington's population is expected to reach 5.8 million by the year 2000.
This new population boom is already putting heavy pressure on the State's
education system, its prisons and its natural resources.
Population growth in the state is expected to slow to 1.4 percent per year
between 1995 and 2020, and the same growth rate is projected for the Washington
labor force during the period. The forecasted growth for the state's labor force
is still much higher than the projected 0.8 percent annual increase for the
nation as a whole.
BUDGETARY PROCESS. Like 22 other states, Washington enacts budgets for a
two-year period, beginning on July 1 of each odd-numbered year. The Governor is
required to submit a budget to the State Legislature no later than December 20
of the year preceding odd-numbered year sessions of the Legislature. The budget
is a proposal for expenditures in the ensuing biennial period based upon
anticipated revenues from the sources and rates existing by law at the time of
submission of the budget. The appropriated budget and any necessary supplemental
budgets are legally required to be adopted through the passage of biennial
appropriation bills by the Legislature and approved by the Governor. Biennial
operating appropriations are generally made at the fund/account and agency
level. In a few cases, however, biennial appropriations are made at the
fund/account and agency/program level. Biennial capital appropriations are
generally made at the fund/account, agency and project level.
Biennial legislative appropriations are strict legal limits on
expenditures/expenses, and over-expenditures are prohibited. All appropriated
and non-appropriated/allotted funds are further controlled by the executive
branch through the allotment process. This process allocates the
expenditure/expense plan into monthly allotments by program, source of funds,
and object of expenditures. According to statutes, except under limited
circumstances, the original biennial allotments are approved by the Governor and
may be revised only at the beginning of the second year of the biennium and must
be initiated by the Governor.
Proprietary funds earn revenues and incur expenses not covered by the
allotment process. Budget estimates are generally made outside the allotment
process according to prepared business plans. These proprietary fund business
plan estimates are adjusted only at the beginning of each fiscal year.
Additional fiscal control is exercised through various means. The Office of
Finance and Management is authorized to make expenditure/expenses allotments
based on availability of unanticipated receipts, mainly federal government grant
increases made during a fiscal year. State law does not preclude the
over-expenditure of allotments, although the statute requires that the
Legislature be provided an explanation of major variances.
As of May 18, 1999, Washington's Governor had signed into law a two-year
$37.7 billion (all funds) operating budget.
REVENUES AND EXPENDITURES. The state receives about 61 percent of its income
in governmental funds from taxes and 26 percent from federal grants. The main
tax sources are retail sales taxes, business and occupation taxes, property
taxes, and motor vehicle taxes. Since 1995, growth in GF-S expenditures has been
constrained by Initiative 601, which established annual spending limits based on
changes in population growth and inflation. The spending limit for the 1999-01
Biennium is $20,592.7 million, based on the Initiative-601 calculations.
<PAGE>
Passed in the November 1993 general election, Initiative 601 eliminated the
Budget Stabilization Account at the beginning of Fiscal Year 1996 and created a
new Emergency Reserve Fund. It also limited annual increases in GF-S
expenditures to the average rate of inflation plus population growth for the
previous three years. Any GF-S revenues in excess of the spending limit for any
given year will be deposited in the Emergency Reserve Fund on a quarterly basis.
If the balance in the Emergency Reserve Fund exceeds 5% of biennial GF-S
revenues, the excess will be deposited in a new Education Construction Fund.
During Fiscal Year 1997, the State maintained GF-S spending levels within
Initiative 601 expenditure limits. In October 1997, the State Treasurer made
Washington's first quarterly transfer to the Emergency Reserve Fund in the
amount of $56.45 million, based on the revenue forecast for Fiscal Year 1998.
Governmental activities are accounted for in four governmental fund types:
general, special revenue, debt service and capital projects funds. Revenues for
all governmental funds totaled $18.5 billion for Fiscal Year 1997 (ended June
30, 1997) and $19.7 billion for Fiscal Year 1998 (ended June 30, 1998). This
represents an increase of 6%.
Expenditures for all governmental fund activities totaled $19.5 billion
during Fiscal Year 1998, up 2.5% over Fiscal 1997's expenditures of $19.0
billion. The largest portion of these expenditures was for human services,
accounting for $7.6 billion or 39.0% of total expenditures. The second largest
recipient of governmental funds was education, with $7.5 billion or 38.0%.
During Fiscal 1998, general government, capital outlays and transportation
expenditures accounted for $1.0 billion, $1.0 billion and $1.1 billion,
respectively.
Washington's General Fund accounts for all general government financial
resources and expenditures not required to be accounted for in other funds. For
Fiscal Year 1998, revenues in the General Fund increased by $700 million or 5.0%
to total $14.0 billion. Retail sales and use taxes, the largest source of
General Fund receipts at 35.7%, totaled $5.0 billion during Fiscal 1999,
increasing by $200 million. Federal grants-in-aid reached $3.87, representing
26.9% of all General Fund revenues.
Expenditures for Fiscal Year 1998 General Fund activities totaled $13.3
billion, up 4.7% from the $12.7 billion spent during Fiscal Year 1997. Of these
expenditures, $5.8 billion went to support local school districts and higher
education, and $6.3 billion was spent for human services. Washington's General
Fund balance, including all reserves and designations, totaled $2.4 billion as
of June 30, 1998.
DEBT MANAGEMENT. The State Constitution and enabling statutes authorize the
incurrence of State general obligation debt, to which the State's full faith,
credit and taxing power are pledged, either by the Legislature or by a body
designated by statute (presently the State Finance Committee).
GENERAL AND LIMITED OBLIGATION BONDS. General obligation bonds have been
authorized and issued primarily to provide funds for acquisition and
construction of capital facilities for public and common schools, higher
education, public and mental health, corrections, conservation, and maintenance
and construction of highways, roads, and bridges. The State also issued bonds
for assistance to municipalities for construction of water and sewage treatment
facilities and corrections facilities. Additionally, bonds are authorized and
issued to provide for the advance refunding of general obligation bonds
outstanding.
Limited obligation bonds have been authorized and issued to provide funds for
public school plant facilities; State, county, and city arterials; and State
capital buildings and facilities. These bonds are payable primarily from
dedicated revenue of the State's motor vehicle fuel excise tax and other
miscellaneous dedicated revenue generated from assets such as harbors and
tidelands, park, and land grants.
Interest rates in the tax exempt bond market continued to be very attractive
for long-term borrowing during Fiscal Year 1998. Over the fiscal year, $729.175
million in new money general obligation bonds and motor vehicle fuel tax general
obligation bonds were sold in June 1997 (5.33 percent), July 1997 (5.22
percent), December 1997 (5.1 percent and 6.4 percent taxable), and April 1998
(4.94 percent). The rates for the $196.4 million outstanding in adjustable rate
general obligation bonds have varied between 2.70 percent and 4.25 percent, with
an average rate of 3.54 percent for the fiscal year 1998.
<PAGE>
Outstanding general and limited obligation bonded debt as of June 30, 1998
totaled $6.608 billion, an increase of 6.7 percent over June 30, 1997. Bonds
were issued primarily for various capital projects throughout the state.
During Fiscal Year 1998, the state continued with its Selective Redemption
Program, which takes advantage of a feature of the state's $196.4 million
outstanding variable rate debt that allows for selectively retiring any other
higher cost long term fixed rate debt in the state's portfolio. For fiscal year
1998, the Selective Redemption Program generated $4.07 million in gross savings
over the life of the bonds - with present value savings of $0.5 million.
General obligation debt is subject to statutory limitations as prescribed by
the Washington State Constitution and the Revised Code of Washington. For the
fiscal year that ended June 30, 1998, the maximum debt authorization subject to
limitation was $4.6 billion. This limit does not include motor vehicle fuel tax
debt, limited obligation debt, or reimbursable debt exempt from the statutory
debt limit.
Zero Interest Rate General Obligation Bonds. Zero interest rate general
obligation bonds have been authorized and issued primarily to provide funds for
acquisition and construction of public administrative buildings and facilities,
and capital facilities for public and common schools and higher education. Total
debt service (principal and interest) requirements for zero interest rate
general obligation bonds to maturity as of June 30, 1995 were approximately $492
million. As of June 30, 1995, zero interest rate general obligation bonds
outstanding totaled $208 million while bonds authorized but unissued equaled
zero. Approximately $25 million of general obligation refunding zero coupon
bonds were sold in Fiscal Year 1997. Approximately $33.67 million zero coupon
bonds were issued in Fiscal Year 1997.
BOND RATINGS. As of June 1, 1999, State of Washington general obligation
bonds currently have the following ratings: Standard & Poor's Ratings Services,
AA+ (upgraded from AA in July 1997); Moody's Investors Service, Inc., Aa1
(upgraded from Aa2 at the end of Fiscal Year 1997); and Fitch IBCA, Inc.
(formerly known as Fitch Investors Service, L.P.), AA+ (upgraded from AA).
REVENUE BONDS. Current State statutes empower certain State agencies to issue
bonds that are not supported, or are not intended to be supported, by the full
faith and credit of the State. These bonds pledge income derived from acquired
or constructed assets for retirement of the debt and payment of the related
interest. Revenue bonds issued by individual agencies are supported by fees,
rentals, and tolls assessed to users. Primary issuing agencies are the State's
Public Universities and various Community Colleges. Total debt service
(principal and interest) for revenue bonds to maturity at June 30, 1995 was
approximately $310 million. As of June 30, 1995, revenue bonds outstanding
totaled $162 million while bonds authorized but unissued equaled zero.
CERTIFICATES OF PARTICIPATION. The Office of the State Treasurer continued
its administration of the state certificates of participation program which has
been in existence since Fiscal Year 1990. This program enables state agencies to
realize substantial savings by financing the acquisition of real and personal
property at tax exempt interest rates. The state's publicly-offered equipment
certificates of participation have been rated "A1" by Moody's Investors Service
which rely on the centralized oversight of the State Treasurer and the Office of
Financial Management as a strong credit element in the rating. In the real
estate component of the financing program, certain projects have been rated
"AA3" by Moody's Investors Service as a reflection of their essentiality to
state government operations. As of June 30, there were outstanding $238.3
million in certificates of participation in all funds. Underlying this amount
were agency certificates originating from 52 agencies amounting to $236.4
million with the balance on deposit with the trustee either for use in the
program or to satisfy reserve requirements. These programs are currently funded
from public offering of certificates of participation through a competitive bid
process
WEST VIRGINIA RISK FACTORS
West Virginia's economy is dominated by service industries while the good
producing sector, which includes manufacturing, construction and mining,
represents 20% of all employment. Service industries experienced growth of 4%
during the 1998 fiscal year. Because the West Virginia economy is now less
dependent on one or two major industries and because of its greater diversity
across industries, its job growth during the 1990-97 period matched the national
rate of job growth.
The November 1998 unemployment rate of 6.0% is the lowest November in two
decades. In 1984, the State's rate was 20% and the national rate was 10%. The
State's current rate of 6% is 1.6% different from the national rate of 4.4%, a
major improvement since 1984.
Population in West Virginia rose by 2% over the five-year period which ended
in 1995. The population level is expected to remain near current levels through
2003.
Per capita personal income growth averaged 4.6% per year during the first
four years of the decade, but has risen by 3.6% per year since. According to the
Bureau of Business Research (BBR) at West Virginia University, continued growth
is expected in employment. That growth is fueled by the service sector. This
continued positive economic performance is expected to result in a stable
population level and moderate real personal income growth. BBR forecasts that
growth in both population and real personal income during the remainder of the
decade will continue, but at a slightly slower rate during the years 1990-1997.
These factors converge to create a positive view of the stability of West
Virginia's economy.
During the past fiscal year, West Virginia has continued short- and long-term
efforts to promote the effective use of technology and to responsibly manage the
State's finances. The State continues to make strides in its long-term
initiatives to improve its economic infrastructure and its level of educational
attainment.
Most state functions are financed through the budgetary fund types, which
include the General Revenue Fund, Appropriated Special Revenue Funds, Road Fund
and Federal Fund.
The State's most significant sources of revenue in the General Revenue Fund
(budgetary basis) are consumer sales tax and personal income tax. Total General
Revenue for fiscal year 1998 was $2.503 million. Of this amount, approximately
34.6% was from the personal income tax and 31.7% was from the consumer sales
tax.
The State's most significant expenditures from the General Revenue Fund
(budgetary basis) remain the areas of public and higher education and health and
human resources. Actual expenditures for fiscal year 1998 were $2.462 million.
Of this amount, 69.1% was in education and 16.5% was in health and human
resources.
The ending fund balance for the General Revenue Fund, as reported on a
budgetary basis, was $101.47 million for fiscal year 1998, as compared to
$120.89 million (unadjusted) for fiscal year 1997.
In order to maintain financial stability, in 1994, the Legislature created
the Revenue Shortfall Reserve Fund ("Rainy Day Fund") to protect against
emergencies and downturns in the economy. This fund has been used for the
emergency assistance expenditures during five natural disasters West Virginia
experienced in fiscal 1996 and again for flood relief in 1998.
The State Code requires that the first 50% of all surplus revenues at the end
of the fiscal year be deposited into the fund with the aggregate amount of the
fund not to exceed five percent of the total appropriations from the General
Revenue Fund. The balance of the Rainy Day Fund at June 30, 1998 was $68
million.
The State has constitutionally limited its ability to incur debt. The State's
general obligation debt must be authorized by constitutional amendment. A
proposed amendment must be approved by two-thirds of both the Senate and House
Delegates before it can be sent to vote. As of June 30, 1998, the balance of
general obligation bonds outstanding was approximately $321 million. The State's
debt portfolio also includes revenue bonds. Total outstanding revenue bonds were
$588 million as of June 30, 1998.
The State maintains a rating of AAA and A1 from Standard & Poor's and
Moody's, respectively, on its general obligation indebtedness.
Contents of Post-Effective Amendment
to Registration Statement
This Post-Effective Amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Insured Municipals Income Trust, 149th Insured Multi-Series, certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal to be hereunto
affixed and attested, all in the City of Chicago and State of Illinois on the
25th day of October, 1999.
Insured Municipals Income Trust, 149th Insured
Multi-Series
(Registrant)
By Van Kampen Funds Inc.
(Depositor)
By Gina Costello
Assistant Secretary
(Seal)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below on October 25, 1999 by the
following persons who constitute a majority of the Board of Directors of Van
Kampen Funds Inc.:
SIGNATURE TITLE
Richard F. Powers III Chairman and Chief Executive )
Officer )
John H. Zimmerman III President and Chief Operating )
Officer )
William R. Rybak Executive Vice President and )
Chief Financial Officer )
A. Thomas Smith III Executive Vice President, )
General Counsel and Secretary )
Michael H. Santo Executive Vice President )
Gina M. Costello______________
(Attorney in Fact)*
- --------------------
* An executed copy of each of the related powers of attorney is filed herewith
or was filed with the Securities and Exchange Commission in connection with the
Registration Statement on Form S-6 of Van Kampen Focus Portfolios, Series 136
(File No. 333-70897) and the same are hereby incorporated herein by this
reference.
Consent of Independent Certified Public Accountants
We have issued our report dated August 20, 1999 accompanying the financial
statements of Insured Municipals Income Trust, 149th Insured Multi-Series as of
June 30, 1999, and for the period then ended, contained in this Post-Effective
Amendment No. 6 to Form S-6.
We consent to the use of the aforementioned report in the Post-Effective
Amendment and to the use of our name as it appears under the caption "Auditors".
Grant Thornton LLP
Chicago, Illinois
October 25, 1999
