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NUVEEN TAX-FREE UNIT TRUSTS
PROSPECTUS
Part One
November 9, 1998
Note: This Prospectus may be used only when accompanied by Part Two.
See Part Two for the "Schedules of Investments," essential information
based thereon, and financial statements, including the report of independent
public accountants, relating to the Series of the Trust offered hereby.
See the Information Supplement dated November 9, 1998, for specific state
risk factor and disclosure information.
The Nuveen Tax-Free Unit Trust consists of a number of underlying separate
unit investment trusts, each of which contains a diversified portfolio of
obligations issued by or on behalf of states and territories of the United
States and authorities and political subdivisions thereof, the interest on which
is, in the opinion of bond counsel to each issuer, exempt from all Federal
income tax under existing law and, in the case of a State Trust, from certain
state income taxes in the state for which such state Trust is named. All Bonds
(as defined herein) in each Traditional Trust (as defined herein) were rated in
the category "A" or better by Standard & Poor's, a division of The McGraw Hill
Companies ("Standard & Poor's" or "S&P"), Moody's Investors Service, Inc.
("Moody's") or Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.)
("Fitch"), on the date each Series was established (BBB or Baa or better by
Standard & Poor's and Moody's, respectively, in the case of National Trust 76
and earlier National Trusts and SP-1, MIG 2 or F-2 or better, respectively, in
the case of a Short Term Trust). All Bonds in each Insured Trust (as defined
herein) are covered by policies of insurance obtained from the MBIA Insurance
Corporation ("MBIA") or the Municipal Bond Insurance Association guaranteeing
payment of principal and interest when due. All such policies of insurance
remain effective so long as the obligations are outstanding. As a result of
such insurance, the Bonds in each portfolio of the Insured Trusts have received
a rating of "Aaa" by Moody's, "AAA" by Fitch and/or "AAA" by Standard & Poor's.
Insurance relates only to the Bonds in the Insured Trusts and not to the Units
offered or to their market value.
The Objectives of the Trusts are tax-exempt income and conservation of
capital through a diversified investment in tax-exempt Bonds (discount Bonds in
the case of the Discount Trusts). (See "Tax Status of Unitholders.") The
payment of interest and the preservation of capital are, of course, dependent
upon the continuing ability of the issuers or obligors, or both, of Bonds and of
any insurer thereof to meet their obligations thereunder. There
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF
THE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
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is no guarantee that the Trusts' objectives will be achieved. The price received
upon redemption may be more or less than the amount paid by Unitholders,
depending upon the market value of the Bonds on the date of tender for
redemption.
Interest Income to each Trust in a Series of the Nuveen Tax-Free Unit Trust
and to the Unitholders thereof, in the opinion of counsel, under existing law,
is exempt from Federal income tax, and, in the case of a State Trust, from state
income taxes in the state for which such State Trust is named. Capital gains,
if any, are subject to tax per Unit for a particular Trust.
Public Offering Price. The Public Offering Price per Unit for a particular
Trust for "secondary market" sales is based on a pro rata share of the sum of
bid prices per Unit of the Bonds in such Trust plus the sales charges for the
Bonds determined in accordance with the table set forth herein under the caption
"Public Offering Price" based on the number of years remaining to the maturity
of each such Bond and adjusted for cash, if any, held or owed by the Trust. See
the table in "Public Offering Price" regarding reduced sales charges on large
transactions. Units are offered at the Public Offering Price plus interest
accrued to, but not including, the date of settlement. (See "Public Offering
Price.") The minimum purchase is either $5,000 or 50 Units, whichever is less.
The bid prices of the Bonds in a portfolio may represent a "market" discount
from or premium over the par value of the Bonds.
The Units being offered by this Prospectus are issued and outstanding Units
that have either been reacquired by John Nuveen & Co. Incorporated through the
purchase of Units tendered to the Trustee for redemption or by purchase by John
Nuveen & Co. Incorporated or dealers in the open market. The price paid in each
instance was not less than the Redemption Price determined as provided herein
under the caption "How Units May Be Redeemed Without Charge." Any profit or
loss resulting from the sale of the Units will accrue to John Nuveen & Co.
Incorporated or dealers and no proceeds from the sale will be received by the
Trusts.
Market. A Unitholder may redeem Units at the office of the Trustee, The
Chase Manhattan Bank, at prices based upon the bid prices of the Bonds in such
Trust. The Sponsor, although not required to do so, intends to make a secondary
market for the Units at prices based upon the bid prices of the Bonds in each
Trust.
Both parts of this Prospectus should be retained for future reference.
Units of the Trust are not deposits or obligations of, or guaranteed or
endorsed by, any bank and are not federally insured or otherwise protected by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency and involve investment risk, including the possible loss of
principal.
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NUVEEN TAX-FREE UNIT TRUSTS
PROSPECTUS
Part One
November 9, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Nuveen Tax-Free Unit Trust - Description...................................... 1
Insurance on Bonds in Insured Trusts.............................................. 2
Insurance on Certain Bonds in Traditional Trusts.................................. 4
Public Offering Price............................................................. 4
Accrued Interest.................................................................. 6
Estimated Long Term Return and Estimated Current Return........................... 7
Determination of the Price of Bonds at Date of Deposit............................ 8
Selection of Bonds for Deposit in the Trusts...................................... 8
Tax Status of Unitholders......................................................... 13
Taxable Equivalent Yields......................................................... 16
Alabama Risk Factors and Tax Status............................................... 18
Arizona Risk Factors and Tax Status............................................... 19
California Risk Factors and Tax Status............................................ 20
Colorado Risk Factors and Tax Status.............................................. 22
Connecticut Risk Factors and Tax Status........................................... 23
Florida Risk Factors and Tax Status............................................... 24
Georgia Risk Factors and Tax Status............................................... 25
Maryland Risk Factors and Tax Status.............................................. 26
Massachusetts Risk Factors and Tax Status......................................... 27
Michigan Risk Factors and Tax Status.............................................. 28
Minnesota Risk Factors and Tax Status............................................. 29
Missouri Risk Factors and Tax Status.............................................. 30
New Jersey Risk Factors and Tax Status............................................ 31
New York Risk Factors and Tax Status.............................................. 32
North Carolina Risk Factors and Tax Status........................................ 33
Ohio Risk Factors and Tax Status.................................................. 34
Oregon Risk Factors and Tax Status................................................ 35
Pennsylvania Risk Factors and Tax Status.......................................... 36
Tennessee Risk Factors and Tax Status............................................. 36
Texas Risk Factors and Tax Status................................................. 38
Virginia Risk Factors and Tax Status.............................................. 39
</TABLE>
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<TABLE>
<S> <C>
Operating Expenses................................................................ 40
Distributions To Unitholders...................................................... 41
National Traditional Trusts 4 Through 39 Semi-Annual Distributions............... 41
National Traditional Trust 40 and Subsequent National Traditional Trusts;
All Other Trusts -- Optional Distributions...................................... 41
Accumulation Plan................................................................. 42
Detailed Reports To Unitholders................................................... 43
Unit Value and Evaluation......................................................... 43
Distribution of Units To The Public............................................... 43
Ownership and Transfer of Units................................................... 44
Replacement of Lost, Stolen or Destroyed Certificates............................. 45
Market For Units.................................................................. 45
How Units May Be Redeemed Without Charge.......................................... 46
How Units May Be Purchased By The Sponsor......................................... 47
How Bonds May Be Removed From The Trusts.......................................... 47
Information About The Trustee..................................................... 47
Limitations on Liabilities of Sponsor and Trustee................................. 47
Successor Trustees And Sponsors................................................... 48
Information About The Sponsor..................................................... 48
Amendment and Termination of Indenture............................................ 49
Legal Opinion..................................................................... 49
Auditors.......................................................................... 49
</TABLE>
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THE NUVEEN TAX-FREE UNIT TRUST
The Nuveen Tax-Free Unit Trust - Description
Each Series of the Nuveen Tax-Free Unit Trust (the "Trust") is one of a
series of separate but similar investment companies created by the Sponsor, each
of which is designated by a different Series number. Each Series includes one
or more underlying separate unit investment trusts; the trusts in which few or
none of the Bonds are insured are sometimes referred to as the "Traditional
Trusts," the trusts in which all of the Bonds are insured as described herein
are sometimes referred to as the "Insured Trusts," and the state trusts (both
Traditional and Insured) are sometimes referred to as the "State Trusts." The
general term "Trust(s)" should be understood to refer collectively to both
Traditional and Insured Trusts. Each Trust includes only Bonds that are, in the
opinion of counsel, exempt from Federal income tax and, in the case of a State
Trust, from certain taxation in the state for which such State Trust is named.
Each Series was created under the laws of the State of New York pursuant to a
Trust Indenture and Agreement (the "Indenture") between John Nuveen & Co.
Incorporated (the "Sponsor") and The Chase Manhattan Bank (the "Trustee").
The objectives of the Trusts are income exempt from Federal income tax and,
in the case of a State Trust, where applicable, from state income and
intangibles taxes, and conservation of capital, through an investment in
obligations issued by or on behalf of states and territories of the United
States and authorities and political subdivisions thereof, the interest on which
is, in the opinion of recognized bond counsel to the issuing governmental
authorities, exempt from Federal income tax under existing law. Bonds in any
State Trust have been issued primarily by or on behalf of the state for which
such Trust is named and counties, municipalities, authorities and political
subdivisions thereof, the interest on which is, in the opinion of bond counsel,
exempt from Federal and (except for certain Bonds in the Connecticut Trusts,
which were issued prior to the taxation by Connecticut of interest income of
resident individuals) certain state income tax and intangibles taxes, if any,
for purchasers who qualify as residents of that state. Insurance guaranteeing
the timely payment, when due, of all principal and interest on the Bonds in each
Insured Trust has been obtained by the Sponsor or by the issuers of such Bonds
from the Municipal Bond Insurance Association or MBIA Insurance Corporation, and
as a result of such insurance the Bonds in the Insured Trusts are rated "Aaa" by
Moody's, "AAA" by Fitch and/or "AAA" by Standard & Poor's. (See "Insurance on
Bonds in Insured Trusts.") All obligations in each Traditional Trust were rated
at the date the Trust was established in the category "A" or better (BBB or Baa
or better by Standard & Poor's and Moody's, respectively, in the case of
National Trust 76 and earlier National Trusts and SP-1, MIG 2 or F-2 or better,
respectively, in the case of short-term obligations included in a Short Term
Traditional Trust) by Standard & Poor's, Moody's and/or Fitch (including
provisional or conditional ratings). (See "Description of Ratings" in the
Information Supplement to the Prospectus.) In addition, certain Bonds in
certain Traditional Trusts may be covered by insurance guaranteeing the timely
payment, when due, of all principal and interest. There is, of course, no
guarantee that the Trusts' objectives will be achieved. The bid prices of the
Bonds in the portfolio of any Trust may represent a deep "market" discount from
the par value of the Bonds. At the time each Discount Trust was
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established, the market value of the Bonds in the portfolio was significantly
below face value, and the current bid prices of the Bonds in such Trusts may
continue to represent a deep "market" discount from the par value of the Bonds.
Gains realized on the sale, payment on maturity or redemption of the Bonds
by the Trustee or on the sale or redemption of Units by a Unitholder are
included in a Unitholder's gross income for Federal income tax purposes. (See
"Tax Status of Unitholders.") The Sponsor has deposited with the Trustee the
interest-bearing obligations listed in the Schedules of Investments in Part Two
(the "Bonds"), which constitute the Trusts' underlying securities. The State of
Florida imposes no income tax on individuals, and exemption from that State's
intangibles tax provides only a slight tax advantage to purchasers of a Florida
Trust. The State of Texas currently imposes no income tax on individuals;
accordingly, there is no State tax advantage to purchasers of a Texas Trust.
(See "Tax Status of Unitholders" for a discussion of these matters.)
Payment of interest on the Bonds in each Insured Trust, and of principal at
maturity, is guaranteed under policies of insurance obtained by the Sponsor or
by the issuers of the Bonds. (See "Insurance on Bonds in Insured Trusts.")
At the Date of Deposit, each National Trust, State Trust and Discount Trust
consisted of long-term (approximately 15 to 40 year maturities) obligations;
each Long Intermediate Trust consisted of intermediate to long-term
(approximately 11 to 19 year maturities) obligations; each Intermediate Trust
and State Intermediate Trust consisted of intermediate-term (approximately 5 to
15 year maturities) obligations; each Short Intermediate Trust and State Short
Intermediate Trust consisted of short to intermediate-term (approximately 3 to 7
year maturities) obligations; and each Short Term Trust consisted of short-term
(approximately 1 to 5 year maturities) obligations.
Each Trust consists of fixed-rate municipal debt obligations. Because of
this an investment in a Trust should be made with an understanding of the risks
which investment in debt obligations may entail, including the risk that the
value of the debt obligations, and therefore of the Units, will decline with
increases in market interest rates. In general, the longer the period until the
maturity of a Bond, the more sensitive its value will be to fluctuations in
interest rates. During the past decade there have been substantial fluctuations
in interest rates and, accordingly, in the value of long-term debt obligations.
The Sponsor cannot predict the extent or timing of such fluctuations and,
accordingly, their effect upon the value of the Bonds. Other risks include the
ability of the issuer, or, if applicable, the insurer, to make payments of
interest and principal when due, "mandatory put" features, early call provisions
and the potential for changes in the tax status of the Bonds.
Each Unit of a Trust represents a fractional undivided interest in the
principal and net income of such Trust in the ratio set forth in "Essential
Information" in Part Two for the applicable Trust. To the extent that any Units
are redeemed by the Trustee, the aggregate value of the Trust's assets will
decrease by the amount paid to the redeeming Unitholder, but the fractional
undivided interest of each unredeemed Unit in such Trust will increase
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proportionately. The Units offered hereby are issued and outstanding Units
which have either been reacquired by the Sponsor through the purchase of Units
tendered to the Trustee for redemption or by purchase by the Sponsor or dealers
in the open market. No offering is being made on behalf of the Trusts and any
profit or loss realized on the sale of Units will accrue to the Sponsor.
Insurance on Bonds in Insured Trusts
Insurance guaranteeing the timely payment, when due, of all principal and
interest on the Bonds in each Insured Trust has been obtained by the Sponsor or
by the issuers or underwriters of Bonds from the Municipal Bond Insurance
Association (the "Association") (for Insured Series 1 through 107) or the MBIA
Insurance Corporation (the "Corporation") (for Insured Series 108 and all
subsequent Series) (the Association and the Corporation are referred to
collectively as the "Insurers"). Each insurance policy is an obligation only of
the Insurer that issued it and not of the other. Policies issued by the
Association are obligations of the Association and not of the Corporation, and
policies issued by the Corporation are not obligations of the Association or its
members. Some of the Bonds in each Insured Trust may be covered by a policy or
policies of insurance obtained by the issuers or underwriters of the Bonds. The
appropriate Insurer has issued a policy or policies of insurance covering each
of the Bonds in the Insured Trusts, each policy to remain in force until the
payment in full of such Bonds and whether or not the Bonds continue to be held
by an Insured Trust. By the terms of each policy the appropriate Insurer will
unconditionally and irrevocably guarantee to the holders or owners of the Bonds
the payment, when due, required of the issuer of the Bonds of an amount equal to
the principal of (either at the stated maturity or by any advancement of
maturity pursuant to a mandatory sinking fund payment) and interest on the Bonds
as such payments shall become due but not be paid (except that in the event of
any acceleration of the due date of principal by reason of mandatory or optional
redemption, default or otherwise, other than any advancement of maturity
pursuant to a mandatory sinking fund payment, the payments guaranteed will be
made in such amounts and at such times as would have been due had there not been
an acceleration). The appropriate Insurer will be responsible for such
payments, less any amounts received by the holders or owners of the Bonds from
any trustee for the Bond issuers or from any other sources other than the
Insurer. Each Insurer has indicated that the insurance policies do not insure
the payment of principal or interest on Bonds which are not required to be paid
by the issuer thereof because the Bonds were not validly issued; as indicated
under "Tax Status of Unitholders," the respective issuing authorities have
received opinions of bond counsel relating to the valid issuance of each of the
Bonds in the Insured Trusts. The Insurers' policies also do not insure against
nonpayment of principal of or interest on the Bonds resulting from the
insolvency, negligence or any other act or omission of the Trustee or any other
paying agent for the Bonds. The policies are not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law. The policies are non-cancelable and the insurance premiums
have been fully paid on or prior to the Date of Deposit, either by the Sponsor
or, if a policy has been obtained by a Bond issuer, by such issuer.
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Upon notification from the trustee for any Bond issuer or any holder or
owner of the Bonds or coupons that such trustee or paying agent has insufficient
funds to pay any principal or interest in full when due, the appropriate Insurer
will be obligated to deposit funds promptly with Citibank, N.A., New York, New
York, as fiscal agent for the Insurers, sufficient to fully cover the deficit.
If notice of nonpayment is received on or after the due date, the appropriate
Insurer will provide for payment within one business day following receipt of
the notice. Upon payment by an Insurer of any Bonds, coupons, or interest
payments, such Insurer shall succeed to the rights of the owner of such Bonds,
coupons or interest payments with respect thereto.
The Association. Each insurance company comprising the Association is
severally and not jointly obligated under each policy issued by the Association
in the following respective percentages: The Travelers Casualty & Surety
Company (formerly The Aetna Casualty and Surety Company), 33%; Fireman's Fund
Insurance Company, 30%; The Travelers Indemnity Company, 15%; CIGNA Property and
Casualty Company (formerly Aetna Insurance Company), 12%; and The Continental
Insurance Company, 10%. As a several obligor, each such insurance company will
be obligated only to the extent of its percentage of any claim under the policy
and will not be obligated to pay any unpaid obligation of any other member of
the Association. Each insurance company's participation is backed by all of its
assets. However, each insurance company is a multiline insurer involved in
several lines of insurance other than municipal bond insurance, and the assets
of each insurance company also secure all of its other insurance policy and
surety bond obligations.
The following table sets forth financial information with respect to the
five insurance companies comprising the Association. The statistics have been
furnished by the Association and are as reported by the insurance companies to
the New York State Insurance Department and are determined in accordance with
statutory accounting principles. No representation is made herein as to the
accuracy or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof. In
addition, these numbers are subject to revision by the New York State Insurance
Department which, if revised, could either increase or decrease the amounts.
Municipal Bond Insurance Association
Five Member Companies, Assets and Policyholders' Surplus
(Unaudited) as of March 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
Travelers CIGNA
Casualty Fireman's Travelers Property Continental
& Surety Fund Indemnity and Casualty Insurance
<S> <C> <C> <C> <C> <C>
Assets $12,099,838 $10,380,078 $11,283,583 $2,325,253 $2,443,794
Liabilities 9,318,112 7,327,508 8,593,024 1,440,522 1,820,590
Policyholder's Surplus 2,781,726 3,052,570 2,690,559 884,731 623,204
</TABLE>
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The Corporation. The Corporation is the principal operating subsidiary of
MBIA, Inc., a New York Stock Exchange listed company. MBIA, Inc. is not
obligated to pay the debts of or claims against the Corporation. The
Corporation is a limited liability corporation rather than a several liability
association. The Corporation is domiciled in the State of New York and licensed
to do business in and subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Corporation has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the insurer, changes in control and
transactions among affiliates. Additionally, the Corporation is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
Effective February 17, 1998, the Company acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC"), a New York domiciled
financial guarantee insurance company, through a merger with its parent, CapMAC
Holdings, Inc. Pursuant to a reinsurance agreement, CMAC 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 the
Insurer. The Company is not obligated to pay the debts of or claims against
CMAC.
As of December 31, 1997, the Corporation had admitted assets of $5.3
billion (audited), total liabilities of $3.5 billion (audited), and total
capital and surplus of $1.8 billion (audited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. As of March 31, 1998, the Corporation had admitted assets of $5.4
billion (unaudited), total liabilities of $3.6 billion (unaudited), and total
capital and surplus of $1.8 billion (unaudited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. Copies of the Corporation's year-end financial statements prepared
in accordance with statutory accounting practices are available from the
Corporation. The address of the Corporation is 113 King Street, Armonk, New
York 10504.
Moody's rates all bond issues insured by the Insurers "Aaa" and short-term
loans "MIG 1", both designated to be of the highest quality.
Standard & Poor's rates all new issues insured by the Insurers "AAA" Prime
Grade.
Fitch, upon request, rates all bond issues insured by the Insurers "AAA"
and short-terms loans "F-1."
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Each rating of the Insurers should be evaluated independently. No
application has been made to any other rating agency in order to obtain
additional ratings on the Bonds. The ratings reflect the respective rating
agency's current assessment of the creditworthiness of the Insurers and their
ability to pay claims on their policies of insurance. (See "Description of
Ratings" in the Information Supplement to the Prospectus.) Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Bonds,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Bonds.
Because the insurance on the Bonds will be effective so long as the Bonds
are outstanding, such insurance will be taken into account in determining the
market value of the Bonds and therefore some value attributable to such
insurance will be included in the value of the Units of the Insured Trusts. The
insurance does not, however, guarantee the market value of the Bonds or of the
Units nor does it guaranty that the ratings on the Bonds will not be revised or
withdrawn.
Insurance on Certain Bonds in Traditional Trusts
Insurance guaranteeing the timely payment, when due, of all principal and
interest on certain Bonds in a Traditional Trust may have been obtained by the
Sponsor, issuer, or underwriter of the particular Bonds involved or by another
party. Such insurance, which provides coverage substantially the same as that
obtained with respect to Bonds in Insured Trusts as described above, is
effective so long as the insured Bond is outstanding and the insurer remains in
business. Insurance relates only to the particular Bond and not to the Units
offered hereby or to their market value. Insured Bonds have received a rating
of "AAA" by Standard & Poor's, "AAA" by Fitch and/or "Aaa" by Moody's, in
recognition of such insurance.
If a Bond in a Traditional Trust is insured, the Schedule of Investments
will identify the insurer. Such insurance will be provided by Financial
Guaranty Insurance Company ("FGIC"), AMBAC Assurance Corporation ("AMBAC"), Bond
Investors Guaranty Insurance Company, now known as MBIA Corp. of Illinois
("BIG"), Capital Guaranty Insurance Company ("CGIC"), Financial Security
Assurance, Inc. ("FSA"), Municipal Bond Insurance Association (the
"Association"), the MBIA Insurance Corporation ("Corporation") or Connie Lee
Insurance Company ("Connie Lee"). The Sponsor to date has purchased and
presently intends to purchase insurance for Bonds in Traditional Trusts
exclusively from the Corporation (see the preceding disclosure regarding the
Corporation). There can be no assurance that any insurer listed herein will be
able to satisfy its commitments in the event claims are made in the future.
However, at the date hereof, Standard & Poor's has rated the claims-paying
ability of each insurer "AAA," and Moody's has rated all bonds insured by each
such insurer, except Connie Lee, "Aaa." Moody's gives no ratings for bonds
insured by Connie Lee.
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Because any such insurance will be effective so long as the insured Bonds
are outstanding, such insurance will be taken into account in determining the
market value of such Bonds and therefore some value attributable to such
insurance will be included in the value of the Units of the Trust that includes
such Bonds. The insurance does not, however, guarantee the market value of the
Bonds or of the Units.
Public Offering Price
The Sponsor will appraise or cause to be appraised daily the value of the
underlying Bonds in each Trust (1) as of 4:00 p.m. eastern time on each day on
which the New York Stock Exchange (the "Exchange") is normally open, or (2) as
of such earlier closing time on each day on which the Exchange is scheduled in
advance to close at an earlier time, and will adjust the Public Offering Price
of the Units commensurate with such appraisal. Such Public Offering Price will
be effective for all orders received by a dealer or the Sponsor at or prior to
4:00 p.m. eastern time, or such earlier closing time, on each such day. Orders
received after that time, or on a day when the Exchange is closed for a
scheduled holiday or weekend, will be held until the next determination of
price.
The sales charge applicable to quantity purchases is reduced on a graduated
scale for sales to any purchaser of at least $50,000 or 500 Units and will be
applied on whichever basis is more favorable to the purchaser. For purposes of
calculating the applicable sales charge, purchasers who have indicated their
intent to purchase a specified amount of Units of any Nuveen-sponsored unit
trust by executing and delivering a letter of intent to the Sponsor, which
letter of intent must be in a form acceptable to the Sponsor and shall have a
maximum duration of thirteen months, will be eligible to receive a reduced sales
charge, according to the table set forth below, based on the amount of intended
aggregate purchases (excluding purchases which are subject only to a deferred
sales charge) as expressed in the letter of intent. For purposes of letter of
intent calculations, units of equity products are valued at $10 per unit. Due
to administrative limitations and in order to permit adequate tracking, the only
secondary market purchases that will be permitted to be applied toward the
intended specified amount and that will receive the corresponding reduced sales
charge are those Units that are acquired through or from the Sponsor.
By establishing a letter of intent, a Unitholder agrees that the first
purchase of Units following the execution of such letter of intent will be at
least 5% of the total amount of the intended aggregate purchases expressed in
such Unitholder's letter of intent. Further, through the establishment of the
letter of intent, such Unitholder agrees that Units representing 5% of the total
amount of the intended purchases will be held in escrow by The Chase Manhattan
Bank, Trustee, pending completion of these purchases. All distributions on
Units held in escrow will be credited to such Unitholder's account. If total
purchases prior to the expiration of the letter of intent period equal or exceed
the amount specified in a Unitholder's letter of intent, the Units held in
escrow will be transferred to such Unitholder's account. A Unitholder who
purchases Units during the letter of intent period in excess of the number of
Units specified in a Unitholder's letter of intent, the amount of which would
cause the Unitholder to be eligible to receive an additional sales charge
reduction, will be allowed such additional sales charge
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reduction on the purchase of Units which caused the Unitholder to reach such new
breakpoint level and on all additional purchases of Units during the letter of
intent period. If the total purchases are less than the amount specified, the
Unitholder involved must pay the Sponsor an amount equal to the difference
between the amounts paid for those purchases and the amounts which would have
been paid if the higher sales charge had been applied; the Unitholder will,
however, be entitled to any reduced sales charge qualified for by reaching any
lower breakpoint level. If such Unitholder does not pay the additional amount
within 20 days after written request by the Sponsor or the Unitholder's
securities representative, the Sponsor will instruct the Trustee to redeem an
appropriate number of the escrowed Units to meet the required payment. By
establishing a letter of intent, a Unitholder irrevocably appoints the Sponsor
as attorney to give instructions to redeem any or all of such Unitholder's
escrowed Units, with full power of substitution in the premises. A Unitholder or
his securities representative must notify the Sponsor whenever such Unitholder
makes a purchase of Units that he wishes to be counted toward the intended
amount.
The Public Offering Price of the Units of each Trust for secondary market
purchases is determined by adding to the Trustee's determination of the bid
price of each Bond in the Trust the appropriate sales charge determined in
accordance with the table set forth below based upon the number of years
remaining to the maturity of each such Bond, adjusting the total to reflect the
amount of any cash held in or advanced to the principal account of the Trust,
and dividing the result by the number of Units of such Trust then outstanding.
For purposes of this calculation, Bonds will be deemed to mature on their stated
maturity dates unless: (a) the Bonds have been called for redemption or funds
or securities have been placed in escrow to redeem them on an earlier call date,
in which case such call date shall be deemed to be the date upon which they
mature; or (b) such Bonds are subject to a "mandatory put," in which case such
mandatory put date shall be deemed to be the date upon which they mature. Any
assumptions regarding maturity made for purposes of determining the appropriate
sales charge in no way predict or guarantee the actual remaining life of a given
Trust.
The effect of this method of sales charge calculation will be that
different sales charge rates will be applied to each of the various Bonds in a
Trust portfolio based upon the maturities of such Bonds, in accordance with the
following schedule. As shown, the sales charge on Bonds in each maturity range
(and therefore the aggregate sales charge on the purchase) is reduced with
respect to purchases of at least $50,000 or 500 Units:
Amount of Purchase*
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$50,000 $100,000 $250,000 $500,000 $1,000,000 $2,500,000 $5,000,000
Years to Maturity Under to to to to to to or
$50,000 $99,999 $249,999 $499,999 $999,999 $2,499,999 $4,999,999 more
Less than 1 0 0 0 0 0 0 0 0
1 but less than 2 1.523% 1.446% 1.369% 1.317% 1.215% 1.061% .900% .750%
2 but less than 3 2.041 1.937 1.833 1.729 1.626 1.420 1.225 1.030
3 but less than 4 2.564 2.433 2.302 2.175 2.041 1.781 1.546 1.310
4 but less than 5 3.093 2.961 2.828 2.617 2.459 2.175 1.883 1.590
5 but less than 7 3.627 3.433 3.239 3.093 2.881 2.460 2.165 1.870
7 but less than 10 4.167 3.951 3.734 3.520 3.239 2.828 2.489 2.150
10 but less than 13 4.712 4.467 4.221 4.004 3.788 3.253 2.842 2.430
13 but less than 16 5.263 4.988 4.712 4.439 4.167 3.627 3.169 2.710
16 or more 5.820 5.542 5.263 4.987 4.603 4.004 3.500 3.000
</TABLE>
____________________
* Breakpoint sales charges are computed both on a dollar basis and on the
basis of the number of Units purchased, using the equivalent of 500 Units
to $50,000, 2,500 Units to $250,000, etc., and will be applied on that
basis which is more favorable to the purchaser.
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The secondary market sales charges above are expressed as a percent of the
net amount invested; expressed as a percent of the Public Offering Price, the
maximum sales charge on a Trust, for instance one consisting entirely of Bonds
with 16 years or more to maturity, would be 5.50% (5.820% of the net amount
invested). For purposes of illustration, the sales charge on a Trust consisting
entirely of Bonds maturing in 13 to 16 years would be 5% (5.263% of the net
amount invested); on a Trust consisting entirely of Bonds maturing in 10 to 13
years, 4.5% (4.712% of the net amount invested); on a Trust consisting entirely
of Bonds maturing in 5 to 7 years, 3.5% (3.627% of the net amount invested); and
on a Trust consisting entirely of Bonds maturing in 3 to 4 years, 2.5% (2.564%
of the net amount invested). The actual secondary sales charge included in the
Public Offering Price of any particular Trust will depend on the maturities of
the Bonds in the portfolio of such Trust.
As more fully set forth under "Accrued Interest" below, accrued interest
from the preceding Record Date to, but not including, the settlement date of the
transaction (three business days after purchase) will be added to the Public
Offering Price to determine the purchase price of Units.
The above graduated sales charge will apply on all applicable purchases of
Nuveen investment company securities on any one day by the same purchaser in the
amounts stated, and for this purpose purchases of any Series will be aggregated
with concurrent purchases of Units of any other Series or of shares of any open-
end management investment company of which the Sponsor is principal underwriter
and with respect to the purchase of which a sales charge is imposed.
Purchases by or for the account of individuals and their spouses, parents,
children, grandchildren, grandparents, parents-in-law, sons- and daughters-in-
law, siblings, a sibling's
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spouse and a spouse's siblings ("immediate family members") will be aggregated
to determine the applicable sales charge. The graduated sales charges are also
applicable to a trustee or other fiduciary purchasing securities for a single
trust estate or single fiduciary account.
Units may be purchased at the Public Offering Price without a sales charge
by officers or directors and by bona fide, full-time employees of Nuveen, Nuveen
Advisory Corp., Nuveen Institutional Advisory Corp. and The John Nuveen Company,
including in each case these individuals and their immediate family members (as
defined above).
Units may be purchased in the secondary market at the Public Offering Price
for non-breakpoint purchases minus the concession the Sponsor typically allows
to brokers and dealers for non-breakpoint purchases (see "Distribution of Units
to the Public") by (1) investors who purchase Units through registered
investment advisors, certified financial planners and registered broker-dealers
who in each case either charge periodic fees for financial planning, investment
advisory or asset management services, or provide such services in connection
with the establishment of an investment account for which a comprehensive "wrap
fee" charge is imposed, (2) bank trust departments investing funds over which
they exercise exclusive discretionary investment authority and that are held in
a fiduciary, agency, custodial or similar capacity, (3) any person who for at
least 90 days, has been an officer, director or bona fide employee of any firm
offering Units for sale to investors or their immediate family members (as
defined above) and (4) officers and directors of bank holding companies that
make Units available directly or through subsidiaries or bank affiliates
(collectively, the "Discounted Purchases"). Notwithstanding anything to the
contrary in this Prospectus, such investors, bank trust departments, firm
employees and bank holding company officers and directors who purchase Units
through this program will not receive sales charge reductions for quantity
purchases.
Cash, if any, made available to the Sponsor prior to the settlement date
for a purchase of Units may be available for use in the Sponsor's business, and
may be of benefit to the Sponsor.
Whether or not Units are being offered for sale, the Sponsor shall also
determine the aggregate value of each Trust as of 4:00 p.m. eastern time: (i)
on each June 30 or December 31 (or, if such date is not a business day, the last
business day prior thereto), (ii) on each day on which any Unit is tendered for
redemption (or the next succeeding business day if the date of tender is a non-
business day), and (iii) at such other times as may be necessary. For this
purpose, a "business day" shall be any day on which the Exchange is normally
open. (See "Unit Value and Evaluation.")
Pursuant to the terms of the Indenture, the Trustee may terminate a Trust
if the net asset value of such Trust, as shown by any evaluation, is less than
20% of the original principal amount of the Trust. In the course of regularly
appraising the value of Bonds in each Trust, the Sponsor will attempt to
estimate the date on which a Trust's value will fall below the 20% level based
on anticipated bond events over a five-year period, including maturities, escrow
calls and current calls or refundings, assuming certain market rates. The
Sponsor intends from time to time to recommend that certain Trusts whose values
have fallen or are anticipated to fall below
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<PAGE>
the 20% level be terminated based on certain criteria which could adversely
affect the Trust's diversification. Once the Sponsor has determined that a
Trust's value has fallen or may fall below the 20% level within a five-year
period, for purposes of computing the sales charge, the maturity of each bond in
such Trust will be deemed to be the earlier of the estimated termination date of
the Trust or the actual date used when pricing the bond under Municipal
Securities Rulemaking Board rules and interpretations issued thereunder.
Accrued Interest
Accrued interest is the accumulation of unpaid interest on a Bond from the
last day on which interest thereon was paid. Interest on Bonds in each Trust is
accounted for daily on an accrual basis. For this reason, the purchase price of
Units of each Trust will include not only the Public Offering Price but also the
proportionate share of accrued interest to the date of settlement. Accrued
interest does not include accrual of original issue discount on zero coupon
bonds, stripped obligations or other original issue discount bonds. (See
"Selection of Bonds for Deposit in the Trusts" and "Tax Status of Unitholders.")
Interest accrues to the benefit of Unitholders commencing with the settlement
date of their purchase transaction.
The Trustee has no cash for distribution to Unitholders until it receives
interest payments on the Bonds in the Trusts. Since municipal bond interest is
accrued daily but generally paid only semi-annually, during the initial months
of each Trust, the Interest Account, consisting of accrued but uncollected
interest and collected interest (cash), will be predominantly the uncollected
accrued interest that is not available for distribution. However, due to
advances by the Trustee, the Trustee will provide a first distribution between
approximately 30 and 60 days after the Date of Deposit. Assuming each Trust
retains the size and composition shown in the accompanying Part Two and expenses
and fees remain the same, annual interest collected and distributed in future
periods will approximate the estimated Net Annual Interest Income stated
therein. However, the amount of accrued interest at any point in time will be
greater than the amount that the Trustee will have actually received and
distributed to Unitholders. Therefore, there will always remain an item of
accrued interest that is included in the purchase price and the redemption price
of the Units.
Interest is accounted for daily, and a proportionate share of accrued and
undistributed interest computed from the preceding Record Date is added to the
daily valuation of each Unit of each Trust. (See "Distributions to
Unitholders.") As Bonds mature, or are redeemed or sold, the accrued interest
applicable to such Bonds is collected and subsequently distributed to
Unitholders. Unitholders who sell or redeem all or a portion of their Units
will be paid their proportionate share of the remaining accrued interest to, but
not including, the third business day following the date of sale or tender.
Estimated Long Term Return and Estimated Current Return
The Estimated Long Term Return for each Trust is a measure of the return to
the investor expected to be earned over the estimated life of the Trust. The
Estimated Long Term Return
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<PAGE>
represents an average of the yields to maturity (or call) of the Bonds in the
Trust's portfolio calculated in accordance with accepted bond practice and
adjusted to reflect expenses and sales charges. Under accepted bond practice,
tax-exempt bonds are customarily offered to investors on a "yield price" basis,
which involves computation of yield to maturity or to an earlier call date
(whichever produces the lower yield), and which takes into account not only the
interest payable on the bonds but also the amortization or accretion of any
premium over, or discount from, the par (maturity) value inherent in the bond's
purchase price. In the calculation of Estimated Long Term Return, the average
yield for a Trust's portfolio is derived by weighting each Bond's yield by the
market value of the Bond and by the amount of time remaining to the date to
which the Bond is priced. This weighted average yield is then adjusted to
reflect estimated expenses, is compounded, and is reduced by a factor which
represents the amortization of the sales charge over the expected average life
of a Trust. The Estimated Long Term Return calculation does not take into
account the effect of a first distribution which may be less than a regular
distribution or may be paid at some point after 30 days (or a second
distribution which may be less than a normal distribution for Unitholders who
choose quarterly or semi-annual plans of distribution), and it also does not
take into account the difference in timing of payments to Unitholders who choose
quarterly or semi-annual plans of distribution, each of which will reduce the
return.
Estimated Current Return is computed by dividing the Net Annual Interest
Income per Unit by the Public Offering Price. In contrast to Estimated Long
Term Return, Estimated Current Return does not reflect the amortization of
premium or accretion of discount, if any, on the Bonds in a Trust's portfolio.
Net Annual Interest Income per Unit is calculated by dividing the annual
interest income to a Trust, less estimated expenses, by the number of Units
outstanding.
Net Annual Interest Income per Unit, used to calculate Estimated Current
Return, will vary with changes in fees and expenses of the Trustee and the
Evaluator and with the redemption, maturity, exchange or sale of Bonds. A Trust
may experience expenses and portfolio changes different from those assumed in
the calculation of estimated Long Term Return. There can be no assurance that
the Estimated Current Returns or Estimated Long Term Returns quoted to a Trust
will be realized in the future. A Unitholder's actual return may vary
significantly from the Estimated Long Term Return, based on their holding
period, market interest rate changes, other factors affecting the prices of
individual bonds in the portfolio, and differences between the expected
remaining life of portfolio bonds and the actual length of time that they remain
in a Trust; such actual holding periods may be reduced by termination of a
Trust, as described in "Amendment and Termination of Indenture". Since both the
Estimated Current Return and the Estimated Long Term Return quoted on a given
business day are based on the market value of the underlying Bonds on that day,
subsequent calculations of these performance measures will reflect the then
current market value of the underlying Bonds and may be higher or lower. The
Sponsor will provide estimated cash flow information relating to a Trust without
charge to each potential investor in a Trust who receives this prospectus and
makes an oral or written request to the Sponsor for such information.
A comparison of tax-free and equivalent taxable estimated current returns
with the returns on various taxable investments is one element to consider in
making an investment decision.
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<PAGE>
The Sponsor may from time to time in its advertising and sales materials compare
the then current estimated returns on a Trust and returns over specified periods
on other similar Nuveen Trusts with returns on taxable investments such as
corporate or U.S. Government bonds, bank CD's and money market accounts or money
market funds, each of which has investment characteristics that may differ from
those of a Trust. U.S. Government bonds, for example, are backed by the full
faith and credit of the U.S. Government and bank CD's and money market accounts
are insured by an agency of the federal government. Money market accounts and
money market funds provide stability of principal, but pay interest at rates
that vary with the condition of the short-term debt market. The investment
characteristics of the Trusts are described more fully elsewhere in the
Prospectus.
Determination of the Price of Bonds at Date of Deposit
Except as indicated below, for Series 590 and all prior Trusts, the prices
at which the Bonds deposited in each Trust would have been offered to the public
on the business day prior to the Date of Deposit were determined by the Trustee
on the basis of an evaluation of the Bonds prepared by Standard & Poor's, a firm
regularly engaged in the business of evaluating, quoting and appraising
comparable bonds. For Series 591 and all subsequent Series, the prices at which
the bonds deposited in each Trust would have been offered to the public on the
business day prior to the Date of Deposit were determined on the basis of an
evaluation of the Bonds by Kenny S&P Evaluation Services, a division of J.J.
Kenny Co., Inc. ("Kenny S&P"), a firm regularly engaged in the business of
evaluating, quoting and appraising comparable bonds. With respect to Bonds in
Insured Trusts and insured Bonds in Traditional Trusts, either Standard & Poor's
or Kenny S&P, as applicable, evaluated the Bonds as so insured. For National
Trust 4 through 22, such prices were determined by the Trustee on the basis of
consultation with dealers in public bonds other than the Sponsor, by reference
to the Blue List of Current Municipal Offerings (a daily publication containing
the current public offering prices of public bonds of all grades currently being
offered by dealers and banks).
Selection of Bonds for Deposit in the Trusts
In selecting Bonds for the Trusts, the following factors, among others,
were considered: (i) the Standard & Poor's, Moody's and/or Fitch ratings of the
Bonds (see page 1 for a description of minimum rating standards), (ii) the
prices of the Bonds relative to other bonds of comparable quality and maturity
(in addition, in the case of Discount Trusts, the prices relative to newly
issued bonds of comparable quality, coupon, and maturity, i.e., the existence of
"market" discount), (iii) the diversification of Bonds as to purpose of issue
and location of issuer, (iv) the maturity dates of the Bonds, and (v) in the
case of Insured Trusts only, the availability of insurance on such Bonds.
In order for Bonds to be eligible for insurance by the Association or the
Corporation, they must have credit characteristics which, in the opinion of the
applicable Insurer, would qualify them as "investment grade" obligations.
Insurance is not a substitute for the basic credit of an issuer, but rather
supplements the existing credit and provides additional security therefor. All
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<PAGE>
Bonds insured by either of the Insurers receive a rating of "AAA" by Standard &
Poor's, "AAA" by Fitch, or "Aaa" by Moody's, as the case may be. (See
"Insurance on Bonds in Insured Trusts.")
Each Trust consists of such Bonds listed in the Schedules of Investments in
Part Two as may continue to be held from time to time (including certain
securities deposited in the Trust in exchange or substitution for Bonds upon
certain refundings), together with accrued and undistributed interest thereon
and undistributed cash realized from the disposition of Bonds. Neither the
Sponsor nor the Trustee shall be liable in any way for any default, failure or
defect in any Bond. Because certain of the Bonds may from time to time under
certain circumstances be sold or redeemed or will mature in accordance with
their terms and the proceeds from such events will be used to pay for Units
redeemed or distributed to Unitholders, and not reinvested, no assurance can be
given that a Trust will retain for any length of time its present size and
composition.
A Trust portfolio may consist of Bonds priced at a deep "market" discount
from par value at maturity. A primary reason for the market values of the Bonds
being less than their par values is that the coupon interest rates on the Bonds
are lower than the current market interest rates for newly issued bonds of
comparable rating and type. At the time of issuance the Bonds were for the most
part issued at then current coupon interest rates. The current yields (coupon
interest income as a percentage of market price) of discount bonds are lower
than the current yields of comparably rated bonds of similar type newly issued
at current interest rates because discount bonds tend to increase in market
value as they approach maturity and the full principal amount becomes payable.
A discount bond held to maturity will have a larger portion of its total return
in the form of capital gain and less in the form of tax-exempt interest income
than a comparable bond newly issued at current market rates. (See "Tax Status
of Unitholders.") Discount bonds with a longer term to maturity tend to have a
higher current yield and a lower current market value than otherwise comparable
bonds with a shorter term to maturity. If interest rates rise, the market
discount of discount bonds will increase and the value of such bonds will
decrease; and if interest rates decline, the market discount of discount bonds
will decrease and the value of the bonds will increase. Market discount
attributable to interest rate changes does not necessarily indicate a lack of
market confidence in the issuer. Investors should also be aware that many of
the Bonds in each Trust portfolio are subject to special or extraordinary
redemption at par (in the case of original issue discount bonds, such redemption
is generally to be made at the issue price plus the amount of original issue
discount accreted to redemption; such price is hereafter referred to as
"Accreted Value") under certain circumstances, including economic and other
defaults. Under such circumstances the redemption price for such Bonds would
not include any premium over par or Accreted Value which the investor may have
paid for such Bonds.
As a number of the Trusts contain Bonds issued by school districts,
investors should be aware that litigation challenging the validity, under state
constitutions, of present systems of financing public education has been
initiated in a number of states. Decisions have been reached in some states
holding such school financing in violation of state constitutions. In addition,
legislation to effect changes in public school financing has been introduced in
a number of states. The Sponsor, however, does not believe that such efforts,
even if successful, will have a material
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adverse effect on the ability of any of the issuers of Bonds contained in the
Trusts' portfolios to make principal and interest payments when due.
The Sponsor participated as either the sole underwriter or manager or as a
member of the syndicates which were the original underwriters of a number of the
Bonds in certain Trusts. An underwriter or underwriting syndicate purchases
bonds from the issuer on a negotiated or competitive bid basis as principal with
the intention of marketing such bonds to investors at a profit.
All of the Bonds in each Trust are subject to being called or redeemed in
whole or in part prior to their stated maturities pursuant to the optional
redemption provisions described in the "Schedules of Investments" in Part Two
and in most cases pursuant to a sinking fund or special or extraordinary
redemption provisions. A bond subject to optional call is one which is subject
to redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a bond issue is redeemed, at or before maturity,
by the proceeds of a new bond issue. A bond subject to sinking fund redemption
is one which is subject to partial call from time to time from a fund
accumulated for the scheduled retirement of a portion of an issue prior to
maturity. Special or extraordinary redemption provisions may provide for
redemption of all or a portion of an issue upon the occurrence of certain
circumstances usually related to defaults or unanticipated changes in
circumstances. Events that may permit or require the special or extraordinary
redemption of bonds include, among others: substantial damage to or destruction
of the project for which the proceeds of the bonds were used; exercise by a
local, state or Federal governmental unit of its power of eminent domain to take
all or substantially all of the project for which the proceeds of the bonds were
used; a final determination that the interest on the bonds is taxable; changes
in the economic availability of raw materials, operating supplies or facilities
or technological or other changes which render the operation of the project for
which the proceeds of the bonds were used uneconomical; changes in law or an
administrative or judicial decree which render the performance of the agreement
under which the proceeds of the bonds were made available to finance the project
impossible or which create unreasonable burdens or which impose excessive
liabilities, such as taxes, not imposed on the date the bonds were issued, on
the issuer of the bonds or the user of the proceeds of the bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the bonds;
an overestimate of the costs of the project to be financed with the proceeds of
the bonds resulting in excess proceeds which may be applied to redeem bonds; an
underestimate of a source of funds securing the bonds resulting in excess funds
which may be applied to redeem bonds; or a default in payment or failure to
comply with the restrictions created as part of the bond financing on the part
of the operator or principal user of a project financed by the bonds. The
Sponsor is unable to predict all of the circumstances which may result in such
redemption of an issue of Bonds. See the discussion of the various types of
bond issues, below, for certain information on the call provisions of such
bonds, particularly single family mortgage revenue bonds.
The exercise of redemption or call provisions will (except to the extent
the proceeds of the called Bonds are used to pay for Unit redemptions) result in
the distribution of principal and may result in a reduction in the amount of
subsequent interest distributions; it may also affect the
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current return on Units of the Trust involved. Redemption pursuant to optional
call provisions is more likely to occur, and redemption pursuant to sinking fund
or special or extraordinary redemption provisions may occur, when the Bonds have
an offering side evaluation which represents a premium over par (as opposed to a
discount from par). Redemption pursuant to optional call provisions may be, and
redemption pursuant to sinking fund or special or extraordinary redemption
provisions is likely to be, at a price equal to the par value of the bonds
without any premium (in the case of original issue discount bonds, such
redemption is generally to be made at the issue price plus the amount of
original issue discount accreted to the date of redemption; such price is
referred to as "Accreted Value"). Because Bonds may have been valued at prices
above or below par value or the then-current Accreted Value at the time Units
were purchased, Unitholders may realize gain or loss upon the redemption of
portfolio Bonds. (See "Estimated Long-Term Return and Estimated Current Return"
and the "Schedules of Investments" in Part Two.)
Certain of the Bonds in each Trust's portfolio may be subject to continuing
requirements regarding the actual use of Bond proceeds, the manner of operation
of the project financed from Bond proceeds or the rebate of excess earnings on
Bond proceeds, any of which may affect the exemption of interest on such Bonds
from Federal income taxation. Although at the time of issuance of each of the
Bonds in each Trust an opinion of bond counsel was rendered as to the exemption
of interest on such obligations from Federal income taxation, and the issuers
covenanted to comply with all requirements necessary to retain the tax-exempt
status of the Bonds, there can be no assurance that the respective issuers or
other obligors on such obligations will fulfill the various continuing
requirements established upon issuance of the Bonds. A failure to comply with
such requirements may cause a determination that interest on such obligations is
subject to Federal income taxation, perhaps even retroactively from the date of
issuance of such Bonds, thereby reducing the value of the Bonds and subjecting
Unitholders to unanticipated tax liabilities.
Certain Bonds may carry a "mandatory put" (also referred to as a "mandatory
tender" or "mandatory repurchase") feature pursuant to which the holder of such
a Bond will receive payment of the full principal amount thereof on a stated
date prior to the maturity date unless such holder affirmatively acts to retain
the Bond. Under the Indenture, the Trustee does not have the authority to act
to retain any Bonds with such features; accordingly, it will receive payment of
the full principal amount of any such Bonds on the stated put date and such date
is therefore treated as the maturity date of such Bonds in selecting Bonds for
the respective Trust and for purposes of calculating the average maturity of the
Bonds in any Trust.
Except as otherwise indicated herein or in Part Two of the Prospectus, to
the best knowledge of the Sponsor, there was no litigation pending as of the
date of this Prospectus in respect of any Bonds which might reasonably be
expected to have a material adverse effect on any of the Trusts. It is possible
that after the date of this Prospectus, litigation may be initiated with respect
to Bonds in any Trust. Any such litigation may affect the validity of such
Bonds or the tax-exempt nature of the interest thereon, but while the outcome of
litigation of such nature can never be entirely predicted, the opinions of bond
counsel to the issuer of each Bond on the
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date of issuance state that such Bonds were validly issued and that the interest
thereon is, to the extent indicated, exempt from Federal income tax.
An investment in Units of any Trust should be made with an understanding of
the risks that such an investment may entail. These include but are not limited
to the ability of the issuer, or, if applicable, the insurer, to make payments
of interest and principal when due, the effects of changes in interest rates
generally, early call provisions and the potential for changes in the tax status
of the Bonds. The following paragraphs discuss certain characteristics of the
Bonds in the Trusts and of certain types of issuers in whose securities a Trust
portfolio may be deemed to be "concentrated." These paragraphs discuss, among
other things, certain circumstances which may adversely affect the ability of
such issuers to make payment of principal and interest on Bonds held in the
portfolio of a Trust or which may adversely affect the ratings of such Bonds;
with respect to the Insured Trusts, however, because of the insurance obtained
by the Sponsor or by the Bond issuers, such changes should not adversely affect
any Insured Trust's receipt of principal and interest, the Standard & Poor's
AAA, Fitch's AAA or Moody's Aaa ratings of the Bonds in an Insured Trust's
portfolio.
Escrow Secured Obligations. Some of the Bonds in a Trust may be
obligations of issuers which are typically secured by direct obligations of the
U.S. Government or in some cases obligations guaranteed by the U.S. Government
placed in an escrow account maintained by an independent trustee until maturity
or a predetermined redemption date. These obligations are generally noncallable
prior to maturity or the predetermined redemption date. In a few isolated
instances, however, bonds which were thought to be escrowed to maturity have
been called for redemption prior to maturity.
Health Care Facility Obligations. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are derived from services provided by
hospitals or other health care facilities, including nursing homes. The ability
of such issuers to make debt service payments on these obligations is dependent
on various factors, including occupancy levels of the facility, demand for
services, the ability of the facility to provide the services required, an
increasing shortage of qualified nurses or a dramatic rise in nursing salaries,
physicians' confidence in the facility, management capabilities, economic
developments in the service area, competition from other similar providers,
efforts by insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, government regulation, the
cost and possible unavailability of malpractice insurance, and the termination
or restriction of governmental financial assistance, including that associated
with Medicare, Medicaid and other similar third party payor programs. Medicare
reimbursements are currently calculated on a prospective basis and are not based
on a provider's actual costs. Such method of reimbursement may adversely affect
reimbursements to hospitals and other facilities for services provided under the
Medicare program and thereby may have an adverse effect on the ability of such
institutions to satisfy debt service requirements. In the event of a default
upon a bond secured by hospital facilities, the limited alternative uses for
such facilities may result in the recovery upon such collateral not providing
sufficient funds to fully repay the bonds.
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Certain hospital bonds provide for redemption at par upon the damage,
destruction or condemnation of the hospital facilities or in other special
circumstances.
Housing Obligations. Some of the Bonds in a Trust may be obligations of
issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. Such issues are generally
characterized by mandatory redemption at par, or in the case of original issue
discount bonds, accreted value in the event of economic defaults and in the
event of a failure of the operator of a project to comply with certain covenants
as to the operation of the project. The failure of such operator to comply with
certain covenants related to the tax-exempt status of interest on the Bonds,
such as provisions requiring that a specified percentage of units be rented or
available for rental to low or moderate income families, potentially could cause
interest on such Bonds to be subject to Federal income taxation from the date of
issuance of the Bonds. The ability of such issuers to make debt service
payments will be affected by events and conditions affecting financed projects,
including, among other things, the achievement and maintenance of sufficient
occupancy levels and adequate rental income, employment and income conditions
prevailing in local labor markets, increases in taxes, utility costs and other
operating expenses, the managerial ability of project managers, changes in laws
and governmental regulations, the appropriation of subsidies and social and
economic trends affecting the localities in which the projects are located.
Occupancy of such housing projects may be adversely affected by rent levels and
income limitations imposed under Federal and state programs.
Single Family Mortgage Revenue Bonds. Some of the Bonds in a Trust may be
single family mortgage revenue bonds, which are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences located within the issuer's boundaries and owned by persons of low or
moderate income. Mortgage loans are generally partially or completely prepaid
prior to their final maturities as a result of events such as sale of the
mortgaged premises, default, condemnation or casualty loss. Because these bonds
are subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such bonds will probably
be redeemed prior to their scheduled maturities or even prior to their ordinary
call dates. Extraordinary mandatory redemption without premium could also
result from the failure of the originating financial institutions to make
mortgage loans in sufficient amounts within a specified time period. The
redemption price of such issues may be more or less than the offering price of
such bonds. Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of principal of or
interest on such mortgage revenue bonds. Single family mortgage revenue bonds
issued after December 31, 1980 were issued under Section 103A of the Internal
Revenue Code of 1954, as amended, or Section 143 of the Internal Revenue Code of
1986, which Sections contain certain requirements relating to the use of the
proceeds of such bonds in order for the interest on such bonds to retain its
tax-exempt status. In each case, the issuer of the bonds has covenanted to
comply with applicable requirements and bond counsel to such issuer has issued
an opinion that the interest on the Bonds is exempt from Federal income tax
under existing laws and regulations. There can be no assurance that such
continuing requirements will be satisfied; the failure to meet such requirements
could cause interest on the Bonds to be subject to Federal income taxation,
possibly from the date of issuance of the Bonds.
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Federally Enhanced Obligations. Some of the mortgages which secure the
various health care or housing projects which underlie the previously discussed
Health Facility, Housing and Single Family Mortgage Revenue Obligations (the
"Obligations") in a Trust may be insured by the Federal Housing Administration
("FHA"). Under FHA regulations, the maximum insurable mortgage amount cannot
exceed 90% of the FHA's estimated value of the project. The FHA mortgage
insurance does not constitute a guarantee of timely payment of the principal of
and interest on the Obligations. Payment of mortgage insurance benefits may be
(1) less than the principal amount of Obligations outstanding or (2) delayed if
disputes arise as to the amount of the payment or if certain notices are not
given to the FHA within prescribed time periods. In addition, some of the
previously discussed Obligations may be secured by mortgage-backed certificates
guaranteed by the Government National Mortgage Association ("GNMA"), a wholly
owned corporate instrumentality of the United States, and/or the Federal
National Mortgage Association ("Fannie Mae"), a federally chartered and
stockholder-owned corporation. GNMA and Fannie Mae guarantee timely payment of
principal and interest on the mortgage-backed certificates, even where the
underlying mortgage payments are not made. While such mortgage-backed
certificates are often pledged to secure payment of principal and interest on
the Obligations, timely payment of interest and principal on the Obligations is
not insured or guaranteed by the United States, GNMA, Fannie Mae or any other
governmental agency or instrumentality. The GNMA mortgage-backed certificates
constitute a general obligation of the United States backed by its full faith
and credit. The obligations of Fannie Mae, including its obligations under the
Fannie Mae mortgage-backed securities, are obligations solely of Fannie Mae and
are not backed by, or entitled to, the full faith and credit of the United
States.
Industrial Revenue Obligations. Certain of the Bonds in a Trust may be
industrial revenue bonds ("IRBs"), including pollution control revenue bonds,
which are tax-exempt securities issued by states, municipalities, public
authorities or similar entities to finance the cost of acquiring, constructing
or improving various industrial projects. These projects are usually operated
by corporate entities. Issuers are obligated only to pay amounts due on the
IRBs to the extent that funds are available from the unexpended proceeds of the
IRBs or receipts or revenues of the issuer under an arrangement between the
issuer and the corporate operator of a project. The arrangement may be in the
form of a lease, installment sale agreement, conditional sale agreement or loan
agreement, but in each case the payments to the issuer are designed to be
sufficient to meet the payments of amounts due on the IRBs. Regardless of the
structure, payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project and, if applicable, corporate guarantor.
Corporate operators or guarantors may be affected by many factors which may have
an adverse impact on the credit quality of the particular company or industry.
These include cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from a
corporate restructuring pursuant to a leveraged buy-out, takeover or otherwise.
Such a restructuring may result in the operator of a project becoming highly
leveraged which may have an impact on such operator's creditworthiness which in
turn would have an adverse impact on the rating and/or market value of such
Bonds. Further, the possibility of such a restructuring may have an adverse
impact on the market for and consequently the value of such Bonds, even though
no actual takeover or other action is ever contemplated or effected. The IRBs
in a Trust may be subject
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to special or extraordinary redemption provisions which may provide for
redemption at par or, in the case of original issue discount bonds, Accreted
Value. The Sponsor cannot predict the causes or likelihood of the redemption of
IRBs in a Trust prior to the stated maturity of such Bonds.
Utility Obligations. Some of the Bonds in a Trust may be obligations of
issuers whose revenues are primarily derived from the sale of several types of
energy, including electric and natural gas. The problems faced by such issuers
include the difficulty in obtaining approval for timely and adequate rate
increases from the applicable public utility commissions, the difficulty of
financing large construction programs, increased competition, reductions in
estimates of future demand for electricity in certain areas of the country, the
limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in absorbing
utility debt, the difficulty in obtaining fuel at reasonable prices and the
effect of energy conservation. All of such issuers have been experiencing
certain of these problems in varying degrees. In addition, Federal, state and
municipal governmental authorities may from time to time review existing, and
impose additional, regulations governing the licensing, construction and
operation of nuclear power plants, which may adversely affect the ability of the
issuers of certain of the Bonds in a Trust to make payments of principal and/or
interest on such Bonds. Finally, utilities may be subject to deregulation and
competitive pressure from alternative providers.
Transportation Facility Revenue Bonds. Some of the Bonds in a Trust may be
obligations of issuers which are payable from and secured by revenues derived
from the ownership and operation of airports, public transit systems and ports.
The major portion of an airport's gross operating income is generally derived
from fees received from airlines pursuant to use agreements which consist of
annual payments for airport use, occupancy of certain terminal space, service
fees and leases. Airport operating income may therefore be affected by the
ability of the airlines to meet their obligations under the use agreements. The
air transport industry is experiencing significant variations in earnings and
traffic, due to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several airlines are
experiencing severe financial difficulties. In particular, facilities with use
agreements involving airlines experiencing financial difficulty may experience a
reduction in revenue due to the possible inability of these airlines to meet
their use agreement obligations because of such financial difficulties and
possible bankruptcy. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Bonds that are secured primarily by the revenue collected by a public
transit system typically are additionally secured by a pledge of sales tax
receipts collected at the state or local level, or other governmental financial
assistance. Transit system net revenues will be affected by variations in
utilization, which in turn may be affected by the degree of local governmental
subsidization, demographic and population shifts, and competition from other
forms of transportation; and by increased costs, including costs resulting from
previous deferrals of maintenance. Port authorities derive their revenues
primarily from fees imposed on ships using the facilities. The rate of
utilization of such facilities may fluctuate depending on the local economy and
on competition from competing forms of transportation such as air, rail and
trucks.
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Water and/or Sewerage Obligations. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are derived from the sale of water and/or
sewerage services. Such Bonds are generally payable from user fees. The
problems of such issuers include the ability to obtain timely and adequate rate
increases, population decline resulting in decreased user fees, the difficulty
of financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the
increasing difficulty of obtaining or discovering new supplies of fresh water,
the effect of conservation programs and the impact of "no-growth" zoning
ordinances. All of such issuers have been experiencing certain of these
problems in varying degrees.
University and College Revenue Obligations. Some of the Bonds in a Trust
may be obligations of issuers which are, or which govern the operation of,
colleges and universities and whose revenues are derived mainly from tuition,
dormitory revenues, grants and endowments. General problems of such issuers
include the prospect of a declining percentage of the population consisting of
"college" age individuals, possible inability to raise tuitions and fees
sufficiently to cover increased operating costs, the uncertainty of continued
receipt of Federal grants and state funding, and government legislation or
regulations which may adversely affect the revenues or costs of such issuers.
All of such issuers have been experiencing certain of these problems in varying
degrees.
Bridge Authority and Tollroad Obligations. Some of the Bonds in a Trust
may be obligations of issuers which derive their payments from bridge, road or
tunnel toll revenues. The revenues of such an issuer could be adversely
affected by competition from toll-free vehicular bridges and roads and
alternative modes of transportation. Such revenues could also be adversely
affected by a reduction in the availability of fuel to motorists or significant
increases in the costs thereof. Specifically, governmental regulations
restricting the use of vehicles in the New York City metropolitan area may
adversely affect revenues of the Triborough Bridge and Tunnel Authority.
Dedicated-Tax Supported Bonds. Some of the Bonds in a Trust may be
obligations of issuers which are payable from and secured by tax revenues from a
designated source, which revenues are pledged to secure the bonds. The various
types of Bonds described below differ in structure and with respect to the
rights of the bondholders to the underlying property. Each type of dedicated-
tax supported Bond has distinct risks, only some of which are set forth below.
One type of dedicated-tax supported Bond is secured by the incremental tax
received on either real property or on sales within a specifically defined
geographical area; such tax generally will not provide bondholders with a lien
on the underlying property or revenues. Another type of dedicated-tax supported
Bond is secured by a special tax levied on real property within a defined
geographical area in such a manner that the tax is levied on those who benefit
from the project; such bonds typically provide for a statutory lien on the
underlying property for unpaid taxes. A third type of dedicated-tax supported
Bond may be secured by a tax levied upon the manufacture, sale or consumption of
commodities or upon the license to pursue certain occupations or upon corporate
privileges within a taxing jurisdiction. As to any of these types of Bonds, the
ability of the designated revenues to satisfy the interest and principal
payments on such Bonds may be affected by changes in the local economy, the
financial success of the enterprise responsible for
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the payment of the taxes, the value of any property on which taxes may be
assessed and the ability to collect such taxes in a timely fashion. Each of
these factors will have a different affect on each distinct type of dedicated-
tax supported bonds.
Municipal Lease Bonds. Some of the Bonds in a Trust may be obligations
that are secured by lease payments of a governmental entity. Such payments are
normally subject to annual budget appropriations of the leasing governmental
entity. A governmental entity that enters into such a lease agreement cannot
obligate future governments to appropriate for and make lease payments but
covenants to take such action as is necessary to include any lease payments due
in its budgets and to make the appropriations therefor. A governmental entity's
failure to appropriate for and to make payments under its lease obligation could
result in insufficient funds available for payment of the obligations secured
thereby.
Original Issue Discount Bonds and Stripped Obligations. Certain of the
Bonds in a Trust may be original issue discount bonds. These Bonds were issued
with nominal interest rates less than the rates then offered by comparable
securities and as a consequence were originally sold at a discount from their
face, or par, values. This original issue discount, the difference between the
initial purchase price and face value, is deemed under current law to accrue on
a daily basis and the accrued portion is treated as tax-exempt interest income
for Federal income tax purposes. On sale or redemption, gain, if any, realized
in excess of the earned portion of original issue discount will be taxable as
capital gain. (See "Tax Status of Unitholders.") The current value of an
original issue discount bond reflects the present value of its face amount at
maturity. In a stable interest rate environment, the market value of an
original issue discount bond would tend to increase more slowly in early years
and in greater increments as the bond approached maturity.
Certain of the original issue discount bonds in a Trust may be zero coupon
bonds. Zero coupon bonds do not provide for the payment of any current
interest; the buyer receives only the right to receive a final payment of the
face amount of the bond at its maturity. The effect of owning a zero coupon
bond is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of the obligation. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest the income on such obligation at a rate as high as the
implicit yield, but at the same time also eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are securities of comparable quality that pay
interest currently.
Original issue discount bonds, including zero coupon bonds, may be subject
to redemption at the Accreted Value plus, if applicable, some premium. Pursuant
to such call provisions an original issue discount bond may be called prior to
its maturity date at a price less than its face value. See the "Schedules of
Investments" in Part Two for call provisions of portfolio Bonds.
Certain of the Bonds in a Trust may be Stripped Obligations, which
represent evidences of ownership with respect to either the principal amount of
or a payment of interest on a tax-exempt obligation. An obligation is
"stripped" by depositing it with a custodian, which then
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effects a separation in ownership between the bond and any interest payment
which has not yet become payable, and issues evidences of ownership with respect
to such constituent parts. A Stripped Obligation therefore has economic
characteristics similar to zero coupon bonds, as described above.
Each Stripped Obligation has been purchased at a discount from the amount
payable at maturity. With respect to each Unitholder, the Internal Revenue Code
treats as "original issue discount" that portion of the discount which produces
a yield to maturity (as of the date of purchase of the Unitholder's Units) equal
to the lower of the coupon rate of interest on the underlying obligation or the
yield to maturity on the basis of the purchase price of the Unitholder's Units
which is allocable to each Stripped Obligation. Original issue discount which
accrues with respect to a Stripped Obligation will be exempt from Federal income
taxation to the same extent as interest on the underlying obligations. (See
"Tax Status of Unitholders.")
Unitholders should consult their own tax advisers with respect to the state
and local tax consequences of owning original issue discount bonds or Stripped
Obligations. Under applicable provisions governing determination of state and
local taxes, interest on original issue discount bonds or Stripped Obligations
may be deemed to be received in the year of accrual even though there is no
corresponding cash payment.
The Sponsor believes the information summarized below describes some of the
more significant events relating to the various State Trusts. The sources of
such information are official statements of issuers in each state and other
publicly available information, generally as of the date on or before the date
of this Part One Prospectus, unless otherwise indicated. The Sponsor has not
independently verified this information and makes no representation regarding
the accuracy or completeness of the sources of information which have been
available to it, but believes them to be complete and has itself relied upon
them.
Tax Status of Unitholders
At the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exclusion of interest thereon from Federal gross
income were rendered by bond counsel to the respective issuing authorities. In
addition, with respect to State Trusts, where applicable, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest on such
Bonds, when held by residents of the state in which the issuers of such Bonds
are located, from state income taxes and certain state or local intangibles and
local income taxes. Neither the Sponsor nor its counsel have made any review of
the Trusts' proceedings relating to the issuance of the Bonds or of the bases
for the opinions rendered in connection therewith. If the interest on a Bond
should be determined to be taxable, the Bond would generally have to be sold at
a substantial discount. In addition, investors could be required to pay income
tax on interest received prior to the date of which interest is determined to be
taxable.
Gain realized on the sale or redemption of the Bonds by the Trustee or of a
Unit by a Unitholder is includable in gross income for Federal income tax
purposes, and may be includable
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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 Trusts is debt, the interest on which is excluded for Federal income tax
purposes.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under
existing law:
(1) the Trusts are not associations taxable as corporations for
Federal income tax purposes, and interest and accrued original issue discount on
Bonds which is excludible from gross income under the Internal Revenue Code of
1986, as amended (the "Code") will retain its status for Federal income tax
purposes, when received by the Trusts and when distributed to the Unitholders;
however, such interest may be taken into account in computing the alternative
minimum tax, an additional tax on branches of foreign corporations and the
environmental tax (the "Superfund Tax"). See "Certain Tax Matters Applicable to
Corporate Unitholders" below;
(2) each Unitholder of a Trust is considered to be the owner of a pro
rata portion of each asset of such Trust under Subpart E, subchapter J of
Chapter 1 of the Code and will have a taxable event when such Trust disposes of
a Bond or when the Unitholder redeems or sells Units. If the Unitholder
disposes of a Unit, he is deemed thereby to have disposed of his entire pro rata
interest in all assets of the Trust involved including his pro rata portion of
all the Bonds represented by the Unit. The Taxpayer Relief Act of 1997 includes
provisions that treat certain transactions designed to reduce or eliminate risk
of loss and opportunities for gain (e.g., short sales, offsetting notional
principal contracts, futures or forward contracts, or similar transactions) 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 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 or her Units are
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sold or redeemed for an amount less than or equal to their original cost;
Unitholders should consult their own tax advisors with regard to the calculation
of basis; and
(3) any amounts paid on defaulted Bonds held by the Trustee under
policies of insurance issued with respect to such 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 so
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 on its issue price (its "adjusted issue price") to
prior owners. If a Bond is acquired with accrued interest, that portion of the
price paid for the accrued interest is added to the tax basis of the Bond. When
this accrued interest is received, it is treated as a return of capital and
reduces the tax basis of the Bond. If a Bond is purchased for a premium, the
amount of the premium is added to the tax basis of the Bond. Bond premium is
amortized over the remaining term of the Bond, and the tax basis of the Bond is
reduced each tax year by the amount of the premium amortized in that tax year.
The application of these rules will also vary depending on the value of the
Bonds on the date a Unit holder acquires his Units, and the price the Unit
holder pays for his Units. Unit holders should consult their tax advisors
regarding these rules and their application.
The Revenue Reconciliation Act of 1993 (the "1993 Tax Act") subjects tax-
exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount (if
any) by which the stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued), subject to statutory
de minimis rule. Market discount can arise based on the price a Trust pays for
Bonds or the price a Unit holder pays for his or her Units. Under the 1993 Tax
Act, accretion of market discount is taxable as ordinary income; under prior
law, the accretion had been treated as capital gain. Market discount that
accretes while a Trust holds a Bond would be recognized as ordinary income by
the Unit holders when principal payments are received on the Bond, upon sale or
at redemption (including early redemption) or upon the sale or redemption of his
or her Units, unless a Unit holder elects to include market discount in taxable
income as it accrues. The market discount rules are complex and Unit holders
should consult their tax advisors regarding these rules and their application.
Certain Tax Matters Applicable to Corporate Unitholders. In the case of
certain corporations, the alternative minimum tax and the Superfund Tax for
taxable years beginning after December 31, 1986 depend upon the corporation's
alternative minimum taxable income
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("AMTI"), which is the corporation's taxable income with certain adjustments.
One of the adjustment items used in computing AMTI 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 AMTI (before such
adjustment item and the alternative tax net operating loss deduction). "Adjusted
current earnings" includes all tax-exempt interest, including interest on all
Bonds in the Trust. Under current Code provisions, the Superfund Tax does not
apply to tax years beginning on or after January 1, 1996. Legislative proposals
have been introduced that would reinstate the Superfund Tax for taxable years
after December 31, 1997 and before January 1, 2009. Also, under the provisions
of Section 884 of the Code, a branch profits tax is levied on the "effectively
connected earnings and profits" of certain foreign corporations which include
tax-exempt interest such as interest on the Bonds in the Trust. Unit holders
should consult their tax advisers with respect to the particular tax
consequences to them, including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the Code.
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 generally would not be able to deduct
any of the interest expense attributable to ownership of Units. Legislative
proposals have been made that would extend the financial institution rules to
certain other corporations, including securities dealers and other financial
intermediaries. Investors with questions regarding these issues should consult
with their tax advisors.
In the case of certain of the Bonds in a Trust, the opinions of bond
counsel indicate that interest on such Bonds received by a "substantial user" of
the facilities being financed with the proceeds of these Bonds, or persons
related thereto, for periods while such Bonds are held by such a user or related
person, will not be excludable from Federal gross income, although interest on
such Bonds received by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under the Code and the U.S.
Treasury Regulations. Any person who believes he or she may be a substantial
user or related person as so defined should contact his or her tax advisor.
All statements in the prospectus concerning exclusion from gross income for
Federal, state or other tax purposes are the opinion of Counsel and are to be so
construed.
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
Fund of the proceedings relating to the issuance of the Bonds or of the basis
for such opinions.
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The Internal Revenue Service Restructuring and Reform Act of 1998 (the
"1998 Tax Act") provides that for taxpayers other than corporations, net capital
gain (which is defined as net long-term capital gain over net short-term capital
loss for the taxable year) realized from property (with certain exclusions) is
subject to a maximum marginal stated tax rate of 20% (10% in the case of certain
taxpayers in the lowest tax bracket). Capital gain or loss is long-term if the
holding period for the asset is more than one year, and 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 for purposes for determining the
holding period of the Unit. The legislation is generally effective
retroactively for amounts properly taken into account on or after January 1,
1998. Capital gains realized from assets held for one year or less are taxed at
the same rates as ordinary income.
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 and prospective investors should consult with
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 and the Superfund Tax for corporations, interest on certain private
activity bonds (which includes most industrial and housing revenue bonds) issued
on or after August 8, 1996 is included as an item of tax preference. However,
the assets of the Trust 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 includible 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 includible in gross income, they will be treated as any
other item of gross income.
In addition, under the 1993 Tax Act, for taxable years beginning after
December 31, 1993, up to 85% of Social Security benefits are includible in gross
income to the extent that the sum of "modified adjusted gross income" plus 50%
of Social Security benefits received exceeds as "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 the Trusts, 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
Page 31
<PAGE>
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 such collateral consequences.
Except as noted herein, the exemption of interest on state and local
obligations for Federal income tax purposes discussed above does not necessarily
result in exemption under the income or other tax laws of any state or city.
The laws of the several states vary with respect to the taxation of such
obligations.
In the opinion of Carter, Ledyard & Milburn, counsel to the Trustee, and,
in the absence of a New York Trust from the Series, special counsel for the
Series for New York tax matters, under existing law:
Under the income tax laws of the State and City of New York, each Trust is
not an association taxable as a corporation and the income of each Trust will be
treated as the income of the Unitholders.
A summary of each opinion of special counsel to the respective State Trusts
for state tax matters is set forth below.
Taxable Equivalent Yields
The following tables show the approximate taxable estimated current returns
for individuals that are equivalent to tax-exempt estimated current returns
under published 1998 marginal Federal tax rates. The tables incorporate
increased tax rates for higher-income taxpayers that were included in the
Revenue Reconciliation Act of 1993. The tables illustrate what you would have
to earn on taxable investments to equal the tax-exempt estimated current return
for your income tax bracket. A taxpayer's marginal tax rate is affected by both
his taxable income and his adjusted gross income. Locate your adjusted gross
income and your taxable income (which is your adjusted gross income reduced by
any deductions and exemptions), then locate your tax bracket based on joint or
single tax filing. Read across to the equivalent taxable estimated current
return you would need to match the tax-free income.
Page 32
<PAGE>
1998 Tax Year
Marginal Federal Tax Rates for Joint Taxpayers
With Four Personal Exemptions
<TABLE>
<CAPTION>
Tax-Free Estimated Current Return
-----------------------------------------------
Federal
Federal Adjusted
Taxable Gross Federal
Income Income Tax
(1,000's) (1,000's) Rate* 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75%
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 42.35 $ 0-124.50 15.00% 5.00% 5.29% 5.59% 5.88% 6.18% 6.47% 6.76%
42.35-102.30 0-124.50 28.00% 5.90% 6.25% 6.60% 6.94% 7.29% 7.64% 7.99%
124.50-186.80 29.00% 5.99% 6.34% 6.69% 7.04% 7.39% 7.75% 8.10%
102.30-155.95 0-124.50 31.00% 6.16% 6.52% 6.88% 7.25% 7.61% 7.97% 8.33%
124.50-186.80 32.00% 6.25% 6.62% 6.99% 7.35% 7.72% 8.09%
186.80-309.30 34.50% 6.49% 6.87% 7.25% 7.63% 8.02% 8.40% 8.78%
155.95-278.45 124.50-186.80 37.00% 6.75% 7.14% 7.54% 7.94% 8.33% 8.73% 9.13%
186.80-309.30 40.00% 7.08% 7.50% 7.92% 8.33% 8.75% 9.17% 9.58%
Over 309.30 37.00%** 6.75% 7.14% 7.54% 7.94% 8.33% 8.73% 9.13%
Over 278.45 186.80-309.30 44.00% 7.59% 8.04% 8.48% 8.93% 9.38% 9.82% 10.27%
Over 309.30 41.00%*** 7.20% 7.63% 8.05% 8.47% 8.90% 9.32% 9.75%
</TABLE>
Page 33
<PAGE>
Marginal Federal Tax Rates for Single Taxpayers
With One Personal Exemption
<TABLE>
<CAPTION>
Tax-Free Estimated Current Return
----------------------------------------------
Federal
Federal Adjusted
Taxable Gross Federal
Income Income Tax
(1,000's) (1,000's) Rate* 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75%
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25.35 $ 0-124.50 15.00% 5.00% 5.29% 5.59% 5.88% 6.18% 6.47% 6.76%
25.35-61.40 0-124.50 28.00% 5.90% 6.25% 6.60% 6.94% 7.29% 7.64% 7.99%
61.40-128.10 0-124.50 31.00% 6.16% 6.52% 6.88% 7.25% 7.61% 7.97% 8.33%
124.50-247.0 32.50% 6.30% 6.67% 7.04% 7.41% 7.78% 8.15% 8.52%
128.10-278.45 124.50-247.0 38.00% 6.85% 7.26% 7.66% 8.06% 8.47% 8.87% 9.27%
Over 247.0 37.00%** 6.75% 7.14% 7.54% 7.94% 8.33% 8.73% 9.13%
Over 278.45 Over 247.0 41.00%*** 7.20% 7.63% 8.05% 8.47% 8.90% 9.32% 9.75%
</TABLE>
____________________
* The table reflects the effect of the limitations on itemized deductions and
the deduction for personal exemptions. They were designed to phase out
certain benefits of these deductions for higher income taxpayers. These
limitations, in effect, raise the current maximum marginal combined state
and Federal tax rate to approximately 44.21% for taxpayers filing a joint
return and entitled to four personal exemptions and to approximately 40.79%
for taxpayers filing a single return entitled to only one personal
exemption. These limitations are subject to certain maximums, which depend
on the number of exemptions claimed and the total amount of the taxpayer's
itemized deductions. For example, the limitation on itemized deductions
will not cause a taxpayer to lose more than 80% of his allowable itemized
deductions, with certain exceptions.
** Federal tax rate reverts to 36% after the 80% cap on the limitation on
itemized deductions has been met. The above table reflects only the effect
of exemption from Federal income taxes. Unitholders of State Trusts, which
are exempt from both Federal and state taxes, would need a somewhat higher
taxable yield than shown in the table to equal the tax-exempt yield of such
Trusts. There can be no assurance that state tax rates will remain
unchanged.
*** Federal tax rate reverts to 39.6% after the 80% cap on the limitation on
itemized deductions has been met.
A comparison of tax-free and equivalent taxable estimated current returns
with the returns on various taxable investments is one element to consider in
making an investment decision. The Sponsor may from time to time in its
advertising and sales materials compare the then current estimated returns on a
Trust and returns over specified periods on other similar Nuveen Trusts with
returns on taxable investments such as corporate or U.S. Government bonds, bank
CDs and money market accounts or money market funds, each of which has
investment characteristics that may differ from those of a Trust. U.S.
Government bonds, for example, are backed by the full faith and credit of the
U.S. Government and bank CDs and money market accounts are insured by an agency
of the Federal government. Money market accounts and money market funds provide
stability of principal, but pay interest at rates that vary with the condition
of the short-term debt market. The investment characteristics of the Trusts are
described more fully elsewhere in this Prospectus.
Page 34
<PAGE>
Alabama Risk Factors and Tax Status
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 "Aa" bond rating from
Standard & Poor's and Moody's, respectively, on its general obligation
indebtedness.
Further information concerning Alabama risk factors may be found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Alabama Trust, Balch &
Bingham, 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:
Under the income tax laws of Alabama, the Alabama Trust is not taxable as a
corporation or otherwise.
Income of the Alabama Trust, to the extent it is taxable, will be taxable
to the Unitholders, not to the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trusts' net income will
be treated as the income of the Unitholder for Alabama income tax purposes.
Interest on obligations of the State and subdivisions thereof and the
Possessions of the United States held by the Alabama Trust which is exempt from
the Alabama income tax will retain its tax-exempt character when the
distributive share thereof is distributed or deemed distributed to each
Unitholder.
Page 35
<PAGE>
Each Unitholder will, for the purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama Trust as though the Bonds were sold or disposed of
directly by the Unitholders.
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 and Tax Status
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 found in the
Information Supplement to this Prospectus.
Tax Status. Snell & Wilmer acted as special Arizona counsel to Arizona
Traditional Trust 192 and all prior Arizona Traditional Trusts. Chapman and
Cutler, counsel to the Sponsor, acted as special Arizona counsel to Arizona
Traditional Trust 193 and all subsequent Trusts, including all Arizona Insured
Trusts. At the time of the closing for each Arizona Trust, the respective
counsel to the Trusts 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 each Arizona 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
Page 36
<PAGE>
"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 Arizona Trusts 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 Chapman and Cutler, 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 income tax purposes and is exempt from state and local taxation pursuant
to federal law when received by the Arizona Trusts will be exempt from Arizona
income taxation and therefore will not be includible 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.
Page 37
<PAGE>
Amounts paid by the Insurer under an insurance policy or policies issued to
an Arizona 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
Trusts, 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.
Chapman and Cutler has expressed no opinion with respect to taxation under
any other provision of Arizona law. Ownership of the Units may result in
collateral Arizona tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
California Risk Factors and Tax Status
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.
Page 38
<PAGE>
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 found in the
Information Supplement to this Prospectus.
Tax Status. Jones, Day, Reavis & Pogue acted as special California counsel
to California Traditional Trust 206 and all prior California Traditional Trusts
and to California Insured Trust 77 and all prior California Insured Trusts.
Wyman, Bautzer, Kuchel & Silbert acted as special California counsel to
California Traditional Trust 207 through California Traditional Trust 239 and
California Insured Trust 78 through California Insured Trust 107. Orrick,
Herrington & Sutcliffe, L.L.P. acted as special California counsel to California
Traditional Trust 240 and all subsequent California Traditional Trusts and to
California Insured Trust 108 and to all subsequent California Insured Trusts and
to California Intermediate Insured Trust 1 and all subsequent California
Intermediate Insured Trusts. At the time of the closing for each California
Trust, the respective counsel to the Trusts rendered an opinion under then
existing California income and property tax law applicable to individuals who
are California residents substantially to the effect that:
The California Trust is not an association taxable as a corporation and the
income of the California Trust will be treated as the income of the Unitholders
thereof under the income tax laws of California.
Interest on the underlying securities (which may include bonds or other
obligations issued by the governments of Puerto Rico, the Virgin Islands, Guam
or the Northern Mariana Islands) which is exempt from tax under California
personal income tax and property tax laws when received by the California Trust
will, under such laws, retain its status as tax-exempt interest when distributed
to Unitholders. However, interest on the underlying securities attributed to a
Unitholder which is a corporation subject to the California franchise tax laws
may be includable in its gross income for purposes of determining its California
franchise tax.
Under California income tax law, each Unitholder in the California Trust
will have a taxable event when the California Trust disposes of a security
(whether by sale, exchange, redemption or payment at maturity) or when the
Unitholder redeems or sells Units. Because of the requirement that tax cost
basis be reduced to reflect amortization of bond premium, under some
circumstances a Unitholder may realize taxable gain when Units are sold or
redeemed for an amount equal to, or less than, their original cost. The total
tax cost of each Unit to a Unitholder is allocated among each of the bond issues
held in the California Trust (in accordance with the proportion of the
California Trust comprised by each bond issue) in order to determine his per
unit tax cost for each bond issue; and the tax cost reduction requirements
relating to amortization of bond premium will apply separately to the per unit
cost of each bond issue. Unitholders' bases in their Units, and the bases for
their fractional interest in each California Trust asset, may have to be
adjusted for the their pro rata share of accrued interest received, if any, on
securities delivered after the Unitholders' respective settlement dates.
Page 39
<PAGE>
Under the California personal property tax laws, bonds (including the bonds
in the California Trust as well as "regular-way" and "when-issued" contracts for
the purchase of bonds) or any interest therein are exempt from such tax.
Any proceeds paid under an insurance policy, if any, issued to the Trustee
of the Fund with respect to the bonds in a California Trust as well as "regular-
way" and "when-issued" contracts for the purchase of bonds which represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from California personal income tax if, and to the same extent as, such interest
would have been so exempt if paid by the issuer of the defaulted obligations.
Under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units of the
Trust is not deductible for the purposes of the California personal income tax.
While there presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to prescribe
regulations determining the proper allocation and apportionment of interest
costs for this purpose. The Franchise Tax Board has not yet proposed or
prescribed such regulations. In interpreting the generally similar Federal
provision, the Internal Revenue Service has taken the position that such
indebtedness need not be directly traceable to the purchase or carrying of Units
(although the Service has not contended that a deduction for interest on
indebtedness incurred to purchase or improve a personal residence or to purchase
goods or services for personal consumption will be disallowed). In the absence
of conflicting regulations or other California authority, the California
Franchise Tax Board generally has interpreted California statutory tax
provisions in accord with Internal Revenue Service interpretations of similar
Federal provisions.
Colorado Risk Factors and Tax Status
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.
Page 40
<PAGE>
Further information concerning Colorado risk factors may be found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Colorado Trust, Sherman &
Howard L.L.C, special Colorado counsel to the Trusts, rendered an opinion under
then existing law substantially to the effect that:
A Trust will consist of obligations which were issued by the State of
Colorado or its political subdivisions or by the United States or possessions of
the United States including Puerto Rico, the Virgin Islands and Guam ("Colorado
Bonds").
Because Colorado income tax law is based upon the Federal law and in light
of the opinion of Chapman and Cutler, each Trust is not an association taxable
as a corporation for purposes of Colorado income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above and the opinion of Chapman
and Cutler referred to above:
Each Colorado Unitholder will be treated as owning a share of each asset of
a Trust for Colorado income tax purposes, in the proportion that the number of
Units of such Trust held by him bears to the total number of outstanding Units
of the Trust, and the income of the Trust will therefore be treated as the
income of each Colorado Unitholder under Colorado law in the proportion
described.
Interest on Colorado Bonds that would not be subject to Colorado income tax
or Colorado alternative minimum tax when paid directly to a Colorado Unitholder
will not be subject to Colorado income tax or alternative minimum tax when
received by a Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder.
Any proceeds paid under an insurance policy issued to the issuer of the
Colorado Bonds involved, to the Depositor prior to deposit of the Colorado Bonds
in the Trust, or to the Trust, which proceeds represent maturing interest on
defaulted Colorado Bonds and which proceeds would not be subject to Colorado
income tax or alternative minimum tax when paid directly to a Colorado
Unitholder will not be subject to Colorado income and alternative minimum tax
when received by the Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder.
Each Colorado Unitholder will realize gain or loss taxable in Colorado when
the Trust disposes of a Colorado Bond (whether by sale, exchange, redemption or
payment at maturity) or when the Colorado Unitholder redeems or sells Units at a
price that differs from original cost as adjusted for amortization of bond
discount or premium and other basis adjustments (including any basis reduction
that may be required to reflect a Colorado Unitholder's share of interest, if
any, accruing on Colorado Bonds during the interval between the Colorado
Unitholder's settlement date and the date such Colorado Bonds are delivered to a
Trust, if later).
Page 41
<PAGE>
Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Colorado Unitholders realizing gain
taxable in Colorado when their Units are sold or redeemed for an amount equal to
or less than their original cost.
If interest on indebtedness incurred or continued by a Colorado Unitholder
to purchase Units in a Trust is not deductible for Federal income tax purposes,
it will not be deductible for Colorado income tax purposes.
Connecticut Risk Factors and Tax Status
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 found in the
Information Supplement to this Prospectus.
Tax Status. The assets of each Connecticut Trust consist of obligations
issued by or on behalf of the State of Connecticut or its political subdivisions
or public instrumentalities, State or local authorities, districts, or similar
public entities created under the laws of the State of Connecticut or by or on
behalf of a United States territory or possession the interest on the
obligations of which Federal law would prohibit Connecticut from taxing if
received directly by a Unitholder (the "Bonds"). Certain Bonds in the
Connecticut Trust that were issued by the State of Connecticut or governmental
authorities located in Connecticut may have been issued prior to the enactment
of a Connecticut tax on the interest income of individuals; therefore, bond
counsel to the issuers of such Connecticut Bonds did not opine as to the
exemption of the interest on such Connecticut Bonds from such tax. However, the
Sponsor and special counsel to the
Page 42
<PAGE>
Trusts for Connecticut tax matters believe that such interest will be so exempt.
Interest on Connecticut Bonds in the Connecticut Trusts issued by other issuers,
if any, is, in the opinion of bond counsel to such issuers, exempt from state
taxation.
At the time of the closing for each Connecticut Trust, Day, Berry & Howard,
special counsel to the Trusts for Connecticut tax matters, rendered an opinion
which relied explicitly on the opinion of Chapman and Cutler, rendered at such
time, regarding Federal income tax matters under then existing Connecticut law,
substantially to the effect that:
The Connecticut Trust is not subject to any tax on or measured by net
income imposed by the State of Connecticut.
Interest income from Bonds held by the Connecticut Trust is not taxable
under the Connecticut tax on the Connecticut taxable income of individuals,
trusts and estates (the "Connecticut Income Tax"), when such interest is
received by the Connecticut Trust or distributed by it to a Unitholder.
Gains and losses recognized by a Unitholder for Federal income tax purposes
upon the maturity, redemption, sale, or other disposition by the Connecticut
Trust of a Bond held by the Connecticut Trust or upon the redemption, sale, or
other disposition of a Unit of a Connecticut Trust held by a Unitholder are
taken into account as gains or losses, respectively, for purposes of the
Connecticut Income Tax, except that, in the case of a Unitholder holding a Unit
of the Connecticut Trust as a capital asset, such gains and losses recognized
upon the maturity, redemption, sale or exchange of a Bond issued by or on behalf
of the State of Connecticut, any political subdivision thereof, or public
instrumentality, state or local authority, district, or similar public entity
created under the laws of the State of Connecticut (a "Connecticut Bond") held
by the Connecticut Trust are excluded from gains and losses taken into account
for purposes of such tax, and no opinion is expressed as to the treatment for
purposes of such tax of gains and losses recognized, to the extent attributable
to Connecticut Bonds, upon the redemption, sale, or other disposition by a
Unitholder of a Unit of the Connecticut Trust held by him.
The portion of any interest income or capital gain of the Connecticut Trust
that is allocable to a Unitholder that is subject to the Connecticut corporation
business tax is includable in the gross income of such Unitholder for purposes
of such tax.
An interest in a Unit of the Connecticut Trust that is owned by or
attributable to a Connecticut resident at the time of his death is includable in
his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
Generally, a Unitholder recognizes gain or loss for purposes of the
Connecticut Income Tax to the same extent 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 a Connecticut Trust of a Bond held by it, or upon the
redemption, sale, or other disposition of a Unit of a 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 the Connecticut Income Tax.
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Regulations indicate that this rule would apply to gain or loss recognized by a
Unitholder holding a Unit of a Connecticut Trust as a capital asset upon the
maturity, redemption, sale, or other disposition of a Connecticut Bond held by a
Connecticut Trust. However, it is not clear whether this rule would also apply,
to the extent attributable to Connecticut Bonds held by a Connecticut Trust, to
gain or loss recognized by a Unitholder upon the redemption, sale, or other
disposition of a Unit of a Connecticut Trust held by the Unitholder. Unitholders
are urged to consult their own tax advisors concerning these matters.
Florida Risk Factors and Tax Status
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 Aa2 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 found in the
Information Supplement to this Prospectus.
Tax Status. The assets of each Florida Trust will consist solely of
interest-bearing obligations issued by or on behalf of the State of Florida, its
political subdivisions and authorities
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or by the Commonwealth of Puerto Rico, Guam, the Virgin Islands, American Samoa,
or the Northern Mariana Islands (the "Florida Bonds").
At the time of the closing for each Florida Trust, Carlton, Fields, Ward,
Emmanuel, Smith & Cutler, P.A., special counsel to the Trusts for Florida tax
matters, rendered an opinion under then existing law substantially to the effect
that:
For Florida State income tax purposes, the Florida Trusts will not be
subject to the Florida income tax imposed by the Florida Code so long as the
Trusts have no income subject to federal taxation. In addition, political
subdivisions of Florida do not impose any income taxes.
Because Florida does not impose an income tax on individuals, non-corporate
Unitholders will not be subject to any Florida income tax on income realized by
the Trust. Each corporate Unitholder will be subject to Florida income taxation
on its share of the income realized by the Trusts notwithstanding the tax exempt
status of the interest received from any bonds under Section 103(a) of the
Internal Revenue Code of 1986 or any other federal law, unless the interest
income constitutes nonbusiness income. Nevertheless, any corporate Unitholder
that has its commercial domicile in Florida will be taxable under the Florida
Code on its share of the Florida Trust income which constitutes nonbusiness
income.
Florida Trust Units will be subject to Florida estate tax only if owned by
Florida residents, certain natural persons not domiciled in Florida, or certain
natural persons not residents of the United States. However, the Florida estate
tax is limited to the amount of the credit allowable under the applicable
Federal Revenue Act (currently Section 2011 (and in some cases Section 2102) of
the Internal Revenue Code of 1986, as amended) for death taxes actually paid to
the several states.
Neither the Bonds nor the Units will be subject to the Florida ad valorem
property tax or Florida sales or use tax.
Because Bonds issued by the State of Florida or its political subdivisions
or by the Commonwealth of Puerto Rico, Guam, the Virgin Islands, American Samoa
and the Northern Mariana Islands are exempt from Florida intangible personal
property taxation under Chapter 199, Florida Statutes, as amended, the Florida
Trust will not be subject to Florida intangible personal property tax. In
addition, the Unitholders will not be subject to Florida intangible personal
property tax on the Units.
Georgia Risk Factors and Tax Status
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
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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 found in the
Information Supplement to this Prospectus.
Tax Status. Smith, Gambrell & Russell acted as special Georgia counsel to
Georgia Trust 188 and all prior Georgia Trusts. Chapman and Cutler, Counsel for
the Sponsor, acted as special Georgia Counsel to Georgia Trust 189 and all
subsequent Georgia Trusts, including all Georgia Insured Trusts. At the time of
the closing for each Georgia Trust, the respective counsel to the Trusts
rendered an opinion under then existing law substantially to the effect that:
The assets of the Trusts 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.
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In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Georgia law:
(1) For Georgia income tax purposes, each 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 includible 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
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 by the Insurer 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.
Chapman and Cutler 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.
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Maryland Risk Factors and Tax Status
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 found in the
Information Supplement to this Prospectus.
Tax Status. The assets of each Maryland Trust will consist of interest-
bearing obligations issued by or on behalf of the State of Maryland, its
political subdivisions and authorities and, provided the interest thereon is
exempt from State income taxes by the laws or treaties of the United States,
obligations issued by or on behalf of the United States' territories or
possessions, including Puerto Rico, Guam and the Virgin Islands, their political
subdivisions and authorities (the "Maryland Bonds").
At the time of the closing for each Maryland Trust, Venable, Baetjer and
Howard, special counsel for the Trusts previous to Trust 319 for Maryland tax
matters and Ober, Kaler, Grimes & Shriver, P.C., special counsel for Trust 319
and subsequent series, for Maryland tax matters, rendered an opinion under then
existing law substantially to the effect that:
For Maryland State and local income tax purposes, each Maryland Trust will
not be taxable as an association, and the income of the Maryland Trust will be
treated as the income of the Unitholders.
For Maryland State and local tax purposes, interest on the Maryland Bonds
which is exempt from Maryland State and local income tax when received by the
Maryland Trust, and which would be exempt from Maryland State and local income
tax if received directly by a Unitholder, will retain its status as tax-exempt
interest when received by the Maryland Trust and distributed to the Unitholders.
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Interest derived from the Maryland Trust by a Unitholder with respect to
the Maryland Bonds will not be subject to Maryland State or local income taxes;
provided that interest or profit derived from the Maryland Trust by a financial
institution, as defined in Section 8-101(c) of the Tax-General Article of the
Annotated Code of Maryland, will be subject to the Maryland state franchise tax
on financial institutions, except to the extent such interest is expressly
exempt from the Maryland state franchise tax by the statutes which authorize the
issuance of such Maryland Bonds (see Section 8-204 of the Tax-General Article of
the Annotated Code of Maryland).
A Unitholder will not be subject to Maryland state or local income tax with
respect to gain realized when Maryland Bonds held in the Maryland Trust are
sold, redeemed or paid at maturity, except with respect to gain realized upon a
sale, redemption or payment at maturity of such Maryland Bonds as are issued by
or on behalf of United States territories or possessions, their political
subdivisions and authorities; such gain will equal the proceeds of sale,
redemption or payment, less the tax basis of the Maryland Bonds (adjusted to
reflect (a) the amortization of Bond premium or discount, and (b) the deposit in
the Maryland Trust after the Unitholder's settlement date of Maryland Bonds with
accrued interest).
Although the matter is not free from doubt, gain realized by a Unitholder
from the redemption, sale or other disposition of a Maryland Trust Unit (i) will
be subject to Maryland state income tax except in the case of individual
Unitholders who are not Maryland residents, and (ii) will be subject to Maryland
local income tax in the case of individual Unitholders who are Maryland
residents.
If interest on indebtedness incurred or continued by a Unitholder to
purchase Units in the Maryland Trust is not deductible for Federal income tax
purposes, it will also be nondeductible for Maryland state income tax purposes
and, if applicable, local income tax purposes.
Maryland Trust Units will be subject to Maryland inheritance and estate tax
only if held by Maryland residents. Neither the Maryland Bonds nor the Maryland
Trust Units will be subject to Maryland personal property tax, sales tax or use
tax.
Massachusetts Risk Factors and Tax Status
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
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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 has remained at A1
since November 1994, 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 found in
the Information Supplement to this Prospectus.
Tax Status. Peabody & Arnold acted as special Massachusetts counsel to
Massachusetts Traditional Trust 182 and all prior Massachusetts Traditional
Trusts and to Massachusetts Insured Trust 44 and all prior Massachusetts Insured
Trusts. Edwards & Angell acted as special Massachusetts counsel to
Massachusetts Traditional Trust 183 and all subsequent Massachusetts Traditional
Trusts and to Massachusetts Insured Trust 45 and all subsequent Massachusetts
Insured Trusts. At the time of the closing for each Massachusetts Trust, the
respective counsel to the Trusts rendered an opinion, based on rulings by the
Commissioner of Revenue and under then existing law, substantially to the effect
that:
For Massachusetts income tax purposes, each Trust will be treated as a
corporate trust under Section 8 of Chapter 62 of the Massachusetts General Laws
("M.G.L.") and not as a grantor trust under Section 10(e) of M.G.L. Chapter 62.
The Trust will not be held to be engaging in business in Massachusetts
within the meaning of said Section 8 and will, therefore, not be subject to
Massachusetts income tax.
Unitholders who are subject to Massachusetts income taxation under M.G.L.
Chapter 62 will not be required to include their respective shares of the
earnings of or distributions from the Trust in their Massachusetts gross income
to the extent that such earnings or distributions represent tax-exempt interest
excludable from gross income for Federal income tax purposes received by a
Massachusetts Trust on obligations issued by Massachusetts, its counties,
municipalities, authorities, political subdivisions or instrumentalities or by
Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands or other
possessions of the Untied States within the meaning of Section 103(c) of the
Internal Revenue Code of 1986, as amended ("Massachusetts Obligations").
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Unitholders who are subject to Massachusetts income taxation under M.G.L.
Chapter 62 will not be required to include their respective shares of the
earnings of or distributions from the Trust in their Massachusetts gross income
to the extent that such earnings or distributions are derived from the proceeds
of insurance obtained by the Sponsor of the Trust or by the issuer or
underwriter of an obligation held by the Trust that represent maturing interest
on defaulted obligations held by the Trustee, if and to the same extent that
such earnings or distributions would have been excludable from the gross income
of such Unitholders if derived from interest paid by the issuer of the defaulted
obligation.
Unitholders which are corporations subject to taxation under M.G.L. Chapter
63 will be required to include their respective shares of the earnings of or
distributions from the Trust in their Massachusetts gross income to the extent
that such earnings or distributions represent interest from bonds, notes or
indebtedness of any state, including Massachusetts, except for interest which is
specifically exempted from such tax by the acts authorizing issuance of said
Massachusetts Obligations.
Each Trust's capital gains and/or capital losses which are includable in
the Federal gross income of Unitholders who are subject to Massachusetts income
taxation under M.G.L. Chapter 62, or Unitholders which are corporations subject
to Massachusetts taxation under M.G.L. Chapter 63 will be included as capital
gains and/or losses in the Unitholders' Massachusetts gross income, except for
capital gain which is specifically exempted from taxation under such Chapters by
the acts authorizing issuance of said Massachusetts Obligations.
Unitholders which are corporations subject to tax under M.G.L. Chapter 63
and which are tangible property corporations will not be required to include the
Units when determining the value of their tangible property. Unitholders which
are intangible property corporations will be required to include the Units when
determining their net worth.
Gains or losses realized on sales or redemptions of Units by Unitholders
who are subject to Massachusetts income taxation under M.G.L. Chapter 62, or
Unitholders which are corporations subject to Massachusetts income taxation
under M.G.L. Chapter 63, will be includable in their Massachusetts gross income.
In determining such gain or loss 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 Massachusetts Obligations delivered to the
Trustee after the Unitholders pay for their Units, for amortization of premiums,
if any, on Massachusetts Obligations held by the Trust, and for accrued original
issue discount with respect to each Massachusetts Obligation which, at the time
the Massachusetts Obligation was issued, had original issue discount.
The Units of a Trust are not subject to any property tax levied by
Massachusetts or any political subdivision thereof, nor to any income tax levied
by any such political subdivision. They are includable in the gross estate of a
deceased holder who is a resident of Massachusetts for purposes of the
Massachusetts Estate Tax.
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Michigan Risk Factors and Tax Status
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 March 1, 1997, all outstanding general obligation bonds of the state
were rated "Aa" by Moody's, and "AA" by Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.). In January 1998, Standard & Poor's raised its rating
on the State's general obligation bonds to "AA+".
Further information concerning Michigan risk factors may be found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Michigan Trust, Dickinson,
Wright, Moon, Van Dusen & Freeman, special Michigan counsel to the Trusts,
rendered an opinion under then-existing law substantially to the effect that:
The assets of a Michigan Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Michigan, and counties, municipalities,
authorities and political subdivisions thereof, and, in limited instances, bonds
issued by Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands or
possessions of the United States (the "Michigan Bonds").
Under the Michigan income tax act, the Michigan single business tax act,
the Michigan city income tax act (which authorizes the only income tax ordinance
that may be adopted by cities in Michigan), and under the law which authorizes a
"first class" school district to levy an excise tax upon income, the Michigan
Trust is not subject to tax. The income of the Michigan Trust will be treated
as the income of the Unitholders and be deemed to have been received by them
when received by the Michigan Trust.
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Interest on the Michigan Bonds in the Michigan Trust which is exempt from
Federal income tax is exempt from Michigan state and local income taxes and from
the Michigan single business tax. Further, any amounts paid under the insurance
representing maturing interest on defaulted obligations held by the Trustee will
be excludable from Michigan state and local income taxes and from the Michigan
single business tax if, and to the same extent as, such interest would have been
excludable if paid by the respective issuer.
For purposes of the foregoing Michigan tax laws (corporations and financial
institutions are not subject to the Michigan income tax), each Unitholder will
be considered to have received his pro rata share of Michigan Bond interest when
it is received by the Michigan Trust, and each Unitholder will have a taxable
event when the Michigan Trust disposes of a Michigan Bond (whether by sale,
exchange, redemption or payment at maturity) or when the Unitholder redeems or
sells Units. Due to the requirement that tax cost be reduced to reflect
amortization of bond premium, under some circumstances a Unitholder may realize
taxable gain when Units are sold or redeemed for an amount equal to, or less
than, their original cost. The tax cost of each Unit to a Unitholder will be
allocated for purposes of these Michigan tax laws in the same manner as the cost
is allocated for Federal income tax purposes.
The Michigan Intangibles Tax was totally repealed effective January 1,
1998.
If a Unitholder is subject to the Michigan single business tax (i.e., is
engaged in a "business activity" as defined in the Michigan single business tax
act), and has a taxable event for Federal income tax purposes when the Michigan
Trust sells or exchanges Michigan Bonds or the Unitholder sells or exchanges
Units, such event may impact the adjusted tax base upon which the single
business tax is computed. Any capital gain or loss realized from such taxable
event which was included in the computation of the Unitholder's Federal taxable
income, plus the portion, if any, of such capital gain excluded in such
computation and minus the portion, if any, of such capital loss not deducted in
such computation for the year the loss occurred, will be included in the
adjusted tax base. The adjusted tax base of any person other than a corporation
is affected by any gain or loss realized from the taxable event only to the
extent that the resulting Federal taxable income is derived from "business
activity."
Minnesota Risk Factors and Tax Status
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
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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 found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Minnesota Trust, Dorsey &
Whitney, special Minnesota counsel for the Trusts, 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:
Counsel understands that the Minnesota Trust will have no income other than
(i) interest income on bonds issued by the State of Minnesota and its political
and governmental subdivisions, municipalities and governmental agencies and
instrumentalities and on bonds issued by Puerto Rico, the Virgin Islands, the
Northern Mariana Islands or Guam which would be exempt from Federal and
Minnesota income taxation when paid directly to an individual, trust or estate
(and the term "Bonds" as used herein refers only to such bonds), (ii) gain on
the disposition of such Bonds, and (iii) proceeds paid under certain insurance
policies issued to the Trustee or to the issuers of the Bonds which represent
maturing interest or principal payments on defaulted Bonds held by the Trustee.
"Taxable income" for Minnesota income tax purposes is the same as "taxable
income" for Federal income tax purposes with certain modifications that (with
one exception) do not apply to the present circumstances. The exception is that
corporations must add to Federal taxable income the amount of any interest
received on the obligations of states and their agencies and instrumentalities,
political and governmental subdivisions, and municipalities. The terms "trust"
and "corporation" have the same meanings for Minnesota income tax purposes, as
relevant to the Minnesota tax status of the Minnesota Trust, as for Federal
income tax purposes.
In view of the relationship between Federal and Minnesota law described in
the preceding paragraph and the opinion of Chapman and Cutler with respect to
the Federal tax treatment of the Minnesota Trust and its Unitholders, (1) the
Minnesota Trust will be treated as a trust rather than a corporation for
Minnesota income tax purposes and will not be deemed the recipient of any
Minnesota taxable income; (2) each Unitholder of the Minnesota Trust will be
treated as the owner of a pro rata portion of the Minnesota Trust for Minnesota
income tax purposes and the income of the Minnesota Trust will therefore be
treated as the income of the Unitholders under
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Minnesota law; (3) interest on the Bonds will be exempt from Minnesota income
taxation of Unitholders who are individuals, trusts and estates, when received
by the Minnesota Trust and attributed to such Unitholders and when distributed
to such Unitholders (except as hereinafter provided with respect to "industrial
development bonds" and "private activity bonds" held by "substantial users");
(4) interest on the Bonds will be includable in the Minnesota taxable income
(subject to allocation and apportionment) of Unitholders that are corporations;
(5) each Unitholder will realize taxable gain or loss when the Minnesota Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when the Unitholder redeems or sells Units at a price which differs
from original cost as adjusted for amortization of bond discount or premium and
other basis adjustments (including any basis reduction that may be required to
reflect a Unitholder's share of interest, if any, accruing on Bonds during the
interval between the Unitholder's settlement date and the date such Bonds are
delivered to the Minnesota Trust, if later); (6) tax cost reduction requirements
relating to amortization of bond premium may, under some circumstances, result
in Unitholders' realizing taxable gain when their Units are sold or redeemed for
an amount equal to or less than their original cost; (7) any proceeds paid under
an insurance policy issued to the Trustee with respect to the Bonds which
represent maturing interest on defaulted obligations held by the Trustee will be
excludable from Minnesota gross income if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligation; (8) any proceeds paid under individual insurance policies obtained
by issuers of Bonds which represent maturing interest on defaulted obligations
held by the Trustee will be excludable from Minnesota gross income if, and to
the same extent as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations; (9) net capital gains
of Unitholder attributable to the Bonds will be fully includable in the
Minnesota taxable income of Unitholders (subject to allocation and apportionment
in the case of corporate Unitholders); and (10) interest on bonds includable in
the computation of "alternative minimum taxable income" for Federal income tax
purposes will also be includable in the computation of "alternative minimum
taxable income" for Minnesota income tax purposes.
Interest income attributable to Bonds that are "industrial development
bonds" or "private activity bonds" as those terms are defined in the Internal
Revenue Code, will be taxable under Minnesota law to a Unitholder who is a
"substantial user" of the facilities financed by the proceeds of such Bonds (or
a "related person" to such a "substantial user") to the same extent as if such
Bonds were held directly by such Unitholder.
Missouri Risk Factors and Tax Status
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.
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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 found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Missouri Trust, Watson &
Marshall, special counsel to the Trusts for Missouri tax matters, rendered an
opinion under then existing Missouri income tax law (not including any Missouri
law imposing a franchise tax) applicable to corporations with Missouri taxable
income and to individuals who are Missouri residents for Missouri income tax
purposes substantially to the effect that:
The Missouri Trust will not be an association taxable as a corporation for
purposes of Missouri income taxation.
Each Missouri Unitholder will be treated as owning a pro rata share of each
asset of the Missouri Trust for Missouri income tax purposes in the proportion
that the number of Units of such Trust held by the Unitholder bears to the total
number of outstanding Units of the Missouri Trust, and the income of the
Missouri Trust will therefore be treated as the income of each Missouri
Unitholder under Missouri law in the proportion described.
Interest on Bonds that would not be includable in Missouri adjusted gross
income when paid directly to a Missouri Unitholder will not be includable in
Missouri adjusted gross income when received by the Missouri Trust and
attributed to such Missouri Unitholder or when distributed to such Missouri
Unitholder.
Each Missouri Unitholder will realize taxable gain or loss when the
Missouri Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity) at a gain or loss or when the Missouri Unitholder redeems
or sells Units at a price that differs from the adjusted basis. Gain or loss
and the adjusted basis will be computed in the same manner as for Federal income
tax treatment. Due to the amortization of bond premium and other basis
adjustments required by the Internal Revenue Code, a Missouri Unitholder, under
some circumstances, may realize taxable gain when his or her Units are sold or
redeemed for an amount equal to or less than their original cost.
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If interest on indebtedness incurred or continued by a Missouri Unitholder
to purchase Units in the Missouri Trust is not deductible for Federal income tax
purposes, it also will be nondeductible for Missouri income tax purposes.
Obligations issued by U.S. Possessions will not be subject to a Missouri
intangibles tax or a personal property tax.
New Jersey Risk Factors and Tax Status
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 found in the
Information Supplement to this Prospectus.
Tax Status. The assets for each New Jersey Trust will consist of interest-
bearing obligations issued by or on behalf of the State of New Jersey and
counties, municipalities, authorities and other political subdivisions thereof,
and certain territories of the United States, including Puerto Rico, Guam, the
Virgin Islands and the Northern Mariana Islands (the "New Jersey Bonds").
At the time of the closing for each New Jersey Trust, Pitney, Hardin, Kipp
& Szuch, special counsel to the Trusts for New Jersey tax matters, rendered an
opinion under then-existing law substantially to the effect that:
Each New Jersey Trust will be recognized as a Trust and not an association
taxable as a corporation. Each New Jersey Trust will not be subject to the New
Jersey Corporation Business Tax or the New Jersey Corporation Income Tax.
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With respect to the non-corporate Unitholders who are residents of New
Jersey, the income of each New Jersey Trust will be treated as the income of
such Unitholders under the New Jersey Gross Income Tax. Interest on the
underlying New Jersey Bonds which is exempt from tax under the New Jersey Gross
Income Tax Law when received by a New Jersey Trust will retain its status as
tax-exempt interest when distributed to the Unitholders.
A non-corporate Unitholder will not be subject to the New Jersey Gross
Income Tax on any gain realized either when a New Jersey Trust disposes of a New
Jersey Bond (whether by sale, exchange, redemption, or payment at maturity) or
when the Unitholder redeems or sells his Units. Any loss realized on such
disposition may not be utilized to offset gains realized by such Unitholder on
the disposition of assets the gain on which is subject to the New Jersey Gross
Income Tax.
Units of a New Jersey Trust may be taxable on the death of a Unitholder
under the New Jersey Transfer Inheritance Tax Law or the New Jersey Estate Tax
Law.
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 New Jersey 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.
New York Risk Factors and Tax Status
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.
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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 "Aa2" by Moody's.
Further information concerning New York risk factors may be found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each New York Trust, Edwards &
Angell, special counsel to the New York Trusts 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:
Interest on obligations issued by New York State, a political subdivision
thereof, Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, or
other possessions of the United States within the meaning of Section 103(c) of
the Internal Revenue Code of 1986, as amended ("New York Obligations"), which
would be exempt from New York State or New York City personal income tax if
directly received by a Unitholder, will retain its status as tax-exempt interest
when received by the New York Trust (the "Trust") and distributed to such
Unitholder. Thus, interest on bonds received by Unitholders which is not
subject to New York State tax is also exempt from New York City personal income
tax.
Interest (less amortizable premium, if any) derived from the Trust by a
resident of New York State (or New York City) in respect of obligations issued
by states other than New York (or their political subdivisions) will be subject
to New York State (or New York City) personal income tax.
A Unitholder who is a resident of New York State (or New York City) will be
subject to New York State (or New York City) personal income tax with respect to
gains realized when New York Obligations held in the New York Trust are sold,
redeemed or paid at maturity or when the Unitholder's Units are sold or
redeemed; such gain will equal the proceeds of sale, redemption or payment less
the tax basis of the New York Obligation or Unit (adjusted to reflect (a) the
amortization of premium or discount, if any, on New York Obligations held by the
Trust, (b) accrued original issue discount, with respect to each New York
Obligation which, at the time the New York Obligation was issued, had original
issue discount, and (c) the deposit of New York Obligations with accrued
interest in the Trust after the Unitholder's settlement date).
Interest or gain from the Trust derived by a Unitholder who is not a
resident of New York State (or New York City) will not be subject to New York
State (or New York City) personal
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income tax, unless the Units are property employed in a business, trade,
profession or occupation carried on in New York State (or New York City).
In the case of the Trust, amounts paid under the insurance policies
representing maturing interest on defaulted New York Obligations held by the
Trustee in the Trust will be excludable from New York State and New York City
income if, and to the same extent as, such interest would have been excludable
if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of obligations of any state or subdivision
thereof including New York.
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 and Tax Status
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 found in
the Information Supplement to this Prospectus.
Tax Status. The assets of each North Carolina Trust will consist of
interest-bearing obligations issued by or on behalf of the State of North
Carolina, its political subdivisions and
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authorities and, provided the interest thereon is exempt from North Carolina
income taxes by the laws or treaties of the United States, by or on behalf of
the United States territories or possessions (including Puerto Rico, the Virgin
Islands, Guam and the Northern Mariana Islands), their political subdivisions
and authorities (the "North Carolina Bonds").
At the time of the closing for each North Carolina Trust, Moore & Van
Allen, special North Carolina counsel to the Trusts, rendered an opinion under
then existing law substantially to the effect that:
The North Carolina Trust is not an association taxable as a corporation for
North Carolina income tax purposes. Interest on the North Carolina Bonds which
is exempt from North Carolina income tax when received by the North Carolina
Trust will retain its status as tax-exempt interest when distributed to
Unitholders.
For North Carolina income tax purposes, each Unitholder will have a taxable
event when, upon redemption or sale of his Units, he receives cash or other
property. Gain or loss will be determined by computing the difference between
the proceeds of such a redemption or sale and the Unitholder's adjusted basis
for the Units.
For North Carolina income tax purposes, each Unitholder will have a taxable
event when the North Carolina Trust disposes of one of the North Carolina Bonds
(whether by sale, payment at maturity, retirement or otherwise); provided that
when any of the North Carolina Bonds held by the North Carolina Trust have been
issued under an act of the General Assembly of North Carolina that provides that
all income from such North Carolina Bond, including a profit made from the sale
thereof, shall be free from all taxation by the State of North Carolina, any
such profit received by the North Carolina Trust will retain its tax-exempt
status in the hands of each Unitholder.
Interest on indebtedness paid or accrued by a Unitholder in connection with
ownership of Units in the North Carolina Trust will not be deductible by the
Unitholder for North Carolina state income tax purposes.
Amortization of North Carolina Bond premiums is mandatory for North
Carolina state income tax purposes for all North Carolina resident Unitholders.
Amortization for the taxable year is accomplished by lowering the basis or
adjusted basis of the Units, with no deduction against gross income for the
year.
Trust Units will be subject to North Carolina inheritance and estate tax if
owned by a North Carolina resident on the date of his death. Neither the North
Carolina Bonds nor the Units will be subject to the North Carolina sales tax or
use tax.
Ohio Risk Factors and Tax Status
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
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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 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.
Further information concerning Ohio risk factors may be found in the
Information Supplement to this Prospectus.
Tax Status. Each Ohio Trust is comprised primarily of interest-bearing
obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities thereof (the "Ohio Obligations"), or
by the governments of Puerto Rico, the Virgin Islands, the Northern Mariana
Islands or Guam ("Territorial Obligations") (collectively, "Obligations").
At the time of the closing for each Ohio Trust, Squire, Sanders & Dempsey,
special Ohio counsel to the Trusts, rendered an opinion under then existing law
substantially to the effect that, provided that at all times at least 50% of the
value of the total assets of the Ohio Trust consist of Ohio Obligations, or
similar obligations of other states or their subdivisions, under existing Ohio
law:
The Ohio Trust is not taxable as a corporation or otherwise for purposes of
the Ohio personal income tax, Ohio school district income taxes, the Ohio
corporation franchise tax, or the Ohio dealers in intangibles tax.
Income of the Ohio Trust will be treated as the income of the Unitholders
for purposes of the Ohio personal income tax and municipal and school district
income taxes in Ohio and the Ohio corporation franchise tax in proportion to the
respective interest therein of each Unitholder.
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Interest on Obligations held by the Ohio Trust is exempt from the Ohio
personal income tax and municipal and school district income taxes in Ohio, and
is excluded from the net income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
Proceeds paid under insurance policies, if any, to the Trustee of the Ohio
Trust, representing maturing interest on defaulted obligations held by the Ohio
Trust that is excluded from gross income for federal income tax purposes will be
exempt from the Ohio personal income tax, and municipal and school district
income taxes in Ohio and the net income base of the Ohio corporation franchise
tax.
Gains and losses realized on the sale, exchange or other disposition by the
Ohio Trust of Ohio Obligations are excluded in determining adjusted gross and
taxable income for purposes of the Ohio personal income tax, and municipal and
school district income taxes in Ohio, and are excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed distributed to
Unitholders.
Oregon Risk Factors and Tax Status
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 found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Oregon Trust, Schwabe,
Williamson, Wyatt, Moore & Roberts, special counsel to the Trusts for Oregon tax
matters, who relied on the
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opinion of Chapman and Cutler, rendered at such time, an opinion under then
existing Oregon law applicable to individuals who are Oregon residents for
Oregon tax purposes substantially to the effect that:
The Oregon Trust is not an association taxable as a corporation for Oregon
income tax or corporate excise tax purposes.
Each Unitholder of the Oregon Trust will be considered the owner of a
fractional portion of the Oregon Trust for purposes of Oregon personal income
taxes.
An item of Oregon Trust income which would be exempt from income tax under
Oregon law if directly received by a Unitholder and which is exempt from income
tax under Oregon law when received by the Oregon Trust will retain its status as
tax-exempt when distributed by such Oregon Trust and received by the
Unitholders.
A Unitholder of the Oregon Trust will have a taxable event when the Oregon
Trust disposes of a trust asset (whether by sale, payment on maturity,
retirement or otherwise) or when the Unitholder redeems or sells his Units.
Because of the requirement that tax cost basis be reduced to reflect
amortization of bond premiums, if any, on obligations held by the Oregon Trust,
a Unitholder may realize taxable gains when his Units are sold or redeemed for
an amount equal to or less than his original cost.
To the extent that the assets of the Oregon Trust consist of intangible
personal property, such assets and any interest thereon are exempt from property
tax under Oregon law.
Pennsylvania Risk Factors and Tax Status
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.
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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 found in
the Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Pennsylvania Trust,
Dechert Price & Rhoads, special Pennsylvania counsel to the Trusts, rendered an
opinion under then existing law substantially to the effect that:
Units evidencing fractional undivided interests in the Trusts are not
subject to any of the personal property taxes presently in effect in
Pennsylvania to the extent of that proportion of the Trust represented by Bonds
issued by the Commonwealth of Pennsylvania, its agencies and instrumentalities,
or by any county, city, borough, town, township, school district, municipality
and local housing or parking authority in the Commonwealth of Pennsylvania or
issued by Puerto Rico, the Virgin Islands, Guam or the Northern Mariana Islands
("Pennsylvania Bonds"). The taxes referred to above include the County Personal
Property Tax, the additional personal property taxes imposed on Pittsburgh
residents by the School District of Pittsburgh and by the City of Pittsburgh.
The City of Pittsburgh, the School District of Pittsburgh and Allegheny County
cannot impose personal property taxes as of January 1, 1995. Trust Units may be
taxable under the Pennsylvania inheritance and estate taxes.
The proportion of interest income representing interest income from
Pennsylvania Bonds distributed to Unitholders of the Trust is not taxable under
the Pennsylvania Personal Income Tax or under the Corporate Net Income Tax
imposed on corporations by Article IV of the Tax Reform Code. Nor will such
interest be taxable under the Philadelphia School District Investment Income Tax
imposed on Philadelphia resident individuals.
The disposition by the Trusts of a Pennsylvania Bond (whether by sale,
exchange, redemption or payment at maturity) will not constitute a taxable event
to a Unitholder under the Pennsylvania Personal Income Tax if the Pennsylvania
Bond was issued prior to February 1, 1994. Further, although there is no
published authority on the subject, counsel is of the opinion that (i) a
Unitholder of the Trusts will not have a taxable event under the Pennsylvania
state and local income taxes referred to in the preceding paragraph (other than
the Corporate Net Income Tax) upon the redemption or sale of his Unit to the
extent that the Trusts are then comprised of Pennsylvania Bonds issued prior to
February 1, 1994 and (ii) the dispositions by the Trusts of a Pennsylvania Bond
(whether by sale, exchange, redemption or payment at maturity) will not
constitute a taxable event to a Unitholder under the Corporate Net Income Tax or
the Philadelphia School District Investment Income Tax if the Pennsylvania Bond
was issued prior to February 1, 1994. (The School District tax has no
application to gain on the disposition of property held by the taxpayer for more
than six months.)
Gains on the sale, exchange, redemption, or payment at maturity of a
Pennsylvania Bond issued on or after February 1, 1994, will be taxable under all
of these taxes, as will gains on the redemption or sale of a unit to the extent
that each Trust is comprised of Pennsylvania Bonds issued on or after February
1, 1994.
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Tennessee Risk Factors and Tax Status
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 found in the
Information Supplement to this Prospectus.
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.
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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
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Commissioner's Letter, distributions from the Trust to Unitholders, to the
extent attributable to interest on the Puerto Rico Bonds (based on the relative
proportion of interest received or accrued attributable to the Puerto Rico
Bonds) will be exempt from the Hall Income Tax when distributed to such
Unitholders. A proportionate share of distributions from the 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 my 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.
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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 and Tax Status
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 found in the
Information Supplement to this Prospectus.
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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:
The State of Texas currently imposes no income tax. However, several
proposals have been introduced in the Texas Legislature that would, among other
things, impose a Texas income tax on individuals, trusts and businesses. It is
impossible to predict whether any such proposals will be enacted, and whether,
if enacted, any such law would exempt interest on Texas Bonds (or out of state
Bonds) from the Texas income tax, or if so whether income distributed by a Texas
Trust would retain its tax-exempt status when received by Unitholders. While no
opinion is rendered as to whether income distributions from any Texas Trust will
be exempt from any income tax that may be imposed on residents of Texas in the
future, at the time of the closing for each Texas Trust, Johnson & Gibbs, P.C.,
special Texas counsel to the Texas Trusts, rendered an opinion pursuant to then
existing Texas law applicable to individuals who are residents of Texas for
Texas tax purposes substantially to the effect that:
Neither the State nor any political subdivision of the State currently
imposes an income tax. Therefore, no portion of any distribution received by a
Unitholder of a Texas Trust in respect of his Units is subject to income
taxation by the State or any political subdivision of the State.
Except in the case of certain transportation businesses, savings and loan
associations and insurance companies, no Unit of the Fund is taxable under any
property tax levied in the State;
The "inheritance tax" of the State, imposed upon certain transfers of
property of a deceased resident individual Unitholder, may be measured in part
upon the value of Units of a Texas Trust included in the estate of such
Unitholder; and
With respect to any Unitholder which is subject to the State corporate
franchise tax, Units in a Texas Trust held by such Unitholder, and distributions
received thereon, will be taken into account in computing the taxable capital of
the Unitholder allocated.
Virginia Risk Factors and Tax Status
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
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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 found in the
Information Supplement to this Prospectus.
Tax Status. At the time of the closing for each Virginia Trust, Christian
& Barton, L.L.P., 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, its counties, municipalities,
authorities or political subdivisions and, provided the interest thereon is
exempt from Virginia income taxes by the laws or treaties of the United States,
by or on behalf of the United States' territories or possessions, including
Puerto Rico, Guam, the Virgin Islands and the Northern Mariana Islands, and
their political subdivisions and authorities (the "Virginia Bonds").
The Trust will be treated as a trust for Virginia income tax purposes and
not as an association taxable as a corporation. As a result, income of the
Trust will be treated as the income of the Unitholders.
Amounts representing tax-exempt interest for Federal income tax purposes
received or accrued by the Trust with respect to the Virginia Bonds, will not be
taxed to the Trust or to the Unitholders for Virginia income tax purposes. To
the extent that interest on obligations of the Commonwealth or any political
subdivision or instrumentality thereof is included in federal adjusted gross
income, that income shall be subtracted in arriving at Virginia taxable income.
Where an independent Virginia income tax exemption is provided for interest
on certain obligations, including those issued by industrial development
authorities pursuant to the Virginia Industrial Development and Revenue Bond
Act, by the Virginia Housing Development Authority, by the Virginia Resources
Authority and by the Virginia Education Loan Authority, interest on such
obligations is exempt from Virginia income taxation without regard to any
exemption from Federal income taxes.
Gain which is subject to Federal income taxation (whether as a result of
the sale of Virginia Bonds by the Trust or as a result of the sale of a Unit by
the Unitholder) will be included in the Unitholder's Virginia taxable income.
Notwithstanding the foregoing, under the language of certain enabling
legislation, however, such as the Virginia Industrial Development
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and Revenue Bond Act, the Virginia Resources Authority Act and the Virginia
Housing Development Authority Act, profit made on the sale of obligations issued
by authorities thereunder is expressly exempt from Virginia income taxation.
Such enabling legislation does not appear to require a disallowance in the
calculation of Virginia taxes of any loss that may be deductible for Federal
income tax purposes with respect to such obligations, although the Virginia
Department of Taxation has taken a contrary view.
No income tax is imposed by any political subdivision of the Commonwealth
of Virginia. The Commonwealth of Virginia does not impose a gift tax and the
Virginia estate tax on a resident's Federal taxable estate and a non-resident's
Federal taxable estate located in the Commonwealth is equal to the maximum state
death tax credit allowable against the Federal estate tax payable by the estate.
Operating Expenses
No annual advisory fee is charged to the Trusts by the Sponsor. The
Sponsor does, however, receive a fee of $0.17 per annum per $1,000 principal
amount of the underlying Bonds in each Trust for regularly evaluating the Bonds
and for maintaining surveillance over the portfolio (the "Sponsor's Evaluation
Fee").
The Trustee receives for ordinary recurring services an annual fee for each
plan of distribution for each Trust as set forth in "Essential Information
Regarding the Trusts" in Part Two of the Prospectus. Each annual fee is per
$1,000 principal amount of the underlying Bonds in a Trust for that portion of
the Trust that represents a particular plan of distribution. The Trustee's
compensation with respect to each Trust is computed on the basis of the largest
principal amount of Bonds in a Trust at any time during the period with respect
to which such compensation is being computed. The Trustee's fee may be
periodically adjusted in response to fluctuations in short-term interest rates
(reflecting the cost to the Trustee of advancing funds to a Trust to meet
scheduled distributions). In addition, the Sponsor's Evaluation Fee and the
Trustee's Fee may be further adjusted in accordance with the cumulative
percentage increase of the United States Department of Labor's Consumer Price
Index entitled "All Services Less Rent of Shelter" since the establishment of
the Trusts, or if such index no longer exists, a comparable index. The Trustee
has the use of funds, if any, being held in the Interest and Principal Accounts
of each Trust for future distributions, payment of expenses and redemptions.
These Accounts are non-interest bearing to Unitholders. Pursuant to normal
banking procedures, the Trustee benefits from the use of funds held therein.
Part of the Trustee's compensation for its services to the Fund is expected to
result from such use of these funds.
Premiums for the policies of insurance obtained by the Sponsor or by the
Bond issuers with respect to Bonds in Insured Trusts and with respect to insured
Bonds in Traditional Trusts have been paid in full prior to the deposit of the
Bonds in the Trusts, and the value of such insurance has been included in the
evaluation of the Bonds in each Trust and accordingly in the Public Offering
Price of Units of each Trust. There are no annual or continuing premiums for
such insurance.
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Commencing with Series 1011, the Trusts (and therefore Unitholders) will
bear all or a portion of their offering costs, including costs of registering
Units with the Securities and Exchange Commission and states, and legal fees,
but not including expenses incurred in the printing of preliminary and final
prospectuses, and expenses incurred in the preparation and printing of brochures
and other advertising materials and any other selling expenses as is common for
mutual funds. Total offering costs will be amortized over the first five years
of such Trusts. For Series 814 through Series 1010, all or a portion of the
expenses incurred in establishing the Trusts, including costs of preparing the
registration statements, the trust indentures and other closing documents,
registering Units with the Securities and Exchange Commission and states, the
initial audit of each Trust portfolio, the initial evaluation, legal fees, the
initial fees and expenses of the Trustee and any other non-material out-of-
pocket expenses, were paid by the Trusts and amortized over the first five years
of such Trusts. For Series prior to Series 814, the Sponsor has borne all costs
of creating and establishing such Trusts. The following are additional expenses
of the Trusts and, when paid by or owed to the Trustee, are secured by a lien on
the assets of the Trust or Trusts to which such expenses are allocable: (1) the
expenses and costs of any action undertaken by the Trustee to protect the Trusts
and the rights and interests of the Unitholders; (2) all taxes and other
governmental charges upon the Bonds or any part of the Trusts (no such taxes or
charges are being levied or made or, to the knowledge of the Sponsor,
contemplated); (3) amounts payable to the Trustee as fees for ordinary recurring
services and for extraordinary non-recurring services rendered pursuant to the
Indenture, all disbursements and expenses including counsel fees (including fees
of bond counsel which the Trustee may retain) sustained or incurred by the
Trustee in connection therewith; and (4) any losses or liabilities accruing to
the Trustee without negligence, bad faith or willful misconduct on its part.
The Trustee is empowered to sell Bonds in order to pay these amounts if funds
are not otherwise available in the Interest and Principal Accounts of the
appropriate Trust.
The Indenture for certain Series requires each Trust to be audited on an
annual basis at the expense of the Trust by independent public accountants
selected by the Sponsor. The Trustee shall not be required, however, to cause
such an audit to be performed if its cost to a Trust shall exceed $.05 per Unit
on an annual basis. Unitholders of a Trust covered by an audit may obtain a
copy of the audited financial statements upon request.
Distributions To Unitholders
Interest received by the Trustee on the Bonds in each Trust, including that
part of the proceeds of any disposition of Bonds which represents accrued
interest and including any insurance proceeds representing interest due on
defaulted Bonds, shall be credited to the "Interest Account" of the appropriate
Trust and all other moneys received by the Trustee shall be credited to the
"Principal Account" of the appropriate Trust.
National Traditional Trusts 4 Through 39 -- Semi-Annual Distributions
The pro rata share of the Interest Account and the pro rata share of the
cash in the Principal Account for each Trust will be computed by the Trustee
semi-annually each year on the
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Record Dates (stated in Part Two of this Prospectus). Shortly after such
computations, distributions will be made to the Unitholders as of the Record
Date. Proceeds received from the disposition of any of the Bonds after a Record
Date and prior to the following Distribution Date will be held in the Principal
Account and either used to pay for Units redeemed or distributed on the
Distribution Date following the next Record Date. The Trustee is not required to
make a distribution from the Principal Account unless the amount available for
distribution shall equal at least ten cents per Unit. Persons who purchase Units
after a Record Date and prior to the following Distribution Date will receive
their first distribution on the second Distribution Date after their purchase of
Units.
As of each Record Date, the Trustee will deduct from the Interest Account
or, to the extent funds are not sufficient therein, from the Principal Account,
amounts needed for payment of expenses of the Trusts. The Trustee also may
withdraw from said accounts such amount, if any, as it deems necessary to
establish a reserve for any governmental charges payable out of the Trusts.
Amounts so withdrawn shall not be considered a part of a Trust's assets until
such time as the Trustee shall return all or part of such amount to the
appropriate account.
National Traditional Trust 40 and Subsequent National Traditional Trusts; All
Other Trusts -- Optional Distributions
The pro rata share of cash in the Principal Account in each Trust will be
computed as of each semi-annual Record Date and distributions to the Unitholders
as of such Record Date will be made on or shortly after the fifteenth day of the
month. Proceeds received from the disposition, including sale, call or
maturity, of any of the Bonds and all amounts paid with respect to zero coupon
bonds and Stripped Obligations will be held in the Principal Account and either
used to pay for Units redeemed or distributed on the Distribution Date following
the next semi-annual Record Date. The Trustee is not required to make a
distribution from the Principal Account of any Trust unless the amount available
for distribution in such account equals at least ten cents per Unit.
The pro rata share of the Interest Account in each Trust will be computed
by the Trustee each month as of the Record Date. For National Traditional
Trusts 40 through 51, distributions will be made on or shortly after the
fifteenth day of each month to Unitholders as of the Record Date. For National
Traditional Trust 52 and subsequent National Traditional Trusts, State
Traditional Trusts and subsequent State Traditional Trusts and all other Trusts,
Unitholders have the option of receiving distributions monthly, quarterly or
semi-annually. Record Dates are the first day of each month for Unitholders
under the monthly plan of distribution, the first day of March, June, September
and December for quarterly distributions, and the first day of June and December
for semi-annual distributions (for National Traditional Trust 140 and subsequent
National Traditional Trusts and all other Trusts, quarterly Record Dates are the
first day of February, May, August and November and for semi-annual
distributions the Record Dates are the first day of May and November).
Distributions will be made on or shortly after the fifteenth day of the month to
Unitholders of such Trust as of the Record Date who are entitled to
distributions at that time under the plan of distribution in effect. Persons
who purchase Units
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between a Record Date and a Distribution Date will receive their first
distribution on the Distribution Date following the next Record Date under the
applicable plan of distribution.
The plan of distribution selected by a Unitholder will remain in effect
until changed. Unitholders purchasing Units of a Trust in the secondary market
will initially receive distributions in accordance with the election of the
prior owner. Unitholders of Trusts having more than one available plan of
distribution who desire to change their plan of distribution may do so by
sending a written notice requesting the change, together with any
Certificate(s), to the Trustee. The notice and any Certificate(s) must be
received by the Trustee not later than the semi-annual Record Date to be
effective as of the semi-annual distribution following the subsequent semi-
annual Record Date. Unitholders are requested to make any such changes within
45 days prior to the applicable Record Date. Certificates should only be sent
by registered or certified mail, return receipt requested, to minimize the
possibility of their being lost or stolen. If no notice is received by the
Trustee in proper form the Unitholder will be deemed to have elected to continue
the same plan.
As of the first day of each month, the Trustee will deduct from the
Interest Account of a Trust or, to the extent funds are not sufficient therein,
from the Principal Account of a Trust, amounts needed for payment of expenses of
such Trust. The Trustee also may withdraw from said accounts such amount, if
any, as it deems necessary to establish a reserve for any governmental charges
payable out of such Trust. Amounts so withdrawn shall not be considered a part
of a Trust's assets until such time as the Trustee shall return all or any part
of such amounts to the appropriate account.
For the purpose of minimizing fluctuations in the distributions from the
Interest Account of a Trust, the Trustee is authorized to advance such amounts
as may be necessary to provide for interest distributions of approximately equal
amounts. The Trustee shall be reimbursed, without interest, for any such
advances from funds in the Interest Account of such Trust. The Trustee's fee
takes into account the costs attributable to the outlay of capital needed to
make such advances.
The Trustee shall withdraw from the Interest Account and the Principal
Account of a Trust such amounts as may be necessary to cover redemptions of
Units of such Trust by the Trustee. (See "How Units May Be Redeemed Without
Charge.")
Funds which are available for future distributions, redemptions and
payments of expenses are held in accounts which are non-interest bearing to
Unitholders and are available for use by the Trustee pursuant to normal banking
procedures.
Accumulation Plan
The Sponsor, John Nuveen & Co. Incorporated, is also the principal
underwriter of several open-end mutual funds (the "Accumulation Funds") into
which Unitholders may choose to reinvest Trust distributions automatically,
without any sales charge. Unitholders may reinvest both interest and principal
distributions or principal distributions only. Each Accumulation Fund
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has investment objectives which differ in certain respects from those of the
Trusts and may invest in securities which would not be eligible for deposit in
the Trusts. The investment adviser to each Accumulation Fund is a wholly-owned
subsidiary of the Sponsor. Unitholders should contact their financial adviser or
the Sponsor to determine which of the Accumulation Funds may be restricted to
residents of a particular state or states. Further information concerning the
Accumulation Plan and a list of Accumulation Funds is set forth in the
Information Supplement to this Prospectus, which may be obtained by contacting
the Trustee at the phone number listed on the back cover of this Prospectus.
Each person who purchases Units of a Trust may become a participant in the
Accumulation Plan and elect to have his or her distributions on Units of a Trust
invested directly in shares of one of the Accumulation Funds. Reinvesting
Unitholders may select any interest distribution plan. Thereafter, each
distribution of interest income or principal on the participant's Units
(principal only in the case of a Unitholder who has chosen to reinvest only
principal distributions) will, on the applicable distribution date, or the next
day on which the New York Stock Exchange is normally open ("business day") if
the distribution date is not a business day, automatically be received by the
transfer agent for each of the Accumulation Funds, on behalf of such participant
and applied on that date to purchase shares (or fractions thereof) of the
Accumulation Fund chosen at net asset value as computed as of 4:00 p.m. eastern
time on each such date. All distributions will be reinvested in the
Accumulation Fund chosen and no part thereof will be retained in a separate
account. These purchases will be made without a sales charge.
The Transfer Agent of the Accumulation Fund will mail to each participant
in the Accumulation Plan a quarterly statement containing a record of all
transactions involving purchases of Accumulation Fund shares (or fractions
thereof) with Trust interest distributions or as a result of reinvestment of
Accumulation Fund dividends. Any distribution of principal used to purchase
shares of an Accumulation Fund will be separately confirmed by the Transfer
Agent. Unitholders will also receive distribution statements from the Trustee
detailing the amounts transferred to their Accumulation Fund accounts.
Participants may at any time, by so notifying the Trustee in writing, elect
to change the Accumulation Fund into which their distributions are being
reinvested, to change from principal only reinvestment to reinvestment of both
principal and interest or vice versa, or to terminate their participation in the
Accumulation Plan altogether and receive future distributions on their Units in
cash. There will be no charge or other penalty for such change of election or
termination. The character of Trust distributions for income tax purposes will
remain unchanged even if they are reinvested in an Accumulation Fund.
Detailed Reports To Unitholders
The Trustee shall furnish Unitholders of a Trust in connection with each
distribution, a statement of the amount of interest, if any, and the amount of
other receipts (received since the preceding distribution) being distributed,
expressed in each case as a dollar amount representing the pro rata share of
each Unit of a Trust outstanding and a year-to-date summary
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of all distributions paid on said Units. Within a reasonable period of time
after the end of each calendar year, the Trustee will furnish to each person,
who at any time during the calendar year was a registered Unitholder of a Trust,
a statement with respect to such Trust (i) as to the Interest Account: interest
received (including amounts representing interest received upon any disposition
of Bonds), and, the percentage of such interest with respect to Trust's other
than State Trusts by states in which the issuers of the Bonds are located,
deductions for fees and expenses of such Trust, redemption of Units and the
balance remaining after such distributions and deductions, expressed in each
case both as a total dollar amount and as a dollar amount representing the pro
rata share of each Unit outstanding on the last business day of such calendar
year; (ii) as to the Principal Account: the dates of disposition of any Bonds
and the net proceeds received therefrom (excluding any portion representing
accrued interest), the amount paid for purchase of Replacement Bonds, the amount
paid upon redemption of Units, deductions for payment of applicable taxes and
fees and expenses of the Trustee, and the balance remaining after such
distributions and deductions expressed both as a total dollar amount and as a
dollar amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (iii) a list of the Bonds held and the
number of Units outstanding on the last business day of such calendar year; (iv)
the Unit Value based upon the last computation thereof made during such calendar
year; and (v) amounts actually distributed during such calendar year from the
Interest Account and from the Principal Account, separately stated, expressed
both as total dollar amounts and as dollar amounts representing the pro rata
share of each Unit outstanding. Each annual statement will reflect pertinent
information in respect of all plans of distribution so that Unitholders may be
informed regarding the results of other plans of distribution.
Unit Value and Evaluation
The value of each Trust is determined by the Sponsor on the basis of (1)
the cash on hand in the Trust or moneys in the process of being collected, (2)
the value of the Bonds in the Trust based on the bid prices of the Bonds and (3)
interest accrued thereon not subject to collection, less (1) amounts
representing taxes or governmental charges payable out of the Trust and (2) the
accrued expenses of the Trust. The result of such computation is divided by the
number of Units of such Trust outstanding as of the date thereof to determine
the per Unit value ("Unit Value") of such Trust. The Sponsor may determine the
value of the Bonds in each Trust (1) on the basis of current bid prices of the
Bonds obtained from dealers or brokers who customarily deal in bonds comparable
to those held by the Trust, (2) if bid prices are not available for any of the
Bonds, on the basis of bid prices for comparable bonds, (3) by causing the value
of the Bonds to be determined by others engaged in the practice of evaluating,
quoting or appraising comparable bonds or (4) by any combination of the above.
Although the Unit Value of each Trust is based on the bid prices of the Bonds,
the Units are sold initially to the public at the Public Offering Price based on
the offering prices of the Bonds.
Because the insurance obtained by the Sponsor or by the issuers of Bonds
with respect to the Bonds in the Insured Trusts and with respect to insured
Bonds in Traditional Trusts is effective so long as such Bonds are outstanding,
such insurance will be taken into account in
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determining the bid and offering prices of such Bonds and therefore some value
attributable to such insurance will be included in the value of Units of Trusts
that include such Bonds.
Distribution of Units To The Public
The Sponsor currently intends to maintain a secondary market for Units of
each Trust. (See "Market for Units" below.) The amount of the dealer
concession on secondary market purchases of Trust Units through the Sponsor will
be computed based upon the value of the Bonds in the Trust portfolio, including
the sales charge computed as described in "Public Offering Price," and adjusted
to reflect the cash position of the Trust principal account, and will vary with
the size of the purchase as shown in the following table:
Amount of Purchase*
<TABLE>
<CAPTION>
$50,000 $100,000 $250,000 $500,000 $1,000,000 $2,500,000 $5,000,000
Under to to to to to to or
Years to Maturity $50,000 $99,999 $249,999 $499,999 $999,999 $2,499,999 $4,999,999 more
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 1 0 0 0 0 0 0 0 0
1 but less than 2 1.00% .90% .85% .80% .70% .55% .467% .389%
2 but less than 3 1.30% 1.20% 1.10% 1.00% .90% .73% .634% .538%
3 but less than 4 1.60% 1.45% 1.35% 1.25% 1.10% .90% .781% .662%
4 but less than 5 2.00% 1.85% 1.75% 1.55% 1.40% 1.25% 1.082% .914%
5 but less than 7 2.30% 2.15% 1.95% 1.80% 1.65% 1.50% 1.320% 1.140%
7 but less than 10 2.60% 2.45% 2.25% 2.10% 1.95% 1.70% 1.496% 1.292%
10 but less than 13 3.00% 2.80% 2.60% 2.45% 2.30% 2.00% 1.747% 1.494%
13 but less than 16 3.25% 3.15% 3.00% 2.75% 2.50% 2.15% 1.878% 1.606%
16 or more 3.50% 3.50% 3.40% 3.35% 3.00% 2.50% 2.185% 1.873%
</TABLE>
____________________
* Breakpoint sales charges and related dealer concessions are computed both
on a dollar basis and on the basis of the number of Units purchased, using
the equivalent of 500 Units to $50,000, 2,500 Units to $250,000, etc., and
will be applied on that basis which is more favorable to the purchaser.
The Sponsor reserves the right to change the foregoing dealer concessions
from time to time.
Volume incentives can be earned as a marketing allowance by eligible dealer
firms who reach cumulative firm sales or sales arrangement levels of a specified
dollar amount of Nuveen unit trusts (other than any series of the Nuveen-The Dow
5SM Portfolios and Nuveen-The Dow 10SM Portfolios) sold in the primary or
secondary market during any quarter as set forth in the
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table below. Eligible dealer firms are dealers that are providing marketing
support for Nuveen unit trusts in the form of 1) distributing or permitting the
distribution of marketing materials and other product information, 2) providing
Nuveen representatives access to the dealer's branch offices, and 3) generally
facilitating the placement of orders by the dealer's registered representatives
such as putting Nuveen unit trusts on their order entry screens. Eligible firms
will not include firms that solely provide clearing services to broker/dealer
firms. For purposes of determining the applicable volume incentive rate for a
given quarter, the dollar amount of all units sold over the current and three
previous quarters (the "Measuring Period") is aggregated. The volume incentive
received by the dealer firm will equal the dollar amount of units sold during
the current quarter times the highest applicable rate for the Measuring Period.
For firms that meet the necessary volume level, volume incentives may be given
on all applicable trades originated from or by that firm.
Total dollar amount sold
over Measuring Period Volume Incentives
------------------------ -----------------
$ 5,000,000 to $ 9,999,999 0.10% of current quarter sales
$10,000,000 to $19,999,999 0.125% if current quarter sales
$20,000,000 to $49,999,999 0.1375% if current quarter sales
$50,000,000 or more 0.15% if current quarter sales
Only sales through the Sponsor qualify for volume incentives and for
meeting minimum requirements. The Sponsor reserves the right to modify or
change the volume incentive schedule at any time and make the determination as
to which firms qualify for the marketing allowance and the amount paid.
Registered investment advisers, certified financial planners and registered
broker-dealers who in each case either charge periodic fees for financial
planning, investment advisory or asset management services, or provide such
services in connection with the establishment of an investment account for which
a comprehensive "wrap fee" charge is imposed, and bank trust departments
investing funds over which they exercise exclusive discretionary investment
authority and that are held in a fiduciary, agency, custodial or similar
capacity, are not entitled to receive any dealer concession for any sales made
to investors which qualified as "Discounted Purchases." (see "Public Offering
Price").
Certain commercial banks are making Units of the Trusts available to their
customers on an agency basis. A portion of the sales charge paid by these
customers is retained by or remitted to the banks in the amounts shown in the
above table. The Glass-Steagall Act prohibits banks from underwriting Trust
Units; the Act does, however, permit certain agency transactions and banking
regulators have not indicated that these particular agency transactions are not
permitted under the Act. In Texas and in certain other states, any bank making
Units available must be registered as a broker-dealer under state law.
The Sponsor offers a program of advertising support to registered broker-
dealer firms, banks and bank affiliates ("Firms") that sell Trust Units or
shares of Nuveen Open-End Tax-Free Mutual Funds (excluding money-market funds)
("Funds"). Under this program, the
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Sponsor will pay or reimburse the Firm for up to one half of specified media
costs incurred in the placement of advertisements which jointly feature the Firm
and the Nuveen Funds and Trusts. Reimbursements to the Firm will be based on the
number of the Firm's registered representatives who have sold Fund shares and/or
Trust Units during the prior calendar year according to an established schedule.
Reimbursement under this program will be made by the Sponsor and not by the
Funds or Trusts.
To facilitate the handling of transactions, sales of Units shall be limited
to transactions involving a minimum of either of $5,000 or 50 Units, whichever
is less. The Sponsor reserves the right to reject, in whole or in part, any
order for the purchase of Units.
Ownership and Transfer of Units
Ownership of Units is evidenced in Certificated form unless the Unitholder
expressly requests that in the purchased Units be evidenced by book-entry
positions recorded on the books and records of the Trustee. For Trusts included
in Nuveen Tax-Free Unit Trust, Series 723 and all subsequent Trusts, the
ownership of Units is evidenced by book entry positions recorded on the books
and records of the Trustee unless the Unitholder expressly requests that the
purchased Units be evidenced in Certificate form. The Trustee is authorized to
treat as the owner of Units that person who at the time is registered as such on
the books of the Trustee. Any Unitholder who holds a Certificate may change to
book-entry ownership by submitting to the Trustee the Certificate along with a
written request that the Units represented by such Certificate be held in book-
entry form. Likewise, a Unitholder who holds Units in book-entry form may
obtain a Certificate for such Units by written request to the Trustee. Units
may be held in denominations of one Unit or any multiple or fraction thereof.
Fractions of Units are computed to three decimal places. Any Certificates
issued will be numbered serially for identification, and are issued in fully
registered form, transferable only on the books of the Trustee. Book-entry
Unitholders will receive a Book-Entry Position Confirmation reflecting their
ownership.
For series allowing optional plans of distribution, Certificates for Units
bear an appropriate notation on their face indicating which plan of distribution
has been selected. When a holder of certificated Units changes his plan of
distribution, the existing Certificate must be surrendered to the Trustee and a
new Certificate issued to reflect the currently effective plan of distribution.
There will be no charge for this service. Holders of book-entry Units can
change their plan of distribution by making a written request to the Trustee,
which will issue a new Book-Entry Position Confirmation to reflect the change.
Units are transferable by making a written request to the Trustee and, in
the case of Units evidenced by Certificate(s), by presenting and surrendering
such Certificate(s) to the Trustee, at its unit investment trust office in New
York City, properly endorsed or accompanied by a written instrument or
instruments of transfer. The Certificate(s) should be sent registered or
certified mail for the protection of the Unitholders. Each Unitholder must sign
such written request, and such Certificate(s) or transfer instrument, exactly as
his name appears on (a) the face of the Certificate(s) representing the Units to
be transferred, or (b) the Book-Entry Position Confirmation(s) relating to the
Units to be transferred. Such signature(s) must be guaranteed by
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a guarantor acceptable to the Trustee. In certain instances the Trustee may
require additional documents such as, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator or certificates
of corporate authority. Mutilated Certificates must be surrendered to the
Trustee in order for a replacement Certificate to be issued.
Although at the date hereof no charge is made and none is contemplated, a
Unitholder may be required to pay $2.00 to the Trustee for each Certificate
reissued or transfer of Units requested and to pay any governmental charge which
may be imposed in connection therewith.
The process of registration and delivery to the Unitholder of Certificates
or Book-Entry Position Confirmations may take up to 30 days. Purchasers of
Units will be unable to exercise any right to transfer or redemption until they
have received their Certificate(s) or Book-Entry Position Confirmation(s). (See
"How Units May Be Redeemed Without Charge.")
Replacement of Lost, Stolen or Destroyed Certificates
To obtain a new Certificate replacing one that has been lost, stolen, or
destroyed, the Unitholder must furnish the Trustee with sufficient
indemnification and pay such expenses as the Trustee may incur. The
indemnification protects the Trustee, Sponsor, and Trust from risk if the
original Certificate is presented for transfer or redemption by a person who
purchased it in good faith, for value, and without notice of any fraud or
irregularity. This indemnification must be in the form of an Open Penalty Bond
of Indemnification. The premium for such an indemnity bond may vary, but
currently amounts to 1.0% of the market value of the Units represented by the
Certificate. In the case, however, of a Trust as to which notice of termination
has been given, the premium currently amounts to 0.5% of the market value of the
Units represented by such Certificate.
Market For Units
Although it is not obligated to do so, the Sponsor intends to maintain a
secondary market for outstanding Units of each Trust at its own expense and
continuously to offer to purchase Units of each Trust at prices, subject to
change at any time, which are based upon the bid prices of Bonds in the
respective portfolios of the Trusts. If the supply of Units of any of the
Trusts exceeds the demand, or for some other business reason, the Sponsor may
discontinue purchases of Units of such Trust at such prices. Unitholders who
wish to dispose of Units should inquire of the Trustee or their broker as to
current redemption prices. (See "How Units May Be Redeemed Without Charge.")
In connection with its secondary market-making activities, the Sponsor may
from time to time enter into secondary market joint account agreements with
other brokers and dealers. Pursuant to such an agreement, the Sponsor will
purchase Units from the broker or dealer at the bid price and will place the
Units into a joint account managed by the Sponsor; sales from the account will
be made in accordance with the then current prospectus and the Sponsor and the
broker or dealer will share profits and losses in the joint account in
accordance with the terms of their joint account agreement.
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How Units May Be Redeemed Without Charge
Unitholders may redeem all or a portion of their Units by (1) making a
written request for such redemption (book entry Unitholders may use the
redemption form on the reverse side of their Book Entry Position Confirmation)
to the Trustee at its unit investment trust office in New York City (redemptions
of 1,000 Units or more will require a signature guarantee), (2) in the case of
Units evidenced by a Certificate, by also tendering such Certificate to the
Trustee, duly endorsed or accompanied by proper instruments of transfer with
signatures guaranteed as explained above, or provide satisfactory indemnity
required in connection with lost, stolen or destroyed Certificates and (3)
payment of applicable governmental charges, if any. Certificates should be sent
only by registered or certified mail to minimize the possibility of their being
lost or stolen. (See "Ownership and Transfer of Units.") No redemption fee
will be charged by the Trust, Sponsor or the Trustee. However, a Unitholder's
financial adviser may charge for serving as agent in the redemption of Units. A
Unitholder may authorize the Trustee to honor telephone instructions for the
redemption of Units held in book entry form. Units represented by Certificates
may not be redeemed by telephone. The proceeds of Units redeemed by telephone
will be sent by check either to the Unitholder at the address specified on his
account or to a financial institution specified by the Unitholder for credit to
the account of the Unitholder. A Unitholder wishing to use this method of
redemption must complete a Telephone Redemption Authorization Form and furnish
the Form to the Trustee. Telephone Redemption Authorization Forms can be
obtained from a Unitholder's registered representative or by calling the
Trustee. Once the completed Form is on file, the Trustee will honor telephone
redemption requests by any authorized person. The time a telephone redemption
request is received determines the "date of tender" as discussed below. The
redemption proceeds will be mailed within three business days following the
telephone redemption request. Only Units held in the name of individuals may be
redeemed by telephone; accounts registered in broker name, or accounts of
corporations or fiduciaries (including among others, trustees, guardians,
executors and administrators) may not use the telephone redemption privilege.
On the third business day following the date of tender, the Unitholder will
be entitled to receive in cash for each Unit tendered an amount equal to the
Unit Value of such Trust determined by the Trustee, as of 4:00 p.m. eastern
time, or as of any earlier closing time on a day on which the Exchange is
scheduled in advance to close at such earlier time, on the date of tender as
defined hereafter, plus accrued interest to, but not including, the third
business day after the date of tender ("Redemption Price"). The price received
upon redemption may be more or less than the amount paid by the Unitholder
depending on the value of the Bonds on the date of tender. Unitholders should
check with the Trustee or their broker to determine the Redemption Price before
tendering Units.
The "date of tender" is deemed to be the date on which the request for
redemption of Units is received in proper form by the Trustee, except that as
regards a redemption request received after 4:00 p.m. eastern time, or as of any
earlier closing time on a day on which the Exchange is scheduled in advance to
close at such earlier time, or on any day on which the Exchange is normally
closed, the date of tender is the next day on which the Exchange is
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normally open for trading and such request will be deemed to have been made on
such day and the redemption will be effected at the Redemption Price computed on
that day.
Accrued interest paid on redemption will be withdrawn from the Interest
Account of the appropriate Trust or, if the balance therein is insufficient,
from the Principal Account of such Trust. All other amounts paid on redemption
shall be withdrawn from the Principal Account of the Trust. The Trustee is
empowered to sell underlying Bonds of a Trust in order to make funds available
for redemption. (See "How Bonds May Be Removed from the Trusts.") Units so
redeemed shall be cancelled. To the extent that Bonds are sold from a Trust,
the size and diversity of such Trust will be reduced. Such sales may be
required at a time when Bonds would not otherwise be sold and might result in
lower prices than might otherwise be realized.
The Redemption Price is determined on the basis of the bid prices of the
Bonds in each Trust.
The right of redemption may be suspended and payment postponed for any
period during which the Securities and Exchange Commission determines that
trading in the municipal bond market is restricted or an emergency exists, as a
result of which disposal or evaluation of the Bonds is not reasonably
practicable, or for such other periods as the Securities and Exchange Commission
may by order permit.
Under regulations issued by the Internal Revenue Service, the Trustee will
be required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's tax
identification number in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may be recovered by
the Unitholder only when filing his or her tax return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker at the time the Certificate or Book Entry Return
Confirmation is issued, and this number is printed on the Certificate or Book
Entry Return Confirmation and on distribution statements. If a Unitholder's tax
identification number does not appear as noted above, or if it is incorrect, the
Unitholder should contact the Trustee before redeeming Units to determine what
action, if any, is required to avoid this "back-up withholding."
How Units May Be Purchased By The Sponsor
The Trustee will notify the Sponsor of any tender of Units for redemption.
If the Sponsor's bid in the secondary market at that time equals or exceeds the
Redemption Price it may purchase such Units by notifying the Trustee before the
close of business on the second succeeding business day and by making payment
therefor to the Unitholder not later than the day on which payment would
otherwise have been made by the Trustee. (See "How Units May Be Redeemed
Without Charge.") The Sponsor's current practice is to bid at the Redemption
Price in the secondary market. Units held by the Sponsor may be tendered to the
Trustee for redemption as any other Units.
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How Bonds May Be Removed From The Trusts
Bonds will be removed from a Trust as they mature or are redeemed by the
issuers thereof. See the "Schedule of Investments" in Part Two and "Selection
of Bonds for Deposit in the Trusts" herein for a discussion of call provisions
of Bonds in the Trusts.
The Indenture also empowers the Trustee to sell Bonds for the purpose of
redeeming Units tendered by any Unitholder, and for the payment of expenses for
which income may not be available. Under the Indenture, the Sponsor is
obligated to provide the Trustee with a current list of Bonds in each Trust to
be sold in such circumstances. In deciding which Bonds should be sold the
Sponsor intends to consider, among other things, such factors as: (1) market
conditions; (2) market prices of the Bonds; (3) the effect on income
distributions to Unitholders of the sale of various Bonds; (4) the effect on
principal amount of underlying Bonds per Unit of the sale of various Bonds; (5)
the financial condition of the issuers; and (6) the effect of the sale of
various Bonds on the investment character of the Trust. Such sales, if
required, could result in the sale of Bonds by the Trustee at prices less than
original cost to the Trust. To the extent Bonds are sold, the size and
diversity of the Trust will be reduced.
In addition, the Sponsor is empowered to direct the Trustee to liquidate
Bonds upon the happening of certain other events, such as default in the payment
of principal and/or interest, an action of the issuer that will adversely affect
its ability to continue payment of the principal of and interest on its Bonds,
or an adverse change in market, revenue or credit factors affecting the
investment character of the Bonds. If a default in the payment of the principal
of and/or interest on any of the Bonds occurs, and if the Sponsor fails to
instruct the Trustee whether to sell or continue to hold such Bonds within 30
days after notification by the Trustee to the Sponsor of such default, the
Indenture provides that the Trustee shall liquidate said Bonds forthwith and
shall not be liable for any loss so incurred. The Sponsor may also direct the
Trustee to liquidate Bonds in a Trust if the Bonds in the Trust are the subject
of an advanced refunding, generally considered to be when refunding bonds are
issued and the proceeds thereof are deposited in irrevocable trust to retire the
refunded bonds on their redemption date.
Except for refunding securities that may be exchanged for Bonds under
certain conditions specified in the Indenture, the Indenture does not permit
either the Sponsor or the Trustee to acquire or deposit bonds either in addition
to, or in substitution for, any of the Bonds initially deposited in the Trust.
Information About The Trustee
The Trustee is The Chase Manhattan Bank, 4 New York Plaza, New York, New
York 10004. The Trustee is subject to supervision and examination by the
Federal Deposit Insurance Corporation, the Board of Governors of the Federal
Reserve System and either the Comptroller of the Currency or state banking
authorities. In connection with the storage and handling of certain Bonds
deposited in the Trusts, the Trustee may use the services of The Depository
Trust Company. These services would include safekeeping of the Bonds and
coupon-clipping, computer book-entry transfer and institutional delivery
services. The Depository Trust Company is a limited purpose trust company
organized under the Banking Law of the State of New York, a
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member of the Federal Reserve System and a clearing agency registered under the
Securities Exchange Act of 1934, as amended.
Limitations on Liabilities of Sponsor and Trustee
The Sponsor and the Trustee shall be under no liability to Unitholders for
taking any action or for refraining from any action in good faith pursuant to
the Indenture, or for errors in judgment, but shall be liable only for their own
negligence, lack of good faith or willful misconduct. The Trustee shall not be
liable for depreciation or loss incurred by reason of the sale by the Trustee of
any of the Bonds. In the event of the failure of the Sponsor to act under the
Indenture, the Trustee may act thereunder and shall not be liable for any action
taken by it in good faith under the Indenture.
The Trustee shall not be liable for any taxes or other governmental charges
imposed upon or in respect of the Bonds or upon the interest thereon or upon it
as Trustee under the Indenture or upon or in respect of any Trust which the
Trustee may be required to pay under any present or future law of the United
States of America or of any other taxing authority having jurisdiction. In
addition, the Indenture contains other customary provisions limiting the
liability of the Trustee.
Successor Trustees And Sponsors
The Trustee or any successor trustee may resign by executing an instrument
of resignation in writing and filing same with the Sponsor and mailing a copy of
a notice or resignation to all Unitholders then of record. Upon receiving such
notice, the Sponsor is required to promptly appoint a successor trustee. If the
Trustee becomes incapable of acting or is adjudged a bankrupt or insolvent, or a
receiver or other public officer shall take charge of its property or affairs,
the Sponsor may remove the Trustee and appoint a successor by written
instrument. The resignation or removal of a trustee and the appointment of a
successor trustee shall become effective only when the successor trustee accepts
its appointment as such. Any successor trustee shall be a corporation
authorized to exercise corporate trust powers, having capital, surplus and
undivided profits of not less than $5,000,000. Any corporation into which a
trustee may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which a trustee shall be a party,
shall be the successor trustee.
If upon resignation of a trustee no successor has been appointed and has
accepted the appointment within 30 days after notification, the retiring trustee
may apply to a court of competent jurisdiction for the appointment of a
successor.
If the Sponsor fails to undertake any of its duties under the Indenture,
and no express provision is made for action by the Trustee in such event, the
Trustee may, in addition to its other powers under the Indenture, (1) appoint a
successor sponsor, or (2) terminate the Indenture and liquidate the Trusts.
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Information About The Sponsor
Since our founding in 1898, John Nuveen & Co. Incorporated has been
synonymous with investments that withstand the test of time. Today, we offer a
broad range of investments designed for mature investors whose portfolio is the
principal source of their ongoing financial security. More than 1.3 million
investors have entrusted Nuveen to help them maintain the lifestyle they
currently enjoy.
A value investing approach--purchasing securities of strong companies and
communities that represent good long-term value--is the cornerstone of Nuveen's
investment philosophy. It is a careful, long-term strategy that offers the
potential for attractive returns with moderated risk. Successful value
investing begins with in-depth research and a discerning eye for marketplace
opportunity. Nuveen's team of investment professionals is backed by the
discipline, resources and expertise of a century of investment experience,
including one of the most recognized research departments in the industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of taxable and tax-free investment
products--including equity and fixed-income mutual funds, unit trusts, exchange-
traded funds, customized asset management services and cash management products.
Nuveen is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by the St. Paul Companies, Inc. ("St. Paul"). St. Paul
is located in St. Paul, Minnesota and is principally engaged in providing
property-liability insurance through subsidiaries. Nuveen is a member of the
National Association of Securities Dealers, Inc. and the Securities Industry
Association and has its principal office located in Chicago (333 West Wacker
Drive). Nuveen maintains 8 regional offices.
To help advisers and investors better understand and more efficiently use
an investment in the Trusts to reach their investment goals, the Sponsor may
advertise and create specific investment programs and systems. For example,
such activities may include presenting information on how to use an investment
in the Trusts, alone or in combination with an investment in other mutual funds
or unit investment trusts sponsored by Nuveen, to accumulate assets for future
education needs or periodic payments such as insurance premiums. The Sponsor
may produce software or additional sales literature to promote the advantages of
using the Trusts to meet these and other specific investor needs.
The Sponsor offers a program of advertising support to registered broker-
dealer firms, banks and bank affiliates ("Firms") that sell Trust Units or
shares of Nuveen Open-End Mutual Funds (excluding money-market funds) ("Funds").
Under this program, the Sponsor will pay or reimburse the Firm for up to one
half of specified media costs incurred in the placement of advertisements which
jointly feature the Firm and the Nuveen Funds and Trusts. Reimbursements to the
Firm will be based on the number of the Firm's registered representatives who
have sold Fund Shares and/or Trust Units during the prior calendar year
according to an established schedule. Reimbursements under this program will be
made by the Sponsor and not by the Funds or Trusts.
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Amendment and Termination of Indenture
The Indenture may be amended by the Trustee and the Sponsor without the
consent of any of the Unitholders (1) to cure any ambiguity or to correct or
supplement any provision thereof which may be defective or inconsistent, or (2)
to make such other provisions as shall not adversely affect the Unitholders,
provided, however, that the Indenture may not be amended to increase the number
of Units in a Trust or to permit the deposit or acquisition of bonds either in
addition to, or in substitution for any of the Bonds initially deposited in a
Trust except the substitution of refunding bonds under certain circumstances.
The Trustee shall advise the Unitholders of any amendment promptly after
execution thereof.
A Trust may be liquidated at any time by the written consent of 100% of the
Unitholders or by the Trustee when the value of such Trust, as shown by any
evaluation, is less than 20% of the original principal amount of such Trust and
will be liquidated by the Trustee in the event that Units not yet sold
aggregating more than 60% of the Units originally created are tendered for
redemption by the Sponsor thereby reducing the net worth of the Trust to less
than 40% of the principal amount of the Bonds originally deposited in the
portfolio. The sale of Bonds from the Trusts upon termination may result in
realization of a lesser amount than might otherwise be realized if such sale
were not required at such time. For this reason, among others, the amount
realized by a Unitholder upon termination may be less than the principal amount
of Bonds originally represented by the Units held by such Unitholder. The
Indenture will terminate upon the redemption, sale or other disposition of the
last Bond held thereunder, but in no event shall it continue beyond the end of
the calendar year preceding the fiftieth anniversary of its execution for
National and State Trusts, beyond the end of the calendar year preceding the
twentieth anniversary of its execution for Long Intermediate, and Intermediate
Trusts or beyond the end of the calendar year preceding the tenth anniversary of
its execution for Short Intermediate and Short Term Trusts.
Written notice of any termination specifying the time or times at which
Unitholders may surrender their Certificates, if any, for cancellation shall be
given by the Trustee to each Unitholder at the address appearing on the
registration books of the Trust maintained by the Trustee. Within a reasonable
time thereafter, the Trustee shall liquidate any Bonds in the Trust then held
and shall deduct from the assets of the Trust any accrued costs, expenses or
indemnities provided by the Indenture which are allocable to such Trust,
including estimated compensation of the Trustee and costs of liquidation and any
amounts required as a reserve to provide for payment of any applicable taxes or
other governmental charges. The Trustee shall then distribute to Unitholders of
such Trust their pro rata share of the balance of the Interest and Principal
Accounts. With such distribution, the Unitholders shall be furnished a final
distribution statement, in substantially the same form as the annual
distribution statement, of the amount distributable. At such time as the
Trustee in its sole discretion shall determine that any amounts held in reserve
are no longer necessary, it shall make distribution thereof to Unitholders in
the same manner.
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Legal Opinion
The legality of the Units offered hereby has been passed upon by Chapman
and Cutler, 111 West Monroe Street, Chicago, Illinois 60603. Special counsel
for the Trusts for respective state matters are named in "Tax Status of
Unitholders" herein. Carter, Ledyard & Milburn, 2 Wall Street, New York, New
York 10005, act as counsel for the Trustee with respect to the Trusts and, in
the absence of a New York Trust from a Series, as special New York tax counsel
for the Trusts.
Auditors
The "Statement of Condition" and the "Schedule of Investments" for each
Trust in a Series and the related "Statement of Operations" and "Statement of
Changes in Condition" and changes in the Trust Units have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report in
Part Two of this Prospectus with information pertaining to the specific Trusts
in the Series to which such report relates, and are set forth in reliance upon
the authority of said firm as experts in giving said report.
Prospectus Part One must be accompanied by Part Two
Sponsor
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, Illinois 60606-1286
Trustee
The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004-2413
800/257-8787
Legal Counsel to Sponsor
Chapman and Cutler
111 West Monroe Street
Chicago, Illinois 60603
Legal Counsel to Trustee
Carter, Ledyard & Milburn
2 Wall Street
New York, New York 10005
Independent Public Accountants for the Trust
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
____________________
Except as to statements made herein furnished by the Trustee, the Trustee
has assumed no responsibility for the accuracy, adequacy and completeness of the
information contained in this Prospectus.
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This Prospectus does not contain all of the information set forth in the
registration statement and exhibits relating thereto, filed with the Securities
and Exchange Commission, Washington, D.C., under the Securities Act of 1933, as
amended, and to which reference is made.
No person is authorized to give any information or to make any
representations not contained in this Prospectus or in supplementary sales
literature prepared by the Sponsor, and any information or representation not
contained herein must not be relied upon as having been authorized by either the
Trusts, the Trustee or the Sponsor. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, securities in any State to
any person to whom it is not lawful to make such offer in such state. The
Trusts are registered as Unit Investment Trusts under the Investment Company Act
of 1940, as amended. Such registration does not imply that the Trusts or any of
their Units have been guaranteed, sponsored, recommended or approved by the
United States or any State or agency or officer thereof.
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NUVEEN TAX-FREE UNIT TRUSTS
Information Supplement
This Information Supplement provides additional information concerning the
structure, operations and risks of a Nuveen Tax-Free Unit Trust not found in the
prospectuses for the Trusts. This Information Supplement is not a prospectus
and does not include all of the information that a prospective investor should
consider before investing in a Trust. This Information Supplement should be
read in conjunction with the prospectus for the Trust in which an investor is
considering investing ("Prospectus"). Copies of the Prospectus can be obtained
by calling or writing the Trustee at the telephone number and address indicated
in Part One of the Prospectus dated November 9, 1998. This Information
Supplement has been created to supplement information contained in the
Prospectus.
This Information Supplement is dated November 9, 1998. Capitalized terms
have been defined in the Prospectus.
TABLE OF CONTENTS
Section Page
Accumulation Plan........................................................ 1
Information about the Sponsor............................................ 3
Description of Ratings................................................... 4
Alabama Risk Factors..................................................... 8
Arizona Risk Factors..................................................... 10
California Risk Factors.................................................. 13
Colorado Risk Factors.................................................... 21
Connecticut Risk Factors................................................. 25
Florida Risk Factors..................................................... 28
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Section Description Page
Georgia Risk Factors..................................................... 33
Maryland Risk Factors.................................................... 36
Massachusetts Risk Factors............................................... 39
Michigan Risk Factors.................................................... 42
Minnesota Risk Factors................................................... 44
Missouri Risk Factors.................................................... 46
New Jersey Risk Factors.................................................. 49
New York Risk Factors.................................................... 53
North Carolina Risk Factors.............................................. 63
Ohio Risk Factors........................................................ 70
Oregon Risk Factors...................................................... 75
Pennsylvania Risk Factors................................................ 77
Tennessee Risk Factors................................................... 81
Texas Risk Factors....................................................... 84
Virginia Risk Factors.................................................... 89
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Accumulation Plan
The Sponsor, John Nuveen & Co. Incorporated, is also the principal
underwriter of the Accumulation Funds listed in the following table. Each of
these funds is an open-end, diversified management investment company into which
Unitholders may choose to reinvest Trust distributions automatically, without
any sales charge. Unitholders may reinvest both interest and principal
distributions or principal distributions only. Each Accumulation Fund has
investment objectives which differ in certain respects from those of the Trusts
and may invest in securities which would not be eligible for deposit in the
Trusts. The investment adviser to each Accumulation Fund is a wholly-owned
subsidiary of the Sponsor. Unitholders should contact their financial adviser
or the Sponsor to determine which of the Accumulation Funds they may reinvest
into, as reinvestment in certain of the Accumulation Funds may be restricted to
residents of a particular state or states. Unitholders may obtain a prospectus
for each Accumulation Fund through their financial adviser or through the
Sponsor at (800) 621-7227. For a more detailed description, Unitholders should
read the prospectus of the Accumulation Fund in which they are interested.
The following is a complete list of the Accumulation Funds currently
available, as of the Date of Deposit of this Prospectus, to Unitholders under
the Accumulation Plan. The list of available Accumulation Funds is subject to
change without the consent of any of the Unitholders.
Accumulation Funds
Mutual Funds
NUVEEN FLAGSHIP MUNICIPAL TRUST
Nuveen Municipal Bond Fund
Nuveen Insured Municipal Bond Fund
Nuveen Flagship All-American Municipal Bond Fund
Nuveen Flagship Limited Term Municipal Bond Fund
Nuveen Flagship Intermediate Municipal Bond Fund
NUVEEN FLAGSHIP MULTISTATE TRUST I
Nuveen Flagship Arizona Municipal Bond Fund
Nuveen Flagship Colorado Municipal Bond Fund
Nuveen Flagship Florida Municipal Bond Fund
Nuveen Flagship Florida Intermediate Municipal Bond Fund
Nuveen Maryland Municipal Bond Fund
Nuveen Flagship New Mexico Municipal Bond Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
Nuveen Flagship Virginia Municipal Bond Fund
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NUVEEN FLAGSHIP MULTISTATE TRUST II
Nuveen California Municipal Bond Fund
Nuveen California Insured Municipal Bond Fund
Nuveen Flagship Connecticut Municipal Bond Fund
Nuveen Massachusetts Municipal Bond Fund
Nuveen Massachusetts Insured Municipal Bond Fund
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
Nuveen Flagship New York Municipal Bond Fund
Nuveen New York Insured Municipal Bond Fund
NUVEEN FLAGSHIP MULTISTATE TRUST III
Nuveen Flagship Alabama Municipal Bond Fund
Nuveen Flagship Georgia Municipal Bond Fund
Nuveen Flagship Louisiana Municipal Bond Fund
Nuveen Flagship North Carolina Municipal Bond Fund
Nuveen Flagship South Carolina Municipal Bond Fund
Nuveen Flagship Tennessee Municipal Bond Fund
NUVEEN FLAGSHIP MULTISTATE TRUST IV
Nuveen Flagship Kansas Municipal Bond Fund
Nuveen Flagship Kentucky Municipal Bond Fund
Nuveen Flagship Kentucky Limited Term Municipal Bond Fund
Nuveen Flagship Michigan Municipal Bond Fund
Nuveen Flagship Missouri Municipal Bond Fund
Nuveen Flagship Ohio Municipal Bond Fund
Nuveen Flagship Wisconsin Municipal Bond Fund
Flagship Utility Income Fund
NUVEEN INVESTMENT TRUST
Nuveen Growth and Income Stock Fund
Nuveen Balanced Stock and Bond Fund
Nuveen Balanced Municipal and Stock Fund
Nuveen European Value Fund
NUVEEN INVESTMENT TRUST II
Nuveen Rittenhouse Growth Fund
Money Market Funds
Nuveen California Tax-Free Money Market Fund
Nuveen Massachusetts Tax-Free Money Market Fund
Nuveen New York Tax-Free Money Market Fund
Nuveen Tax-Free Reserves, Inc.
Nuveen Tax-Exempt Money Market Fund, Inc.
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Each person who purchases Units of a Trust may become a participant in the
Accumulation Plan and elect to have his or her distributions on Units of a Trust
invested directly in shares of one of the Accumulation Funds. Reinvesting
Unitholders may select any interest distribution plan. Thereafter, each
distribution of interest income or principal on the participant's Units
(principal only in the case of a Unitholder who has chosen to reinvest only
principal distributions) will, on the applicable distribution date, or the next
day on which the New York Stock Exchange is normally open ("business day") if
the distribution date is not a business day, automatically be received by the
transfer agent for each of the Accumulation Funds, on behalf of such participant
and applied on that date to purchase shares (or fractions thereof) of the
Accumulation Fund chosen at net asset value as computed as of 4:00 p.m. eastern
time on each such date. All distributions will be reinvested in the
Accumulation Fund chosen and no part thereof will be retained in a separate
account. These purchases will be made without a sales charge.
The Transfer Agent of the Accumulation Fund will mail to each participant
in the Accumulation Plan a quarterly statement containing a record of all
transactions involving purchases of Accumulation Fund shares (or fractions
thereof) with Trust interest distributions or as a result of reinvestment of
Accumulation Fund dividends. Any distribution of principal used to purchase
shares of an Accumulation Fund will be separately confirmed by the Transfer
Agent. Unitholders will also receive distribution statements from the Trustee
detailing the amounts transferred to their Accumulation Fund accounts.
Participants may at any time, by so notifying the Trustee in writing, elect
to change the Accumulation Fund into which their distributions are being
reinvested, to change from principal only reinvestment to reinvestment of both
principal and interest or vice versa, or to terminate their participation in the
Accumulation Plan altogether and receive future distributions on their Units in
cash. There will be no charge or other penalty for such change of election or
termination. The character of Trust distributions for income tax purposes will
remain unchanged even if they are reinvested in an Accumulation Fund.
Information about the Sponsor
Since our founding in 1898, Nuveen has been synonymous with investments
that withstand the test of time. Today, we offer a broad range of investments
designed for mature investors whose portfolio is the principal source of their
ongoing financial security. More than 1.3 million investors have entrusted
Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach--purchasing securities of strong companies and
communities that represent good long-term value--is the cornerstone of Nuveen's
investment philosophy. It
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is a careful, long-term strategy that offers the potential for attractive
returns with moderated risk. Successful value investing begins with in-depth
research and a discerning eye for marketplace opportunity. Nuveen's team of
investment professionals is backed by the discipline, resources and expertise of
a century of investment experience, including one of the most recognized
research departments in the industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of taxable and tax-free investment
products--including equity and fixed-income mutual funds, unit trusts, exchange-
traded funds, customized asset management services and cash management products.
Nuveen is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by the St. Paul Companies, Inc. ("St. Paul"). St. Paul
is located in St. Paul, Minnesota and is principally engaged in providing
property-liability insurance through subsidiaries. Nuveen is a member of the
National Association of Securities Dealers, Inc. and the Securities Industry
Association and has its principal office located in Chicago (333 West Wacker
Drive). Nuveen maintains 8 regional offices.
To help advisers and investors better understand and more efficiently use
an investment in the Trusts to reach their investment goals, the Sponsor may
advertise and create specific investment programs and systems. For example,
such activities may include presenting information on how to use an investment
in the Trusts, alone or in combination with an investment in other mutual funds
or unit investment trusts sponsored by Nuveen, to accumulate assets for future
education needs or periodic payments such as insurance premiums. The Sponsor
may produce software or additional sales literature to promote the advantages of
using the Trusts to meet these and other specific investor needs.
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Description of Ratings/1/
Standard & Poor's Corporation. A description of the applicable Standard &
Poor's Corporation rating symbols and their meanings follows:
A Standard & Poor's rating is a current assessment of the creditworthiness
of an obligor with respect to a specific debt obligation. This assessment may
take into consideration obligors such as guarantors, insurers or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
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. Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.
__________________________
/1/ As published by the rating companies
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Plus (+) or Minus (): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the project, makes
no comment on the likelihood of, or the risk of default upon failure of, such
completion. Accordingly, the investor should exercise his own judgment with
respect to such likelihood and risk.
Note Ratings: A Standard & Poor's note rating reflects the liquidity
concerns and market access risks unique to notes. Notes due in 3 years or less
will likely receive a note rating. Notes maturing beyond 3 years will most
likely receive a long-term debt rating.
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follows:
Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Their safety is so
absolute that, with the occasional exception of oversupply in a few specific
instances, characteristically, their market value is affected solely by money
market fluctuations.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. Their market value is virtually immune to all but money market
influences, with the occasional exception of oversupply in a few specific
instances.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest
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are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future. The market value of A-rated
bonds may be influenced to some degree by economic performance during a
sustained period of depressed business conditions, but, during periods of
normalcy, A-rated bonds frequently move in parallel with Aaa and Aa obligations,
with the occasional exception of oversupply in a few specific instances.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at the high
end of its category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. The market value of Baa-rated
bonds is more sensitive to changes in economic circumstances, and aside from
occasional speculative factors applying to some bonds of this class, Baa market
valuations move in parallel with Aaa, Aa and A obligations during periods of
economic normalcy, except in instances of oversupply.
Con. (--)--Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note Ratings:
MIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P) A brief
description of the applicable Fitch IBCA, Inc. rating symbols and their meanings
follow:
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
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AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Note Ratings:
FIN-1 Notes assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
FIN-2 Notes assigned this rating reflect a degree of assurance for
timely payment only slightly less in degree than the highest category.
Alabama Risk Factors
Alabama Economy. Alabama's economy has experienced a major trend toward
industrialization over the past two decades. By 1990, manufacturing accounted
for 26.7% of Alabama's Real Gross State Product (the total value of goods and
services produced in Alabama). During the 1960s and 1970s, the State's
industrial base became more diversified and balanced, moving away from primary
metals into pulp and paper, lumber, furniture, electrical machinery,
transportation equipment, textiles (including apparel), chemicals, rubber and
plastics. Since the early 1980s, modernization of existing facilities and an
increase in direct foreign investments in the State has made the manufacturing
sector more competitive in domestic and international markets.
Among several leading manufacturing industries have been pulp and papers
and chemicals. In recent years, Alabama has ranked as the fifth largest
producer of timber in the nation. The State's growing chemical industry has
been the natural complement of production of
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wood pulp and paper. Mining, oil and gas production and service industries are
also important to Alabama's economy. Coal mining is by far the most important
mining activity.
From 1996-97, total farm and forestry receipts were over $4.2 billion.
Cash receipts from farm commodities totaled $3.18 billion in 1996, an increase
from $2.87 billion in 1995. The top five commodities for cash receipts were (1)
poultry, (2) cattle and calves, (3) cotton, (4) nursery, sod, and greenhouse
products, and (5) peanuts. Combined, they accounted for approximately 85% of
the total receipts. Poultry made up almost 60% of the total cash receipts.
Principal crops in Alabama during 1996-97 were cotton, corn, soybeans,
peanuts, and wheat. Alabama ranked third in broiler production, third in
peanuts, and 9th in cotton production.
Employment. Preliminary data show total nonagricultural employment as of
March 1998 was 1.877 million (not seasonally adjusted). This is an increase of
22,900 from March 1997. The preliminary unemployment rate (seasonally adjusted)
as of March 1998 was 4.2%, lower than its 5.1% rate in March 1997. The national
unemployment rate (seasonally adjusted) was 4.7% and 5.2% in March of 1998 and
March 1997, respectively.
From 1993 to 1996, Alabama created approximately 150,000 nonagricultural
jobs. This translates to 37,460 net new jobs a year, for an average annual
growth rate of 2.1%. By comparison, employment at the national level for the
same period increased by 1.5% annually. Beginning in 1996, however, Alabama's
employment growth dropped well below the average for the period. That slower
growth continued in 1997 when the state's employment increased by only 1.1%,
adding 20,700 new jobs, while employment in the U.S. rose over 2.0%. There are
two primary reasons for 1997's slow job creation.
First, job losses offset job gains. That is, more than 13,000 apparel jobs
lost during 1995-1997 offset the jobs gained in other sectors. In 1997 alone,
durable goods industries in Alabama created over 1,300 new jobs, but nondurable
goods industries, primarily apparel, lost about 3,300 jobs. Apparel jobs in
Alabama continue to be at risk. The recent events that weakened some Asian
currencies argue that clothing can be constructed more economically overseas
then in Alabama.
Second, the state's already low unemployment rate and slow growth in its
civilian labor force make it difficult for firms to find people with the skills
needed to fill jobs. Alabama has a low natural population growth rate and low
immigration rate. The labor shortages are not going away soon. Alabama's
average unemployment rate in 1997 was 5.1% compared to the national average of
4.9% (both seasonally adjusted).
Given the above constraints, Alabama is expected to add about 17,100 net
new nonagricultural jobs in 1998. These jobs will occur primarily in the
services, trade, and construction sectors. While durable goods-producing
industries should add about 800 net new
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jobs, nondurable goods industries are expected to lose about 3,100 jobs,
resulting in a net decline in manufacturing employment.
Alabama's service sector should add about 8,400 new jobs in 1998, primarily
in business and health services. The Boeing plant in Morgan County, together
with other industrial and commercial construction projects in the state's
metropolitan areas, will create about 4,000 new jobs in 1998. Employment in
wholesale and retail trade will increase by 5,700 in 1998, slightly below the
6,550 new jobs added in 1997.
Income growth in Alabama has not kept pace with that of the United States,
with Alabama raking low among all states on income growth. After increasing
about 5.2% in 1997, total personal income in Alabama is estimated to increase by
4.7% in 1998. Taking inflation into account, the real rate of growth will be
just 1.9%.
Transportation. Alabama contains one of the largest networks of inland
river systems in the nation. Across the northern section of the State, through
the heartland and down to the Gulf of Mexico flow the waters of four major
rivers offering barge transportation to industries and businesses that depend on
the movement of large, heavy or bulky cargoes.
The Port of Mobile is one of the nation's busiest ports in tons of cargo
handled. During the fiscal year ending September 30, 1991, the Port of Mobile
handled approximately 35,031,521 tons of cargo. It has been the largest port of
entry in the United States for bauxite, a basic ingredient in aluminum. Other
important imports handled at the Port of Mobile are manganese, iron ore, chrome
ore, newsprint, wire and nails. In addition to coal, the State's most important
export, the other significant exports passing through the Port of Mobile are
soybeans, corn, flour, wheat, rice, lumber, scrap iron, paper and paper
products, creosoted timbers, dry milk, iron, steel and iron and steel products.
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.
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.
Most income and sales tax revenues in Alabama are "earmarked" for the
Education Trust Fund. The Education Trust Fund in fiscal year 1996-97 increased
by 5.4% and net receipts totaled $3,527.0 million. Expenditures and
encumbrances in the Education Trust Fund were
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$3,550.7 million. The balance in the Education Trust Fund at the end of fiscal
year 1996-97 was $898,229.
Estimated net receipts in the Education Trust Fund for fiscal years 1997-98
and 1998-99 are $3,683 million and $3,840 million, respectively. Estimated
expenditures and encumbrances are $3,683.9 million for fiscal year 1997-98 and
$3,840 million for fiscal year 1998-99. Projections for fiscal year 1997-98 and
1998-99 show a zero ending balance in the Education Trust Fund.
The State's General Fund grew 1.8% for fiscal year 1996-97 with General
Fund receipts at $913.39 million. Expenditures and encumbrances in the General
Fund were $924.51 million. The balance in the General Fund at the end of fiscal
year 1996-97 was $22.28 million.
Estimated receipts in the General Fund for fiscal years 1997-98 and 1998-99
are $952.5 million and $961.95 million, respectively, with expenditures and
encumbrances estimated at $974.63 million and $962.1 million, respectively. The
balance at the end of fiscal year 1997-98 is projected at $152,176 and for
fiscal year 1998-99, there is a $0 ending balance.
Total annual payments for the State's general obligation bonds for the
period 1997-2010 are $531,253,717.50. Total annual payments for revenue
obligation bonds for the period 1997-2026 are $1,233,361,150.30. Total bonded
indebtedness during 1997-2026 amounts to $1,764,614,867.80.
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 1998. 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, although this compares favorably with the national
figure of 2.0%. Arizona's wage and salary employment grew 5.6% in 1996, 4.5% in
1997 and is forecast to increase by 3.5% to 4.5% in 1998, and 3.5% in 1999. The
unemployment rate, around 4.5% for 1997, should remain low before increasing in
late 1998 and 1999.
Arizona ranked third in the nation in personal income growth during 1991-
96. Personal income, after growing 7.2% in 1997, is estimated at 6.7% in 1998
and 6.5% 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.
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Population, because of continued employment growth, will record above-
average growth rates. After population growth of 3.2% in 1996 and 3% in 1997,
the forecast calls for 2.8% in 1998 and 2.5% in 1999. That translates into
almost 130,000 more people in the state in 1998 and 117,000 in 1999.
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).
In 1997, combined MBU and OBU in the General Fund totaled $4.68 billion, and is
estimated at $5.1 billion in 1998.
Revenues and Expenditures. The General Fund closed fiscal year 1997 with a
$515.9 million ending balance, setting a new record for the state, and the
Executive plan for fiscal year 1998 anticipates a $497.1 million balance.
Overall, fiscal year 1997 revenues totaled $5,028.2 million. Corporate income
tax revenue jumped by 34%, from $448 million in fiscal year 1996 to $600 million
in fiscal year 1997. Individual income tax revenues grew by 12% from fiscal
year 1996 to fiscal year 1997. Expenditures for fiscal year 1997 totaled
$4,826.5 million. Revertments totaled $80.17 million in fiscal year 1997.
The current Executive forecast for fiscal year 1998 revenue is $5.289
billion. The major revenue source, transaction privilege taxes, is forecast to
produce $2.3 billion for fiscal year 1998. All three major revenue categories -
individual income taxes, corporate income taxes and transaction privilege taxes
- - showed gains on a year-over-year basis. The most significant impact on fiscal
year 1998 revenues will be the various tax cutting measures enacted over the
past several years, which has decreased revenues by some 3.2%. Overall, the
Executive estimates a 3.7% or $196.9 million increase in base revenues of the
current Fiscal year 1998 estimate. This compares to the 4.5%, or $227.5 million
increase in base revenues between fiscal year 1997 and fiscal year 1998.
The Executive fiscal plan for Fiscal Year 1998 is based on revenue
estimates, yet still provides for Executive-initiated program changes and school
finance of $127.7 million; a $210 million tax reduction and a $96.0 million
capital program. The Executive projects a fiscal year 1998 ending balance of
$497.1 million.
For Fiscal year 1999, the Executive is recommending a base operating budget
of $5.4 billion, an increase of approximately $260.6 million. The majority of
recommended expenditures for fiscal year 1999 are in education. A projected
ending balance of $19.9 million
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is expected for Fiscal Year 1999. This amount would ordinarily be considered
"thin" at only 0.4% of expenditures. However, given the prudent revenue forecast
and the available reserves of $393 million in the Budget Stabilization Fund, $95
million in the Medical Services Stabilization Fund, and $42.4 million in the
Temporary Assistance Stabilization Fund, the $19.9 million amount seems
appropriate.
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.
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
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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. Federal Department of Defense civilian
employment in California is down more than 60,000 from the late 1980s peak and
is still falling.
Yet, in 1997, California's economy outperformed the national economy due to
strong growth in high-technology manufacturing and services. Employment growth
was 3.1% in 1997, adding approximately 400,000 new jobs. Since 1995,
California's rate of job growth has been roughly one and one-half times the
national average rate of increase. Among industries, business services is the
leading job producer adding close to 70,000 jobs in 1997. One-third of that
increase was concentrated in computer software. Construction was California's
second leading source of new jobs in 1997, adding nearly 50,000 jobs, driven by
a 28% increase in nonresidential building activity. California's large labor
force, at 15,873,000 in 1997, had an unemployment rate of 6.3% in 1997. In
comparison, the 1997 unemployment rate for the United States was 4.9%.
Personal income grew by 7.2% in 1997. Personal income exceeded the
national rate of increase by a considerable margin. Wage and salary increased
by 7.7%; proprietors' growth was 7.9%; and an increase in property income
(dividends, interest, and rent) was over 9.3%. In contrast, transfer payments
(including unemployment insurance, welfare, Social Security, and Medicare) were
up only 2% in 1997, the smallest gain in more than 60 years.
California is the nation's leading export state, with shipments of
California-made goods to other countries exceeding $100 billion in 1996.
California exports 15 to 16% of its trillion dollar domestic product to other
countries, compared to less than 11% for the U.S. as a whole. Events in Asia
could have implications for California. Over half of California-made goods
exports are sold to Asia, and the state has already seen declines in cargoes
destined for Japan, South Korea, Singapore and Malaysia. At the same time,
strong growth continues in exports to Taiwan, Hong Kong, and Mexico. Overall,
exports of California-made goods slowed to 2% growth in the first half of 1997,
from over 8% the year before. Strong export growth was a major element during
the initial stages of the state's recovery in 1994 and 1995. The upturn has
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broadened sufficiently over the last two years, to the point that California is
now posting solid gains in employment and income despite the slowing of exports.
For 1998, California's economy should continue to see robust growth.
Nonfarm employment is expected to increase 2.8% or 365,000 jobs. Unemployment
is expected to drop to 5.6% in 1998. Personal income is projected to drop
slightly to a 6.3% increase in 1998.
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,"
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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
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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 $14.9 billion aggregate principal amount of
non-self liquidating general obligation bonds outstanding, and $6.4 billion
authorized and unissued, as of December 31, 1997. Outstanding lease revenue
bonds totaled $7.2 billion as of December 31, 1997, and are estimated to total
$7.5 billion as of June 30, 1998.
From July 1, 1996 to July 1, 1997, the State issued approximately $1.03
billion in non-self liquidating general obligation bonds and $1.26 billion in
revenue bonds. Refunding bonds, which are used to refinance existing long-term
debt, accounted for none of the general obligation bonds and $841.38 million of
the revenue bonds.
General Fund general obligation debt service expenditures for fiscal year
1996-97 were $1.92 billion, and are estimated at $1.89 billion for fiscal year
1997-98.
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 November
30, 1997, the General Fund had outstanding internal loans from Special Funds of
$2.8 billion (in addition, there are $3 billion of external loans represented by
the 1997 Revenue Anticipation Notes, which mature on June 30, 1998). The
revised projected 1997-98 fiscal year balance in the General Fund Reserve for
Economic Uncertainties is $329 million. Special Fund revenues are estimated at
$14.2 billion for the 1997-98 fiscal year and appropriated Special Fund
expenditures at $14.4 billion.
The Budget. California's solid economic performance during 1997 led to
healthy revenue growth. General Fund collections grew by over 6% in fiscal year
1996-97 to reach $49.2 billion, an increase of $2.9 billion from the prior year.
Revenue for the 1997-98 and 1998-99 fiscal years is expected to reach $52.9
billion and $55.4 billion, respectively. This represents annual growth of $3.7
billion (7.5%) for 1997-98 and $2.5 billion (4.7%) for 1998-99.
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 1997 was
$23,273 million and is expected to increase 11.6% for 1997-98 and 6.4% for
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1998-99. The enactment of the Federal Taxpayer Relief Act of 1997 is expected to
result in changes in taxpayer behavior that will generate additional state
revenue (from increased capital gains realizations), adding $480 million to
personal income tax receipts in 1997-98 and $560 million in 1998-99.
Expenditures for the 1996-97 fiscal year were $49.1 billion, an 8%
increase. Expenditures for the 1997-98 fiscal year are estimated at $53.0
billion. As of June 30, 1997, the General Fund balance was $906 million. The
estimate for June 30, 1998 is $773.8 million.
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
"A+" by Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.). 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, 1997, amounted to $28.3 billion, with an average
effective yield of 5.6%. For the year ended June 30, 1996, the average daily
investment was $26.6 billion and the average effective yield was 5.71%. Total
earnings of the PMIA for fiscal year 1996-97 amounted to $1.6 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
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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 fro 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.
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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
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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
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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
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 will be
$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,
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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") which, in general, became effective December 31, 1992, and
which could restrict the ability of the State and local governments to increase
revenues and impose taxes. The Amendment applies to the State and all local
governments, including home rule entities ("Districts"). Enterprises, defined
as government-owned businesses authorized to issue revenue bonds and receiving
under 10% of annual revenue in grants from all Colorado state and local
governments combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield
no more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to the
Amendment, local government spending is to be limited by the same formula as the
limitation for property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in state population in the
prior calendar year. The 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
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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 will be placed on the
November 1998 ballot to deal with the excess revenue in fiscal year 1998. The
measure proposes 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%
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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.
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.
State Economy. 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.
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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
The following information is only a summary of risk factors associated with
Connecticut. It has been compiled from official government statements and other
publicly available documents. Although the Sponsor has not independently
verified the information, it has no reason to believe that it is not correct in
all material respects.
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to as the "State"). The manufacturing industry
is diversified, with transportation equipment (primarily aircraft engines,
helicopters and submarines) the dominant industry, followed by non-electrical
machinery, fabricated metal products and electrical machinery. As a result of a
rise in employment in service-related industries and a decline in manufacturing
employment, however, manufacturing accounted for only 17.39% of total non-
agricultural employment in Connecticut in 1996. Defense-related business
represents a relatively high proportion of the manufacturing sector. On a per
capita basis, defense awards to Connecticut have traditionally been among the
highest in the nation, and reductions in defense spending have had a substantial
adverse impact on Connecticut's economy.
The average annual unemployment rate in Connecticut increased from a low of
3.0% in 1988 to 7.6% in 1992 and, after a number of important changes in the
method of calculation, was reported to be 5.8% in 1996. Average per capita
personal income of Connecticut residents increased in every year from 1987 to
1996, rising from $21,592 to $33,875. However, pockets of significant
unemployment and poverty exist in several Connecticut cities and towns.
At the end of the 1990-1991 fiscal year, the General Fund had an
accumulated unappropriated deficit of $965,712,000. For the six fiscal years
ended June 30, 1997, the General Fund ran operating surpluses, based on the
State's budgetary method of accounting, of approximately $110,200,000,
$113,500,000, $19,700,000, $80,500,000, $250,000,000 and $262,600,000,
respectively. General Fund budgets for the biennium ending June 30, 1999, were
adopted in 1997. General Fund expenditures and revenues are budgeted to be
approximately $9,550,000,000 and $9,700,000,000 for the 1997-1998 and 1998 1999
fiscal years, respectively, an increase of more than 35% from the budgeted
expenditures of approximately $7,008,000,000 for the 1991-1992 fiscal year.
During 1991, the State issued a total of $965,710,000 Economic Recovery
Notes. The notes were to be payable no later than June 30, 1996, but as part of
the budget adopted for the biennium ending June 30, 1997, payment of the notes
scheduled to be paid during the 1995-1996 fiscal year was rescheduled to be made
over the four fiscal years ending June 30, 1999. The outstanding notes were
$157,055,000 as of December 1, 1997.
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The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of December 1, 1997, the State had authorized direct
general obligation bond indebtedness totaling $11,460,239,000, of which
$10,159,950,000 had been approved for issuance by the State Bond Commission and
$9,181,272,000 had been issued. As of December 1, 1997, State direct general
obligation indebtedness outstanding was $6,475,986,251.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University is authorized to issue bonds totaling $962,000,000
to finance the improvements. The University's bonds will be secured by a State
debt service commitment, the aggregate amount of which is limited to $382
million for the four fiscal years ending June 30, 1999, and $580 million for
bonds issued in the six fiscal years ending June 30, 2005.
In addition, the State has limited or contingent liability on a significant
amount of other bonds. Such bonds have been issued by the following quasi-
public agencies: the Connecticut Housing Finance Authority, the Connecticut
Development Authority, the Connecticut Higher Education Supplemental Loan
Authority, the Connecticut Resources Recovery Authority and the Connecticut
Health and Educational Facilities Authority. Such bonds have also been issued
by the cities of Bridgeport and West Haven and the Southeastern Connecticut
Water Authority. As of March 3, 1998, the amount of bonds outstanding on which
the State has limited or contingent liability totaled $4,000,900,000.
In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport). The
total cost of the program through June 30, 2002, is currently estimated to be
$12.3 billion, to be met from federal, state, and local funds. The State
expects to finance most of its $5.1 billion share of such cost by issuing $4.6
billion of special tax obligation ("STO") bonds. The STO bonds are payable
solely from specified motor fuel taxes, motor vehicle receipts, and license,
permit and fee revenues pledged therefor and credited to the Special
Transportation Fund, which was established to budget and account for such
revenues.
As of December 1, 1997, the General Assembly had authorized $4,302,700,000
of such STO bonds, of which $3,894,700,000 of new money borrowings had been
issued. It is anticipated that additional STO bonds will be authorized annually
in amounts necessary to finance and to complete the infrastructure program.
Such additional bonds may have equal rank with the outstanding bonds provided
certain pledged revenue coverage requirements are met. The State expects to
continue to offer bonds for this program.
The State's general obligation bonds are rated AA- by Standard & Poor's and
Aa3 by Moody's. On March 17, 1995, Fitch reduced its ratings of the State's
general obligation bonds from AA+ to AA.
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The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) a class action by the Connecticut Criminal Defense Lawyers
Association claiming a campaign of illegal surveillance activity and seeking
damages and injunctive relief; (ii) an action on behalf of all persons with
traumatic brain injury, who have been placed in certain State hospitals,
claiming that their constitutional rights are violated by placement in State
hospitals alleged not to provide adequate treatment and training, and seeking
placement in community residential settings with appropriate support services;
(iii) litigation involving claims by Indian tribes to a portion of the State's
land area; and (iv) an action in the name of several public school students and
the Connecticut municipalities in which the students reside, seeking a
declaratory judgment that the State's current system of financing public
education violates the Connecticut Constitution.
As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The fiscal impact of this decision
might be significant but is not determinable at this time.
General obligation bonds issued by municipalities are payable primarily
from ad valorem taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of these
is the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991.
The State opposed the petition. The United States Bankruptcy Court for the
District of Connecticut held that Bridgeport has authority to file such a
petition but that its petition should be dismissed on the grounds that
Bridgeport was not insolvent when the petition was filed. State legislation
enacted in 1993 prohibits municipal bankruptcy filings without the prior written
consent of the Governor.
In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities finance projects by issuing
bonds that are not considered to be debts of the municipality. Such bonds may
be repaid only from revenues of the financed project, the revenues from which
may be insufficient to service the related debt obligations.
Regional economic difficulties, reductions in revenues and increases in
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. Difficulties in payment of debt service
on borrowings could result in declines, possibly severe, in the value of their
outstanding obligations, increases in their future borrowing costs, and
impairment of their ability to pay debt service on their obligations.
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Florida Risk Factors
Population. Historically, population growth has been a crucial driving
force for Florida's economy. It has accounted for the State's tendency to
outperform the U.S. economy in terms of job creation and total income growth.
Between 1980 and 1990, Florida added almost 3.2 million persons, more than any
other state except California. The State's population has accelerated since the
fiscal year 1990-91 recession, sparked by improving economies. From 1996-97,
Florida ranked fourth among the fifty states with an estimated population of
14.63 million. By 1999, Florida's population is expected to average 15.18
million. Florida's attraction, as both a growth and retirement state, has kept
net migration fairly steady. Net migration reached a peak of 229,000 in FY
1993-94. It remained close to this peak in FY 1994-95 and FY 1995-96. In FY
1996-97, net migration is estimated to have reached a new peak of 253,000. In
FY 1997-98, it is expected to decline to 242,000. Yet, Florida continues to be
the fastest growing of the eleven largest states. In addition to attracting
senior citizens to Florida as a place for retirement, the State is also
recognized as attracting a significant number of working age individuals. Since
1985, the prime working age population (18-44) has grown at an average annual
rate of 2.2%. The share of Florida's total working age population (18-59) to
total State population is approximately 54%. This share is not expected to
change appreciably into the twenty-first century.
Income. The State's personal income has been growing strongly the last
several years and has generally outperformed both the United States 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 due to the
fact that Florida's population has been growing at a very strong pace and, since
the early 1970s, the State's economy has diversified so as to provide a broader
economic base. As a result, Florida's real per capita personal income has
tracked closely with the national average and has tracked above the southeast.
Florida's personal income growth is expected to exceed that for the United
States in both FY 1997-98 and 1998-99. Real personal income will increase 3.6%
in FY 1998-99, slower than the 5.1% increase expected for FY 1997-98, and only a
little faster than the 3.2% increase of FY 1996-97. Florida had a per capita
personal income of $24,226 in 1996 and the United States had $24,426. Real per
capita income will slow to a 1.8% growth rate in FY 1998-99 from 3.1% in FY
1997-98.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest and rent) and transfer payments (Social
Security and pension benefits, among other sources of income) are relatively
more important sources of income. For example, Florida's total wages and
salaries and other labor income in 1996-97 was 54.2% of total personal income,
while a similar figure for the nation was 62.4%. Property income accounted for
25.6% of total personal income in Florida in 1996-97 and transfer payments made
up 18.7%. Property income and transfer payments for the U.S. were 18.1% and
16.4%, respectively. Transfer payments are typically less sensitive to the
business cycle than employment income and, therefore, act as stabilizing forces
in weak economic periods.
Employment. Historically, Florida's economy has outperformed the nation's,
a relationship that is expected to continue. Florida has typically created jobs
50% faster than the national rate. Contributing to the State's rapid rate of
growth in employment and income is
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international trade. Changes to its economy have also contributed to the State's
strong performance. The State is now less dependent on employment from
construction, construction related manufacturing, and resource based
manufacturing, which have declined as a proportion of total State employment. In
recent years, the State's service sector employment has accounted for
approximately 85% of total non-farm employment. While the southeast and the
nation have a greater proportion of manufacturing jobs, which tend to pay higher
wages, service jobs tend to be less sensitive to swings in the business cycle.
The State has a concentration of manufacturing jobs in high-tech and high value-
added sectors, such as electrical and electronic equipment, as well as printing
and publishing. Manufacturing employment is forecast to decline slightly in FY
1997-98 and FY 1998-99.
As the State's economic growth has slowed from its previous highs, its
unemployment rate has tracked above the national average. More recently,
Florida's unemployment rate has been below the national average. The State's
unemployment rate was 4.8% in November 1996 and 4.6% in November 1997. The
national unemployment rate was 5.4% in 1996 and 4.6% as of November 1997.
The State's economy is expected to decelerate along with the nation, but is
expected to outperform the nation as a whole. Florida ranked third nationally
and created more than 217,000 new jobs prior to the end of 1997. Total non-farm
employment in Florida is expected to increase 3.9% in 1997-98 and 2.6% in 1998-
99. In comparison, the U.S. growth rate peaked in the first quarter of 1997 at
an annual rate of 3.2% but has slowly declined and is estimated to average 1.3%
by FY 1998-99.
The strongest areas in job growth in Florida in fiscal year 1997-98 and
1998-99 are expected to be in services and a combination of retail and wholesale
trade. Services are forecast to lead the economy, growing 4.7% (105,400 jobs)
in fiscal year 1997-98, and accounting for about 50% of total new jobs in that
year. Services are the single largest source of employment in Florida, making
up about a third of the total in fiscal year 1997-98.
Wholesale and retail trade is projected to increase 3.6% in fiscal year
1997-98 (59,700 new jobs), which parallels general economic growth. This sector
is the second largest, with about 25% of all jobs in the state, and is
anticipated to increase 2.3% (39,100 jobs) in fiscal year 1998-99. Construction
job growth is expected to decline from 12% (42,000 jobs) in FY 1997-98 to 1.5%
(5,600 jobs) in FY 1998-99 because of a slowing economy. Manufacturing will
continue to struggle with the effects of international competition.
Tourism. Tourism is one of Florida's most important industries.
Approximately 41.8 million tourists visited the State in 1995. In terms of
business activities and State tax revenues, tourists in Florida effectively
represented additional residents, spending their dollars predominantly at eating
and drinking establishments, hotels and motels, and amusement and recreation
parks. The State's tourist industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. By the end of fiscal year 1997-98, 43.8 million domestic and
international tourists are expected to have visited the State.
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In 1998-99, tourist arrival should reach a high of 45.6 million, representing
4.1% growth from 1997-98.
Revenues and Expenses. Estimated fiscal year 1997-98 General Revenue plus
Working Capital and Budget Stabilization funds available to the State total
$18,150.9 million. Of the total General Revenue plus Working Capital and Budget
Stabilization funds available to the State, $16,598.5 million of that is
Estimated Revenues. With effective General Revenues plus Working Capital Fund
appropriations at $17,201.7 million, unencumbered reserves at the end of 1997-98
are estimated at $949.2 million with $263.2 million of this amount from the
Working Capital Fund. Estimated fiscal year 1998-99 General Revenue plus
Working Capital and Budget Stabilization funds available total $18,546.1
million, a 2.2% increase over 1997-98. The $17,405.5 million in Estimated
Revenues represents an increase of 4.9% over the previous year's Estimated
Revenues. Total estimated appropriations in the combined General Revenue and
Working Capital Fund for 1998-99 are $17,672.4 million, a 5.7% increase from
1997-98.
In fiscal year 1998-99, approximately 71% of the State's $17,672.4 million
General revenue will come from sales tax collections. Corporate income tax,
intangible personal property tax and beverage tax will account for 8%, 4% and
3%, respectively, of total General Revenue Funds available during fiscal 1998-
99. In that same year, expenditures for education, human services and criminal
justice and corrections will amount to approximately 53%, 24% and 16%,
respectively, of total expenditures from the General Revenue Fund.
The State's sales and use tax (6%) currently accounts for the State's
single largest source of tax receipts. Slightly less than 10% of the State's
sales and use tax is designated for local governments and is distributed to the
respective counties in which collected for use by the counties, and the
municipalities therein. In addition to this distribution, local governments may
assess (by referendum) a 0.5% or a 1.0% discretionary sales surtax within their
county. Proceeds from this local option sales tax are earmarked for funding
local infrastructure programs and acquiring land for public recreation or
conservation or protection of natural resources as provided under applicable
Florida law. Certain charter counties have other additional taxing powers, and
non-consolidated counties with a population in excess of 800,000 may levy a
local option sales tax to fund indigent health care. It alone cannot exceed
0.5% and when combined with the infrastructure surtax, cannot exceed 1.0%. For
the fiscal year ending June 30, 1999, sales and use tax receipts (exclusive of
the tax on gasoline and special fuels) are expected to total $12.5 billion, an
increase of 6.5% over fiscal year 1997-98.
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's second largest funding source for the General Revenue Fund is
the corporate income tax. All receipts of the corporate income tax are credited
to the General Revenue Fund. For the fiscal year ending June 30, 1999, receipts
from this source are estimated to be $1.4 billion, an increase of 1.5% from
fiscal year 1997-98.
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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 estimated at $463.9 million in fiscal year ending June 30, 1999.
Alcoholic beverage tax receipts are expected to increase 1.7% from the previous
year's total. This tax generates 3% of the State's total General Revenue and
the revenues collected from this tax are deposited into the State's General
Revenue Fund.
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 are expected to total $935 million during fiscal year
1998-99, a 3.8% increase from the previous fiscal year. Of this amount, $347.7
million is to be deposited to the General Revenue Fund.
The State imposes a gross receipts tax on electric, natural and
manufactured 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 1998-99, this tax is estimated at
$642.9 million, an increase of 5% over the current 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. The State also imposes a
non recurring 2 mil tax on mortgages and other obligations secured by liens on
Florida real property. The intangible personal property tax provides 4% of the
revenues for the General revenue Fund as well as funding the county revenue
sharing program. In fiscal year 1998-99, total intangible personal property tax
collections are estimated at $1.1 billion, a 2.3% decrease from the prior year
in which growth was 15.1%. Of the tax proceeds, $678.4 million will be
distributed to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50.0% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0%, for costs of administering the
lottery. Fiscal year 1994-95 lottery ticket sales totaled $2.3 billion,
providing education with approximately $874 million. In fiscal year 1998-99,
sales are estimated at $2,052 million with $785 million available for education
enhancements.
Debt-Balanced Budget Requirement. As of June 30, 1996, the State's net
outstanding debt totaled $9.0 billion. Approximately 67% is full faith and
credit bonds while the remaining 33% is comprised of revenue bonds pledging a
specific tax or revenue. The Governor's Recommended Budget for fiscal year
1997-98 includes six bond issues totaling $1.38 billion for construction of
schools, roads, bridges, and prisons, and the purchase of environmentally
sensitive lands.
The State Constitution and statutes mandate that the State budget, as a
whole, and each separate fund within the State budget, be kept in balance from
currently available revenues each fiscal year. If the Governor or Comptroller
believe a deficit will occur in any State fund, by
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statute, he must certify his opinion to the Administrative Commission, which
then is authorized to reduce all State agency budgets and releases by a
sufficient amount to prevent a deficit in any fund. Additionally, the State
Constitution prohibits issuance of State obligations to fund State operations.
Litigation. Currently under litigation are several issues relating to
State actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that any of such
matters, individually or in the aggregate, will not have a material adverse
affect on the State's financial position.
The State of Florida and the tobacco industry settled a lawsuit on August
25, 1997, in which the state sought to recover the costs associated with tobacco
usage by Florida residents. The settlement provided for $750 million in
payments to the state on or before September 15, 1997, then annual payments
beginning September 15, 1998, that will accumulate to about $10.5 billion over
25 years. The estimated payment for FY 1998-99 is $220 million.
Ratings. The State maintains a bond rating of Aa2, AA+ and AA from Moody's
Investors Service, Standard & Poor's and Fitch, respectively, on the all of its
general obligation bonds. 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 Bonds 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, it has no reason to believe that the
information is not correct in all material respects.
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 1990's has been steady and is better than regional trends. The nation's
economy expanded by 3.4% in 1997, while Georgia's economy increased by 3.6%,
slightly above the predicted gain of 3.3% but below its 4.4% growth in 1996.
The 1998 forecast anticipates that Georgia's real Gross State Product
(inflation adjusted) will increase by 3.1%, significantly less than in 1997, but
higher than the expected rate of growth in the national Gross Domestic Product
(2.3%). While this recovery does not meet the explosive
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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 inflation-adjusted personal income is expected to expand by
3.5%, compared with the 1997 increase of 4.1%. Higher employment will be the
most important factor in 1998 income gains, but a tight labor market will ensure
that wage and salary increases also will contribute 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 rose by 4.2% in 1996, double the U.S. gain,
mainly due to activity related to Olympic preparations. Employment dipped
slightly in the six months after the Olympic games but has continued its upward
trend through the beginning of 1998. In 1997, the State's nonagricultural
employment expanded by 1.9%, compared with the 3.7% gain in 1996. In contrast,
the national rate of employment growth in 1996 and 1997 were 2% and 2.2%
respectively. During 1997, the State's total employment averaged 3.620 million,
up from 3.537 million in 1996. Preliminary figures for March 1998 indicate that
employment reached 3.704 million and growth is expected to reflect a 2.1% gain,
or 76,300 new jobs for the year.
Although prospects are best for services, the 1998 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 1996 and 1997 annual average unemployment rates (not seasonally
adjusted) for Georgia were 4.6% and 4.5%, respectively, as compared to the
national unemployment rates of 5.4% and 4.7%, respectively. Georgia's
unemployment rate has decreased every year since 1992 and has averaged 4.0%
during the first three months of 1998.
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 (adjusted for price changes) climbed by 4.5% to $24,061 in 1997, compared
to the 5.0% increase in 1996. Among the states, Georgia currently ranks twenty-
fifth in the nation in per capita personal income and third among the twelve
states of the Southeast region. The national average increase in per capita
personal income was 4.8% during 1997, up from 4.6% in 1996.
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
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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 15.6%
since 1990, more than twice the rate of the nation as a whole. The Census Bureau
estimates that in July 1997 Georgia's population reached 7.49 million and will
exceed 7.7 million by the end of 1998, a gain of 144,000 over the previous year.
Revenues and Expenditures. Excluding net proceeds from the Georgia Lottery
and revenues from the Indigent Care Trust Fund, net collections received by the
Georgia Department of Revenue grew by 5.5% in Fiscal Year 1997, slightly lower
than the predicted rate of 6.1%. Revenue collections are projected to increase
by 5.1% in Fiscal 1998. This rate of growth reflects cyclical gains, an
expected loss from the gradual elimination of the State's sales tax on food, and
an expected boost from changes in the federal capital gains tax. Total revenue
collections in Fiscal 1999 are expected to rise by 4.8%.
Receipts in Fiscal Year 1997 (ended June 30, 1997) reached $10.521 billion,
an increase of $580.8 million or 5.8% over Fiscal 1996. The top revenue
producer was the personal income tax, at $4.741 billion or 45.1% of total
revenue. This tax source increased 11.7% over Fiscal 1996. The sales and use
tax was the second largest source, at $4.079 billion or 38.8% of total receipts.
Sales and use tax collections were up 2.6% in Fiscal 1997. These two taxes,
income and sales, have accounted for roughly 85% of total revenues since 1989.
Corporate income tax accounted for 7.1% of total collections or $750.0 million,
up 1.2% over Fiscal Year 1996 receipts. The next two largest revenue producers
were motor fuel taxes at 3.7% or $389.7 million (down 1.9% from Fiscal 1996) and
motor vehicle taxes at 1.9% or $202.1 million (down 2.9%).
Two ongoing legislative measures were of significance for Fiscal Year 1997.
First, Georgia's four cent sales tax on eligible food and beverage was reduced
by half beginning October 1, 1996 and was reduced by an additional one cent on
October 1, 1997. The final one cent will be eliminated on October 1, 1998
(House Bill 265). Second, in 1995, the Georgia Department of Revenue issued the
first of four, equal yearly refund checks to eligible federal and military
retirees pursuant to House Bill 90. House Bill 3 required the Department of
Revenue, in October 1996, to issue refunds to a second category of eligible
retirees.
Expenditures and appropriations for State funds for Fiscal Year 1997
totaled $11.793 billion, a 7.4% increase over Fiscal 1996 appropriations. Of
these appropriations, 55.8% was used for education, 10.4% for human resources,
and 11.2% for Medicaid funding. The State's funds surplus reached $216.4
million at the end of Fiscal 1997; combined with the lottery surplus and other
additional revenues, Georgia's total surplus for Fiscal 1997 was $493.9 million.
Though March 1998, the Georgia Department of Revenue has collected $8.124
billion, up $456.0 million over the same period in Fiscal 1997. The largest
increases occurred in the estate tax and the individual income tax, up 17.2% and
9.2%, respectively. The motor vehicle tax, however, is down 11.1% for this
period compared to the previous year. Estimated total revenue
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for Fiscal Year 1998 $11.778 billion, and appropriations totaling $11.772
billion are recommended by the Governor for expenditure, a 0.2% decrease from
Fiscal 1997 expenditures.
Constitutional Considerations. The Georgia Constitution permits the
issuance by the State of general obligation debt and of certain guaranteed
revenue debt. The State may incur guaranteed revenue debt by guaranteeing the
payment of certain revenue obligations issued by an instrumentality of the
State. The Georgia Constitution prohibits the incurring of any general
obligation debt or guaranteed revenue debt if the highest aggregate annual debt
service requirement for the then current year or any subsequent fiscal year for
outstanding general obligation debt and guaranteed revenue debt, including the
proposed debt, exceed 10% of the total revenue receipts, less refunds, of the
State treasury in the fiscal year immediately preceding the year in which any
such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to
supply a temporary deficit in the State treasury in any fiscal year created by a
delay in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State treasury
in the fiscal year immediately preceding the year in which such debt is
incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred out of the taxes levied for that
fiscal year. No such debt may be incurred in any fiscal year if there is then
outstanding unpaid debt from any previous fiscal year which was incurred to
supply a temporary deficit in the State treasury. No such short-term debt has
been incurred under this provision since the inception of the constitutional
authority referred to in this paragraph.
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 year 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 is $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 is $4,727,630,000.
Georgia's aggregate fiscal year debt service on all outstanding bonds as of
October 31, 1996 is approximately $7.15 billion.
Bond Ratings. Currently, Moody's Investors Service, Inc. rates State of
Georgia general obligation bonds Aaa; Standard & Poor's Ratings Services rates
such bonds AAA (upgraded
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from AA+ on July 29, 1997); and Fitch IBCA, Inc. (formerly known as Fitch
Investors Service, L.P.) rates such bonds as AAA.
Legal Proceedings. Georgia is involved in certain legal proceedings that,
if decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues. An adverse final decision
could materially affect the State's governmental operations and, consequently,
its ability to pay debt service on its obligations.
Maryland Risk Factors
Economic Outlook. Since 1989, Maryland has consistently ranked among the
bottom states in job creation. Employment in Maryland increased 1.1% in
calendar 1996, and since late 1992, only about 160,000 new jobs have been
created. During the 1990's the weakest employment areas were banking, federal
government and manufacturing. Growth has been heavily concentrated in business
and health services, transportation, construction and trade.
The service sector accounts for 31.1% of total employment in the State, but
provided more than 62% of the new jobs during 1996. Employment in the computer
and data processing industry grew by 4.9% in 1996 and is expected to continue to
grow at a steady rate. Employment in health services increased by 3.6% annually
between 1991 and 1993 before slowing to an average annual gain of 2.0% between
1994 and 1996.
In December 1997, overall employment was estimated to have increased by
2.2% or 48,000 new jobs during calendar 1997. Job growth in the services,
construction and retail trade sectors lead this expansion. Maryland's State
Comptroller projects that employment in Maryland will increase by 1.6% in 1998
and 1.3% in 1999.
While Maryland's overall tax burden is below the national average, the
State and local personal income tax is among the highest in the nation.
Economic data indicate that most jobs are created by small businesses, and
nearly 80% of Maryland's companies are small businesses. Since many small
businesses pay the personal income tax, higher State taxes directly reduce their
profitability and negatively affect business decisions about location, expansion
and creation of new jobs.
During 1996, the State ranked 6th in the nation in per capita income, with
an average per capita income of $27,618 as compared to the national average of
$24,426. In 1997, Maryland's General Assembly enacted new laws providing for a
personal income tax reduction. According to the State's November 1997
Comprehensive Annual Financial Report ("CAFR"), total personal income is
expected to rise by 5.4%, 5.1% and 4.8% in 1997, 1998 and 1999, respectively.
During 1995 and 1996, Maryland implemented substantial regulatory reform,
eliminated or reduced ten business taxes, and significantly increased funding
for the Sunny Day Fund and
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other business incentive programs to improve the State's business climate and
increase competitiveness. As a result of these actions, the total number of jobs
in Maryland is at an all time high and unemployment remains below the national
average.
Maryland's economy has been influenced recently by structural changes in
the national economy: less national defense spending and defense subcontract
work; reductions in federal employment; and corporate acquisition. Major
Maryland employment sectors, such as finance, insurance and professional
service, have restructured and downsized. Due in part to defense downsizing and
international competition, realignments in manufacturing have also affected the
State's economy.
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 modest during the next three years, constrained in part by a lack
of workers.
Revenue and Expenditures. Income and sales taxes comprise over 80% of the
State's general fund revenue. These taxes, along with transportation revenues,
make up over 55% 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 reported in the CAFR that revenues totaled
$13.476 billion for the fiscal year ending June 30, 1997. This figure
represents an increase of 5.9% over revenues for Fiscal Year 1996. Income tax,
the largest source of revenue, produced 30.3% of general governmental revenues
in Fiscal 1997, compared to 29.8% in Fiscal 1996. Individual income tax
revenues increased 7.6% over Fiscal 1996 due to continued gains in employment
and personal income, and corporate income tax revenues increased by 10.3% in
Fiscal 1997, reflecting strong gains in total corporate profitability.
The State's total expenditures reached $13.386 billion in Fiscal 1997.
This figure represents a $561.7 million or 4.4% increase over Fiscal 1996.
Revenues exceeded expenditures by $90.1 million, the first positive balance
since 1994. The actual fund balance for the State's general fund on June 30,
1997 was $1.059 billion, an increase of $298.7 million over the Fiscal Year 1996
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 general fund revenues for its Revenue
Stabilization Account to protect against revenue downturns and maintain the
State's bond ratings. At the close of Fiscal Year 1997, the State Reserve Fund
balance was $865 million, up $54.9 million over Fiscal Year 1996.
Fiscal year 1998 represents 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 fiscal years 1998-2002,
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reducing the State's current 5% income tax rate by 10% overall. The first phase
of the proposed income tax cut will reduce general fund revenues by $39 million,
but a proposed cigarette tax increase will add $99 million for allocation to the
Reserve Fund to help pay for future years of this tax reduction.
Maryland's Board of Revenue Estimates expects general fund revenues, which
represent approximately 55-60% of each year's total budget, to reach $7.887
billion during Fiscal Year 1998, an increase of 3.4% or $198 million above the
last official estimate for that fiscal year in March 1997. The State projects
that it will finish Fiscal 1998 with a general fund surplus of $283 million.
The Fiscal 1998 budget estimates that $554 million or 7% of general fund
revenues will be set aside for the State Reserve Fund.
During Fiscal Year 1999, the Board projects general fund revenues of $8.095
billion, a 2.8% increase. Net of the income tax reduction, the growth in
general fund revenues is projected to equal 3.9%. Maryland's budget for Fiscal
1999 totals $16.5 billion, a 5.1% increase over Fiscal 1998. This increase
includes $100 million in reserve funding to pay for the cost of the State's
scheduled 10% income tax cut.
The State Reserve Fund is expected to increase to $695.8 million at the end
of Fiscal Year 1999. The Fiscal 1999 budget anticipates using its entire
budgetary surplus for payments to the State's Reserve Fund and for one-time
expenditures--not for ongoing expenses that would contribute to long-term
deficits. The one-time expenditures include the costs of the upcoming tax
reduction, school construction, a Med-Evac helicopter, and technology costs
incurred for Year 2000 compliance.
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 1997
were within the limits established by the Committee. For Fiscal Year 1997, new
general obligation bond authorizations totaled $399,991,000 (net of
deauthorization of $12.1 million from prior projects).
During Fiscal Year 1997, the following new general obligation bonds were
issued by the State of Maryland: $170 million on October 9, 1996 and $240
million on February 26, 1997.
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Outstanding general obligation bonds totaled $2.860 billion in 1996 and $3.025
billion in 1997. In addition, the State Department of Transportation and the
Maryland Transportation Authority had $935.6 million and $391.9 million,
respectively, in outstanding limited obligation bonds at the close of Fiscal
Year 1997.
General obligation bonds totaling $415 million were authorized for the
Fiscal Year 1998 budget, consistent with the State's Capital Debt Affordability
Committee. General funds in the capital budget total $78.2 million for Fiscal
1998. The use of general funds to supplement the capital budget is generally
limited to certain programs which cannot be prudently funded with tax-exempt
bonds. Federal funds in the capital budget total $17.6 million. In Fiscal
1998, these monies will be used primarily for prison construction, developing
Canal Place in Cumberland and construction of military facilities for National
Guard units. Special funds in the capital budget total $184.6 million and
consist of dedicated revenues for improvements such as open space, agricultural
land preservation and law enforcement training facilities. Revenue bonds total
$45 million in Fiscal 1998 and are designated for capital improvements to
academic facilities at the University of Maryland system and for local
governments to fund infrastructure and environmental improvements.
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 have been
rated by Moody's Investors Service, Inc. as Aaa; by Standard & Poor's Rating
Services as AAA; and by Fitch IBCA, Inc. (formerly known as Fitch Investors
Service, L.P.) as AAA, making Maryland one of several 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 1980's. Growth will continue through the second half of
Fiscal Year 1998 and Fiscal Year 1999 at a modest annualized growth rate of
about 2.1%.
Economic growth at the national level has been mirrored in Massachusetts,
where over 373,000 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 3.6% in January 1998, one of
the lowest rates for any large industrial state. The unemployment rate in
January 1998 was 4.7% for the nation as a whole and 4.1% in New England. Total
nonfarm employment (seasonally adjusted) is also at an all-time high, growing by
91,300 during 1997 to 3,173 million.
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Improvements in the employment picture have had a positive impact on
personal income for Massachusetts residents. On average, personal income growth
has been among the highest in the nation, outpacing the rate of growth in the
national economy in most quarters since 1991. During Fiscal Year 1997,
Massachusetts personal income grew by 6.0%, down slightly from 6.2% in Fiscal
1996. Growth in personal income is expected to decline from the Fiscal 1997
rate to approximately 5.7% in Fiscal 1998. Personal income is also expected to
fall in Fiscal Year 1999 to 4.3-4.5% and remain at that rate through the next
few years. Unemployment is projected at 3.7% through Fiscal Year 1998 and to
remain steady at 3.7-3.9% annually through 2000.
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. The service sector, at
approximately 34.3% of the state work force, is the largest sector in the
Commonwealth's economy. Although the manufacturing and trade sectors
experienced large decreases in employment in recent years, in 1997 these sectors
rebounded with growth rates of 2.3% and 3.0%, respectively, the largest annual
increase since the mid-1980's. At the same time, there has been a reversal of
the dramatic growth which occurred during the 1980's in the finance, insurance
and real estate sector and in the construction sectors of the Massachusetts
economy.
The Commonwealth has a very full public construction agenda which is
expected not only to improve mobility, but also to provide a substantial number
of construction and related employment opportunities. These projects include
the $6 billion Central Artery/Tunnel project involving the construction of a
third tunnel under Boston Harbor linking the MassPike and downtown Boston with
Logan International Airport, and the depression into tunnels of the Central
Artery that traverses the City of Boston. Federal funds are expected to cover
approximately 90% of the cost of this project. The Central Artery/Tunnel
project is expected to employ approximately 5,000 on-site workers and 10,000
auxiliary workers during the peak years of construction in the mid-1990s.
Revenues and Expenditures. The financial condition of the Commonwealth
during Fiscal Year 1997 reflects the recovery which began early this decade.
Massachusetts' revenues exceeded expenditures for the seventh consecutive year.
In addition, during Fiscal Year 1997, the Commonwealth was able to retire the
last of its 1990 fiscal recovery bonds: the September 1990 $1.455 billion bond
sale, the seventh largest municipal bond issue in history, was a response to a
$1.9 billion budgetary deficit.
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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. Including the Fiscal Year
1997 deposit of $234.3 million, the fund's balance at the middle of Fiscal 1998
stands at $799.3 million, in marked contrast to the zero balance carried in the
fund during Fiscal 1990. Also in Fiscal 1997, a separate $229.8 million capital
investment trust, funded with surplus revenue instead of bonded debt, was
established to address immediate capital needs. Moreover, the Commonwealth
passed legislation to reserve a one-time Fiscal 1997 federal welfare-revenue
windfall as a safeguard against future caseload increases.
An expanding economy translates directly into a broader tax revenue base.
Increased employment, income, housing starts, and business activity directly
impact sales, personal income, corporate, deeds, and other tax collections. In
Fiscal 1997, sales tax collections were up 10.2%, and income tax revenues
increased to $7.18 billion, up by 7.1% or $475 million over Fiscal 1996. In the
aggregate, tax revenues totaled $12.865 billion in Fiscal 1997, up $815 million
or 6.8% from Fiscal 1996. According to the December 1997 Comprehensive Annual
Financial Report, Fiscal 1997 closed with a $1.1 billion balance in budgeted
funds.
Through December 31, 1997, Fiscal Year 1998 tax revenue collections totaled
$6.147 billion, up $341 million or 5.9% from the same period in Fiscal 1997.
The Commonwealth's Department of Revenue projects that total tax receipts for
Fiscal 1998 will reach $13.154 billion, an increase of 2.25% over Fiscal 1997.
The change is lower than the projected tax-base growth of 5.2% because of six
recent tax law changes and the implementation of six others approved in prior
fiscal years. Spending in Fiscal 1998 is projected to total $18.150 billion, a
2.9% increase over Fiscal 1997.
Fiscal Year 1999 total revenues are projected to be $18.961 billion. Non-
tax revenues are expected to reach $5.297 billion, a 5.3% decrease from Fiscal
1998. For the tax revenue base, the Department of Revenue projects a slowing in
the growth rate based upon the assumption of moderate economic growth and low
inflation. In Fiscal 1999, the tax revenue base is expected to increase 4.9%,
as compared to 5.2% in Fiscal 1998 and 8.5% in Fiscal 1997. Total tax revenues
for Fiscal 1999 are estimated at $13.665 billion, which reflects a 3.9% increase
over projected Fiscal 1998 revenues and a reduction of $244.8 million due to
proposed tax cuts. Proposed spending reflects a modest increase of 3.4% in
Fiscal 1999, directed largely to increased funding for local aid, education and
health care. Fiscal 1999 total expenditures are projected to be $19.06 billion,
a 3.4% increase over projected Fiscal 1998 expenditures.
Important proposals for Fiscal 1999 include reducing the tax rate for
"earned" income from 5.95% to 5% over the next three years, reducing the tax
rate for "unearned" income from 12% to 5% over the next five years, creating
personal income tax credits and exemptions to encourage saving for higher
education, creating an exemption from capital gains taxes on the sale of a
principal residence, and creating a personal income tax exemption for providing
care to elderly relatives.
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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 Fiscal 1997. The average annual increase in the
growth of debt for Fiscal Years 1998 through 2002 is projected at only 3.3%,
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 has remained at A1 since
November 1994, and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.)
raised its rating from A+ to AA- in January 1998.
Michigan Risk Factors
Investors should be aware that the economy of the State of Michigan has, in
the past, proven to be cyclical, due primarily to the fact that the leading
sector of the State's economy is the manufacturing of durable goods. While the
State's efforts to diversify its economy have proven successful, as reflected by
the fact that the share of employment in the State in the durable goods sector
has fallen from 33.1 percent in 1960 to 17.9 percent in 1990 and to 15.2 percent
in 1997, durable goods manufacturing still represents a sizable portion of the
State's economy. As a result, any substantial national economic downturn is
likely to have an adverse effect on the economy of the State and on the revenues
of the State and some of its local governmental units.
In July 1995, Moody's Investors Service, Inc. raised the State's general
obligation bond rating to "Aa". In January 1998, Standard & Poor's raised its
rating on the State's general obligation bonds to "AA+". In April, 1998, Fitch
IBCA, Inc. raised its rating on the State's general obligation bonds to AA+.
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe. In addition, as described in the
State's comprehensive annual financial report on file with the Nationally
Recognized Municipal Securities Information Repositories, the State is party to
a number of lawsuits and legal actions, some of which, if determined adversely
to the State, could have a materially adverse impact on the State's finances.
In recent years, the State of Michigan has reported its financial results
in accordance with generally accepted accounting principles. For each of the
last five fiscal years, the State ended the fiscal year with its General Fund in
balance after transfers in most of those years from the General Fund to the
Budget Stabilization Fund. The balance in the Budget Stabilization Fund was
$1.15 billion as of September 30, 1997, including a reserve of $572.6 million
for educational
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expenses described in the next paragraph. In all but one of the last five fiscal
years, the State has borrowed between $500 million and $900 million for cash
flow purposes. It borrowed $900 million in each of the 1996, 1997 and 1998
fiscal years.
In November of 1997, the State Legislature adopted legislation to provide
for the funding of claims of local school districts, some of whom had alleged in
a lawsuit, Durant v. State of Michigan, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution. Under
this legislation, the State paid to school districts which were plaintiffs in
the suit approximately $212 million from the Budget Stabilization Fund on April
15, 1998, and will be required to pay to other school districts from the Budget
Stabilization Fund (i) an additional $32 million per year in the years 1998-99
through 2007-08, and (ii) up to an additional $40 million per year in the years
1998-99 through 2012-13.
The Michigan Constitution of 1963 limits the amount of total revenues of
the State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the prior calendar
year. In the event that the State's total revenues exceed the limit by 1
percent or more, the Michigan Constitution of 1963 requires that the excess be
refunded to taxpayers. In order to comply with this requirement, the State
refunded approximately $113 million through income tax credits for the 1995
calendar year.
On March 15, 1994, Michigan voters approved a school finance reform
amendment to the State's Constitution which, among other things, increased the
State sales tax rate from 4% to 6% and placed a cap on property assessment
increases for all property taxes. Concurrent legislation cut the State's income
tax rate from 4.6% to 4.4%, reduced some property taxes and altered local school
funding sources to a combination of property taxes and state revenues, some of
which is provided from other new or increased State taxes. The legislation also
contained other provisions that alter (and, in some cases, may reduce) the
revenues of local units of government, and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted, investors
should be alert to the potential effect of such measures upon the operations and
revenues of Michigan local units of government.
In addition, the State Legislature in 1995 adopted a package of state tax
cuts, including a phase out of the intangibles tax, an increase in exemption
amounts for personal income tax, and reductions in single business tax.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of bonds
issued by the State Building Authority, the dependency of the State Building
Authority on the receipt of rental payments from the State to meet debt service
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requirements upon such bonds. In the 1991 fiscal year, the State deferred
certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, while total
State revenue sharing payments have increased in each of the last five years,
the State did reduce revenue sharing payments to municipalities below that level
otherwise provided under formulas in each of those years.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978,
or issued after December 22, 1978 with the approval of the electors of the local
unit, are payable from property taxes levied without limitation as to rate or
amount. With respect to bonds issued after December 22, 1978, and which were
not approved by the electors of the local unit, the tax levy of the local unit
for debt service purposes is subject to constitutional, statutory and charter
tax rate limitations. In addition, several major industrial corporations have
instituted challenges of their ad valorem property tax assessments in a number
of local municipal units in the State. If successful, such challenges could
have an adverse impact on the ad valorem tax bases of such units which could
adversely affect their ability to raise funds for operation and debt service
requirements.
Minnesota Risk Factors
Minnesota's economy continued to out perform the national averages during
1996-97. The annual unemployment rate in Minnesota has been below the U.S.
every year since 1985. In November 1997, the state's unemployment rate, on a
seasonally adjusted basis, stood at 2.8%, down 1.2 percentage points from the
4.0% observed one year earlier. That unemployment rate was well below the
national rate of 4.6%. From November 1996 to November 1997, Minnesota's economy
added 53,700 jobs, an increase of 2.2%. This is comparable to the national
increase of 2.4%. Services accounted for 41.3% of Minnesota's over-the-year
growth, adding 22,200 jobs. Of the major industries, only mining experienced a
decrease in employment over the year, down 200 jobs.
Construction continues to boast the highest growth rate of the major
industries, up 4.6%. Minnesota continues to outpace the nation in construction
employment growth, whose growth rate was 3.6% from November 1996 to November
1997. During this time period, employment in the manufacturing sector rose
2.2%, up 9,500 jobs. The national rate was 0.8%.
In 1996, Minnesota's per capita personal income rose to $25,663, an
increase of 6.7% from 1995. The U.S. increase for 1996 was 4.6%.
Personal income in Minnesota is now estimated to have grown at a 6.6%
annual rate during fiscal year 1997, well above the national average of 5.3%.
Wage growth was strong, but as in neighboring Midwestern states, all of whom
also had strong growth in personal income, the
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agricultural sector was a major contributor. Prices were higher than average,
yields were strong, and federal farm program payments under the 1996 farm bill
were much larger than they would have been under the previous program.
Personal income in Minnesota is forecast to grow by 5.0% during the 1998
fiscal year, slightly below the average rate forecast for the nation. Payroll
employment is expected to grow at a 2.1% annual rate, consistent with the
national average. Wage and salary income growth, however, is projected to lag
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. Farm income in the 1998 fiscal year is also
forecast to be down from the high levels reported during fiscal year 1997 since
commodity prices have returned to more normal levels.
Minnesota's fiscal period is a biennium. General Fund revenues and
transfers-in totaled $10.202 billion for fiscal year 1997, up 6.1% from those
for fiscal year 1996. Actual total resources were $11.546 billion. General
Fund expenditures and transfers-out for the year totaled $9.551 billion, a
decrease of almost 1% from the previous year. Of this amount, $3.3 billion went
to education, children and families. The actual ending balance for fiscal year
1997 was $1.995 billion, $364 million higher than forecast. Much of the
unexpected growth was due to higher than anticipated capital gains realizations
in 1996.
The top three revenue producers of the State's $11.546 billion total
resources were: individual income tax at $4.768 billion, sales tax at $3.03
billion, and non-dedicated revenue at $974.4 million. These three sources
comprised approximately 41%, 26% and 8.5%, respectively, of the total resources.
As of November 1997, revenues for the 1998-99 biennium are forecast at
$21.045 billion, a 3.6% or $729 million increase from end of the session
estimates. The higher revenue base for Fiscal Year 1997 and a slight
improvement in the outlook for Minnesota's economy were the major sources of
additional revenue. The reduction in the federal capital gains tax rate is
expected to encourage investors to realize profits more rapidly than in the
past, further adding to state revenues. Expenditures and transfers for the
biennium are estimated at $20.669 billion, leaving a budgetary balance of $1.360
billion. Expenditures are $256 million (1.2%) below earlier estimates. Slower
growth in human services spending accounts for nearly all of the forecast
expenditure savings. The available general fund balance at the end of the
biennium is projected at $453 million.
General Fund debt service for the 1998-99 biennium is estimated to be $581
million. This amount is for funding outstanding general obligation bonds, new
bonds to be sold for currently authorized projects and a projected capital
budget of $500 million in the 1998 legislative session.
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The State's budget reserve for the 1998-99 biennium is doubled to $522
million (an increase from $233.5 million in fiscal year 1997) or 5% of fiscal
year 1999 spending to protect against economic uncertainty.
The State issued $170.0 million of new general obligation bonds, and $172.1
million of general obligation bonds were redeemed during 1997, leaving an
outstanding balance of $2.2 billion. General obligation bonds authorized but
unissued as of June 30, 1997 were $912.6 million.
Minnesota Statutes, Section 16A.641 provides for an annual appropriation
for transfer to the Debt Service Fund. The amount of the appropriation is to be
such that, when combined with the balance on hand in the Debt Service Fund on
December 1 of each year for state bonds, it will be sufficient to pay all
general obligation bond principal and interest due and to become due through
July 1 in the second ensuing year. If the amount appropriated is insufficient
when combined with the balance on hand in the Debt Service Fund, the state
constitution requires the state auditor to levy a statewide property tax to
cover the deficiency. No such property tax has been levied since 1969 when the
law was enacted requiring the appropriation. In fiscal year 1996, total
operating transfers to the Debt Service Fund were $277.522 million.
The Governor's budget recommends a General Fund appropriation of $545.6
million for fiscal year 1998-99 for debt service on bonds sold for existing
authorizations, bonds authorized but unissued, and new bonds anticipated to be
authorized in the 1998 legislative session. This amount represents 2.8% of
total general fund spending. The Governor also proposed $16.6 million be
appropriated to pay remaining state claims from the Cambridge Bank Litigation
judgment, rather than issuing additional revenue bonds for this purpose.
In May 1996, Moody's Investor Services upgraded Minnesota's general
obligation bond rating to Aaa. In August 1997, Standard & Poor's raised the
State's general obligation bond rating to AAA from AA+. Fitch's rates Minnesota
bonds at 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.
As a major manufacturing, financial, and agricultural state, Missouri's
economic health is tied closely to that of the nation. The economic outlook is
for continued improvement in fiscal year 1998. Missouri's personal income, which
directly impacts individual income tax and sales tax, rose at a 5.9% rate during
fiscal year 1997. Personal income in 1996 grew 5.6%. The Missouri economy has
produced exceptional job growth over the past three years. Missouri's employment
stood at 2.8 million as of November 1997, an increase of over 317,000 since
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January of 1993. At the end of November 1997, the state unemployment rate was
3.5% which compares favorably to the national unemployment rate of 4.3%.
Agriculture is a significant part of Missouri's economy with an industry of
approximately $5.0 billion in Fiscal Year 1997. Missouri is among the nation's
leading livestock producers, with livestock and related products accounting for
$2.5 billion of the state's agricultural receipts in Fiscal Year 1997.
Balancing Missouri's budget in fiscal year 1997 was achieved through sound
financial management. The growing economy produced general revenues that were
better than projected. The Governor and General Assembly adopted a conservative
State budget meeting mandated expenditure increases and providing limited
funding for new and expanded program. In future years, Missouri will focus on
controlling the growth of mandatory programs though welfare reform, managed
care, and cost-effective alternatives. Major funding priorities include
education, corrections, economic development, mental health, children's
services, and repairs and upgrades to existing state facilities.
The State of Missouri completed fiscal year 1997 in sound financial
condition due to strong revenue collections and efficient management of State
programs. Net general revenue collections increased over fiscal year 1996 due
to a strong national and state economy. Expenditures were lower than
anticipated in fiscal year 1997 as prudent state agency managers did not use all
available spending authority. General revenue collections in fiscal year 1997
were $5,843.4 million, 7.4% above fiscal year 1996 collections. General Revenue
expenditures in fiscal year 1997 for the operating budget were $5,926.1 million.
The fiscal year 1998 budget is conservatively based upon general revenue
collections of $6,029.6 million.
Preliminary calculations made pursuant to Article X of the Missouri
Constitution show that total state revenues for Fiscal Year 1997 exceeded the
total state revenue limit by $318.8 million. Therefore, in accordance with
Article X, the entire amount of excess revenues will be refunded to Missouri
income taxpayers in calendar year 1998. The Office of Administration projects
that total state revenues will exceed the total state revenue limit by
approximately $125 million in Fiscal Year 1998. The Office of Administration
projects that revenues will not exceed the revenue limit in Fiscal Year 1999 if
the Governor's recommended tax reductions of $120 million are enacted. Together
with the 1997 tax cut, this brings the total tax reduction for Fiscal Year 1999
to $375 million.
The State ended fiscal year 1997 with an ending balance (surplus) of $49.5
million for the General Revenue Fund. An appropriation of $86.55 million was
transferred to the Budget Stabilization Fund to bring that Fund to 2.5% of net
general revenue collections. The ending General Fund balance for fiscal year
1998 is projected at $172.4 million.
Missouri will continue to see reduced desegregation costs. Federal court-
ordered payments for the St. Louis and Kansas City desegregation plans were
$254.9 million in fiscal year 1997 which is about 3.9% of the State's general
revenue budget. The estimate for
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fiscal year 1998 is $255.9 million. In Fiscal Year 1999, ongoing savings
totaling $91.7 million from Kansas City and $2.1 million from St. Louis have
been used to boost state aid to all Missouri schools. In addition, cumulative
one-time savings of $77.8 million have been redirected to Missouri schools.
State law requires that desegregation savings go toward the school foundation
formula.
As of December 31, 1997, the State has spent $3.1 billion on the
desegregation cases in St. Louis and Kansas City. At the end of Fiscal Year
1998, that total will reach an estimated $3.2 billion. The appropriation for
Fiscal Year 1998 is $264 million and the revised estimate is $255.9 million.
Desegregation expenditures, court orders, and other developments are continually
monitored to provide the best possible anticipation and forecast of future
costs.
State desegregation costs could significantly be affected by a State
determination of liability for costs incurred by the Special School District for
Phase I part-time transfer students. If a liability is determined, amounts from
retroactive claims and accrued interest (if any), could be significant. For
Kansas City, under the terms of a settlement agreement approved by the federal
district court on March 25, 1997, state court-ordered desegregation payments
will end in Fiscal Year 1999. The payment schedule is $110 million, $105
million and $99 million for Fiscal Year's 1997, 1998 and 1999, respectively.
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 the amount of $1 million. Total general
obligation bonds issued as of November 30, 1997, was $1,147.4 million of which
$979.4 was outstanding. As of November 30, 1997, total revenue bonds issued was
$148.5 million with $114.68 million outstanding. Total State indebtedness as of
November 30, 1997, was $1,624,746,207 with $1,289,911,009 outstanding.
As of January 1, 1998, $194,465,000 principal remains outstanding of the
$200,000,000 issued fourth state building bonds (approved in August 1994); and
$128,590,000 principal remains outstanding of the $439,494,240 issued water
pollution control bonds (both amounts excluding refunding issuances). With the
final $75 million issuance on December 1, 1987, all $600 million in third state
building bonds authorized by Missouri voters in 1982 were issued. With the
final issuance in fiscal year 1998, Missouri will have issued all $250 million
in fourth state building bonds authorized by Missouri voters.
In fiscal year 1997, Missouri invested a total of $276.5 million in its
capital assets with appropriations for maintenance and construction projects
throughout the State. Appropriations for fiscal year 1998 are estimated at
$237.6 million. Capital improvements of $192.5 million are recommended for
fiscal years 1998-99 biennial budget. Of this amount, $20.8 million is for
vital maintenance and repairs to state-owned facilities to initiate the voter-
approved maintenance funding mechanism. Also included is $171.8 million for
planning, major renovation, new construction, land acquisition, and other
improvements. Amounts are designated to prison
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construction, projects at elementary and secondary education institutions, and
facilities for veterans.
The State's general obligation bond issues received triple "A" ratings from
Moody's Investors Service, Inc., Standard & Poor's Rating Group, and Fitch IBCA,
Inc. (formerly Fitch Investors Service, L.P.). Missouri is one of only eight
states that have this rating from all three rating organizations. Although
these ratings indicate that the State of Missouri is in relatively good economic
health, there can be no assurance that this will continue or that particular
bond issues may not be adversely affected by changes in the State or local
economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and environmental
policies and conditions, which are not within the control of the issuers of the
Bonds, could affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Missouri Trust to pay interest on or principal of the Bonds.
New Jersey Risk Factors
New Jersey is the ninth largest state in population and the fifth smallest
in land area. With an average of 1,071 people per square mile, it is the most
densely populated of all the states. The State's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
Historically, New Jersey's average per capita income has been well above the
national average, and in 1995, the State ranked second among the states in per
capita personal income ($29,248).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and 1989,
employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many Midwest states and the State's service sectors,
which had fueled the State's prosperity since 1982, lost momentum. In the
meantime, the prolonged fast growth in the State in the mid 1980s resulted in a
tight labor market situation, which has led to relatively high wages and housing
prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures.
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The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration of
New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an estimated 4.9% in
December 1997, which is higher than the national average of 4.6% in December
1997. Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a correspondingly slow pace, due to the fact that some
sectors may lag due to continued excess capacity. In addition, employers even
in rebounding sectors can be expected to remain cautious about hiring until they
become convinced that improved business will be sustained. Also, certain firms
will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital projects
is through the sale of the general obligation bonds of the State. These bonds
are backed by the full faith and credit of the State tax revenues and certain
other fees are pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1996, there was a total authorized bond indebtedness of
approximately $10.31 billion, of which $3.69 billion was issued and outstanding,
$4.76 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.86 billion
was unissued. The appropriation for the debt service obligation on such
outstanding indebtedness is $446.9 million for Fiscal Year 1997.
New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30. At the end of Fiscal Year
1993, there was a surplus in the State's general fund (the fund into which all
State revenues not otherwise restricted by statute are deposited and from which
appropriations are made) of $937.4 million. At the end of Fiscal Year 1994,
there was a surplus in the general fund of $926.0 million. At the end of Fiscal
Year 1995, there was a surplus in the general fund of $569.2 million. It is
estimated that New Jersey closed its Fiscal Year 1996 with a surplus of $442
million and Fiscal Year 1997 with a surplus of $276.2 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, paper products (which has since
been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately
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$1.5 billion in additional revenue. Projections and estimates of receipts from
sales and use taxes, however, have been subject to variance in recent fiscal
years.
The second part of the tax hike took effect on January 1, 1991, in the form
of an increased state income tax on individuals. At the time of enactment, it
was projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead rebate
program and state assumption of welfare and social services costs. Projections
and estimates of receipts from income taxes, however, have also been subject to
variance in recent fiscal years. Under the legislation, income tax rates
increased from their previous range of 2% to 3.5% to a new range of 2% to 7%,
with the higher rates applying to married couples with incomes exceeding $70,000
who file joint returns, and to individuals filing single returns with incomes of
more than $35,000.
The Florida administration had contended that the income tax package will
help reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation, the State will assume
approximately $289 million in social services costs that previously were paid by
counties and municipalities and funded by property taxes. In addition, under
the new formula for funding school aid, an extra $1.1 billion is proposed to be
sent by the State to school districts beginning in 1991, thus reducing the need
for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from
7% to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995, further reductions
ranging from 1% up to 10% in income tax rates took effect. Governor Whitman
recently signed into law further reductions up to 15% for some taxpayers
effective January 1, 1996, completing her campaign promise to reduce income
taxes by up to 30% within three years for most taxpayers.
In June 1997, Governor Whitman signed the New Jersey Legislature's $16.8
billion budget for Fiscal Year 1998. The balanced budget, which includes $442
million in surplus, is $800 million more than the 1997 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are cases challenging the following: the
funding of teachers' pension funds; the 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
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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 Ratings. For many years prior to 1991, both Moody's Investors
Service, Inc. and Standard and Poor's Corporation had rated New Jersey general
obligation bonds "Aaa" and "AAA," respectively. On July 3, 1991, however,
Standard and Poor's Corporation downgraded New Jersey general obligation bonds
to "AA+." On June 4, 1992, Standard and Poor's Corporation placed New Jersey
general obligation bonds on CreditWatch with negative implications, citing as
its principal reason for its caution the unexpected denial by the Federal
Government of New Jersey's request for $450 million in retroactive Medicaid
payments for psychiatric hospitals. These funds were critical to closing a $1
billion gap in the State's $15 billion budget for fiscal year 1992 which ended
on June 30, 1992. Under New Jersey state law, the gap in the current budget
must be closed before the new budget year began on July 1, 1992. Standard and
Poor's Corporation suggested the State could close fiscal 1992's budget gap and
help fill fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the State
calculates its pension liability. On July 6, 1992, Standard and Poor's
Corporation reaffirmed its "AA+" rating for New Jersey general obligation bonds
and removed the debt from its CreditWatch list, although it stated that New
Jersey's long-term financial outlook was negative. Standard & Poor's
Corporation was concerned that the State was entering the 1993 fiscal year that
began July 1, 1992, with a slim $26 million surplus and remained concerned about
whether the sagging State economy would recover quickly enough to meet
lawmakers' revenue projections. It also remained concerned about the recent
federal ruling leaving in doubt how much the State was due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on appeal, of the
State's method for paying for uninsured hospital patients. However, on July 27,
1994, S&P announced that it was changing the State's outlook from negative to
stable due to a brightening of the State's prospects as a result of Governor
Whitman's effort to trim spending and cut taxes, coupled with an improving
economy. S&P reaffirmed its "AA+" rating at the same time.
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On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aa1," stating that the reduction reflected a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures would
persist. On August 5, 1994, Moody's reaffirmed its "Aa1" rating, citing on the
positive side New Jersey's broad-based economy, high income levels, history of
maintaining a positive financial position and moderate (albeit rising) debt
ratios, and, on the negative side, a continued reliance on one-time revenues and
a dependence on pension-related savings to achieve budgetary balance.
New York Risk Factors
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.
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The Portfolio of the New York Trust includes obligations issued by New York
State (the "State"), by its various public bodies (the "Agencies"), and/or by
other entities located within the State, including the City of New York (the
"City").
Some of the more significant events relating to the financial situation in
New York are summarized below. This section provides only a brief summary of
the complex factors affecting the financial situation in New York and is based
in part on Official Statements issued by, and on other information reported by
the State, the City and the Agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
(1) The State: The State has historically been one of the wealthiest
states in the nation. For decades, however, the State economy has grown more
slowly than that of the nation as a whole, gradually eroding the State's
relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the suburbs and
an influx of generally less affluent residents. Regionally, the older Northeast
cities have suffered because of the relative success that the South and the West
have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State. However, the State's 1995-96 budget
reflected significant actions to reduce the burden of State taxation, including
adoption of a 3-year, 20% reduction in the State's personal income tax. During
1996-97, New York led the nation in tax cuts, at 54.1%, bringing the total value
of tax reductions in effect for the 1997 year to over $6 billion. Annual
savings are intended to grow to $12 billion by 2001-02. When measured as a
percentage of personal income, state-imposed taxes in New York should be below
the national median in 1998. The budget for fiscal year 1998-99 proposes an
additional $700 million in tax reductions.
Slowdown of Regional Economy. A national recession commenced in mid-1990.
Economic recovery started considerably later in the State than in the nation as
a whole due in part to the significant retrenchment in the banking and financial
services industries, downsizing by several major corporations, cutbacks in
defense spending, and an oversupply of office buildings. In the last few years,
New York has shown signs of economic resurgence. New York has gone from last in
the nation in percentage of private sector employment growth to a level that
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is on par with the national average, gaining 250,000 private sector jobs since
December 1994. Overall employment growth was close to 1.4% for 1997. National
employment growth in 1997 was estimated at 2.3%. The New York economy in 1998
is expected to grow at about the same rate as in 1997. 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. Personal income is expected
to increase 6.1% in 1997 and 4.5% in 1998.
1997-98 Fiscal Year. The 1997-98 General Fund Financial Plan continues to
be balanced, with a projected surplus of $1.83 billion. This will be the third
consecutive budget surplus generated by the Governor's administration. Of this
amount, $700 million is being used to finance one-time costs related to an extra
27th payroll and 53rd Medicaid cycle ($282 million) due to the cyclical timing
of these payments and to provide "hard-dollar" financing for capital projects of
the Community Enhancement Facilities Assistance Program which were previously
anticipated to be supported with bond proceeds. Proposed tax cut accelerations
account for the use of another $685 million of the surplus. Of the remainder,
$365 million is being used to finance 1998-99 Executive Budget recommendations,
and $68 million is being deposited into the Tax Stabilization Reserve Fund (the
State's "rainy day" fund) as provided by the Constitution. This is the third
consecutive extraordinary deposit in the rainy day fund and increases the size
of that fund to $400 million by the end of 1997-98, the highest balance ever
achieved.
The surplus results primarily from growth in projected receipts. As
compared to the enacted budget, revenues increased by $1.28 billion, while
disbursements increased by only $565 million. These changes from Mid-Year
Financial Plan projections reflect actual results through December 1997 as well
as modified economic and caseload projections for the balance of the fiscal
year.
The General Fund is projected to be balanced on a cash basis for the 1997-
98 fiscal year. Total receipts and transfers from other funds are projected to
be $35.197 billion, an increase of $216 billion from total receipts in the prior
fiscal year. Total General Fund disbursements and transfers to other funds are
projected to be $35.165 billion, an increase of $2.26 billion from the total
amount disbursed in the prior fiscal year.
The General Fund closing balance is expected to be $465 million at the end
of 1997-98. Of this amount, $400 million will be on deposit in the Tax
Stabilization Reserve Fund (TSRF), while another $65 million will be on deposit
in the Contingency Reserve Fund (CRF) after a $24 million deposit in 1997-98.
The TSRF had an opening balance of $317 million to be supplemented by a required
payment of $15 million and an extraordinary maximum deposit of $68 million from
surplus 1997-98 monies.
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
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support for State programs. As noted, the 1997-98 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.
One major uncertainty to the 1997-98 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 1997-98 State
Financial Plan 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.
1998-99 Fiscal Year. General Fund receipts in 1998-99 will reflect the
initial phases of the STAR property tax reduction program as well as the
continuing impact of other 1997 and earlier tax reduction accomplishments. In
addition, the 1998-99 budget reflects several tax reduction proposals that will
reduce receipts available to the General Fund by about $700 million during the
fiscal year. Recurring growth in the State General Fund tax base is projected
to be nearly 6% during 1998-99. That growth rate is lower than that achieved in
1996-97 or currently estimated for 1997-98 and roughly equivalent to the rate
experienced in 1995-96. Total General Fund receipts for 1998-99 are projected
at $36.22 billion, an increase of more than $1 billion from the revised 1997-98
estimate. The largest source of receipts is the sales and use tax which
accounts for nearly 80% of projected receipts.
Total General Fund spending in the 1998-99 Executive Budget is projected to
increase $1.02 billion of 2.89% from the current year. The average annual
increase since 1994-95 is 1.85%. This rate is below the rate of inflation and
much lower than the average annual increase of 5.4% prior to 1994-95.
Education's recommended share of General Fund spending is 30% in 1998-99 and
criminal justice spending is 6.5%. Medicaid and welfare spending growth has
been reduced, reflecting Medicaid and welfare reforms implemented since 1995.
The 1998-99 Financial Plan includes approximately $62 million in non-
recurring resources, the lowest projected level ever recorded. In fiscal year
1986-87 through 1994-95, the average annual level of one-timers was
approximately $819 million.
The projected 1998-99 closing fund balance of $500 million in the General
Fund is composed of monies available in the TSRF and the CRF. An additional
deposit of $35 million will supplement the $65 million balance in the CRF,
increasing that amount available for possible litigation risks to $100 million
in 1998-99.
On November 16, 1993, the Court of Appeals, the State's highest court,
affirmed the decision of a lower court in three actions, which declared
unconstitutional State actuarial funding methods for determining State and local
contributions to the State employee retirement system. Following the decision,
the State Comptroller developed a plan to phase in a constitutional
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funding method and to restore prior funding levels of the retirement systems
over a four-year period. The plan is not expected to require the State to make
additional contributions with respect to the 1993-94 fiscal year nor to
materially and adversely affect the State's financial condition thereafter.
Through fiscal year 1998-99, the State expects to contribute $643 million more
to the retirement plans that would have been required under the prior funding
method.
Future Fiscal Years. There can be no assurance that the State will not
face substantial potential budget gaps in the future resulting from a
significant disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need to
take significant actions to align recurring receipts and disbursements.
Indebtedness. As of March 31, 1997, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.767 billion. As of
the same date, the State had approximately $5.03 billion in outstanding general
obligation debt, including $294 million of Bond Anticipation Notes ("BANS")
outstanding.
As of March 31, 1997, $22.499 billion of bonds, issued in connection with
lease-purchase and contractual obligation financings of State capital programs,
were outstanding. The total amount of outstanding State-supported debt as of
March 31, 1997 was $32.766 billion. As of March 31, 1997, total State-related
debt (which includes the State-supported debt, moral obligation and certain
other financings and State-guaranteed debt) was $37.114 billion.
The State anticipates that its borrowings for capital purposes during the
State's 1997-98 fiscal year will consist of $605 million in general obligation
bonds and BANS and $140 million in general obligation commercial paper. The
Legislature has also authorized the issuance of $311 million in certificates of
participation (including costs of issuance, reserve funds and other costs)
during the State's 1997-98 fiscal year for equipment purchases. The projection
of the State regarding its borrowings for the 1997-98 fiscal year may change if
actual receipts fall short of State projections or if other circumstances
require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
As of June, 1995, LGAC had issued bonds and notes to provide net proceeds of
$4.7 billion, and has been authorized to issue its bonds to provide net proceeds
of up to $529 million during the State's 1995-96 fiscal year to redeem notes
sold in June 1995. The LGAC program was completed in 1995-96 with the issuance
of the last installment of authorized bond sales. As of March 31, 1997, $5.239
billion remained outstanding of the LGAC.
Ratings. Moody's rating of the State's general obligation bonds is Aa2 and
S&P's rating is A. Previously, Moody's lowered its rating to A on June 6, 1990,
its rating having been A1 since May 27, 1986. S&P's previous rating was A- on
January 13, 1992. S&P's ratings were A
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from March 1990 to January 1992, AA-from August 1987 to March 1990 and A+ from
November 1982 to August 1987.
(2) The City and the Municipal Assistance Corporation ("MAC"): The City
accounts for approximately 41% of the State's population and personal income,
and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other actions,
the State Legislature (i) created MAC to assist with long-term financing for the
City's short-term debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve the City's
budgets and City four-year financial plans (the financial plans also apply to
certain City-related public agencies (the "Covered Organizations")).
From 1993 to 1996, the rate of economic growth in the City slowed
substantially. The City's economic improvement significantly accelerated in
fiscal year 1997, 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. In 1997, the City experienced the largest
private sector job growth in the last 13 years.
Pursuant to State law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections. The City is required to submit its
financial plans to review bodies, including the Control Board. If the City were
to experience certain adverse financial circumstances, including the occurrence
or the substantial likelihood and imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the public
credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its 1997-
98 fiscal year or subsequent years, such developments could result in reductions
in projected State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow and
additional City expenditures as a result of such delays.
The 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
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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.
1996-99 Financial Plan. On July 11, 1995, the City submitted to the
Control Board the 1996-99 Financial Plan, which relates to the City, the Board
of Education and the City University of New York. The 1996-99 Financial Plan is
based on the City's expense and capital budgets for the City's 1996 fiscal year,
which were adopted on June 14, 1995, and sets forth proposed actions by the City
for the 1996 fiscal year to close substantial projected budget gaps resulting
from lower than projected tax receipts and other revenues and greater than
projected expenditures. In addition to substantial proposed agency expenditure
reductions and productivity, efficiency and labor initiatives negotiated with
the City's labor unions, the 1996-99 Financial Plan reflects a strategy to
substantially reduce spending for entitlements for the 1996 and subsequent
fiscal years.
1998-2002 Financial Plan. 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 fiscal year 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
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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.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
torts, breaches of contracts, and other violations of law and condemnation
proceedings. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the City's ability to
carry out its financial plan. 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.
Ratings. As of March 1996, Moody's rating of the City's general obligation
bonds stood at Baa1. S&P's current rating of the City's general obligation
bonds is BBB+. S&P's previous rating of the City's general obligation bonds was
A-.
On July 10, 1995, S&P revised downward its rating on City general
obligation bonds from A- to BBB+ and removed City bonds from CreditWatch. S&P
stated that "structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector." Other
factors identified by S&P in lowering its rating on City bonds included a trend
of using one-time measures, including debt refinancings, to close projected
budget gaps, dependence on unratified labor savings to help balance financial
plans, optimistic projections of additional Federal and State aid or mandate
relief, a history of cash flow difficulties caused by
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State budget delays and continued high debt levels. Fitch IBCA Inc. (formerly
Fitch Investors Service, L.P.) continues to rate the City general obligation
bonds A-.
On February 11, 1991, Moody's had lowered its rating from A. Previously,
Moody's had raised its rating to A in May 1988, to Baa1 in December 1986, to Baa
in November 1983 and to Ba1 in November 1981. S&P had raised its rating to A-
in November 1987, to BBB+ in July 1985 and to BBB in March 1981.
Indebtedness. As of June 30, 1997, the City had $3.671 billion of
outstanding debt service of which $3.515 billion was net long-term indebtedness.
(3) The State Agencies: Certain Agencies of the State have faced
substantial financial difficulties which could adversely affect the ability of
such Agencies to make payments of interest on, and principal amounts of, their
respective bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is expected
that the problems faced by these Agencies will continue and will require
increasing amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations could result in a
default by one or more of the Agencies. Such default, if it were to occur, would
be likely to have a significant adverse effect on investor confidence in, and
therefore the market price of, obligations of the defaulting Agencies. In
addition, any default in payment on any general obligation of any Agency whose
bonds contain a moral obligation provision could constitute a failure of certain
conditions that must be satisfied in connection with Federal guarantees of City
and MAC obligations and could thus jeopardize the City's long-term financing
plans.
(4) State Litigation: The State is a defendant in numerous legal
proceedings pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited to,
claims asserted against the State arising from alleged torts, alleged breaches
of contracts, condemnation proceedings, and other alleged violations of State
and Federal laws. Included in the State's outstanding litigation are a number
of cases challenging the constitutionality or the adequacy and effectiveness of
a variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. 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.
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(5) 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 State's 1997-98 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("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.
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 are 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.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1995, the total indebtedness of all localities in
the State other than New York City was approximately $19.0 billion.
Approximately $102.3 million of that indebtedness represented borrowing to
finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Eighteen
localities had outstanding indebtedness for deficiting financing at the close of
their fiscal year ending in 1995.
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, New York City or any of the Agencies were to suffer serious
financial difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State, including notes or bonds in the New York Trust, could be adversely
affected. Localities also face anticipated and potential problems resulting
from certain pending litigation, judicial decisions, and long-range economic
trends. The long range potential problems of declining
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urban population, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
(6) Other Issuers of New York Municipal Obligations. There are a number
of other agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
North Carolina Risk Factors
The portions of the following discussion regarding the financial condition
of the State government may not be relevant to general obligation or revenue
bonds issued by political subdivisions of the State. Those portions and the
sections which follow regarding the economy of the State are included for the
purpose of providing information about general economic conditions that may or
may not affect issuers of the North Carolina Bonds. None of the information is
relevant to Bonds issued by territories or possessions of the United States that
may be included in the portfolio of the North Carolina Trust.
General obligations of a city, town or county in North Carolina are payable
from the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue bonds,
college and hospital revenue bonds and other "private activity bonds" which are
essentially non-governmental debt issues and which are payable exclusively by
private entities such as non-profit organizations and business concerns of all
sizes. State and local governments have no obligation to provide for payment of
such private activity bonds and in many cases would be legally prohibited from
doing so. The value of such private activity bonds may be affected by a wide
variety of factors relevant to particular localities or industries, including
economic developments outside of North Carolina. In addition, the Trust is
concentrated in Bonds of North Carolina issuers and is subject to additional
risk from decreased diversification as well as factors that may be particular to
North Carolina or, in the case of revenue bonds payable exclusively from private
party revenues or from specific state non-tax revenue, factors that may be
particular to the related activity or payment party.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself of
the provisions of Chapter 9 of the United States Bankruptcy Code, but only with
the consent of the Local Government Commission of the State and of the holders
of such percentage or percentages of the indebtedness of the issuer as may be
required by the Bankruptcy Code (if any such consent is required). Thus,
although limitations apply, in certain circumstances political subdivisions
might be able to seek the protection of the Bankruptcy Code.
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State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the surplus
remaining in the State Treasury at the beginning of the period. In November
1996, the voters of the State approved a constitutional amendment giving the
Governor the power to veto certain legislative matters, including budgetary
matters.
Since 1994, the State has had a budget surplus, in part as a result of new
taxes and fees and spending reductions put into place in the early 1990's. In
addition, the State, like the nation, has experienced economic recovery during
the 1990's. The State budget is based upon estimated revenues and a multitude
of existing and assumed State and non-State factors, including State and
national economic conditions, international activity and federal government
policies and legislation. The unreserved General Fund balance at June 30, 1997,
the end of the 1996-97 fiscal year was approximately $292.2 million, and the
reserved balance of the General Fund was approximately $880.8 million.
In 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning January 1, 1995, the tax levied on various forms of
intangible personal property. The legislature provided specific appropriations
to counties and municipalities from state revenues to replace the revenues those
political subdivisions previously received from intangibles tax revenue. In
addition, in the 1996 session the legislature reduced the corporate income tax
rate from 7.75% to 6.9% (phased in over four years), reduced the food tax from
4% to 3%, and eliminated most privilege license taxes as of January 1, 1997. As
a result of the comprehensive tax reductions, General Fund tax collections for
1995-96 grew by only 1.0% over 1994-95, as opposed to the 6.4% growth that would
have occurred if such measures had not been taken.
In the 1996-97 Budget prepared by the Office of State Budget and
Management, it was projected that General Fund net revenues would increase 3%
over 1995-96. In fact, actual General Fund net revenues for 1996-97 increased
8.3% over 1995-96. This increase resulted primarily from growth in the North
Carolina economy, which resulted in increased personal and corporate income tax
receipts.
It is unclear what effect these developments at the State level may have on
the value of the Bonds in the North Carolina Trust.
Litigation. The following are cases pending in which the State faces the
risk of either a loss of revenue or an unanticipated expenditure. In the
opinion of the Department of State Treasurer, an adverse decision in any of
these cases would not materially adversely affect the State's ability to meet
its financial obligations.
Leandro, et. al. v. State of North Carolina and State Board of Education --
In May, 1994, students and boards of education in five counties in the State
filed suit in state Superior Court requesting a declaration that the public
education system of North Carolina, including its system of funding, violates
the North Carolina Constitution by failing to provide adequate or
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substantially equal educational opportunities and denying due process of law,
and violates various statutes relating to public education.
On July 24, 1997, the North Carolina Supreme Court issued a decision in the
case. The Court upheld the present funding system against the claim that it
unlawfully discriminated against low wealth counties on the basis that the
Constitution does not require substantially equal funding and educational
advantages in all school districts. The Court remanded the case for trial on
the claim for relief based on the Court's conclusion that the Constitution
guarantees every child of the state an opportunity to receive a sound basic
education in North Carolina public schools. Five other counties intervened and
now allege claims for relief on behalf of their students' rights to a sound
basic education on the basis of the high proportion of at-risk students in their
counties' systems. The North Carolina Attorney General's Office believes that
sound legal arguments support the State's position on the outstanding claims.
Francisco Case -- In August, 1994, a class action lawsuit was filed in
state court against the Superintendent of Public Instruction and the State Board
of Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and has
failed to supervise local school systems in administering programs for them.
The complaint does not allege an amount in controversy, but asks the Court to
order the defendants to fund a comprehensive program to ensure equal educational
opportunities for children with limited English proficiency. Discovery is
underway, but no trial date has been set. The North Carolina Attorney General's
Office believes that sound legal arguments support the State's position.
Faulkenbury v. Teachers' and State Employees' Retirement System; Peele v.
Teachers' and State Employees' Retirement System; Woodward v. Local Governmental
Employees' Retirement System -- Plaintiffs are disability retirees who brought
class actions in state court challenging changes in the formula for payment of
disability retirement benefits and claiming impairment of contract rights,
breach of fiduciary duty, violation of other federal constitutional rights, and
violation of state constitutional and statutory rights. The Superior Court
issued an order ruling in favor of plaintiffs. The Order was affirmed by the
North Carolina Supreme Court. A determination of the actual amount of the
State's liability and the payment process is being determined by the parties.
The plaintiffs have submitted documentation to the court asserting that the cost
in damages and higher prospective benefit payments to the plaintiffs and class
members would amount to $407 million. These amounts would be payable from the
funds of the Retirement systems.
The Bailey Case -- State and local government retirees filed a class action
suit in 1990 as a result of the repeal of the income tax exemptions for state
and local government retirement benefits. The original suit was dismissed after
the North Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to
comply with state law requirements for challenging unconstitutional taxes and
the United States Supreme Court denied review.
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In 1992, many of the same plaintiffs filed a new lawsuit alleging
essentially the same claims, including breach of contract, unconstitutional
impairment of contract rights by the State in taxing benefits that were
allegedly promised to be tax-exempt, and violation of several state
constitutional provisions. Thereafter, taxpayers also filed additional lawsuits
claiming refunds of income taxes paid for tax years through 1996. In May 1995,
the trial court found that the repeal of the tax exemption for state and local
government retirement benefits that were vested before August 1989 was unlawful
and that such benefits remain exempt from income taxation.
The North Carolina Supreme Court allowed discretionary review, and handed
down its decision on May 8, 1998, upholding the decision of the trial court.
Potential refunds and interest are estimated by the State to be $352.68 million
through December 31, 1997, with respect to refunds, and through June 30, 1998,
with respect to interest. Until this matter is resolved, any additional
potential refunds and interest will continue to accrue. In addition to refunds
and interest, the State will be unable to continue to tax the applicable
retirement benefits, thus reducing future revenue. The case was remanded by the
North Carolina Supreme Court for administration and further orders to carry out
the decision. Under the initial order of the trial judge, the State would
offset its liabilities to improperly taxed retirees by allowing tax credits to
eligible retirees who are deceased, no longer residents of the State, or who
have no tax liability, to be paid in whole to such retirees or their estates.
At present, no decision has been made by the State as to whether it will
seek review of the North Carolina Supreme Court's decision by the United States
Supreme Court or request the North Carolina Supreme Court to reconsider its
decision. There is no assurance that either of such actions would be
successful.
Patton v. State -- Federal retirees filed a class action suit in Wake
County Superior Court in 1995 seeking monetary relief for taxes paid since 1989.
This case was brought in anticipation of a favorable outcome for the plaintiffs
in the Bailey case. The federal retirees allege that a result in the Bailey
case that exempts State and local retirement benefits from State income taxes
would require a similar exemption for federal retirement benefits under the
United States Supreme Court's 1989 decision in Davis v. Michigan. In Davis, the
United States Supreme Court ruled that a Michigan income tax statute that taxed
federal retirement benefits while exempting those paid by state and local
governments violated the constitutional doctrine of intergovernmental tax
immunity. At the time of the Davis decision, North Carolina law contained
similar exemptions in favor of state and local retirees. Those exemptions were
repealed prospectively, beginning with the 1989 tax year, by the act of the
General Assembly held unconstitutional in Bailey. The Patton case was being
held in abeyance pending the outcome in Bailey. Now that Bailey has been
decided, the case is expected to proceed. Potential refunds and interest are
estimated by the State to be $702.36 million through December 31, 1997, with
respect to refunds, and through June 30, 1998, with respect to interest. Until
this matter is resolved, any additional potential refunds and interest have
continued and will continue to accrue.
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Smith, et al. v. Offerman and State of North Carolina, et. al. -- This
class action is related to litigation in Fulton Corporation v. Faulkner, 516
U.S. 325, 133 L.Ed.2d 796 (1995), a case filed by a single taxpayer relating to
the State's intangibles tax. On July 7, 1995, while the Fulton case was pending
before the United States Supreme Court, the Smith class action was commenced on
behalf of all other taxpayers who had complied with the requirements of the tax
refund statute N.C.G.S. 105-267, and would therefore be entitled to refunds if
Fulton prevailed on its refund claim. These original plaintiffs were later
designated Class A when a second group of plaintiffs were added. The new class,
denominated Class B, consisted of taxpayers who had paid the tax but failed to
comply with the tax refund statute. On February 21, 1996, the United States
Supreme Court held in Fulton that the State's intangibles tax on shares of tax
(by then repealed) violated the Commerce Clause of the United States
Constitution because it discriminated against stock issued by corporations that
do all or part of their business outside of North Carolina. It remanded the
case to the North Carolina Supreme Court to consider remedial issues including
whether the offending provision in the statute (the taxable percentage
deduction) was severable.
On February 10, 1997, the Supreme Court of North Carolina in the Fulton
remand proceeding severed the taxable deduction provision and invited the
General Assembly to determine the appropriate remedy for the discriminatory tax
treatment of eligible taxpayers who paid the tax but did not benefit from the
deduction. While the General Assembly considered the remedial issues raised by
the Fulton remand, the Smith plaintiffs moved for judgment on their refund
claims. On June 11, 1997, the trial judge in Smith ordered refunds to be made
for tax years 1991-1994 to the Class A plaintiffs and dismissed the Class B
claims. Refunds to Class A taxpayers, totaling approximately $120,000,000, have
substantially been paid, with interest. The Class B plaintiffs appealed, and
their appeal is pending in the North Carolina Court of Appeals. The decision in
Bailey that overruled prior decisions requiring a taxpayer to pay the tax and
file a protest within thirty (30) days may have an adverse impact on the outcome
of this case.
Shaver v. Boyles, Refrow, and State of North Carolina -- This class action
was filed on January 16, 1998, by intangibles taxpayers who paid intangibles tax
on shares of stock for tax years 1990-1994 and did not receive refunds because
they failed to meet the tax refund statute requirements. These are the same
taxpayers as Class B plaintiffs in Smith, but they claim refund entitlement
under an alleged alternative theory. They claim refunds of approximately
$131,750,000 for tax years 1991-1994 and $80,000,000 for tax year 1990.
In the opinion of the Department of the State Treasurer, the decision in
the Bailey case, if it becomes final, and any adverse decisions in the Patton
and Smith cases, should an adverse decision be rendered, will not materially
adversely affect the State's ability to meet its financial obligations in view
of the State's ongoing financial strength and of the current status of its
finances, including its budget stabilization reserve of $500 million. Also, as
of March 31, 1998, in addition to the State's beginning unreserved General Fund
balance of $315 million, the State has realized $585 million in revenues in
excess of expenditures in the General Fund.
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The State is involved in numerous other claims and legal proceedings, many
of which normally occur in governmental operations; however, the North Carolina
Attorney General does not expect any of the other outstanding lawsuits to
materially adversely affect the State's ability to meet its financial
obligations.
General. The population of the State has increased 13% from 1980, from
5,895,195 to 6,656,810 as reported by the 1990 federal census, and the State
rose from twelfth to tenth in population. The State's estimate of population as
of July, 1997 is 7,436,690. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only six municipalities with
populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
State has moved from an agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to the wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the
period 1980 to 1996, the State labor force grew about 33% (from 2,855,200 to
3,796,200). Per capita income during the period 1985 to 1996 grew from $11,870
to $22,010, an increase of 85.4%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of July 1997, the State was reported to
rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward trend since
1991. The following table reflects the fluctuations in certain key employment
categories:
<TABLE>
<CAPTION>
Category (All
Seasonally Adjusted) JUNE 1993 JUNE 1994 JUNE 1995 JUNE 1996 JUNE 1997
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,504,000 3,560,000 3,578,000 3,704,000 3,797,000
Nonagricultural Employment 3,203,400 3,358,700 3,419,100 3,506,000 3,620,300
Goods Producing Occupations 993,600 1,021,500 1,036,700 1,023,800 1,041,000
(mining, construction and
manufacturing)
Service Occupations 2,209,800 2,337,200 2,382,400 2,482,400 2,579,300
Wholesale/Retail Occupations 723,200 749,000 776,900 809,100 813,500
Government Employees 515,400 554,600 555,300 570,800 579,600
Miscellaneous Services 676,900 731,900 742,200 786,100 852,500
Agricultural Employment 88,400 53,000 53,000 53,000 not available
</TABLE>
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The seasonally adjusted unemployment rate in July 1997 was estimated to be
3.7% of the labor force, as compared with 4.8% nationwide.
North Carolina's economy continues to benefit from a vibrant manufacturing
sector. Manufacturing firms employ approximately 24% of the total non-
agricultural workforce. North Carolina has the second highest percentage of
manufacturing workers in the nation. The State's annual value of manufacturing
shipments totals $142 billion, ranking the State eighth in the nation. The
State 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. Charlotte is now
the second largest financial center in the country, based on assets of banks
headquartered there. The strength of the State's manufacturing sector also
supports the growth in exports; the latest annual statistics show $8.76 billion
in exports, making North Carolina one of the few states with an export trade
surplus.
In 1996, the State's gross agricultural income of nearly $8.0 billion
placed it eighth in the nation in gross agricultural income. The State ranks
third in the nation in net farm income. According to the State Commissioner of
Agriculture, in 1996, the State ranked first in the nation in the production of
flue-cured tobacco, total tobacco, turkeys and sweet potatoes; second in hog
production, trout and the production of cucumbers for pickles; third in the
value of net farm income poultry and egg products, and greenhouse and nursery
income; fourth in commercial broilers, peanuts, blueberries and strawberries;
and fifth in burley tobacco.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production, which had been the leading source of agricultural
income in the State, declined in 1995. The poultry industry is now the leading
source of gross agricultural income, at 29%, and the pork industry provides 22%
of the total agricultural income. Tobacco farming in North Carolina has been
and is expected to continue to be affected by major Federal legislation and
regulatory measures regarding tobacco production and marketing and by
international competition. The tobacco industry remains important to North
Carolina providing approximately 13% of gross agricultural income.
The number of farms has been decreasing; in 1997 there were approximately
57,000 farms in the State, down from approximately 72,000 in 1987 (a decrease of
about 20% in ten years). However, a strong agribusiness sector supports farmers
with farm inputs (agricultural chemicals and fertilizer, farm machinery, and
building supplies) and processing of commodities produced by farmers (vegetable
canning and cigarette manufacturing). North Carolina's agriculture industry,
including food, fiber and forest products, contributes over $45 billion annually
to the State's economy.
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The North Carolina Department of Commerce, Travel and Tourism Division,
indicates that travel and tourism is increasingly important to the State's
economy. Travel and tourism's $9.8 billion economic impact in 1996 represents a
6.5% increase over 1995. The North Carolina travel and tourism industry
directly supports 167,100 jobs or 4.7% of total non-agricultural employment.
Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's
also reaffirmed its stable outlook for the State in June 1996. Standard &
Poor's reports that North Carolina's rating reflects the State's strong economic
characteristics, sound financial performance, and low debt levels.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of rating
agencies and statements by, or news reports of statements by State officials and
employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any matters contained in this
Prospectus other than the tax opinion in Prospectus Part I.
Ohio Risk Factors
The Ohio Trust will invest most of its net assets in securities issued by
or no 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.
It is possible that the investment may be in particular Ohio Obligations, or in
those of particular issuers, as to which those factors apply. However, the
information below is intended only as a general summary, and is not intended as
a discussion of any specific factors that may affect any particular obligation
or issuer.
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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.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1996 is 11,173,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
The national figure for example, the reported 1990 average monthly State
rate was 5.7%, compared to the 5.5% national figure. However, for the last
seven years, the State rates were below the national rates (4.6% versus 4.9% in
1997). The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Trust or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY") or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund ("GRF"), for which
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has well-
established procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
The 1992-1993 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences, an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the Budget Stabilization Fund (BSF, a cash and
budgetary management fund) to the GRF in FY 1992.
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Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected and then timely addressed, an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance, and additional amounts from certain
other funds, were transferred late in the FY to the GRF, and adjustments made in
the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF
fund balance was approximately $111 million, of which, as a first step to
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service or lease rentals relating to any State obligations.
The 1994-1995 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995, with a GRF ending fund balance of $928
million, of which $535.2 million was transferred into the BSF. The significant
GRF fund balance, after leaving in the GRF an unreserved and undesignated
balance of $70 million, was transferred to the BSF and other funds including
school assistance funds and, in anticipation of possible federal program
changes, a human services stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. The 1996-97 biennium-ending GRF
fund balance was $834.9 million. Of that, $250 million went to school building
construction and renovation, $94 million to the school computer network, $44.2
million for school textbooks and instructional materials and a distance learning
program, and $34 million to the BSF (which had a May 9, 1998 balance of $862.7
million), and the $263 million balance to a State income tax reduction fund.
The GRF appropriations act for the 1997-98 biennium was passed on June 25,
1997, and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. Subsequent
litigation increased the fiscal year 1999 GRF appropriation level for elementary
and secondary education, with the increase to be funded in part by mandated
small percentage reductions in State appropriations for various State agencies
and institutions. Expressly exempt from those reductions are all appropriations
for debt service, including lease rental payments.
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The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, approved from 1921 to date (the latest
adopted in 1995), Ohio voters authorized the incurrence of State debt and the
pledge to taxes or excises to its payment. At 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 for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding authorization, and authorizes not more than $1.2 billion to
be outstanding at any time and not more than $220 million to be issued in a
fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5.1 billion of
which were outstanding at May 6, 1998.
The State estimates aggregate FY 1998 rental payments under various capital
lease and lease purchase agreements (as of May 6, 1998) to be 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 FY 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.
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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 (state-wide
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
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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.
Oregon Risk Factors
According to the Department of Administrative Services, Oregon's economy
continues to slow. Construction and manufacturing, the engines of the 1994-96
state economic boom, have clearly entered a period of slower growth. However,
income growth remains strong. This suggests that Oregon's consumers are
supplanting business investment as the primary force behind the state's economic
expansion.
Oregon employment increased 3.4% during 1997, down from 4.0% in 1996 but
well above the national average of 2.3%. Oregon's job growth was the 8th
fastest among the states in 1997. The Portland area also ranked 8th among large
metropolitan labor markets (more than 750,000 workers).
Job growth data through February 1998 showed Oregon slipped to number
sixteen among the states. For the previous 12-month period ending in February
1997, Oregon had the 8th fastest growth rate. The shifting nature of Oregon's
economic expansion is hinted at by the state-by-state comparisons. In
construction job growth, Oregon ranks number 28, slightly below the U.S.
average. The state ranks number 17 in year over year manufacturing job growth.
In trade employment (retail and wholesale), Oregon ranks number eight. This
indicates that while Oregon's construction and manufacturing sectors cool,
consumer activity remains relatively strong.
Manufacturing job growth slowed in the second half of 1997. Though it
picked up slightly in the first quarter, overall manufacturing jobs increased at
a relatively subdued 2.9% annual rate. Overall, high tech employment was
essentially flat. Lumber and wood products jobs edged up 2.2%. The largest
gains occurred in metals and food processing.
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The service-producing sectors recorded generally solid gains in the first
quarter of 1997, reflecting healthy consumer spending. Service sector
employment, exclusive of health, jumped 9.2%. Seasonal adjustment may have
contributed to this large gain. Wholesale trade jobs climbed 10.8%. This
follows three quarters of relatively small gains. Retail trade employment edged
up at a 1.5% rate. This follows a large 5.1% gain the fourth quarter of 1997.
Steady job growth characterized the traditionally regulated industries.
Financial services, despite layoffs associated with the U.S. Bank merger, grew
at a 2.2% rate. Transportation services increased 3.7% while communications and
utilities rose 4.0%.
Oregon's preliminary personal income figures for 1997 confirm the state's
strong economic performance. Overall, personal income rose 7.1% in 1997,
essentially matching the 7.2% rate recorded in 1996. Wage and salary income
climbed 8.5%. The year 1997 marked the third year in a row that wage and salary
income growth has exceeded 8%. Dividend, interest and rent income grew 6.6% in
1997. This figure does not include capital gains from stock price appreciation.
As a result, it understates the impact of the stock market on personal income.
The Oregon Office of Economic Analysis expects Oregon's economy to slow
further as Asian exports decline and the state's high technology investment boom
winds down. In-migration should remain relatively subdued as California's job
growth surpasses Oregon's. Oregon will likely continue shifting from a business
investment led expansion to one fueled primarily by consumer spending. Because
of this shift, the slowdown will be more pronounced in the manufacturing and
construction sectors. The service-producing sectors are expected to see only
moderately slower growth over the next two years.
Oregon's job growth is projected to slow from 3.4% in 1997 to 2.8% in 1998
and 1.7% in 1999. Personal income is forecast to increase 5.8% in 1998 and 5%
in 1999. The low inflation environment means that this income growth rate will
translate into a sizeable increase in purchasing power. After adjustment for
inflation, personal income is projected to rise 4.4% in 1998 and 2.7% in 1999.
A reduction in exports to Asia is an important factor slowing the state
economy. Asia is overwhelmingly the most important export market for Oregon's
forest and agricultural products. These sectors will slow further as Asian
demand weakens.
Deteriorating Asian markets will also slow the high technology
manufacturing sector. Moreover, this sector is in the process of consolidating
gains related to the rapid growth of the past four years. High tech job growth
averaged 10.1% from 1994 to 1996. It slowed to 6.7% in 1997. High tech
employment is forecast to increase 3.1% in 1998 before bottoming out at 1.7%
growth in 1999. The forecast is for a slowdown in high tech sector job growth,
not a decline. The development of a national recession would almost certainly
bring outright job reductions to this sector.
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Slowing high technology investment and lower rates of net in-migration will
likely translate into a softer state construction market. Construction
employment is forecast to edge up 2.1% in 1998 before declining 1.7% in 1999.
Housing starts are expected to decline 3.8% in 1998 and an additional 14.5% in
1999.
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.
The Office of Economic Analysis projects General Fund revenue to be $8,573.2
million for the 1997-99 biennium. This is an increase of $69.1 million compared
to the March 1998 forecast. The June 1997-99 revenue projection is $348.1
million higher than the 1997 close of legislative session (COS) forecast. The
beginning balance is estimated to be $794.2 million. The 1997-99 total General
Fund resource estimate is $9,367.4 million.
A surplus kicker refund credit is projected for personal income taxpayers.
If the current forecast holds, a refund of $356.2 million will be paid to
taxpayers in the fall of 1999. No corporate kicker credit is forecast.
General Fund revenue is projected to be $9,877.8 million for the 1999-2001
biennium. This is an increase of 15.2% from the prior biennium projection. The
beginning balance is forecast to be $604.2 million. Total General Fund
resources, equal to the sum of revenue and the beginning balance, are projected
to be $10,482.1 million for the biennium. The total resource forecast is $77.7
million higher than the March 1998 projection.
As of September 1, 1997, total outstanding general obligation bonds was
$3.26 billion. The debt service requirements, including interest of
approximately $2.39 billion, as of
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September 1, 1997, was $5.66 billion. Also as of September 1, 1997, the
certificates participation debt totaled $634.9 million. The debt service
requirements for certifications of participation for 1995-1997 was estimated at
$70.1 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," "Aa," and "AA," respectively.
Pennsylvania Risk Factors
Investors should be aware of certain factors that might affect the
financial conditions of the Commonwealth of Pennsylvania. Pennsylvania
historically has been identified as a heavy industry state although that
reputation has changed recently as the industrial composition of the
Commonwealth diversified when the coal, steel and railroad industries began to
decline. A more diversified economy was necessary as the traditionally strong
industries in the Commonwealth declined due to a long-term shift in jobs,
investment and workers away from the northeast part of the nation. The major
sources of growth in Pennsylvania are in the service sector, including trade,
medical and the health services, education and financial institutions.
Pennsylvania's agricultural industries are also an important component of the
Commonwealth's economic structure, particularly in crop and livestock products
as well as agribusiness and food related industries.
Strong growth experienced in Pennsylvania in 1997 was unanticipated and is
unlikely to continue. The peak growth was reached during the first quarter and
growth in subsequent quarters has been lower. Due to Pennsylvania's improved
competitive position, the Commonwealth should experience economic growth rates
close to the national average. The annual rate of job growth, ranked 45th in
1995, is currently ranked 17th nationwide.
Non-manufacturing employment has increased in recent years to 82.8% of
total Commonwealth employment as of March 1998. Consequently, manufacturing
employment constitutes a diminished share of total employment within the
Commonwealth. Manufacturing, contributing 17.2% of non-agricultural employment
as of March 1998, has fallen behind both the services sector and the trade
sector as the largest single source of employment within the Commonwealth. In
March 1998, the services sector accounted for 31.8% of all non-agricultural
employment while the trade sector accounted for 22.4%.
Preliminary results from the Pennsylvania Department of Labor and Industry
show Pennsylvania's total non-farm jobs increased by 66,900 or almost 1.2% from
March 1997 to March 1998, a stark difference from the 106,200 gain between
December 1996 and December 1997. The services industry was responsible for over
one-half of all new jobs created during this period. Retail trade increased
merely .31% or 3,000 jobs. Construction employment increased 3% or 6,300 jobs.
Manufacturing growth was slow at .6% or 5,100 jobs from March 1997 to March
1998. As of March 1998, the seasonally adjusted unemployment rate for the
Commonwealth was 4.8% compared to 4.7% for the United States.
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More jobs in 1997 brought faster growing personal income. For the four
quarters ending with the first quarter of 1997, personal income in Pennsylvania
rose at a rate of over 6%. This healthy advance contributed to a 6.1% increase
in General Fund tax revenue for fiscal year 1996-97 due to similar increases in
collections for personal income tax and the sales and use tax.
Financial information for the principal operating funds of the Commonwealth
is maintained on a budgetary basis of accounting. A budgetary basis of
accounting is used for the purpose of ensuring compliance with the enacted
operating budget and is governed by applicable statutes of the Commonwealth and
by administrative procedures. The Commonwealth also prepares annual financial
statements in accordance with generally accepted accounting principles ("GAAP").
The budgetary basis financial information maintained by the Commonwealth to
monitor and enforce budgetary control is adjusted at fiscal year-end to reflect
appropriate accruals for financial reporting in conformity with GAAP.
Fiscal 1997 Financial Results. At June 30, 1997, the Commonwealth reported
an unreserved/undesignated fund balance (budgetary basis) of $402.7 million in
the General Fund. This compares to a budgetary basis fund balance of $158.5
million at June 30, 1996. The budgetary basis fund balance for the fiscal year
ended June 30, 1997 was the result of revenue collections totaling $26,149.6
million less appropriation authorizations totaling $25,835.7 million, less other
net financing uses totaling $69.7 million. Included in the $25,835.7 million
appropriation authorizations are $164.3 million of state supplemental
appropriations and $207.0 million in federal supplemental appropriations
authorized during the fiscal year.
On a GAAP basis, at June 30, 1997, the Commonwealth's General Fund reported
a fund balance of $1,364.9 million, an increase of $729.7 million from the
$635.2 million fund balance at June 30, 1996. Total assets increased by $563.4
million to $4,268.5 million . Liabilities decreased $166.3 million to $2,903.6
million.
For fiscal year 1996-97, revenues of the Commonwealth's General, Special
Revenue, Debt Service and Capital Projects Funds (collectively, the governmental
funds) totaled $32,073 million, an increase of $1,147 million or 3.7% from
fiscal year 1995-96. Taxes accounted for 56.6% of the total general
governmental revenues. Their combined fund balances at June 30, 1997 increased
by $914.6 million to $2,900.9 million. The unreserved/undesignated fund balance
was $699.2 million compared to $378.2 million from the previous year.
Fiscal 1998 Budget. Total receipts for fiscal year 1997-98 are projected
at $17,077 million. Appropriations are estimated at $17,269 million. The
closing balance in the General Fund (after adding the beginning balance of $403
billion and deducting lapses of $120 million) is $331 million. After a transfer
to the Rainy Day Fund of $50 million, the ending balance in the General Fund for
fiscal year 1997-98 is estimated at $281 million.
Estimated revenues for 1997-98 have been raised $231.1 million due to
substantial upward revisions to personal income and inheritance revenues and
downward revisions to sales and use and insurance premiums taxes. The personal
income tax has provided almost all of the
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revenue surplus. Through December 1997, fiscal year 1997-98 revenues have
increased 2.8% over the same period in the prior fiscal year. Revised estimates
for 1997-98 project a 2.1% increase in General Fund revenues. Total revenues,
excluding proposed tax changes, are projected to increase by 2.9%.
Proposed Fiscal 1999 Budget. The Governor's 1998-99 Budget continues a
four-year record of tax cuts and fiscal discipline. The proposed 1998-99
General Fund Budget is $17.8 billion, an increase of $518 million or 3%. The
total recommended budget for 1998-99 is $35.8 billion. Approximately $10.16
billion is from federal funds.
General Fund revenue is estimated to be generated in the following
percentages: 34.7% from sales tax, 34.2% from personal income tax, 12.5% from
business tax, 9.3% from corporate net income tax, 5.4% from other revenues, and
3.9% from the inheritance tax. Total expenditures for fiscal year 1998-99 are
estimated in the following percentages: 44.3% for education, 34.4% for health
and human services, 11.3% for protection, 3.8% for direction programs, 3.1% for
other programs, and 3.1% for economic development.
Budgets for the past four years have proposed an average spending growth of
2.0%. The average growth in the enacted budgets during the previous ten-year
period was 5.4%. Over $128 million in tax reductions are proposed in 1998-99 to
help working families and to stimulate job creation and retention.
After an estimated $2 million transfer to the Rainy Day Fund in 1998-99,
the ending fund balance for the General Fund for fiscal year 1998-99 is
estimated at $9 million. With the projected transfer at the end of 1998-99, the
reserve balance in the Commonwealth's Rainy Day Fund will exceed $500 million,
more than seven times the balance in 1994-95.
Debt Administration. 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 $4,842 million. 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.
All outstanding general obligation bonds of the Commonwealth are rated AA-
by S&P and Aa3 by Moody's. Any explanation concerning the significance of such
ratings must be
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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.
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 population of 1,478,002 in 1996, 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.
S&P's rating on Philadelphia's general obligation bonds is "BBB" and
Moody's rating is "Baa." 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
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Pennsylvania, and there is no obligation on the part of the Commonwealth to make
payment on such local obligations in the event of default.
Tennessee Risk Factors
Constitutional Considerations. The State Constitution of Tennessee
requires a balanced budget. No legal authority exists for deficit spending for
operating purposes beyond the end of a fiscal year. Tennessee law permits tax
anticipation borrowing but any amount borrowed must be repaid during the fiscal
year for which the borrowing was done. Tennessee has not issued any debt for
operating purposes during recent years with the exception of some advances which
were made from the Federal Unemployment Trust Fund in 1984. No such advances
are now outstanding nor is borrowing of any type for operating purposes
contemplated.
The State Constitution of Tennessee forbids the expenditure of the proceeds
of any debt obligation for a purpose other than the purpose for which it was
authorized by statute. Under State law, the term of bonds authorized and issued
cannot exceed the expected life of the projects being financed. Furthermore,
the amount of a debt obligation cannot exceed the amount authorized by the
General Assembly.
The State and its Economy. The Tennessee economy entered 1998 at or near
its full employment productive capacity. Growth rates had slowed during 1996
but began to reaccelerate at the end of 1997, and the state's economic
fundamentals remain strong. The economy continues to expand, with growth
occurring in both jobs and income. As with 1997, the prospects for a sharp
upturn or downturn in economic activity seem slim.
Job growth for 1997 was initially reported to be 0.9%, but the revisions
show a much stronger growth rate of 1.9%. The data show strong growth in
service jobs and good growth in construction jobs, though somewhat less than
previously thought. Job growth will likely exceed initial estimates by at least
one-half a percentage point.
Based on other economic data, the state's economy appears to have closed
out 1997 on a reasonably strong note. Inflation-adjusted personal income is
expected to have advanced 2.8% for the year. Personal income growth may also be
revised upward at some future point. The state unemployment rate, once revised,
came in at 5.4% (slightly higher than the 5.2% rate in 1996). Sales tax
collections have also been expanding at a rapid 6.1% pace, second fastest in the
southeast.
As is typically the case, economic growth shows considerable variation
across the state. Some sectors of the economy, most notably manufacturing, have
had some problems. The revised data indicate a 0.5% decline in overall
manufacturing employment, as 1.0% growth in the durable goods sector was swamped
by a 2.3% decline the nondurable goods sector.
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Different regions of the state also have shown divergent growth patterns.
During most of the 1990s, the state's metropolitan regions have outgrown their
rural counterparts. For example, between 1990 and 1995, the state's
metropolitan areas saw jobs expand by 13.8%, while rural counties saw slower
growth of 7.9%. This continued in 1997, as rural counties grew less than one-
half as fast as metropolitan counties. The metropolitan areas of the state also
display higher levels of per capita personal income (a good measure of economic
well being), lower unemployment rates, more rapid population growth and a larger
retail sales tax base.
The short term economic outlook for 1998 and 1999 calls for reasonably
strong economic growth. Barring any unforeseen shocks to the national economy
that might jar the state from its current trajectory, the next two years will
look a lot like the revised situation for 1997.
Nonagricultural jobs will advance at least 1.2% in 1998, improving to 1.4%
growth in 1999. Employment in the manufacturing sector will be approximately
flat in 1998 and should be better in 1999. Jobs in nondurable goods
manufacturing will slip 1.3% in 1998 and will fall at the same pace in 1999.
Jobs in the durable goods sector will expand 0.9% in 1998 and 1.6% in 1999. The
state's unemployment rate will average 5.3% in both 1998 and 1999.
Nominal personal income is expected to rise 5.1% in 1998 and 5.5% in 1999.
Nominal per capital personal income should grow 3.9% and 4.2% in 1998 and 1999,
respectively.
Taxable sales are projected to grow 8.0% in the current fiscal year.
Taxable sales growth will subside to 4.1% in fiscal year 1999, aligning more
closely with underlying economic growth.
Tourism is rapidly becoming a more prominent sector in the Tennessee
economy, as 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. Both corn and nursery
operations have ranked fourth and fifth (often switching places) in terms of
cash receipts for Tennessee farmers since 1990. Other important crops include
wheat, floriculture, hay, and vegetables. Moreover, cattle operations generate
more income in the aggregate than any other single commodity in Tennessee. In
all, production agriculture generates more than $2 billion in annual cash
receipts for Tennessee farmers. For 1998, farmers will be concerned about the
potential impacts of the El Nino weather phenomenon on crop yields.
The 1997 year is the first full year under the 1996 farm bill, which
radically changed the character of federal income support for agriculture.
Overall, Tennessee will benefit from the bill, especially in the next few years
when federal payments are substantially higher than what farmers would have
received under the old policy regime. Yet, production shifting (i.e., cotton to
corn and wheat) is expected to cost the state $29.1 million in total income and
output, as well as
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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.
The actual state budget for fiscal year 1996-97 was $13.826 billion and the
estimated state budget for 1997-98 is $14.553 billion. Actual General Fund
revenue for fiscal year 1996-97 was $11,713.4 million. Actual General Fund
appropriations were $5,477.8 million. Estimated revenue for the General Fund
for fiscal year 1997-98 is $12,485.2 million, an increase of $771.7 million or
6.6%. Estimated appropriations in the General Fund for 1997-98 are $5,980.2
million, an increase of $502.5 million or 9.2%.
Total state revenue for fiscal year 1997-98 is estimated at $7,237.1
million, an increase of 4.4% from 1996-97. Of this amount, approximately 91.9%
or $6,649.7 million is scheduled to be obtained from taxes, each of which will
generate a certain percentage of the total revenues as follows: sales and use
(56.5%); franchise and excise (13.1%); gasoline and gasoline inspection (8.4%);
gross receipts and privilege (4.2%); motor vehicle (2.8%); income and
inheritance (2.7%); motor fuel (1.8%); tobacco, beer, and alcoholic beverages
(1.8%) and all other taxes (.6%).
The recommended state budget for fiscal year 1998-99 is $15.408 billion
which is $855.3 million more than 1997-98. Recommended General Fund revenues
for fiscal year 1998-99 are $12,909.4 million and appropriations are $6,281.5
million. The revenue increase from the prior fiscal year is $424.2 million or
3.4% and the increase in appropriations is $301.2 million, or 5%.
Total state revenue for fiscal year 1998-99 is estimated at $7,528.4
million. Approximately 92.1% or $6,934.9 million of this amount is projected to
be from taxes. The top three state tax revenue producers are expected to be
sales and use tax at 56.7% or $4,268.8 million of total state revenue, franchise
and excise tax at 13.3% or $1,004.1 million, and gasoline/gasoline inspection
tax at 8.2% or $620 million.
Bond Ratings. Tennessee's general obligation bonds are rated Aaa by
Moody's, AA+ by Standard & Poor's and AAA by Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.). There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
obligations contained in the Portfolio of a Tennessee Trust may not be adversely
affected by changes in economic or political conditions.
The state sold general obligation bonds in the amount of $197.8 million in
fiscal year 1996-97. This issue increased Tennessee's total general obligation
bonded debt at June 30, 1997 to $910,395,000. This debt was issued entirely for
institutional and building construction. Total authorized but unissued bonds
for fiscal year 1997-98 is $1,254,077,000. The 1998-99 proposed fiscal year
budget recommends the authorization of an additional $90 million in highway
construction bonds, $247.6 million in institutional and building bonds, and
$12.9 million in cash to finance capital projects.
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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.
Texas Risk Factors
Economic Outlook. Texas's economic growth in general has paralleled U.S.
growth since 1995. The State's economic expansion is expected to slow in 1998-
99, 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 in the next two
fiscal years.
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 3.5%. In fiscal 1996, the gross product grew by only 2.8%,
while the U.S. growth rate fell to 1.9%. This pattern should continue throughout
the 1998-99 biennium, with the State's inflation-adjusted gross state product
increasing at an annual rate of 3.2%, compared to 2.2% for national gross
domestic product.
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 have in 1996 and 1997.
Texas's largest industries in terms of earnings have traditionally been
services, state and local government, and retail trade. In 1996, they
represented 25.8%, 10.8%, and 9.2% of all earnings, respectively. Of the major
industries accounting for at least 5% of earnings, the slowest growing in 1996
was nondurable goods manufacturing (7.6% of all earnings) which increased by
3.0%; the fastest was construction (6.2% of all earnings) which increased by
9.2%. During the 1998-99 biennium, the electronic equipment and industrial
machinery industries will become more important to the Texas economy. In 1996,
exports of high-tech items such as
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semiconductors, communications equipment and computers reached $29.9 billion, or
more than 40% of total exports. High-tech firms with established plants in
Texas, such as Dell Computer, Texas Instruments, Compaq, Intel and Motorola,
will drive much of this growth.
Mexico is Texas's largest market, thanks in part to its proximity, trade
liberalization and the peso recovery. During 1997, the economic picture for
border areas began to brighten in the aftermath of the 1994 peso devaluation.
Mexico's fiscal crisis had spilled over into 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. Exports to Mexico,
which totaled $21.9 billion in 1995, or 32% of Texas's total exports, expanded
to $27.4 billion in 1996, or 37% of total exports. Brazil is another important
business partner, with exports jumping by 20% from 1995 to 1996.
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 1986, the State ranked 27th in the United States with a per
capita personal income of $14,024. In 1996, however, the State dropped to 32nd
in the nation, with personal income at $22,282 or 91.2% of the national average
($24,426). The 1996 per capita personal income in Texas reflected an increase of
4.6% from 1995, equaling the increase in the United States. The State
Comptroller's Office estimates that personal income will increase by 5.6%
annually through 1999, with about half of the growth attributable to inflation.
In fiscal 1997, Texas nonfarm employment registered 2.6% annual growth and
reached a record 8.45 million, including over 200,000 new jobs. The State
Comptroller's Spring 1997 economic forecast predicts 2.2% 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 1996, Texas
experienced its lowest unemployment rate in ten years, reaching 5.3%. This rate
has further decreased to 4.9% in October 1997. The unemployment rate for the
United States in 1996 was 5.4%, which has decreased to 4.3% in October 1997.
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 was the
State's largest source of income in fiscal 1997, increasing 4.0% compared to
1996 and totaling 28.4% of total revenue. Sales tax, which had been the main
source of revenue between 1981 and 1993, was second, accounting for 26.6% of
total revenues in fiscal 1997. For the past 10 years, the sales tax has produced
more revenue each year than all other taxes combined. Total sales tax
collections for the 1998-99 biennium are expected to grow by 8.8% and reach
$24.0 billion, an increase of $1.9 billion over the 1996-97 biennium. While
overall collections have expanded with the Texas economy, the growth in sales
tax collections
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has slackened recently. A cooling in the volume of retail spending and the final
implementation of an exemption from sales tax for production machinery are major
factors in the softer growth rates observed since 1994.
Oil production and regulation tax receipts in 1998-99 are expected to reach
$717 million, down from the $806 million collected in 1996-97. 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.
National gas tax receipts in 1998-99 are expected to reach $1,021 million, down
slightly from $1,159 million in 1996-97. Like oil, the increase in 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 $4.5 billion.
Net revenues for general and special funds at the end of fiscal 1997
totaled $42.6 billion, or 5.3% over fiscal 1996. The two largest increases in
revenue were a $1.4 billion (7.2%) rise in tax revenues and a $470.2 million
(4.0%) increase in federal funds. Expenditures at the end of fiscal 1997
increased by $1.8 billion, or 4.5% over fiscal 1996. Health and human service
agencies experienced the largest expenditure increase, $1.4 billion or 10.5%
over 1996, while transportation expenses were down by $343.7 million or 10.2%
from 1996.
The State's Comptroller's Office estimates that revenue in 1998-99 will
total $87.3 billion. The State of Texas will have $52.2 billion in funds
available to finance general revenue-related operations during the 1998-99
biennium. Available funds will come from three main sources. The ending balance
available for certification carried forward from the 1996-97 biennium was $2.4
billion. Total tax revenue will be $40.1 billion, and total non-tax revenue will
contribute an additional $9.7 billion. Of the remaining revenue, the single
largest portion will be $25.4 billion in federal revenue. The revenue estimate
for the 1996-97 biennium 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.
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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
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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. 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.
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.
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 an important component of Virginia's economy.
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The Virginia economy experienced solid growth in fiscal year 1997. Both
total nonagricultural employment and personal income growth were much stronger
than expected. Virginia nonagricultural employment grew by 2.9%, increasing by
90,600 jobs during fiscal year 1997, close to doubling the amount of new jobs
created in fiscal year 1996. All the employment sectors, with the exception of
wholesale and retail trade, recorded stronger job growth than forecast.
Although job losses continued in the manufacturing and federal government
sectors, they were less severe than forecast. Strong job growth pushed
Virginia's unemployment rate down to 4.3% in fiscal year 1997, the lowest since
fiscal year 1990.
The Virginia standard forecast expects the Commonwealth to slightly
outperform the nation in both job growth and personal income growth in the next
few years. Total personal income in Virginia is forecast to grow at 5.8%, 6.0%
and 6.1%, respectively, in fiscal years 1998 through 2000. In fiscal year 1998,
Virginia should add 76,800 nonagricultural jobs for growth of 2.4%. The
services sector is expected to again lead job growth with gains of 42,600 jobs
or 4.5% growth, less than the 5.2% growth rate achieved in fiscal year 1997.
Wholesale and retail trade should add almost 16,500 jobs, a slow steady growth
consistent with fiscal year 1997. Construction employment is expected to slow
from its brisk pace of fiscal year 1997, growing by only 2.2%, 1.1% and 1.2%,
respectively, in fiscal years 1998, 1999, and 2000. Virginia's manufacturing
employment is expected to improve slightly over the next three fiscal years.
The forecast calls for an increase of 2,100 jobs in fiscal year 1998, followed
by 0.8% and 0.7% growth in fiscal years 1999 and 2000, respectively. Job growth
is forecast to continue to slow over the next biennium, growing by 2.2% in
fiscal year 1999 and 1.8% in fiscal year 2000.
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 fiscal year 1991 to fiscal year 1997, job losses from federal
government downsizing were more than 60,000, nearly a typical year's job growth.
From fiscal year 1998 to 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.
Total retail sales rose 5.4% in Virginia during fiscal year 1997, well
above the 4.2% national average and stronger than the Commonwealth's fiscal year
1996 growth of 4.6%.
The Commonwealth's total revenue comprises two types of 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.
In fiscal year 1997, total revenues grew 8.1% to $7,949.3 million,
exceeding the official forecast of $7,751.0 million (5.4% growth) by $198.3
million. This marked the seventh consecutive year that actual revenue
collections exceeded the official forecast. In five of those seven years,
revenue collections were within one percent of the forecast.
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Collections of net individual income taxes contributed $141.8 million to
the revenue surplus in fiscal year 1997. Receipts of corporate income taxes and
sales and use taxes also exceeded their estimates. Collections of insurance
company premiums taxes and public service gross receipts taxes, however, fell
short of expectations. Collectively, the five major sources ended the year with
a surplus of $179.7 million. The forecast for general fund revenue shows growth
of 7.1% for fiscal year 1998, 5.8% for fiscal year 1999 and 6.0% growth for
fiscal year 2000.
General Fund - Cash Basis. The Commonwealth of Virginia has historically
operated on a fiscally conservative basis and is required by its Constitution to
have a balanced biennial budget. During fiscal year 1997, the General Fund
received $8.6 billion in resources. Individual income taxes accounted for 55%
of General Fund resources, while sales taxes made up 21%. These revenues plus
other direct revenues from outside sources totaled $8.1 billion, or 95%. The
remaining monies totaling $427 million came through transfers from other funds,
including alcoholic beverage sales and lottery profits.
Revenues (not including transfers) increased by $850 million over fiscal
year 1996. Individual income tax revenues, which grew by 10% compared to fiscal
year 1996, played a major role in this growth.
General Fund disbursements including transfers for fiscal year 1997 totaled
$8.1 billion. Expenditures totaled $6.8 billion and transfers to other funds
were $1.3 billion. Education accounted for 50%, while social services,
Medicaid, public health and mental health accounted for 23% of the General Fund.
Expenditures, not including transfers, increased by $358 million over the prior
year. Of the total increase, education accounted for 74%, while public safety
accounted for another 20%.
General Fund revenues exceeded expenditures and net transfers by $460.9
million in fiscal year 1997. In other words, the General Fund had an operating
profit for the year. The profit resulted from increased tax receipts coupled
with expenditures that were less than budgeted.
The General Fund balance on a cash basis has fluctuated in previous years.
In fiscal year 1993, Virginia had just come out of a severe recession. Over the
next year, economic conditions continued to improve and the balance again
increased. A $168 million operating deficit in fiscal year 1995, caused
primarily by payments made to settle a lawsuit filed by federal retirees,
reduced the General Fund balance at the end of fiscal year 1995 to $350.7
million. Fiscal year 1996's $126 million profit restored the balance of $476.3
million. Fiscal year 1997 showed a strong balance of $937.2 million.
Balances are "committed" if there are plans in place for their use.
"Available" balances may be used by the Governor and General Assembly for new
projects or programs. At the end of fiscal year 1997, there was an available
balance of $76.3 million, compared to an available balance of $1.1 million at
the end of fiscal year 1996.
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The "rainy day" fund is required by an amendment to the State Constitution
which was approved by the voters on November 7, 1992. This fund is a reserve of
fund balance 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 1997 is $214.9 million. The
1998-2000 budget makes deposits to the rainy day fund totaling $211 million,
bringing the amount currently available to $426.4 million, or roughly 4.5% of
annual general fund revenues.
General Fund - GAAP Basis. When the General Fund was accounted for on a
GAAP basis, the fund had a positive balance of $491.8 million in fiscal year
1997, compared to a balance of $180.4 million in fiscal year 1996. Virginia
fully adopted GAAP financial reporting in fiscal year 1983, and experienced GAAP
deficits from fiscal year 1990-92 as a result of a recession. The deficit in
fiscal year 1995 was primarily the result of the federal retiree lawsuit noted
earlier. 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 as a problem for state finances.
Debt Administration. The total outstanding debt of the Commonwealth as of
the end of fiscal year 1997 was $10.7 billion. Long term bonds and notes
represent 97% of all debt, with the remaining 3% consists of capital leases,
installment purchase contracts and various other payables. A total of $1.1
billion, or 10.7% 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 $2.3 billion and was
outstanding at the end of fiscal year 1997. This accounted for 21.3% of all
debt on the books of the Commonwealth. Non-tax supported debt makes up 68% 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 year 1997 was $7.3 billion.
The Commonwealth of Virginia maintains a "triple A" bond rating from
Standard & Poor's, Moody's Investors Service, Inc. and Fitch IBCA, Inc.
(formerly Fitch Investors Service, L.P.) 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.
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SEC FILE NO. 33-55405
40 ACT FILE NO. 811-2271
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-6
For registration under the Securities Act of 1933 of Securities of Unit
Investment Trusts registered on Form N-8B-2
Nuveen Tax-Free Unit Trust, Series 756 (fORMERLY KNOWN
As Nuveen Tax-Exempt Unit Trust)
JOHN NUVEEN & CO. INCORPORATED
(Name of Depositor)
333 West Wacker Drive
Chicago, Illinois 60606
(Complete address of Depositor's Principal Executive Offices)
John Nuveen & Co., Incorporated Chapman & Cutler
Attention: Gifford R. Zimmerman Attention: Eric F. Fess
333 West Wacker Drive 111 West Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60603
(Name and complete address of Agents for Service)
An indefinite number of Units has been registered pursuant to Rule 24F-2
promulgated under the Investment Company Act of 1940, as amended. On February
28, 1990, a Rule 24F-2 Notice with respect to this Series was filed with the
Securities and Exchange Commission.
It is proposed that this filing will become effective (check appropriate box)
( ) Immediately upon filing pursuant to paragraph (B)
( X ) On February 1, 1999 pursuant to paragraph (B) of Rule 485
( ) 60 days after filing pursuant to paragraph (A)
( ) On (date) pursuant to paragraph (A) of Rule (485 or 486)
( ) Check box if it is proposed that this filing will become
effective on (date) at (time) pursuant to Rule 487.
Contents of Post-Effective Amendment
of Registration Statement
This Post-Effective Amendment of Registration Statement comprises the
following papers and documents:
The Facing Sheet
The Prospectus
The Signatures
The Consent of Independent Accounts
Part One of the Registrant's Prospectus, filed separately, is incorporated by
this Reference hereto.
PAGE 2
Tax-Free Unit Trust
Series 756
National Insured Trust 278 71,703.862 Units
California Insured Trust 232 34,312.578 Units
Pennsylvania Insured Trust 187 32,360.865 Units
Prospectus - Part Two
Revision Date February 1, 1999
Note: This Prospectus Part Two may not be distributed unless accompanied by
Part One.
Currently Offered at Public Offering Price plus interest accrued to the date
of settlement. Minimum purchase - either $5,000 or 50 Units, whichever is
less.
THE UNITS of fractional undivided interest in the Nuveen Tax-Free Unit Trust
being offered hereby are issued and outstanding Units that have been
reacquired by John Nuveen & Co. Incorporated either by purchase of Units
tendered to the Trustee for redemption or by purchase in the open market. The
price paid in each instance was not less than the Redemption Price determined
as provided in Part One under the caption "How Units May Be Redeemed Without
Charge." The Units are being offered at the Public Offering Price computed in
the manner described in Part One under the caption "Public Offering Price."
Any profit or loss resulting from the sale of Units will accrue to John Nuveen
& Co. Incorporated and no proceeds from the sale will be received by the
Trust.
THE NUVEEN TAX-FREE UNIT TRUST consists of a number of underlying separate
unit investment trusts, each of which contains a diversified portfolio of
interest-bearing obligations issued by or on behalf of the states (or in the
case of State Trusts, primarily by or on behalf of the State for which such
State Trust is named) and counties, municipalities, authorities and political
subdivisions thereof, the interest on which is, in the opinion of bond counsel
to each issuer, exempt from all Federal income tax and, in the case of a State
Trust, from State income taxes in the State for which such State Trust is
named. All Bonds in each Trust were rated in the category "A" or better by
Standard & Poor's Corporation or Moody's Investors Service, Inc. on the Date
of Deposit ("BBB" or "Baa", respectively, or better by such services in the
case of National Traditional Trust 76 and earlier National Traditional
Trusts). Current ratings, if any, on Bonds in a Trust are set forth in the
Schedule of Investments for such trust herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PAGE 3
<PAGE>
<TABLE>
ESSENTIAL INFORMATION REGARDING THE TRUST(S)
As Of November 30, 1998
Sponsor and Evaluator.......John Nuveen & Co. Incorporated
Trustee.................The Chase Manhattan Bank, N.A.
The income, expense and distribution data set forth below have been calculated for Unitholders electing to receive monthly
distributions. Unitholders choosing distributions quarterly or semi-annually will receive a slightly higher net annual interest
income because of the lower Trustee's fees and expenses under such plans.
<CAPTION>
National Insured California Insured Pennsylvania
Trust 278 Trust 232 Insured Trust 187
- ------------------------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Principal Amount of Bonds in Trust............... $ 7,110,000 $ 3,435,000 $ 3,185,000
Number of Units.................................. 71,159.862 34,312.578 31,880.865
Fractional Undivided Interest in
Trust Per Unit................................. 1/ 71,159.862 1/ 34,312.578 1/ 31,880.865
Public Offering Price ---
Less then 1,000 Units
Aggregate Bid Price of Bonds in Trust........ $ 7,763,546 $ 3,598,194 $ 3,361,785
Plus Sales Charge <F1>....................... $ 381,345 $ 209,180 $ 195,656
Total...................................... $ 8,144,891 $ 3,807,374 $ 3,557,441
Divided by Number of Units................... $ 114.46 $ 110.96 $ 111.59
Plus Cash Per Unit <F2>...................... $ 0.06 $( 0.11) $ 0.03
Public Offering Price Per Unit <F3>.......... $ 114.52 $ 110.85 $ 111.62
Redemption Price Per Unit (exclusive of
accrued interest).............................. $ 109.16 $ 104.75 $ 105.48
Sponsor's Repurchase Price Per Unit
(exclusive of accrued interest)................ $ 109.16 $ 104.75 $ 105.48
Excess of Public Offering Price Per Unit
over Redemption Price Per Unit................. $ 5.36 $ 6.10 $ 6.14
Excess of Public Offering Price per Unit over
Sponsor's Repurchase price Per Unit............ $ 5.36 $ 6.10 $ 6.14
Par Value Per Unit <F4>...................... $ 100.55 $ 99.99 $ 99.93
Calculation of Net Annual Interest Income
Per Unit
Annual Interest Income....................... $ 6.1862 $ 5.7172 $ 6.0113
Less Estimated Annual Expense................ $ 0.1923 $ 0.1974 $ 0.2001
Net Annual Interest Income................... $ 5.9939 $ 5.5198 $ 5.8112
Daily Rate of Accrual Per Unit................... $ 0.01665 $ 0.01533 $ 0.01614
Trustee's Annual Fee per $1000 principal (6)..... $ 1.7190 $ 1.7260 $ 1.7090
Estimated Current Return <F5>.................... 5.23% 4.98% 5.21%
Estimated Long Term Return <F5>.................. 3.59% 4.26% 3.83%
Evaluations for purpose of sale, purchase or redemption of Units are made as of the close of trading on the New York Stock Exchange
next following receipt by John Nuveen & Co. Incorporated of an order for a sale or purchase of units or receipt by United States
Trust Company of New York of units tendered for redemption.
- -------------------------------------------------------------------------------------------------------------
<F1>
(1) See "Public Offering Price" in Part One for the method by which the
sales charge is calculated.
<F2>
(2) This amount represents cash held by the Trust (or an advancement of
cash to the Trust by the Trustee) which may amount to less than $.01 per Unit
and is added to (or deducted from) the Public Offering Price.
<F3>
(3) Units are offered at the Public Offering Price plus accrued interest to
the date of settlement (three business days after purchase). On the above
date there was added to the Public Offering Price of the National Insured
Trust 278, California Insured Trust 232 and Pennsylvania Insured Trust 187,
respectively, $114.52, $110.85 and $111.62, accrued interest to the settlement
date of $.05, $.07 and $.05, for a total price of $114.57, $110.92 and
$111.67, respectively.
<F4>
(4) Par value per Unit is each Unit's pro rata share of aggregate principal
amount of Bonds in the Trust adjusted to reflect cash, if any, held in or
advanced to the Principal Account.
<F5>
(5) See "Estimated Long Term Return and Estimated Current Return" in Part
One for an explanation of these returns.
<F6>
(6) Notwithstanding anything to the contrary in Part One, the Trustee's
Annual Fee is set forth herein. The Trustee's Annual Fee per $1000 principal
amount of Bonds set forth above is calculated for Unitholders electing the
monthly plan of distribution. The Trustee's Annual Fee per $1000 principal
amount of Bonds for National Insured Trust 278, California Insured Trust 232
and Pennsylvania Insured Trust 187 will be $1.3990,$1.4060 and $1.3890, under
the quarterly distribution option and $1.2090,$1.2160 and $1.1990, under the
semi-annual distribution option.
PAGE 4
<PAGE>
Essential Information Regarding the Trust(s) on
Date of Deposit (Continued)
General Information
Record Dates ................................................ See "Distributions to Unitholders" in Part One
Distribution Dates .......................................... See "Distributions to Unitholders" in Part One
Minimum Principal Distribution ............................................................. $0.10 per Unit.
Date Trust Established ...................................................................... October 5,1994
Mandatory Termination Date ........................ See "Amendment and Termination of Indenture" in Part One
Minimum Value of Trust ............................ See "Amendment and Termination of Indenture" in Part One
Sponsor's Annual Evaluation Fee ................................. $0.170 per $1000 principal amount of Bonds
</TABLE>
PAGE 5
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
NATIONAL INSURED TRUST 278
(Series 756)
Statement of Net Assets
September 30, 1998
<S> <C>
Assets:
Investments in municipal securities,
at market value (Cost $6,837,987) (Note 1) ............... $ 7,855,516
Accrued interest receivable ................................ 108,991
--------------
Total assets ..................................... $ 7,964,507
--------------
Liabilities:
Advance from Trustee ....................................... $ 36,983
Accrued trustee and evaluator fees ......................... 2,603
--------------
Total liabilities ................................ $ 39,586
--------------
Net assets, applicable to 71,704 units of
fractional undivided interest outstanding ...... $ 7,924,921
==============
Net assets, represented by:
Cost to original investors of 75,000 units sold ............ $ 7,516,644
Less initial underwriting commission (Note 1) ............ ( 368,284)
--------------
$ 7,148,360
Less cost of 3,296 units redeemed .......................... ( 349,014)
--------------
$ 6,799,346
Undistributed net investment income ........................ 66,436
Unrealized appreciation (depreciation) of investments ...... 1,017,529
Accumulated net realized gain (loss) from
investment transactions .................................. 41,610
Principal distributions to unitholders of proceeds
from investment transactions ............................. 0
--------------
$ 7,924,921
==============
Net asset value per unit:
Net Asset Value Per Unit
Before
Type of Units Accrued Accrued
Income Distribution Outstanding Interest Interest Total
Monthly.................. 47,088 $ 109.60 $ .51 $ 110.11
Quarterly................ 13,147 109.60 1.02 110.62
Semi-Annual.............. 11,469 109.60 2.53 112.13
--------------- ============ ============== ===========
71,704
===============
See accompanying notes to financial statements.
</TABLE>
PAGE 6
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
NATIONAL INSURED TRUST 278
(Series 756)
Statements of Operations and Changes in Net Assets
Year Ended September 30,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Statement of Operations
<S> <C> <C> <C>
Investment income (Note 1):
Interest income ................................... $ 449,228 $ 459,435 $ 463,208
---------------- ---------------- ----------------
Expenses (Note 3):
Trustee fees and expenses ....................... $ 12,403 $ 12,672 $ 14,296
Evaluator fees .................................. 1,237 1,265 1,275
---------------- ---------------- ----------------
Total expenses .............................. $ 13,640 $ 13,937 $ 15,571
---------------- ---------------- ----------------
Net investment income ................... $ 435,588 $ 445,498 $ 447,637
---------------- ---------------- ----------------
Realized and unrealized gain (loss) on investments
(Note 1):
Net realized gain (loss) from investment
transactions .................................. $ 29,230 $ 11,759 $ 621
Net change in unrealized appreciation or
depreciation of investments ................... 210,210 303,758 94,842
---------------- ---------------- ----------------
Net gain (loss) on investments .......... $ 239,440 $ 315,517 $ 95,463
---------------- ---------------- ----------------
Net increase (decrease) in net assets
from operations ................................. $ 675,028 $ 761,015 $ 543,100
================ ================ ================
Statement of Changes in Net Assets
Operations:
Net investment income ............................. $ 435,588 $ 445,498 $ 447,637
Net realized gain (loss) from investment
transactions (Note 1) ........................... 29,230 11,759 621
Net change in unrealized appreciation or
depreciation of investments ..................... 210,210 303,758 94,842
---------------- ---------------- ----------------
Net increase (decrease) in net assets
from operations ............................. $ 675,028 $ 761,015 $ 543,100
---------------- ---------------- ----------------
Distributions to unitholders from:
Net investment income ............................. $( 437,354) $( 448,260) $( 448,031)
Proceeds from investment transactions ............. 0 0 0
---------------- ---------------- ----------------
Total distributions to unitholders ............ $( 437,354) $( 448,260) $( 448,031)
---------------- ---------------- ----------------
Redemption of 1,947, 1,248 and
99 units, respectively .......................... $( 209,329) $( 129,494) $( 10,026)
---------------- ---------------- ----------------
Total increase (decrease) in net assets ............. $ 28,345 $ 183,261 $ 85,043
Net assets at beginning of year ..................... 7,896,576 7,713,315 7,628,272
---------------- ---------------- ----------------
Net assets at end of year (including
undistributed net investment income of
$66,436,$68,201 and $70,963,respectively) .......... $ 7,924,921 $ 7,896,576 $ 7,713,315
================ ================ ================
See accompanying notes to financial statements.
</TABLE>
PAGE 7
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
NATIONAL INSURED TRUST 278
(Series 756)
Schedule of Investments
September 30, 1998
<CAPTION>
Ratings(2) Carrying
Optional ---------- Value
Redemption Standard at Market
Principal Name of Issuer and Title of Issue Provisions(1) & Poor's Moody's (Bid Prices)
- ------------ --------------------------------------------------- ------------- ---------- ---------- ------------
<C> <S> <C> <C> <C> <C>
$ 750,000 The City of Los Angeles, California, Wastewater 2003 at 102 AAA Aaa $ 795,982
System Revenue Bonds, Refunding Series 1993-A,
5.800% Due 6/1/2021.
950,000 Metropolitan Pier and Exposition Authority 2003 at 102 AAA Aaa 1,066,679
(Illinois), McCormick Place Expansion Project
Bonds, Series 1992A, 6.500% Due 6/15/2022. (Escrow
Secured To Optional Redemption Date.)
670,000 Illinois Development Finance Authority, Pollution 2004 at 102 AAA Aaa 702,207
Control Refunding Revenue Bonds, 1994 Series A
(Illinois Power Company Project), 5.700% Due
2/1/2024.
590,000 Massachusetts Bay Transportation Authority, General 2004 at 102 AAA Aaa 656,611
Transportation System Bonds, 1994 Series B Bonds,
5.900% Due 3/1/2024. (Escrow Secured To Optional
Redemption Date.)
550,000 The Pollution Control Financing Authority of Salem 2004 at 102 AAA Aaa 600,749
County (New Jersey), Pollution Control Revenue
Refunding Bonds, 1994 Series B (Public Service
Electric and Gas Company Project), 6.250% Due
6/1/2031.
750,000 New York State Medical Care Facilities Finance 2004 at 102 AAA Aaa 829,763
Agency, Mental Health Services Facilities
Improvement Revenue Bonds, 1994 Series E, (General
Obligation Bonds.) 6.500% Due 8/15/2024.
250,000 Metropolitan Transportation Authority, New York, 2004 at 101.5 AAA Aaa 285,492
Commuter Facilities Revenue Bonds, Series 1994A,
6.500% Due 7/1/2024. (Escrow Secured To Optional
Redemption Date.)
500,000 Lehigh County Industrial Development Authority, 2004 at 102 AAA Aaa 550,120
Pollution Control Revenue Refunding Bonds, 1994
Series B (Pennsylvania Power & Light Company
Project), 6.400% Due 9/1/2029.
PAGE 8
<PAGE>
NUVEEN TAX-FREE UNIT TRUST
NATIONAL INSURED TRUST 278
(Series 756)
Schedule of Investments
September 30, 1998
<CAPTION>
Ratings(2) Carrying
Optional ---------- Value
Redemption Standard at Market
Principal Name of Issuer and Title of Issue Provisions(1) & Poor's Moody's (Bid Prices)
- ------------ --------------------------------------------------- ------------- ---------- ---------- ------------
<C> <S> <C> <C> <C> <C>
$ 725,000 Harris County Health Facilities (Texas), 2004 at 101 AAA Aaa $ 821,889
Development Corporation Hospital Revenue Bonds
(Hermann Hospital), Series 1994, 6.375% Due
10/1/2024. (Escrow Secured To Optional Redemption
Date.)
730,000 Texas Health Facilities Development Corporation, 2003 at 102 AAA Aaa 789,918
Hospital Revenue Bonds (All Saints Episcopal
Hospitals of Fort Worth Project), Series 1993B,
6.250% Due 8/15/2022.
200,000 Conservation and Renewable Energy System (State of 2004 at 102 AAA Aaa 223,086
Washington), Conservation Project Revenue Bonds,
Series 1994, 6.500% Due 10/1/2014.
500,000 Washington Public Power Supply System, Nuclear 2003 at 102 AAA Aaa 533,020
Project No. 2 Refunding Revenue Bonds, Series
1993A, 5.750% Due 7/1/2012.
- ------------ ------------
$ 7,165,000 $ 7,855,516
============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Financial Statements and notes to Schedule of Investments.
One Bond in the Trust is a general obligation of the governmental entity
issuing it and is backed by the taxing power thereof. Payment of principal
and interest on four Bond(s) in the Trust is secured by funds or securities
deposited in escrow. The remaining issues are payable as to principal and
interest from the income of a specific project or authority and are not
supported by the issuers' power to levy taxes. The sources of payment for
these remaining issues in the Trust are divided as follows: Power Revenue, 5;
Health Care Facility Revenue, 1; Water And/or Sewer Revenue, 1.
Approximately 34% of the aggregate principal amount of Bonds in the Trust
consist of obligations of issuers whose revenues are derived from the sale or
service of Power Revenue.
For a discussion of the characteristics of bonds issued by various types of
issuers and of the risks associated with an investment therein, see "Selection
of Bonds for Deposit in the Trusts" in Part One.
All of the Bonds in the Trust, as insured, are rated AAA by Standard & Poor's
Corporation and Aaa by Moody's Investors Service, Inc. 23% of the Bonds
comprise issues of entities located in the state of Illinois. The Bond
Portfolio consists of 12 obligations issued by entities located in 8 states.
</TABLE>
PAGE 9
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
CALIFORNIA INSURED TRUST 232
(Series 756)
Statement of Net Assets
September 30, 1998
<S> <C>
Assets:
Investments in municipal securities,
at market value (Cost $3,083,868) (Note 1) ............... $ 3,607,370
Accrued interest receivable ................................ 51,330
--------------
Total assets ..................................... $ 3,658,700
--------------
Liabilities:
Advance from Trustee ....................................... $ 25,520
Accrued trustee and evaluator fees ......................... 1,221
--------------
Total liabilities ................................ $ 26,741
--------------
Net assets, applicable to 34,312 units of
fractional undivided interest outstanding ...... $ 3,631,959
==============
Net assets, represented by:
Cost to original investors of 35,000 units sold ............ $ 3,305,059
Less initial underwriting commission (Note 1) ............ ( 161,934)
--------------
$ 3,143,125
Less cost of 688 units redeemed ............................ ( 68,096)
--------------
$ 3,075,029
Undistributed net investment income ........................ 28,631
Unrealized appreciation (depreciation) of investments ...... 523,502
Accumulated net realized gain (loss) from
investment transactions .................................. 4,797
Principal distributions to unitholders of proceeds
from investment transactions ............................. 0
--------------
$ 3,631,959
==============
Net asset value per unit:
Net Asset Value Per Unit
Before
Type of Units Accrued Accrued
Income Distribution Outstanding Interest Interest Total
Monthly.................. 23,699 $ 105.01 $ .51 $ 105.52
Quarterly................ 6,062 105.01 .97 105.98
Semi-Annual.............. 4,551 105.01 2.37 107.38
--------------- ============ ============== ===========
34,312
===============
See accompanying notes to financial statements.
</TABLE>
PAGE 10
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
CALIFORNIA INSURED TRUST 232
(Series 756)
Statements of Operations and Changes in Net Assets
Year Ended September 30,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Statement of Operations
<S> <C> <C> <C>
Investment income (Note 1):
Interest income ................................... $ 197,182 $ 197,964 $ 198,325
---------------- ---------------- ----------------
Expenses (Note 3):
Trustee fees and expenses ....................... $ 5,934 $ 6,093 $ 6,911
Evaluator fees .................................. 586 589 590
---------------- ---------------- ----------------
Total expenses .............................. $ 6,520 $ 6,682 $ 7,501
---------------- ---------------- ----------------
Net investment income ................... $ 190,662 $ 191,282 $ 190,824
---------------- ---------------- ----------------
Realized and unrealized gain (loss) on investments
(Note 1):
Net realized gain (loss) from investment
transactions .................................. $ 2,938 $ 892 $ 0
Net change in unrealized appreciation or
depreciation of investments ................... 101,894 140,173 114,768
---------------- ---------------- ----------------
Net gain (loss) on investments .......... $ 104,832 $ 141,065 $ 114,768
---------------- ---------------- ----------------
Net increase (decrease) in net assets
from operations ................................. $ 295,494 $ 332,347 $ 305,592
================ ================ ================
Statement of Changes in Net Assets
Operations:
Net investment income ............................. $ 190,662 $ 191,282 $ 190,824
Net realized gain (loss) from investment
transactions (Note 1) ........................... 2,938 892 0
Net change in unrealized appreciation or
depreciation of investments ..................... 101,894 140,173 114,768
---------------- ---------------- ----------------
Net increase (decrease) in net assets
from operations ............................. $ 295,494 $ 332,347 $ 305,592
---------------- ---------------- ----------------
Distributions to unitholders from:
Net investment income ............................. $( 190,746) $( 193,672) $( 189,789)
Proceeds from investment transactions ............. 0 0 0
---------------- ---------------- ----------------
Total distributions to unitholders ............ $( 190,746) $( 193,672) $( 189,789)
---------------- ---------------- ----------------
Redemption of 264, 5 and
125 units, respectively ......................... $( 27,336) $( 450) $( 12,291)
---------------- ---------------- ----------------
Total increase (decrease) in net assets ............. $ 77,412 $ 138,225 $ 103,512
Net assets at beginning of year ..................... 3,554,547 3,416,322 3,312,810
---------------- ---------------- ----------------
Net assets at end of year (including
undistributed net investment income of
$28,631,$28,715 and $31,105,respectively) .......... $ 3,631,959 $ 3,554,547 $ 3,416,322
================ ================ ================
See accompanying notes to financial statements.
</TABLE>
PAGE 11
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
CALIFORNIA INSURED TRUST 232
(Series 756)
Schedule of Investments
September 30, 1998
<CAPTION>
Ratings(2) Carrying
Optional ---------- Value
Redemption Standard at Market
Principal Name of Issuer and Title of Issue Provisions(1) & Poor's Moody's (Bid Prices)
- ------------ --------------------------------------------------- ------------- ---------- ---------- ------------
<C> <S> <C> <C> <C> <C>
$ 500,000 California Statewide Communities Development 2003 at 102 AAA Aaa $ 515,650
Authority, Certificates of Participation, Sutter
Health Obligated Group, 5.500% Due 8/15/2023.
500,000 California Statewide Communities Development 2004 at 102 AAA Aaa 538,045
Authority, Certificates of Participation, Sharp
Healthcare Obligated Group, 6.000% Due 8/15/2024.
475,000 California Educational Facilities Authority, 2003 at 102 AAA Aaa 491,616
Revenue Bonds (Pooled College and University
Projects), 1993 Series A, 5.500% Due 6/1/2019.
500,000 California Health Facilities Financing Authority, 2003 at 102 AAA Aaa 517,225
Kaiser Permanente, Revenue Bonds, 1993 Series C,
5.600% Due 5/1/2033.
490,000 Los Angeles County Metropolitan Transportation 2003 at 102 AAA Aaa 509,972
Authority (California), Proposition A, Sales Tax
Revenue Refunding Bonds, Series 1993-A, 5.625% Due
7/1/2018.
500,000 The City of Los Angeles, California, Wastewater 2003 at 102 AAA Aaa 530,655
System Revenue Bonds, Refunding Series 1993-A,
5.800% Due 6/1/2021.
470,000 Sacramento Municipal Utility District (California), 2004 at 102 AAA Aaa 504,207
Electric Revenue Bonds, 1994 Series I, 6.000% Due
1/1/2024.
- ------------ ------------
$ 3,435,000 $ 3,607,370
============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Financial Statements and notes to Schedule of Investments.
All of the issues are payable as to principal and interest from the income of
a specific project or authority and are not supported by the issuers' power to
levy taxes. The sources of payment for these issues in the Trust are divided
as follows: Dedicated-Tax Supported Revenue, 1; Education Revenue, 1; Power
Revenue, 1; Health Care Facility Revenue, 3; Water And/or Sewer Revenue, 1.
Approximately 44% of the aggregate principal amount of Bonds in the Trust
consist of obligations of issuers whose revenues are derived from the sale or
service of Health Care Facility Revenue.
PAGE 12
<PAGE>
NUVEEN TAX-FREE UNIT TRUST
CALIFORNIA INSURED TRUST 232
(Series 756)
Schedule of Investments
September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
For a discussion of the characteristics of bonds issued by various types of
issuers and of the risks associated with an investment therein, see "Selection
of Bonds for Deposit in the Trusts" in Part One.
All of the Bonds in the Trust, as insured, are rated AAA by Standard & Poor's
Corporation and Aaa by Moody's Investors Service, Inc. The Bond Portfolio
consists of 7 obligations issued by entities located in California.
</TABLE>
PAGE 13
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
PENNSYLVANIA INSURED TRUST 187
(Series 756)
Statement of Net Assets
September 30, 1998
<S> <C>
Assets:
Investments in municipal securities,
at market value (Cost $3,038,722) (Note 1) ............... $ 3,431,512
Accrued interest receivable ................................ 50,492
--------------
Total assets ..................................... $ 3,482,004
--------------
Liabilities:
Advance from Trustee ....................................... $ 11,366
Accrued trustee and evaluator fees ......................... 1,303
--------------
Total liabilities ................................ $ 12,669
--------------
Net assets, applicable to 32,361 units of
fractional undivided interest outstanding ...... $ 3,469,335
==============
Net assets, represented by:
Cost to original investors of 35,000 units sold ............ $ 3,454,028
Less initial underwriting commission (Note 1) ............ ( 169,233)
--------------
$ 3,284,795
Less cost of 2,639 units redeemed .......................... ( 272,331)
--------------
$ 3,012,464
Undistributed net investment income ........................ 37,899
Unrealized appreciation (depreciation) of investments ...... 392,790
Accumulated net realized gain (loss) from
investment transactions .................................. 26,182
Principal distributions to unitholders of proceeds
from investment transactions ............................. 0
--------------
$ 3,469,335
==============
Net asset value per unit:
Net Asset Value Per Unit
Before
Type of Units Accrued Accrued
Income Distribution Outstanding Interest Interest Total
Monthly.................. 18,812 $ 106.04 $ .51 $ 106.55
Quarterly................ 3,563 106.04 1.00 107.04
Semi-Annual.............. 9,986 106.04 2.47 108.51
--------------- ============ ============== ===========
32,361
===============
See accompanying notes to financial statements.
</TABLE>
PAGE 14
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
PENNSYLVANIA INSURED TRUST 187
(Series 756)
Statements of Operations and Changes in Net Assets
Year Ended September 30,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Statement of Operations
<S> <C> <C> <C>
Investment income (Note 1):
Interest income ................................... $ 201,171 $ 206,063 $ 207,957
---------------- ---------------- ----------------
Expenses (Note 3):
Trustee fees and expenses ....................... $ 5,772 $ 6,040 $ 6,982
Evaluator fees .................................. 571 584 589
---------------- ---------------- ----------------
Total expenses .............................. $ 6,343 $ 6,624 $ 7,571
---------------- ---------------- ----------------
Net investment income ................... $ 194,828 $ 199,439 $ 200,386
---------------- ---------------- ----------------
Realized and unrealized gain (loss) on investments
(Note 1):
Net realized gain (loss) from investment
transactions .................................. $ 20,307 $ 1,130 $ 4,745
Net change in unrealized appreciation or
depreciation of investments ................... 49,149 111,330 43,336
---------------- ---------------- ----------------
Net gain (loss) on investments .......... $ 69,456 $ 112,460 $ 48,081
---------------- ---------------- ----------------
Net increase (decrease) in net assets
from operations ................................. $ 264,284 $ 311,899 $ 248,467
================ ================ ================
Statement of Changes in Net Assets
Operations:
Net investment income ............................. $ 194,828 $ 199,439 $ 200,386
Net realized gain (loss) from investment
transactions (Note 1) ........................... 20,307 1,130 4,745
Net change in unrealized appreciation or
depreciation of investments ..................... 49,149 111,330 43,336
---------------- ---------------- ----------------
Net increase (decrease) in net assets
from operations ............................. $ 264,284 $ 311,899 $ 248,467
---------------- ---------------- ----------------
Distributions to unitholders from:
Net investment income ............................. $( 195,803) $( 197,596) $( 200,497)
Proceeds from investment transactions ............. 0 0 0
---------------- ---------------- ----------------
Total distributions to unitholders ............ $( 195,803) $( 197,596) $( 200,497)
---------------- ---------------- ----------------
Redemption of 1,662, 418 and
383 units, respectively ......................... $( 174,266) $( 42,044) $( 39,137)
---------------- ---------------- ----------------
Total increase (decrease) in net assets ............. $( 105,785) $ 72,259 $ 8,833
Net assets at beginning of year ..................... 3,575,120 3,502,861 3,494,028
---------------- ---------------- ----------------
Net assets at end of year (including
undistributed net investment income of
$37,899,$38,874 and $37,031,respectively) .......... $ 3,469,335 $ 3,575,120 $ 3,502,861
================ ================ ================
See accompanying notes to financial statements.
</TABLE>
PAGE 15
<PAGE>
<TABLE>
NUVEEN TAX-FREE UNIT TRUST
PENNSYLVANIA INSURED TRUST 187
(Series 756)
Schedule of Investments
September 30, 1998
<CAPTION>
Ratings(2) Carrying
Optional ---------- Value
Redemption Standard at Market
Principal Name of Issuer and Title of Issue Provisions(1) & Poor's Moody's (Bid Prices)
- ------------ --------------------------------------------------- ------------- ---------- ---------- ------------
<C> <S> <C> <C> <C> <C>
$ 500,000 Pennsylvania Higher Educational Facilities 2003 at 102 AAA Aaa $ 518,740
Authority (Commonwealth of Pennsylvania),
University Revenue and Refunding Bonds (Duquesne
University Project), Series A of 1993, 5.500% Due
9/1/2020.
500,000 Allegheny County Hospital Development Authority 2002 at 100 AAA Aaa 525,585
(Pennsylvania), Health Center Revenue Bonds,
Series 1992A (Presbyterian University Health
System, Inc. Project), 6.250% Due 11/1/2023.
(Escrow Secured - Revocable.)
305,000 Dauphin County General Authority, Hospital Revenue 2003 at 102 AAA Aaa 321,580
Bonds, HAPSCO Group, Inc. Tax-Exempt Loan Program
(The Western Pennsylvania Hospital Project), Fixed
Rate Bonds, 1993 Series A-1, 5.750% Due 7/1/2016.
500,000 Pennsylvania Intergovernmental Cooperation 2003 at 100 AAA Aaa 521,725
Authority, Special Tax Revenue Bonds (City of
Philadelphia Funding Program), Series of 1993,
5.875% Due 6/15/2023.
470,000 Lehigh County Industrial Development Authority, 2004 at 102 AAA Aaa 517,113
Pollution Control Revenue Refunding Bonds, 1994
Series B (Pennsylvania Power & Light Company
Project), 6.400% Due 9/1/2029.
470,000 Montgomery County Higher Education and Health 2002 at 102 AAA Aaa 513,249
Authority, Montgomery County, Pennsylvania, Saint
Joseph's University Revenue Bonds, Series of 1992,
6.500% Due 12/15/2022.
490,000 Northampton County Higher Education Authority 2002 at 102 AAA Aaa 513,520
(Pennsylvania), University Revenue Bonds (Lehigh
University), Series A of 1993, 5.750% Due
11/15/2018.
- ------------ ------------
$ 3,235,000 $ 3,431,512
============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Financial Statements and notes to Schedule of Investments.
PAGE 16
<PAGE>
NUVEEN TAX-FREE UNIT TRUST
PENNSYLVANIA INSURED TRUST 187
(Series 756)
Schedule of Investments
September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
All of the issues are payable as to principal and interest from the income of
a specific project or authority and are not supported by the issuers' power to
levy taxes. Payment of principal and interest on one Bond(s) in the Trust is
secured by funds or securities deposited in escrow. The sources of payment
for the remaining issues in the Trust are divided as follows: Dedicated-Tax
Supported Revenue, 1; Education Revenue, 3; Power Revenue, 1; Health Care
Facility Revenue, 1.
Approximately 45% of the aggregate principal amount of Bonds in the Trust
consist of obligations of issuers whose revenues are derived from the sale or
service of Education Revenue.
For a discussion of the characteristics of bonds issued by various types of
issuers and of the risks associated with an investment therein, see "Selection
of Bonds for Deposit in the Trusts" in Part One.
All of the Bonds in the Trust, as insured, are rated AAA by Standard & Poor's
Corporation and Aaa by Moody's Investors Service, Inc. The Bond Portfolio
consists of 7 obligations issued by entities located in Pennsylvania.
</TABLE>
PAGE 17
Notes To Financial Statements
1. Summary of Significant Accounting Policies:
The Trustee is responsible for maintaining the books and records of the
Trust on a cash basis and for safekeeping securities owned by the Trust. The
Sponsor is responsible for preparation of the financial statements in
accordance with generally accepted accounting principles based upon the books
and records provided by the Trustee. The following is a summary of the
significant accounting policies followed by each Trust.
Organizational Costs - Each Trust (and therefore Unitholders)deposited on
or after July 25, 1995 will bear all or a portion of the estimated
organizational costs which will be deferred and amortized over five years from
the Initial Date of Deposit.
Security Valuation - Tax-Free Bonds are reflected at market value in the
accompanying statement of net assets. The Sponsor determines the market price
of the Bonds in each Trust (1) on the basis of current bid prices of the Bonds
obtained from dealers or brokers (including the Sponsor) who customarily deal
in bonds comparable to those held by the Trust, (2) if bid prices are not
available for any of the Bonds, on the basis of bid prices for comparable
bonds, (3) by causing the value of the Bonds to be determined by others
engaged in the practice of evaluating, quoting or appraising comparable bonds,
or (4) by any combination of the above.
Unit Valuation - On the Date of Deposit, the Public Offering Price of
Units was determined by adding a sales charge to the Trustee's determination
of the offering price of the Bonds. The value of Units offered in the
secondary market maintained by the Sponsor is based upon the pro rata share of
the bid price of the Bonds, plus a sales charge determined in accordance with
the table set forth in Part One under the caption "Public Offering Price"
based on the number of years remaining to the maturity of each Bond and
adjusted for cash, if any, held or owed by such Trust.
The initial underwriting commission and investors' original cost of
Units, as shown on the statement of net assets, are based upon the assumption
that the maximum sales commission was charged for each initial purchase of
Units.
Income and Expenses - Income and expenses are recognized on the accrual basis
of accounting. Gains and losses from Bond transactions are determined on a
specific identification basis.
2. Income Tax Status:
Each Trust is not an association taxable as a corporation for Federal
income tax purposes, and, therefore, has recorded no provision for Federal
income taxes. Each unitholder is considered to be the owner of a pro rata
portion of the Trust under Subpart E, subchapter J of Chapter 1 of the
Internal Revenue Code of 1986 and will have a taxable event each time the
Trust disposes of a bond.
3. Operating Expenses:
See "Operating Expenses" in Part One of this Prospectus for information
with respect to trustee and evaluator fees and expenses.
4. Use of Estimates:
The Preparation of the Trust's financial statements in conformity with
generally accepted accounting principles requires the Sponsor to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of increases and decreases in net assets from operations during the reporting
period.
Notes To Schedule(s) Of Investments
1. The Bonds are first subject to optional redemption in the years, and at
the prices shown. Unless otherwise indicated, the Bonds, except for Bonds
issued at a substantial original issue discount, are redeemable at declining
prices (but not below par value) in subsequent years. Original issue discount
bonds are generally redeemable at prices based on the issue price plus the
amount of original issue discount accreted to redemption plus, if applicable,
some premium, the amount of which will decline in subsequent years. The Bonds
may also be subject to sinking fund redemption without premium prior to the
dates shown.
Certain Bonds may be subject to redemption without premium prior to the date
shown pursuant to special or mandatory call provisions; for example, if bond
proceeds are not able to be used as contemplated, the project is condemned or
sold, or the project is destroyed and insurance proceeds are used to redeem
the bonds. Single family mortgage revenue bonds and housing obligation bonds
are most likely to be called subject to such provisions, but other bonds may
have similar call features. (See Part One, "Selection of Bonds for Deposit in
the Trusts.")
The Trustee's determination of the offering price of Bonds in the Trust may
be greater or less than the amounts that may be received upon redemption or
maturity of such Bonds. Subject to rules concerning amortization of bond
premium and of original issue discount, gain or loss realized by the Trustee
on disposition of any Bonds will be recognized as taxable capital gain or loss
by Unitholders. (See Part One, "Tax Status of Unitholders.") 2. The ratings
shown are those assigned as of the date of the Schedule of Investments. Any
Bonds insured by MBIA, are rated AAA by Standard & Poor's Corporation and Aaa
by Moody's Investors Service, Inc.
PAGE 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of John Nuveen & Co. Incorporated and Unitholders of
Nuveen Tax-Free Unit Trust, Series 756:
We have audited the accompanying statements of net assets and schedules of
investments of Nuveen Tax-Free Unit Trust, Series 756 (comprising, National
Insured Trust 278, California Insured Trust 232 and Pennsylvania Insured Trust
187), as of September 30, 1998 and the related statements of operations and
changes in net assets for the periods indicated on the face of the financial
statements. These financial statements are the responsibility of the Sponsor
(See Note 1). Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the Sponsor, as well as evaluating the overall financial
statement presentation. In addition, securities owned as of September 30,
1998 were confirmed by direct correspondence with the Trustee. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the trusts constituting the
Nuveen Tax-Free Unit Trust, Series 756, as of September 30, 1998, the results
of their operations and changes in their net assets for the periods indicated
on the face of the financial statements, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 15, 1999.
PAGE 19
Prospectus
Part Two must be accompanied by Part One
Sponsor John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, Illinois 60606
312.917.7700
Swiss Bank Tower
10 East 50th Street
New York, New York 10022
212.207.2000
Trustee The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004-2413
800.257.8787
Legal Counsel Chapman and Cutler
to Sponsor 111 West Monroe Street
Chicago, Illinois 60603
Legal Counsel Carter, Ledyard & Milburn
to Trustee 2 Wall Street
New York, New York 10005
Independent Arthur Andersen LLP
Public Accountants 33 West Monroe Street
for the Trust Chicago, Illinois 60603
Except as to the statements made herein furnished by the Trustee, the Trustee
has assumed no responsibility for the accuracy, adequacy and completeness of
the information contained in this Prospectus.
This Prospectus does not contain all of the information set forth in the
registration statement and exhibits relating thereto, filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Act
of 1933, and to which reference is made.
No person is authorized to give any information or to make any representations
not contained in this Prospectus; and any information or representation not
contained herein must not be relied upon as having been authorized by the
Trust, the Trustee or the Sponsor. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, securities in any State
to any person to whom it is not lawful to make such offer in such state. The
Trust is registered as a Unit Investment Trust under the Investment Company
Act of 1940. Such registration does not imply that the Trust or any of its
Units has been guaranteed, sponsored, recommended or approved by the United
States or any State or agency or officer thereof.
PAGE 20
Statement of differences between electronic filing and printed document.
Pursuant to Rule 499(C) (7) under the Securities Act of 1933 and Rule 0-11
under the Investment Company Act of 1940, Registrant hereby identifies those
differences in the foregoing document between the electronic format in which
it is filed and the printed form in which it will be circulated: (1) The
printed and distributed Prospectus may be paged differently because the
printed document may contain a different amount of information on each page
from that contained in the electronic transmission. (2) In the printed
document, footnote symbols may include a "Dagger" or multiple "Dagger". The
"Dagger" symbol is represented as # in the electronic document.
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
undersigned Registrant certifies that it meets all of the requirements for
effectiveness of this post-effective amendment of its Registration Statement
pursuant to Rule 485(B) under the Securities Act of 1933 and has duly caused
this post-effective amendment of its Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized, all in the city of
Chicago and state of Illinois on this January 25, 1999.
Nuveen Tax-Free Unit Trust
Series 756
By/S/Larry W. Martin
Vice President
By/S/Gifford R. Zimmerman
Assistant Secretary
or
By/S/Karen L. Healy
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment of Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
Signatures *Title Date
Timothy R. Schwertfeger Chairman, Board of Directors and Chief
Executive Officer
Anthony T. Dean President, Chief Operating Officer and Director
Stephen D. Foy Vice President and Manager (Principal
Accounting Officer)
John P. Amboian Executive Vice President
(Chief Financial Officer)
______________________
/s/ Larry W. Martin
Attorney-in-Fact**
*The titles of the persons named herein represent their capacity in and
relationship to John Nuveen & Co. Incorporated, The Sponsor.
**An executed copy of each of the related Powers of Attorney has been
filed with the Securities and Exchange Commission with the Amendment to the
Registration Statement on Form S-6 of the Nuveen Tax-Exempt Unit Trust, Series
671 (File No. 33-49175). The aforesaid Powers of Attorney are incorporated
herein by this reference.
Consent of Independent Public Accountants
As Independent Public Accountants, we hereby consent to the use of our
Report and to all references to our firm included in this Post-Effective
Amendment of Registration Statement.
*Arthur Andersen LLP
Chicago, Illinois
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