<PAGE>
Registration Nos. 33-58217
33-57429
33-55359
33-58485
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF
1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
B.
Name of Depositor:
SMITH BARNEY INC.
<TABLE>
<S> <C>
C. Complete address of depositor's principal executive
office:
SMITH BARNEY
INC.
388 Greenwich Street
New York, New York 10013
D. Name and complete address of agent for service:
LAURIE A. HESSLEIN
Smith Barney
Inc.
388 Greenwich Street
New York, New York 10013
</TABLE>
It is proposed that this filing will become effective August 23,
1996
pursuant to paragraph (b) of Rule 485.
<PAGE>
TAX EXEMPT SECURITIES TRUST
CROSS-REFERENCE SHEET
Pursuant to Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction
as to the Prospectus in Form S-6)
<TABLE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
<C> <S> <C>
1. . . . . . . . . (a) Name of trust Prospectus front cover
(b) Title of securities issued . .
2.Name and address of each depositor Sponsors: Prospectus back
cover
3. . . . Name and address of trustee Trustee
4.Name and address of each principal underwriterSponsors:
Prospectus back cover
5. . .State of organization of trust Tax Exempt Securities
Trust
6.Execution and termination of trust agreementTax Exempt
Securities Trust - The
Trust:
Amendment and Termination
of the Trust Agreement 7. .
. . . . . . . . Changes of name *
8. . . . . . . . . . . . Fiscal year *
9. . . . . . . . . . . . .Litigation *
II. General Description of the Trust and
Securities of the Trust
10.(a) Registered or bearer securities Rights of Unit Holders
(b) Cumulative or distributive securities
(c) Redemption . . . . . . . . . .
(d) Conversion, transfer, etc. . .
(e) Periodic payment plan. . . . . *
(f) Voting rights. . . . . . . . .
(g) Notice to certificate holders Rights of Unit Holders -
Reports and Records:
Sponsors -
Responsibility: Trustee -
Resignation: Amendment
and Termination of the
Trust Agreement -
Amendment
(h) Consents required. . . . . . . Sponsors - Responsibility:
Amendment and Termination
of the Trust Agreement (i) Other
provisions . . . . . . . Tax Exempt Securities Trust - Tax Status
11.Type of securities comprising units Prospectus front cover:
Tax Exempt Securities
Trust - Portfolio
12.Certain information regarding periodic
payment certificates. . . . . . . *
13.. .(a) Load, fees, expenses, etc. Prospectus front cover:
Summary of Essential
Information; Public
Offering - Offering
Price; Public Offering -
Sponsors' and
Underwriters' Profits:
Tax Exempt Securities
Trust - Expenses and
Charges
<PAGE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
II. General Description of the Trust and
Securities of the Trust
<C> <S> <C>
(b) Certain information regarding periodic
payment certificates . . . . *
(c) Certain percentages. . . . . . Public Offering - Offering
Price
(d) Certain other fees, etc, payable by holders
Rights of Unit Holders - Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons . . . . . . Public Offering - Sponsors'
and Underwriters' Profits:
Rights of Unit Holders -
Redemption of Units -
Purchase by the Sponsors of
Units Tendered for
Redemption
(f) Ratio of annual charges to income*
14.. .Issuance of trust's securities Tax Exempt Securities
Trust - The Trust: Rights
of Unit Holders -
Certificates
15.Receipt and handling of payments from purchasers*
16.Acquisition and disposition of underlying
securities . . . . . . . . . . . . Tax Exempt Securities Trust
- Portfolio: Sponsors -
Responsibility
17.. . . . .Withdrawal or redemption Rights of Unit Holders -
Redemption of Units
18.(a) Receipt, custody and disposition of incomeRights of Units
Holders - Distribution of
Interest and Principal:
Rights of Unit Holders -
Reports and Records
(b) Reinvestment of distributions *
(c) Reserves or special funds. . . Rights of Unit Holders -
Distribution of Interest
and Principal: Tax Exempt
Securities Trust - Expenses
and Charges - Other Charges (d) Schedule of
distributions. . . *
19.. . Records, accounts and reports Rights of Unit Holders -
Reports and Records:
Rights of Unit Holders -
Distribution of Interest
and Principal
20.Certain miscellaneous provisions of trust agreementAmendment
and Termination of the Trust
(a) Amendment. . . . . . . . . . . Agreement: Trustee -
Resignation: Trustee -
(b) Termination . . . . . . . . . Resignation: Trustee -
Limitations on Liability:
(c) and (d) Trustee, removal and successorSponsors -
Responsibility: Sponsors - Resignation
(e) and (f) Depositors, removal and successor
21.. . . . Loans to security holders *
22.. . . . .Limitations on liability Sponsors - Limitations on
Liability: Trustee -
Limitations on Liability:
Tax Exempt Securities
Trust - Portfolio
23.. . . . . . .Bonding arrangements *
24.Other material provisions of trust agreement*
______
* Inapplicable, answer negative or not required.
<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
III. Organization, Personnel and
Affiliated Persons of Depositor
<C> <S> <C>
25.. . . .Organization of depositors Sponsors
26.. . . Fees received by depositors *
27.. . . . . .Business of depositors Sponsors
28.Certain information as to officials and
affiliated persons of depositors [Contents of Registration
Statement]
29.. Voting securities of depositors *
30.. .Persons controlling depositors *
31.Payments by depositor for certain services
rendered to trust . . . . . . . . *
32.Payments by depositors for certain other services
rendered to trust . . . . . . . . *
33.Remuneration of employees of depositors for
certain services rendered to trust *
34.Remuneration of other persons for certain services
rendered to trust . . . . . . . . *
IV. General Description of the Trust and
Securities of the Trust
35.Distribution of trust's securities by statesPublic Offering -
Distribution of Units
36.Suspension of sales of trust's securities*
37.Revocation of authority to distribute*
38.. . . .(a) Method of distribution Public Offering -
Distribution of Units
(b) Underwriting agreements. . . .
(c) Selling agreements . . . . . .
39.(a) Organization of principal underwritersSponsors
(b) N.A.S.D. membership of principal underwriters
40.Certain fees received by principal underwriters*
41.(a) Business of principal underwritersSponsors
(b) Branch offices of principal underwriters*
(c) Salesmen of principal underwriters*
42.Ownership of trust's securities by certain persons*
43.Certain brokerage commissions received by principal
underwriters. . . . . . . . . . . *
44.. . . . . (a) Method of valuation Prospectus front cover:
Public Offering -
Offering Price: Public
Offering - Distribution
of Units
(b) Schedule as to offering price *
(c) Variation in offering price to certain personsPublic
Offering - Distribution of Units
45.. Suspension of redemption rights *
46.. . . . .(a) Redemption Valuation Rights of Unit Holders -
Redemption of Units -
Computation of Redemption
Price per Unit
(b) Schedule as to redemption price *
47.Maintenance of position in underlying securities
Public Offering - Market for Units: Rights of Unit Holders -
Redemption of Units - Purchase by the Sponsors of Units
tendered for Redemption; Rights of Unit Holders - Redemption
of Units - Computation of Redemption Price per Unit
______
* Inapplicable, answer negative or not required.<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
V. Information Concerning the Trustee
or Custodian
<C> <S> <C>
48.Organization and regulation of trusteeTrustee
49.. . .Fees and expenses of trustee Tax Exempt Securities
Trust - Expenses and
Charges
50.. . . . . . . . . .Trustee's lien Tax Exempt Securities
Trust - Expenses and
Charges - Other Charges
VI. Information Concerning Insurance of
Holders of Securities
51.Insurance of holders of trust's securities*
VI. Policy of Registrant
52. (a) Provisions of trust agreement with respect to
selection or elimination of underlying securitiesProspectus
front cover: Sponsors-Responsibility
(b)Transactions involving elimination of
underlying securities . . . . . *
(c)Policy regarding substitution or elimination
of underlying securities. . . . Sponsors - Responsibility
(d)Fundamental policy not otherwise covered*
53. Tax status of trust . . . . . . Prospectus front cover: Tax
Exempt Securities Trust -
Tax Status
VIII. Financial and Statistical Information
54. Trust's securities during last ten years*
55. . . . . . . . . . . . . . . . . *
56. Certain information regarding periodic payment
securities . . . . . . . . . . . . *
57. . . . . . . . . . . . . . . . . *
58. . . . . . . . . . . . . . . . . *
59. Financial statements (Instruction 1(c) to form S-6)
Statement of Financial Condition of The Tax Exempt Securities
Trust
______
* Inapplicable, answer negative or not required.
<PAGE>
</TABLE>
NATIONAL TRUST 207
CALIFORNIA TRUST 141
MINNESOTA TRUST 114
NEW YORK TRUST 144
In the opinion of counsel, under existing law interest income to the
Trusts and, with certain exceptions, to Unit holders is exempt from all
Federal income tax. In addition, in the opinion of counsel, the interest
income of each State Trust is similarly exempt from state income taxes
in the state for which such Trust is named. Capital gains, if any, are
subject to tax. Investors should retain both parts of this Prospectus for
future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUSTS
HAS BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE
ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN
ACQUIRED BY THE SPONSOR EITHER BY PURCHASE FROM
THE TRUSTEE OF UNITS TENDERED FOR REDEMPTION OR
IN THE SECONDARY MARKET. SEE PART B, "RIGHTS OF
UNIT HOLDERS--REDEMPTION OF UNITS--PURCHASE BY
THE SPONSOR OF UNITS TENDERED FOR REDEMPTION"
AND "MARKET FOR UNITS". THE PRICE AT WHICH THE
UNITS OFFERED HEREBY WERE ACQUIRED WAS NOT LESS
THAN THE REDEMPTION PRICE DETERMINED AS PROVIDED
HEREIN. SEE PART B, "RIGHTS OF UNIT HOLDERS--
REDEMPTION OF UNITS--COMPUTATION OF REDEMPTION
PRICE PER UNIT".
THE TAX EXEMPT SECURITIES TRUST, consists of FOUR
underlying separate unit investment trusts designated as the
NATIONAL TRUST 207, CALIFORNIA TRUST 141, MINNESOTA
TRUST 114 AND NEW YORK TRUST 144 (the "Trusts" or the
"Trust" as the context requires and in the case of a Trust designated
by a state name, the "State Trust" or the "State Trusts as the context
requires). Each Trust was formed for the purpose of obtaining for its
Unit holders tax-exempt interest income and conservation of capital
through investment in a fixed portfolio of long term municipal bonds
rated at the time of deposit in the category A or better by Standard &
Poor's Corporation, Moody's Investors Service or Fitch Investors
Service, Inc., with certain ratings being conditional or provisional.
(See "Portfolio of Securities".) Each State Trust is comprised of a
fixed portfolio of interest-bearing obligations issued primarily by or on
behalf of the state for which such State Trust is named and counties,
municipalities, authorities or political subdivisions thereof. The
interest on all bonds in each Trust is, in the opinion of bond counsel
to the issuers of the obligations, (i) under existing law, excludable
from gross income for Federal income tax purposes (except in certain
instances depending upon the Unit holder) (see Part B, "Tax Exempt
Securities Trust - Taxes") and (ii) as respects the underlying State
Trusts exempt from state and any local income taxes, to individual
Unit holders resident in the state for which a State Trust is named.
(See Part B, "Tax Exempt Securities Trust - Taxes")
THE PUBLIC OFFERING PRICE of the Units of each Trust is
equal to the aggregate bid price of the underlying Securities in the
Trust's portfolio divided by the number of Units outstanding in such
Trust, plus a sales charge equal to 5% of the Public Offering Price
(5.263% of the aggregate bid price of the Securities per Unit) (the
aggregate offering price of the bonds per Unit) for the New Jersey
Trust (Selected Term) and the New York Trust (Selected Term). A
proportional share of accrued and undistributed interest on the
Securities at the date of delivery of the Units to the purchaser is also
added to the Public Offering Price.
THE SPONSOR, although not obligated to do so, intends to maintain
a market for the Units of the Trusts at prices based upon the aggregate
bid price of the underlying Securities, as more fully described in Part
B, "Market for Units". If such a market is not maintained, a Unit
holder may be able to dispose of his Units only through redemption at
prices based upon the aggregate bid price of the underlying Securities.
MONTHLY DISTRIBUTIONS of principal and interest received by
the Trusts will be made on or shortly after the fifteenth day of each
month to holders of record on the first day of that month. For further
information regarding the distributions by the Trust, see the "Summary
of Essential Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus Part A dated August 23, 1996
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST
SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE
21, 1996+
Sponsor: SMITH BARNEY INC.
Trustee: THE CHASE MANHATTAN BANK, N.A.
Evaluator: KENNY S&P EVALUATION SERVICES
NationalCaliforniaMinnesotaNew York
Trust 207Trust 141Trust 114Trust 144
<S><C><C><C><C>
Principal Amount of Securities in
Trust$7,990,000$3,000,000$2,250,000$3,000,000
Number of Units 8,0003,0002,2503,000
Fractional Undivided Interest in Trust per Unit
1/8,0001/3,0001/2,2501/3,000
Minimum Value of Trust:
Trust may be terminated if Principal Amount is less
than$4,000,000$1,500,000$1,500,000$1,500,000
Principal Amount of Securities in Trust per Unit$
998.75$1,000.00$1,000.00$1,000.00
Public Offering Price per Unit#*$ 1,005.28$
1,006.95$1,029.47$999.43
Sales Charge (5% of Public Offering Price)# 50.26 50.34
51.47 49.97
Approximate Redemption and Sponsor's Repurchase Price
per Unit (per Unit Bid Price of Securities)#**$955.02$ 956.61
$978.00$949.46
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit$61.68$60.05$60.91$60.71
Less Estimated Annual Expenses per Unit 1.20 1.37
1.38 1.31
Estimated Net Annual Income per Unit$60.48$58.68$59.53$59.40
Monthly Income Distribution per Unit$5.04$4.89$4.96$4.95
Daily Rate (360-day basis) of Income Accrual per
Unit$.1680$.1630$.1653$.1650
Estimated Current Return Based on Public Offering Price#
6.01%5.82%5.78%5.94%
Estimated Long-Term Return# 6.05%5.88%5.72%5.98%
<FN>
#Subject to changes in the prices of the underlying securities. The
aggregate bid price of the securities is determined on each business
day as of the Evaluation Time.
*Plus $4.20, $4.08, $4.13 and $4.13 per Unit, representing
accrued interest and the net of cash on hand, accrued expenses and
amounts distributable to Unit holders, attributable to the Units of
National Trust, California Trust, Minnesota Trust and New York
Trust, respectively, through the expected date of settlement (three
business days after June 21, 1996).
**Plus $3.36, $3.26, $3.30 and $3.30 per Unit, representing
accrued interest and the net of cash on hand, accrued expenses and
amounts distributable to Unit holders, attributable to the Units of
National Trust, California Trust, Minnesota Trust and New York
Trust, respectively, as of June 21, 1996, on a pro rata basis. (See
"Redemption of Units - Computation of Redemption Price per
Unit".)<PAGE>
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
Record Dates: The 1st day of each month
Distribution Dates: The 15th day of each month
Evaluation Time: Close of trading on the New York Stock Exchange
(currently 4:00 P.M. New York Time)
Date of Deposit and
Trust Agreement:May 23, 1995
Mandatory Termination Date:Each Trust will terminate on the date of
maturity, redemption, sale or other disposition of the last Bond held in
the Trust. The actual date of termination of each Trust may be
considerably earlier (see Part B, "Amendment and Termination of the
Trust Agreement--Termination").
Trustee's Annual Fee:$.55, $.53, $.54 and $.54 per $1,000 principal
amount of bonds for the National Trust, California Trust, Minnesota
Trust and New York Trust, respectively ($8,820 per year on the basis of
bonds in the principal amount of $16,240,000) plus expenses.
Evaluator's Fee:$.30 per bond per evaluation
Sponsor's Annual Portfolio
Supervision Fee:Maximum of $.25 per $1,000 face amount of the
underlying bonds
As of June 21, 1996, 11 (51%) of the Bonds in the National Trust
were rated by Standard & Poor's Corporation (9% being rated AA, 36%
being rated A and 6% being rated BBB) and 9 (49%) were rated by
Moody's Investors Service (7% being rated Aaa, 6% being rated Aa and
36% being rated A); 7 (55%) of the Bonds in the California Trust were
rated by Standard & Poor's (49% being rated A and 6% being rated
BBB) and 3 (35%) were rated A by Moody's and 1 (10%) was not rated
by either service; 8 (85%) of the Bonds in the Minnesota Trust were
rated by Standard & Poor's (39% being rated AAA, 8% being rated AA,
27% being rated A and 11% being rated BBB) and 1 (15%) was rated A
by Moody's; 6 (64%) of the Bonds in the New York Trust were rated by
Standard & Poor's (25% being rated AAA, 9% being rated AA, 21%
being rated A and 9% being rated BBB) and 3 (36%) were rated by
Moody's (8% being rated A and 28% being rated Baa). Ratings assigned
by rating services are subject to change from time to time.
Additional Considerations - Investment in any Trust should be made
with an understanding that the value of the underlying Portfolio may
decline with increases in interest rates. Approximately 1% of the Bonds
in the New York Trust consist of general obligation bonds.
Approximately 38%, 36%, 63% and 12% of the Bonds in the National
Trust, California Trust, Minnesota Trust and New York Trust,
respectively, consist of hospital revenue bonds (including obligations of
health care facilities). Approximately 40%, 18%, 26% and 25% of the
Bonds in the National Trust, California Trust, Minnesota Trust and New
York Trust, respectively, consist of obligations of municipal housing
authorities. Approximately 15% and 7% of the Bonds in the National
Trust and New York Trust, respectively, consist of bonds which are
subject to the Mortgage Subsidy Bond Tax Act of 1980. Approximately
12%, 14% and 11% of the Bonds in the National Trust and California
Trust consist of Bonds in the power facilities category. (See Part B "Tax
Exempt Securities Trust--Portfolio" for a brief summary of additional
considerations relating to certain of these issues.)
<PAGE>
+ The percentages referred to in this summary are each computed on
the basis of the aggregate bid price of the Bonds as of June 21, 1996.<PAGE>
<TABLE>TAX EXEMPT SECURITIES TRUST
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
IncomePrincipal
UnitsNet AssetDistributionsDistributions
Period EndedOutstandingValue Per UnitPer UnitPer Unit
<C><S><C><C><C><C>
May 23, 1995National8,000$956.92$-$-
California 3,000953.71--
Minnesota2,250985.56--
New York3,000980.01--
April 30, 1996National8,000$962.45$51.68$1.25
California 3,000964.2450.09-
Minnesota2,250988.2850.80-
New York3,000961.9650.70-
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
BALANCE SHEETS
April 30, 1996
ASSETS
NationalCalifornia MinnesotaNew York
Trust 207Trust 141Trust 114Trust 144
<S><C><C><C><C>
Investments in tax exempt bonds, at market value
(Cost $7,700,118, $2,879,123, $2,220,827 and $2,952,025,
respectively) (Note 3 to Portfolio of Securities)$
7,658,418$2,877,501$2,212,235$2,870,553
Accrued interest 161,884 46,870 45,785
50,552
Total Assets$7,820,302$2,924,371$2,258,020$2,921,105
LIABILITIES AND NET ASSETS
Overdraft payable$120,158$31,431$34,227$ 35,032
Accrued expenses 494 203 158
193
Total Liabilities 120,652 31,634 34,385 35,225
Net Assets (Units of fractional undivided interest
outstanding - 8,000, 3,000, 2,250 and 3,000, respectively):
Original cost to investors (Note 1)
8,090,8803,021,1212,330,3583,097,619
Less initial underwriting commission (sales charge)
(Note 1) 380,287 141,998 109,531 145,594
7,710,5932,879,1232,220,8272,952,025
Cost of bonds sold or redeemed since date of deposit
(May 23, 1995) (10,475)- - -
Net unrealized market depreciation (41,700) (1,622) (8,592) (81,472)
7,658,4182,877,5012,212,2352,870,553
Undistributed net investment income 41,232 15,236
11,400 15,327
Net Assets 7,699,650 2,892,737 2,223,635 2,885,880
Total Liabilities and Net
Assets$7,820,302$2,924,371$2,258,020$2,921,105
Net asset value per unit$962.45$964.24$988.28$961.96
The accompanying Notes to Financial Statements are an integral
part of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
STATEMENTS OF OPERATIONS*
NationalCaliforniaMinnesotaNew York
Trust 207Trust 141Trust 114Trust 144
<S><C><C><C>
Investment Income-interest (Note 2)$ 462,430$ 168,664$
128,294$ 170,500
Less expenses:
Trustee's fees and expenses 6,2752,3421,9272,406
Evaluator's fees 1,483 816 667 667
Total expenses 7,758 3,158 2,594 3,073
Net investment income 454,672 165,506 125,700
167,427
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5) (475)- - -
Net unrealized market depreciation (41,700) (1,622) (8,592) (81,472)
Net loss on investments (42,175) (1,622) (8,592) (81,472)
Net increase in net assets resulting from
operations$412,497$163,884$117,108$85,955
STATEMENTS OF CHANGES IN NET ASSETS*
Operations:
Net investment income$454,672$165,506$125,700$167,427
Net realized loss on securities transactions (Note 5) (475)- - -
Net unrealized market depreciation (41,700) (1,622) (8,592) (81,472)
Net increase in net assets resulting from operations 412,497
163,884 117,108 85,955
Distributions to Unit Holders:
Net investment income (Note 4) (413,440)(150,270)(114,300)(152,100)
Proceeds from securities sold or redeemed(10,000)- - -
Accrued interest at date of deposit (138,349) (46,123) (43,366) (45,058)
Total Distributions (561,789) (196,393) (157,666) (197,158)
Decrease in net assets (149,292) (32,509) (40,558) (111,203)
Net Assets:
Beginning of period 7,848,942 2,925,246 2,264,193
2,997,083
End of period (including undistributed net investment income
of $41,232, $15,236, $11,400 and $15,327,
respectively)$7,699,650$2,892,737$2,223,635$2,885,880
* For the period May 23, 1995 through April 30, 1996.
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
April 30, 1996
NOTES TO FINANCIAL STATEMENTS
(1)The original cost to the investors represents the aggregate initial public
offering price as of the date of deposit (May 23, 1995), exclusive of accrued
interest, computed on the basis of the aggregate offering price of the
securities. The initial underwritting commission (sales charge) was 4.70%
of the aggregate Public Offering Price (4.932% of the aggregate offering
price of the securities) for the National Trust, California Trust, Minnesota
Trust and New York Trust, respectively.
(2)Interest income represents interest earned on the Trust's portfolio and has
been recorded on the accrual basis.
(3)No Units were redeemed by the Trustee during the period from May 23,
1995 (date of deposit) through April 30, 1996.
(4)Interest received by the Trust is distributed to Unit holders on the
fifteenth day of each month, after deducting applicable expenses.
(5)The loss from the sale or redemption of securities is computed on the
basis of the average cost of the issue sold or redeemed.
(6)The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of each Trust
and is responsible for establishing and maintaining a system of internal
control directly related to, and designed to provide reasonable assurance as
to the integrity and reliability of, financial reporting of each Trust. The
Trustee is also responsible for all estimates of expenses and accruals
reflected in each Trust's financial statements. The Evaluator determines the
price for each underlying Bond included in each Trust's Portfolio of
Securities on the basis set forth in Part B, "Public Offering - Offering
Price". Under the Securities Act of 1933, as amended (the "Act"), the
Sponsor is deemed to be issuer of each Trust's Units. As such, the Sponsor
has the responsibility of issuer under the Act with respect to financial
statements of each Trust included in the Registration Statement.
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsor and Trustee of
Tax Exempt Securities Trust:
We have audited the accompanying balance sheets of Tax Exempt Securities
Trust (comprising, respectively, National Trust 207, California Trust 141,
Minnesota Trust 114 and New York Trust 144), including the portfolios of
securities, as of April 30, 1996, and the related statements of operations and
changes in net assets for the period from May 23, 1995 (date of deposit)
through April 30, 1996. These financial statements are the responsibility of
the Trustee (see Note 6). Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of April 30,
1996 by correspondence with the Trustee. An audit also includes assessing
the accounting principles used and significant estimates made by the Trustee,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective Trusts
constituting Tax Exempt Securities Trust, as of April 30, 1996, and the
results of their operations and changes in their net assets for the period from
May 23, 1995 (date of deposit) through April 30, 1996, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
August 21, 1996
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 207 - PORTFOLIO OF SECURITIES - April
30, 1996
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
<S><C><C><C><C>
San Bernardino County, California,
Certificates of Participation,
Medical Center Financing Project,A---$250,000$222,120
5.50% due 8/1/2022S.F. 8/1/21 @ 100
Sequoia Hospital District, Redwood
City, California, Revenue Bonds, BBB8/15/03 @ 102520,000423,062
5.375% due 8/15/2023S.F. 8/15/14 @ 100
Hillsborough County, Florida, Capital
Improvement Revenue Bonds, County A7/1/02 @ 102100,000112,076
Center Project, 6.75% due 7/1/2022 (p)
Chicago, Illinois, Metropolitan
Housing Development Corporation, Housing
Development Revenue Refunding Bonds,
FHA-Insured Mortgage Loan, Section 8 AA7/1/02 @
102600,000615,750
Assisted Projects, 6.85% due 7/1/2022
Illinois Health Facilities Authority
Revenue Bonds, Northern Illinois Medical
Center Project, McHenry Illinois,A-9/1/03 @ 102500,000460,030
6.00% due 9/1/2019S.F. 9/1/14 @ 100
Illinois Health Facilities Authority
Revenue Bonds, Alexian Brothers MedicalA*1/1/02 @
102240,000244,555
Center, Inc. Project, 6.80% due 1/1/2022S.F. 1/1/16 @ 100
DeKalb County, Indiana, Redevelopment
Authority Mini-Mill Local PublicA1/15/05 @ 102500,000514,415
Improvement Project, 6.625% due 1/15/2017S.F. 1/15/05 @ 100
Indiana Health Facility Financing
Authority, Hospital Revenue Bonds,
Lafayette Home Hospital Project,A1*2/1/03 @ 102400,000366,492
6.00% due 8/1/2023S.F. 8/1/14 @ 100
Iowa Finance Authority, Multifamily
Housing Revenue Refunding Bonds,
GNMA Collateralized Windsor on theAaa*6/20/05 @
100500,000501,655
River Project, 6.50% due 6/20/2030S.F. 12/20/15 @ 100
Louisiana Housing Finance Agency,
Multifamily Housing Revenue Bonds,
FHA Insured Mortgage Loan, Emerald
Pointe Apartments Project, Aa*11/1/02 @ 103490,000508,453
7.10% due 11/1/2033S.F. 5/1/08 @ 100
New Hampshire Higher Educational &
Health Facilities Authority Revenue
Bonds, Exeter Hospital, A10/1/02 @ 102250,000229,613
6.00% due 10/1/2023S.F. 10/1/14 @ 100
A-8<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 207 - PORTFOLIO OF SECURITIES - April
30, 1996
(Continued)
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
North Carolina Eastern Municipal
Agency, Power System Revenue Refunding A*1/1/03 @
100$735,000$655,083
Bonds, 5.50% due 1/1/2021S.F. 1/1/19 @ 100
Cleveland-Rock Glen Housing Assistance
Corporation, Ohio, Multifamily
Housing Revenue and Revenue Refunding
Bonds, Ambleside Apartments, Section 8A*6/1/06 @
103500,000519,530
Assisted Projects, 7.00% due 6/1/2018S.F. 6/1/06 @ 100
County of Franklin, Ohio, Hospital
Facilities Revenue Refunding and
Improvement Bonds, Doctors HospitalA*12/1/03 @ 102250,000232,475
Project, 5.875% due 12/1/2023S.F. 12/1/14 @ 100
State of Ohio, General Obligation
Infrastructure Improvement Bonds,AA8/1/04 @ 102110,00098,186
4.80% due 8/1/2013
Union County, Pennsylvania, Hospital
Authority, Hospital Revenue Bonds
Evangelical Community Hospital A-8/1/03 @ 102550,000502,453
Project, 5.875% due 7/1/2023S.F. 7/1/12 @ 100
Rhode Island Health and Educational
Building, Corporation Health Facilities
Revenue Bonds, Saint Antoine ResidenceA1*11/15/03 @
102250,000256,168
Issue, 6.75% due 11/15/2018S.F. 11/15/13 @ 100
The Industrial Development Board,
Government of Nashville and Davidson
County, Tennessee, Multifamily Housing
Revenue Refunding Bonds, The Park atA2/1/04 @ 102445,000423,070
Hermitage Project, 5.90% due 2/1/2019S.F. 8/1/04 @ 100
Matagorda County, Texas, District
Number One, Pollution Control Revenue
Refunding Bonds, Central Power & LightA-7/1/03 @
102300,000293,202
Company Project, 6.00% due 7/1/2028
Wisconsin Housing and Economic
Development Authority, Housing A1*12/1/03 @ 102 500,000
480,030
Revenue Bonds, 5.875% due 11/1/2019S.F. 11/1/14 @ 100
$7,990,000$7,658,418
The accompanying Notes are an integral part of this Portfolio.
A-9<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
CALIFORNIA TRUST 141 - PORTFOLIO OF SECURITIES - April
30, 1996
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
City of Bakersfield, California,
Hospital Revenue Bonds, Bakersfield A*1/1/02 @ 102$250,000$256,180
Memorial Hospital, 6.50% due 1/1/2022S.F. 1/1/13 @ 100
California Housing Finance Agency,
Multi-Unit Rental Housing Revenue A+8/1/02 @ 102500,000512,010
Bonds, 6.70% due 8/1/2015S.F. 2/1/06 @ 100
Health Facilities Revenue Bonds,
California, Catholic Health
Corporation, Various Projects, NR11/15/02 @ 102250,000274,647
6.30% due 11/15/2015 (p)S.F. 11/15/10 @ 100
State Public Works Board of the State
of California, Lease Revenue Bonds,
The Trustees of the California State
University, Various California StateA*9/1/05 @ 100360,000351,918
University Projects, 6.00% due 9/1/2015S.F. 9/1/11 @ 100
Redding, California, Joint Powers
Financing Authority, Solid Waste
and Corporation Yard Revenue Bonds, A*1/1/03 @ 102435,000390,665
5.50% due 1/1/2013S.F. 1/1/06 @ 100
San Bernardino County, California,
Certificates of Participation,
Medical Center Financing Project,
5.50% due 8/1/2022A---135,000119,945
S.F. 8/1/21 @ 100
4.75% due 8/1/2028A-8/1/04 @ 102100,00076,271
S.F. 8/1/27 @ 100
City and County of San Francisco,
California, Redevelopment Financing
Authority, A Tax Allocation Revenue
Bonds, San Francisco Redevelopment A8/1/05 @ 103250,000246,320
Projects, 6.20% due 8/1/2025
Sequoia Hospital District, Redwood
City, California, Revenue Bonds, BBB8/15/03 @ 102230,000187,123
5.375% due 8/15/2023S.F. 8/15/14 @ 100
The Regents of the University of
California, Research Facilities A-9/1/01 @ 102365,000335,753
Revenue Bonds, 5.75% due 9/1/2018S.F. 9/1/15 @ 100
City of West Covina, California,
Certificates of Participation,
Queen of the Valley Hospital,A8/15/04 @ 102 125,000 126,669
6.50% due 8/15/2019S.F. 8/15/15 @ 100
$3,000,000$2,877,501
The accompanying Notes are an integral part of this Portfolio.
A-10
__________________________________________________________
_______________________________________
TAX EXEMPT SECURITIES TRUST
MINNESOTA TRUST 114 - PORTFOLIO OF SECURITIES - April
30, 1996
__________________________________________________________
_______________________________________
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
City of Bass Brook, Minnesota,
Collateralized Pollution Control
Refunding Revenue Bonds, Minnesota
Power & Light Company Project,BBB+7/1/02 @ 102$250,000$240,510
6.00% due 7/1/2022
City of Bemidji, Minnesota, Hospital
Facilities First Mortgage Revenue
Bonds, North County Health ServicesAAA9/1/01 @ 102150,000168,444
Project, 7.00% due 9/1/2021 (p)S.F. 9/1/12 @ 100
City of Breckenridge, Minnesota,
Health Facilities Revenue Bonds,
Catholic Health Corporation Project,AA-11/15/03 @ 102200,000185,494
5.25% due 11/15/2013S.F. 11/15/09 @ 100
City of Burnsville, Minnesota, Multifamily
Housing Revenue Refunding Bonds, FHA
Insured Mortgage Loan, Summit Park AAA7/1/03 @
102400,000386,700
Apartments Project, 6.00% due 7/1/2033S.F. 7/1/09 @ 100
City of Eden Prairie, Minnesota,
Multifamily Housing Revenue Bonds,
Windslope Apartments Project, A11/1/01 @ 102100,000104,059
7.10% due 11/1/2017S.F. 11/1/07 @ 100
City of Mankato, Minnesota, Hospital
Facilities First Mortgage Revenue Bonds,
Immanuel, St. Joseph's Hospital of
Mankato, Inc. Project, A-8/1/02 @ 102500,000503,455
6.30% due 8/1/2022S.F. 8/1/06 @ 100
Housing and Redevelopment Authority
of the City of Saint Paul and City of
Minneapolis, Minnesota, Health Care
Facility Revenue Bonds, Group HealthA*12/1/02 @ 102300,000318,594
Plan, Inc. Project, 6.90% due 10/15/2022S.F. 12/15/14 @ 100
City of Minneapolis, Minnesota and
Housing and Redevelopment Authority
of the City of Saint Paul, Health Care
System Revenue Bonds, HealthSpan, AMBACAAA11/15/03 @
102100,00083,471
Insured, 4.75% due 11/15/2018S.F. 11/15/14 @ 100
City of St. Louis Park, Minnesota,
Health Care Facilities Revenue Bonds,
HealthSystem Minnesota Obligated Group,AAA7/1/03 @ 102
250,000 221,508
AMBAC Insured, 5.20% due 7/1/2023S.F. 7/1/17 @ 100
$2,250,000$2,212,235
The accompanying Notes are an integral part of this Portfolio.
A-11<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
NEW YORK TRUST 144 - PORTFOLIO OF SECURITIES - April
30, 1996
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
New York State Dormitory Authority,
State University Educational FacilitiesBBB+5/15/03 @
102$270,000$258,031
Revenue Bonds, 6.00% due 5/15/2022S.F. 5/15/18 @ 100
Dutchess County, New York, Resource
Recovery Agency, Solid Waste ManagementA-1/1/03 @
102500,000495,905
System Revenue Bonds, 6.80% due 1/1/2010S.F. 1/1/02 @ 100
Grand Central District Management
Association, Inc., Grand Central
Business Improvement District, Capital
Improvement Refunding Bonds, A1*1/1/04 @ 102250,000217,358
5.25% due 1/1/2022S.F. 1/1/15 @ 100
New York City Housing Development
Corporation, Multi-Family Mortgage
Revenue Bonds, FHA Insured MortgageAAA4/1/03 @
102500,000515,965
Loan, 6.55% due 10/1/2015S.F. 10/1/05 @ 100
Dormitory Authority of the State of
New York Revenue Bonds, Upstate Baa1*7/1/04 @ 102500,000458,210
Community Colleges, 5.70% due 7/1/2021S.F. 7/1/15 @ 100
Dormitory Authority of the State of
New York, University of Rochester,
Strong Memorial Hospital Revenue Bonds, A+7/1/04 @
102110,000101,953
5.50% due 7/1/2021S.F. 7/1/18 @ 100
New York State, Housing Finance Agency,
Insured Multi-Family Mortgage HousingAAA8/15/02 @
102200,000203,562
Revenue Bonds, 6.50% due 8/15/2024S.F. 2/15/15 @ 100
New York State Medical Care Facilities
Finance Agency, FHA-Insured
Mortgage Project Revenue Bonds, AA2/15/05 @ 102250,000253,375
6.375% due 8/15/2029
New York State Urban Development
Corporation, Correctional Capital
Facilities Revenue Bonds, Baa1*1/1/04 @ 102 420,000 366,194
5.375% due 1/1/2023S.F. 1/1/14 @ 100
$3,000,000$2,870,553
The accompanying Notes are an integral part of this Portfolio.
A-12<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST
NOTES TO PORTFOLIO OF SECURITIES - April 30, 1996
At April 30, 1996, the net unrealized market depreciation of all tax
exempt bonds was comprised of the following:
NationalCaliforniaMinnesotaNew York
Trust 207Trust 141Trust 114Trust 144
<S><C><C><C><C>
Gross unrealized market appreciation$23,788$36,566$12,970$526
Gross unrealized market depreciation (65,488) (38,188) (21,562) (81,998)
Net unrealized market depreciation$(41,700)$(1,622)$(8,592)$(81,472)
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1)All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors Service.
The meaning of the applicable rating symbols is set forth in Part B,
"Ratings".
(2)There is shown under this heading the year in which each issue of
bonds initially or currently is redeemable and the redemption price for
that year; unless otherwise indicated, each issue continues to be
redeemable at declining prices thereafter, but not below par. "S.F."
indicates a sinking fund has been or will be established with respect to
an issue of bonds. The prices at which bonds may be redeemed or called
prior to maturity may or may not include a premium and, in certain
cases, may be less than the cost of the bonds to the Trust. Certain bonds
in the portfolio, including bonds not listed as being subject to redemption
provisions, may be redeemed in whole or in part other than by operation
of the stated redemption or sinking fund provisions under certain unusual
or extraordinary circumstances specified in the instruments setting forth
the terms and provisions of such bonds. For example, see discussion of
obligations of municipal housing authorities under "Tax Exempt
Securities Trust-Portfolio" in Part B.
(3)The market value of securities as of April 30, 1996 was determined
by the Evaluator on the basis of bid prices for the securities at such date.
(p)It is anticipated that these bonds will be redeemed prior to their
scheduled maturity, pursuant to a pre-refunding, as reflected under the
column "Redemption Provisions".
A-13
<PAGE>
PROSPECTUS-PART B
Note: Part B of this Prospectus may not be distributed
unless accompanied by Part A
TAX EXEMPT SECURITIES TRUST
For over 20 years, Tax Exempt Securities Trust has specialized in
quality municipal bond investments designed to meet a variety of investment
objectives and tax situations. Tax Exempt Securities Trust is a convenient
and cost effective alternative to individual bond purchases. Each State Trust
or Umbrella Series is one of a series of similar but separate unit investment
trusts created under the laws of the State of New York by a Trust Indenture
and Agreement and related Reference Trust Agreement (collectively, the "Trust
Agreement"), dated the Date of Deposit, of Smith Barney Inc. as sponsor (the
"Sponsor"), The Chase Manhattan Bank, as trustee (the "Trustee"), and Kenny
S&P Evaluation Services, Inc., a business unit of J.J. Kenny Company, Inc., as
evaluator (the "Evaluator"). On the Date of Deposit, the Sponsor deposited
with the Trustee interest-bearing obligations (the "Bonds"), including
contracts for the purchase of certain such obligations of a State for which
such Trust is named herein (a "State Trust") and all other Trusts (hereinafter
referred to as the "Umbrella Series") (such Bonds and Deposited Units being
referred to herein collectively as the "Securities"). The Trustee thereafter
delivered to the Sponsor registered certificates of beneficial interest (the
"Certificates") representing the units (the "Units") comprising the entire
ownership of each State Trust or Umbrella Series. The initial public offering
of Units in each State Trust and Umbrella Series has been completed. The
Units offered hereby are issued and outstanding Units which have been acquired
by the Sponsor either by purchase from the Trustee of Units tendered for
redemption or in the secondary market. References to multiple Trusts in Part B
herein should be read as references to a single Trust if Part A indicates the
creation of only one Trust. See "Rights of Unit Holders -- Redemption of
Units -- Purchase by the Sponsor of Units Tendered for Redemption" and "Public
Offering -- Market for Units."
Objectives
A tax-exempt unit investment trust provides many of the same benefits as
individual bond purchases, while the Unit holder avoids the complexity of
analyzing selecting and monitoring a multibond portfolio. The objectives of
each State Trust and Umbrella Series are tax-exempt income and conservation of
capital through an investment in a diversified portfolio of municipal bonds.
There is, of course, no guarantee that a State Trust's or Umbrella Series'
objectives will be achieved since the payment of interest and the preservation
of principal are dependent upon the continued ability of the issuers of the
Bonds to meet such obligations.
Portfolio
The Sponsor's investment professionals select Bonds for the Trust
portfolios from among the 200,000 municipal bond issues that vary according
to bond purpose, credit quality and years to maturity. The following factors,
among others, were considered in selecting the Bonds for each State Trust and
Umbrella Series: (1) all the Bonds deposited in a State Trust or an Umbrella
Series are obligations of the State for which such State Trust is named or of
the counties or municipalities of such State, territories or possessions of
the United States, and authorities or political subdivisions thereof, so that
the interest on them will, in the opinion of recognized bond counsel to the
issuing governmental authorities given on the date of the original delivery of
the Bonds, be exempt from Federal income tax under existing law and from state
income taxes in the state for which such Trust is named in each case to the
extent indicated in "Tax Exempt Securities Trust - Taxes", (2) the Bonds are
diversified as to purpose of issue and location of issuer, except in the case
of a State Trust is named to the extent described in Part C, (3) in the
opinion of the Sponsor, the Bonds are fairly valued relative to other bonds of
comparable quality and maturity and (4) the Bonds were chosen in part on the
basis of their respective maturity dates and offer a degree of call
protection. The rating of each issue is also set forth in Part A, "Portfolio
of Securities." For a description of the meaning of the applicable rating
symbols as published by Standard & Poor's, Moody's Fitch Investors Service,
Inc. ("Fitch") and Duff & Phelps Credit Rating Co. ("Duff & Phelps"), see
"Bond Ratings." It should be emphasized, however, that the ratings of
Standard & Poor's, Moody's, Fitch and Duff & Phelps represent their opinions
as to the quality of the Bonds which they undertake to rate, and that these
ratings are general and are not absolute standards of quality.
References to State Trusts, in the following discussion, also relate to
other Trusts comprising Umbrella Series.
The Bonds in the Portfolio of a State Trust were chosen in part on the
basis of their respective maturity dates. The Bonds in each Trust will have a
dollar-weighted portfolio maturity as designated in "Part A-Portfolio Summary
as of Date of Deposit." The actual maturity date of each of the Bonds
contained in a State Trust, which date may be earlier or later than the
dollar-weighted average portfolio maturity of the Trust is indicated in Part
A, "Portfolio of Securities". A sale or other disposition of a Bond by the
Trust prior to the maturity of such Bond may be at a price which results in a
loss to the State Trust or Umbrella Series. The inability of an issuer to pay
the principal amount due upon the maturity of a Bond would result in a loss to
the State Trust or Umbrella Series.
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State Trust and Umbrella Series
are subject to redemption prior to their stated maturity date pursuant to
sinking fund or call provisions. (See Part A-"Portfolio Summary as of Date of
Deposit" for information relating to the particular State Trust and Umbrella
Series described therein.) In general, a call or redemption provision is more
likely to be exercised when the offering price valuation of a bond is higher
than its call or redemption price, as it might be in periods of declining
interest rates, than when such price valuation is less than the bond's call or
redemption price. To the extent that a Bond was deposited in a State Trust
and Umbrella Series at a price higher than the price at which it is
redeemable, redemption will result in a loss of capital when compared with the
original public offering price of the Units. Conversely, to the extent that a
Bond was acquired at a price lower than the redemption price, redemption will
result in an increase in capital when compared with the original public
offering price of the Units. Monthly distributions will generally be reduced
by the amount of the income which would otherwise have been paid with respect
to redeemed bonds. The Estimated Current Return and Estimated Long-Term
Return of the Units may be affected by such redemptions. Each Portfolio of
Securities in Part A contains a listing of the sinking fund and call
provisions, if any, with respect to each of the Bonds in a State Trust and
Umbrella Series. 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 distributed to Unit
holders and will not be reinvested, no assurance can be given that a State
Trust and Umbrella Series will retain for any length of time its present size
and composition. Neither the Sponsor nor the Trustee shall be liable in any
way for any default, failure or defect in any Bond.
The Portfolio of the State Trust and Umbrella Series may consist of some
Bonds whose current market values were below face value on the Date of
Deposit. A primary reason for the market value of such Bonds being less than
face value at maturity is that the interest coupons of such Bonds are at lower
rates than the current market interest rate for comparably rated Bonds, even
though at the time of the issuance of such Bonds the interest coupons thereon
represented then prevailing interest rates on comparably rated Bonds then
newly issued. Bonds selling at market discounts tend to increase in market
value as they approach maturity when the principal amount is payable. A
market discount tax-exempt Bond held to maturity will have a larger portion of
its total return in the form of taxable ordinary income and less in the form
of tax-exempt income than a comparable Bond bearing interest at current market
rates. Under the provisions of the Internal Revenue Code in effect on the
date of this Prospectus any ordinary income attributable to market discount
will be taxable but will not be realized until maturity, redemption or sale of
the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit", the State
Trust and Umbrella Series may contain or be concentrated in one or more of the
classifications of Bonds referred to below. A State Trust and Umbrella Series
is considered to be "concentrated" in a particular category when the Bonds in
that category constitute 25% or more of the aggregate value of the Portfolio.
(See Part A-"Portfolio Summary as of Date of Deposit" for information relating
to the particular State Trust and Umbrella Series described therein.) An
investment in Units of the State Trust and Umbrella Series should be made with
an understanding of the risks that these investments may entail, certain of
which are described below.
General Obligation Bonds. Certain of the Bonds in the Portfolio may be
general obligations of a governmental entity that are secured by the taxing
power of the entity. General obligation bonds are backed by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. However, the taxing power of any governmental entity may be
limited by provisions of state constitutions or laws and an entity's credit
will depend on many factors, including an erosion of the tax base due to
population declines, natural disasters, declines in the state's industrial
base or inability to attract new industries, economic limits on the ability to
tax without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both their
revenues and expenditures, as well as other factors, many state and local
governments are confronting deficits and potential deficits which are the most
severe in recent years. Many issuers are facing highly difficult choices
about significant tax increases and/or spending reductions in order to restore
budgetary balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits or cash
flow needs.
In addition, certain of the Bonds in the State Trust and Umbrella Series
may be obligations of issuers (including California issuers) who rely in whole
or in part on ad valorem real property taxes as a source of revenue. Certain
proposals, in the form of state legislative proposals or voter initiatives, to
limit ad valorem real property taxes have been introduced in various states,
and an amendment to the constitution of the State of California, providing for
strict limitations on ad valorem real property taxes, has had a significant
impact on the taxing powers of local governments and on the financial
conditions of school districts and local governments in California. It is not
possible at this time to predict the final impact of such measures, or of
similar future legislative or constitutional measures, on school districts and
local governments or on their abilities to make future payments on their
outstanding debt obligations.
Industrial Development Revenue Bonds ("IDRs"). IDRs, including
pollution control revenue bonds, are tax-exempt securities issued by states,
municipalities, public authorities or similar entities ("issuers") to finance
the cost of acquiring, constructing or improving various projects, including
pollution control facilities and certain industrial development facilities.
These projects are usually operated by corporate entities. IDRs are not
general obligations of governmental entities backed by their taxing power.
Issuers are only obligated to pay amounts due on the IDRs to the extent that
funds are available from the unexpended proceeds of the IDRs or receipts or
revenues of the issuer under arrangements between the issuer and the corporate
operator of a project. These arrangements 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 IDRs.
IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable under the
issuer's arrangements with the corporate operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee for the
benefit of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or a trustee
as additional security for the IDRs. In addition, IDRs are frequently
directly guaranteed by the corporate operator of the project or by another
affiliated company. Regardless of the structure, payment of IDRs is solely
dependent upon the creditworthiness of the corporate operator of the project
or corporate guarantor. Corporate operators or guarantors that are industrial
companies 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 (including that of low-cost foreign
companies), unfunded pension fund liabilities or off-balance sheet items, and
financial deterioration resulting from leveraged buy-outs or takeovers.
However, certain of the IDRs in the Portfolio may be additionally insured or
secured by letters of credit issued by banks or otherwise guaranteed or
secured to cover amounts due on the IDRs in the event of default in payment by
an issuer.
Hospital and Health Care Facility Bonds. The ability of hospitals and
other health care facilities to meet their obligations with respect to revenue
bonds issued on their behalf is dependent on various factors, including the
level of payments received from private third-party payors and government
programs and the cost of providing health care services.
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all
of which may materially decrease the rate of program payments for health care
facilities. There can be no assurance that payments under governmental
programs will remain at levels comparable to present levels or will, in the
future, be sufficient to cover the costs allocable to patients participating
in such programs. In addition, there can be no assurance that a particular
hospital or other health care facility will continue to meet the requirements
for participation in such programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures,
rate-setting, and compliance with building codes and environmental laws.
Facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards
necessary for licensing and accreditation. These regulatory requirements are
subject to change and, to comply, it may be necessary for a hospital or other
health care facility to incur substantial capital expenditures or increased
operating expenses to effect changes in its facilities, equipment, personnel
and services.
Hospitals and other health care facilities are subject to claims and
legal actions by patients and others in the ordinary course of business.
Although these claims are generally covered by insurance, there can be no
assurance that a claim will not exceed the insurance coverage of a health care
facility or that insurance coverage will be available to a facility. In
addition, a substantial increase in the cost of insurance could adversely
affect the results of operations of a hospital or other health care facility.
The Clinton Administration may impose regulations which could limit price
increases for hospitals or the level of reimbursements for third-party payors
or other measures to reduce health care costs and make health care available
to more individuals, which would reduce profits for hospitals. Some states,
such as New Jersey, have significantly changed their reimbursement systems.
If a hospital cannot adjust to the new system by reducing expenses or raising
rates, financial difficulties may arise. Also, Blue Cross has denied
reimbursement for some hospitals for services other than emergency room
services. The lost volume would reduce revenues unless replacement patients
were found.
Certain hospital bonds may provide for redemption at par at any time
upon the sale by the issuer of the hospital facilities to a non-affiliated
entity, if the hospital becomes subject to ad valorem taxation, or in various
other circumstances. For example, certain hospitals may have the right to
call bonds at par if the hospital may be legally required because of the bonds
to perform procedures against specified religious principles or to disclose
information that is considered confidential or privileged. Certain
FHA-insured bonds may provide that all or a portion of these bonds, otherwise
callable at a premium, can be called at par in certain circumstances. If a
hospital defaults upon a bond obligation, the realization of Medicare and
Medicaid receivables may be uncertain and, if the bond obligation is secured
by the hospital facilities, legal restrictions on the ability to foreclose
upon the facilities and the limited alternative uses to which a hospital can
be put may severely reduce its collateral value.
The Internal Revenue Service has engaged in a program of intensive
audits of certain large tax-exempt hospital and health care facility
organizations and it has been reported that the tax-exempt status of some of
these organizations may be revoked. At this time, it is uncertain whether any
of the hospital and health care facility bonds held by the State Trust and
Umbrella Series will be affected by such audit proceedings.
Single Family and Multi-Family Housing Bonds. Multi-family housing
revenue bonds and single family mortgage revenue bonds are state and local
housing issues that have been issued to provide financing for various housing
projects. Multi-family housing revenue bonds are payable primarily from the
revenues derived from mortgage loans to housing projects for low to moderate
income families. Single-family mortgage revenue bonds are issued for the
purpose of acquiring from originating financial institutions notes secured by
mortgages on residences.
Housing obligations are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by these programs
as well as the failure by a state or local housing issuer to satisfy the
qualifications required for coverage under these programs or any legal or
administrative determinations that the coverage of these programs is not
available to a housing issuer, probably will result in a decrease or
elimination of subsidies available for payment of amounts due on the issuer's
obligations. The ability of housing issuers to make debt service payments on
their obligations will also be affected by various economic and non-economic
developments including, among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family
projects, the rate of default on mortgage loans underlying single family
issues and the ability of mortgage insurers to pay claims, employment and
income conditions prevailing in local markets, increases in construction
costs, taxes, utility costs and other operating expenses, the managerial
ability of project managers, changes in laws and governmental regulations and
economic trends generally in the localities in which the projects are
situated. Occupancy of multi-family housing projects may also be adversely
affected by high rent levels and income limitations imposed under Federal,
state or local programs.
All single family mortgage revenue bonds and certain multi-family
housing revenue bonds are prepayable over the life of the underlying mortgage
or mortgage pool, and therefore the average life of housing obligations cannot
be determined. However, the average life of these obligations will ordinarily
be less than their stated maturities. Single-family issues are subject to
mandatory redemption in whole or in part from prepayments on underlying
mortgage loans; mortgage loans are frequently partially or completely prepaid
prior to their final stated maturities as a result of events such as declining
interest rates, sale of the mortgaged premises, default, condemnation or
casualty loss. Multi-family issues are characterized by mandatory redemption
at par upon the occurrence of monetary defaults or breaches of covenants by
the project operator. Additionally, housing obligations are generally subject
to mandatory partial redemption at par to the extent that proceeds from the
sale of the obligations are not allocated within a stated period (which may be
within a year of the date of issue). To the extent that these obligations
were valued at a premium when a Holder purchased Units, any prepayment at par
would result in a loss of capital to the Holder and, in any event, reduce the
amount of income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on
qualification under Section 143 of the Internal Revenue Code of 1986, as
amended (the "Code"), in the case of single family mortgage revenue bonds or
Section 142(a)(7) of the Code or other provisions of Federal law in the case
of certain multi-family housing revenue bonds (including Section 8 assisted
bonds). These sections of the Code or other provisions of Federal law contain
certain ongoing requirements, including requirements relating to the cost and
location of the residences financed with the proceeds of the single family
mortgage revenue bonds and the income levels of tenants of the rental projects
financed with the proceeds of the multi-family housing revenue bonds. While
the issuers of the bonds and other parties, including the originators and
servicers of the single-family mortgages and the owners of the rental projects
financed with the multi-family housing revenue bonds, generally covenant to
meet these ongoing requirements and generally agree to institute procedures
designed to ensure that these requirements are met, there can be no assurance
that these ongoing requirements will be consistently met. The failure to meet
these requirements could cause the interest on the bonds to become taxable,
possibly retroactively to the date of issuance, thereby reducing the value of
the bonds, subjecting the Holders to unanticipated tax liabilities and
possibly requiring the Trustee to sell the bonds at reduced values.
Furthermore, any failure to meet these ongoing requirements might not
constitute an event of default under the applicable mortgage or permit the
holder to accelerate payment of the bond or require the issuer to redeem the
bond. In any event, where the mortgage is insured by the Federal Housing
Administration, its consent may be required before insurance proceeds would
become payable to redeem the mortgage bonds.
Power Facility Bonds. The ability of utilities to meet their
obligations with respect to revenue bonds issued on their behalf is dependent
on various factors, including the rates they may charge their customers, the
demand for a utility's services and the cost of providing those services.
Utilities, in particular investor-owned utilities, are subject to extensive
regulations relating to the rates which they may charge customers. Utilities
can experience regulatory, political and consumer resistance to rate
increases. Utilities engaged in long-term capital projects are especially
sensitive to regulatory lags in granting rate increases. Any difficulty in
obtaining timely and adequate rate increases could adversely affect a
utility's results of operations.
The demand for a utility's services is influenced by, among other
factors, competition, weather conditions and economic conditions. Electric
utilities, for example, have experienced increased competition as a result of
the availability of other energy sources, the effects of conservation on the
use of electricity, self-generation by industrial customers and the generation
of electricity by co-generators and other independent power producers. Also,
increased competition will result if federal regulators determine that
utilities must open their transmission lines to competitors. Utilities which
distribute natural gas also are subject to competition from alternative fuels,
including fuel oil, propane and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of
capital, the availability and cost of fuel and other factors. In addition,
natural gas pipeline and distribution companies have incurred increased costs
as a result of long-term natural gas purchase contracts containing "take or
pay" provisions which require that they pay for natural gas even if natural
gas is not taken by them. There can be no assurance that a utility will be
able to pass on these increased costs to customers through increased rates.
Utilities incur substantial capital expenditures for plant and equipment. In
the future they will also incur increasing capital and operating expenses to
comply with environmental legislation such as the Clean Air Act of 1990, and
other energy, licensing and other laws and regulations relating to, among
other things, air emissions, the quality of drinking water, waste water
discharge, solid and hazardous substance handling and disposal, and siting and
licensing of facilities. Environmental legislation and regulations are
changing rapidly and are the subject of current public policy debate and
legislative proposals. It is increasingly likely that some or many utilities
will be subject to more stringent environmental standards in the future that
could result in significant capital expenditures. Future legislation and
regulation could include, among other things, regulation of so-called
electromagnetic fields associated with electric transmission and distribution
lines as well as emissions of carbon dioxide and other so-called greenhouse
gases associated with the burning of fossil fuels. Compliance with these
requirements may limit a utility's operations or require substantial
investments in new equipment and, as a result, may adversely affect a
utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased financing
requirements coupled with limited availability of capital, (e) exposure to
cancellation and penalty charges on new generating units under construction,
(f) problems of cost and availability of fuel, (g) compliance with rapidly
changing and complex environmental, safety and licensing requirements, (h)
litigation and proposed legislation designed to delay or prevent construction
of generating and other facilities, (i) the uncertain effects of conservation
on the use of electric energy, (j) uncertainties associated with the
development of a national energy policy, (k) regulatory, political and
consumer resistance to rate increases and (l) increased competition as a
result of the availability of other energy sources. These factors may delay
the construction and increase the cost of new facilities, limit the use of, or
necessitate costly modifications to, existing facilities, impair the access of
electric utilities to credit markets, or substantially increase the cost of
credit for electric generating facilities. The Sponsor cannot predict at this
time the ultimate effect of such factors on the ability of any issuers to meet
their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law in October,
1992, made it mandatory for a utility to permit non-utility generators of
electricity access to its transmission system for wholesale customers, thereby
increasing competition for electric utilities. NEPA also mandated demand-side
management policies to be considered by utilities. NEPA prohibits the Federal
Energy Regulatory Commission from mandating electric utilities to engage in
retail wheeling, which is competition among suppliers of electric generation
to provide electricity to retail customers (particularly industrial retail
customers) of a utility. However, under NEPA, a state can mandate retail
wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil
fuels. Congressional support for the increased regulation of air, water, and
soil contaminants is building and there are a number of pending or recently
enacted legislative proposals which may affect the electric utility industry.
In particular, on November 15, 1990, legislation was signed into law that
substantially revised the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the United
States by the year 2000. A main feature of the 1990 Amendments is the
reduction of sulphur dioxide and nitrogen oxide emissions caused by electric
utility power plants, particularly those fueled by coal. Under the 1990
Amendments the U.S. Environmental Protection Agency ("EPA") was required to
develop limits for nitrogen oxide emissions by 1993. The sulphur dioxide
reduction will be achieved in two phases. Phase I addresses specific
generating units named in the 1990 Amendments. In Phase II the total U.S.
emissions will be capped at 8.9 million tons by the year 2000. The 1990
Amendments contain provisions for allocating allowances to power plants based
on historical or calculated levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of
toxic air emissions from electric generating units pending the results of
several federal government studies to be conducted over three to four years
with respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed
to risks inherent in the nuclear industry. These risks include exposure to
new requirements resulting from extensive federal and state regulatory
oversight, public controversy, decommissioning costs, and spent fuel and
radioactive waste disposal issues. While nuclear power construction risks are
no longer of paramount concern, the emerging issue is radioactive waste
disposal. In addition, nuclear plants typically require substantial capital
additions and modifications throughout their operating lives to meet safety,
environmental, operational and regulatory requirements and to replace and
upgrade various plant systems. The high degree of regulatory monitoring and
controls imposed on nuclear plants could cause a plant to be out of service or
on limited service for long periods. When a nuclear facility owned by an
investor-owned utility or a state or local municipality is out of service or
operating on a limited service basis, the utility operator or its owners may
be liable for the recovery of replacement power costs. Risks of substantial
liability also arise from the operation of nuclear facilities and from the
use, handling, and possible radioactive emissions associated with nuclear
fuel. Insurance may not cover all types or amounts of loss which may be
experienced in connection with the ownership and operation of a nuclear plant
and severe financial consequences could result from a significant accident or
occurrence. The Nuclear Regulatory Commission has promulgated regulations
mandating the establishment of funded reserves to assure financial capability
for the eventual decommissioning of licensed nuclear facilities. These funds
are to be accrued from revenues in amounts currently estimated to be
sufficient to pay for decommissioning costs.
The ability of state and local joint action power agencies to make
payments on bonds they have issued is dependent in large part on payments made
to them pursuant to power supply or similar agreements. Courts in
Washington, Oregon and Idaho have held that certain agreements between the
Washington Public Power Supply System ("WPPSS") and the WPPSS participants are
unenforceable because the participants did not have the authority to enter
into the agreements. While these decisions are not specifically applicable to
agreements entered into by public entities in other states, they may cause a
reexamination of the legal structure and economic viability of certain
projects financed by joint power agencies, which might exacerbate some of the
problems referred to above and possibly lead to legal proceedings questioning
the enforceability of agreements upon which payment of these bonds may depend.
Water and Sewer Revenue Bonds. Water and sewer bonds are generally
payable from user fees. The ability of state and local water and sewer
authorities to meet their obligations may be affected by failure of
municipalities to utilize fully the facilities constructed by these
authorities, economic or population decline and resulting decline in revenue
from user charges, rising construction and maintenance costs and delays in
construction of facilities, impact of environmental requirements, failure or
inability to raise user charges in response to increased costs, the difficulty
of obtaining or discovering new supplies of fresh water, the effect of
conservation programs and the impact of "no growth" zoning ordinances. In
some cases this ability may be affected by the continued availability of
Federal and state financial assistance and of municipal bond insurance for
future bond issues.
University and College Bonds. The ability of universities and colleges
to meet their obligations is dependent upon various factors, including the
size and diversity of their sources of revenues, enrollment, reputation,
management expertise, the availability and restrictions on the use of
endowments and other funds, the quality and maintenance costs of campus
facilities, and, in the case of public institutions, the financial condition
of the relevant state or other governmental entity and its policies with
respect to education. The institution's ability to maintain enrollment levels
will depend on such factors as tuition costs, demographic trends, geographic
location, geographic diversity and quality of the student body, quality of the
faculty and the diversity of program offerings.
Legislative or regulatory action in the future at the Federal, state or
local level may directly or indirectly affect eligibility standards or reduce
or eliminate the availability of funds for certain types of student loans or
grant programs, including student aid, research grants and work-study
programs, and may affect indirect assistance for education.
Lease Rental Bonds. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created
solely for the construction of buildings (administrative offices, convention
centers and prisons, for example) or the purchase of equipment (police cars
and computer systems, for example) that will be used by a state or local
government (the "lessee"). Thus, the bonds are subject to the ability and
willingness of the lessee government to meet its lease rental payments which
include debt service on the bonds. Willingness to pay may be subject to
changes in the views of citizens and government officials as to the essential
nature of the finance project. Lease rental bonds are subject, in almost all
cases, to the annual appropriation risk, i.e., the lessee government is not
legally obligated to budget and appropriate for the rental payments beyond the
current fiscal year. These bonds are also subject to the risk of abatement in
many states-rental bonds cease in the event that damage, destruction or
condemnation of the project prevents its use by the lessee. (In these cases,
insurance provisions and reserve funds designed to alleviate this risk become
important credit factors). In the event of default by the lessee government,
there may be significant legal and/or practical difficulties involved in the
reletting or sale of the project. Some of these issues, particularly those
for equipment purchase, contain the so-called "substitution safeguard", which
bars the lessee government, in the event it defaults on its rental payments,
from the purchase or use of similar equipment for a certain period of time.
This safeguard is designed to insure that the lessee government will
appropriate the necessary funds even though it is not legally obligated to do
so, but its legality remains untested in most, if not all, states.
Capital Improvement Facility Bonds. The Portfolio of a State Trust and
Umbrella Series may contain Bonds which are in the capital improvement
facilities category. Capital improvement bonds are bonds issued to provide
funds to assist political subdivisions or agencies of a state through
acquisition of the underlying debt of a state or local political subdivision
or agency which bonds are secured by the proceeds of the sale of the bonds,
proceeds from investments and the indebtedness of a local political
subdivision or agency. The risks of an investment in such bonds include the
risk of possible prepayment or failure of payment of proceeds on and default
of the underlying debt.
Solid Waste Disposal Bonds. Bonds issued for solid waste disposal
facilities are generally payable from tipping fees and from revenues that may
be earned by the facility on the sale of electrical energy generated in the
combustion of waste products. The ability of solid waste disposal facilities
to meet their obligations depends upon the continued use of the facility, the
successful and efficient operation of the facility and, in the case of
waste-to-energy facilities, the continued ability of the facility to generate
electricity on a commercial basis. All of these factors may be affected by a
failure of municipalities to fully utilize the facilities, an insufficient
supply of waste for disposal due to economic or population decline, rising
construction and maintenance costs, any delays in construction of facilities,
lower-cost alternative modes of waste processing and changes in environmental
regulations. Because of the relatively short history of this type of
financing, there may be technological risks involved in the satisfactory
construction or operation of the projects exceeding those associated with most
municipal enterprise projects. Increasing environmental regulation on the
federal, state and local level has a significant impact on waste disposal
facilities. While regulation requires more waste producers to use waste
disposal facilities, it also imposes significant costs on the facilities.
These costs include compliance with frequently changing and complex regulatory
requirements, the cost of obtaining construction and operating permits, the
cost of conforming to prescribed and changing equipment standards and required
methods of operation and, for incinerators or waste-to-energy facilities, the
cost of disposing of the waste residue that remains after the disposal
process in an environmentally safe manner. In addition, waste disposal
facilities frequently face substantial opposition by environmental groups and
officials to their location and operation, to the possible adverse effects
upon the public health and the environment that may be caused by wastes
disposed of at the facilities and to alleged improper operating procedures.
Waste disposal facilities benefit from laws which require waste to be disposed
of in a certain manner but any relaxation of these laws could cause a decline
in demand for the facilities' services. Finally, waste-to-energy facilities
are concerned with many of the same issues facing utilities insofar as they
derive revenues from the sale of energy to local power utilities (see Power
Facility Bonds above).
Moral Obligation Bonds. The State Trust and Umbrella Series may also
include "moral obligation" bonds. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of the bonds becomes a moral
commitment but not a legal obligation of the state or municipality in
question. Even though the state may be called on to restore any deficits in
capital reserve funds of the agencies or authorities which issued the bonds,
any restoration generally requires appropriation by the state legislature and
accordingly does not constitute a legally enforceable obligation or debt of
the state. The agencies or authorities generally have no taxing power.
Refunded Bonds. Refunded Bonds 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 to date, however, bonds which were thought
to be escrowed to maturity have been called for redemption prior to maturity.
Airport, Port and Highway Revenue Bonds. Certain facility revenue bonds
are payable from and secured by the revenues from the ownership and operation
of particular facilities, such as airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross airport operating income
is generally derived from fees received from signatory airlines pursuant to
use agreements which consist of annual payments for airport use, occupancy of
certain terminal space, facilities, service fees, concessions 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 aviation
fuel costs, deregulation, traffic constraints, the recent recession and other
factors. As a result, several airlines experienced severe financial
difficulties. Several airlines including America West Airlines sought
protection from their creditors under Chapter 11 of the Bankruptcy Code. In
addition, other airlines such as Midway Airlines, Inc., Eastern Airlines, Inc.
and Pan American Corporation have been liquidated. However, Northwest
Airlines, Continental Airlines and Trans World Airlines emerged from
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.
Furthermore, proposed Legislation would provide the U.S. Secretary of
Transportation with the temporary authority to freeze airport fees upon the
occurrence of disputes between a particular airport facility and the airlines
utilizing that facility.
Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be adversely
affected by reduction in revenues due to such factors and increased cost of
maintenance or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
Special Tax Bonds. Special tax bonds are payable from and secured by
the revenues derived by a municipality from a particular tax such as a tax on
the rental of a hotel room, on the purchase of food and beverages, on the
rental of automobiles or on the consumption of liquor. Special tax bonds are
not secured by the general tax revenues of the municipality, and they do not
represent general obligations of the municipality. Therefore, payment on
special tax bonds may be adversely affected by a reduction in revenues
realized from the underlying special tax due to a general decline in the local
economy or population or due to a decline in the consumption, use or cost of
the goods and services that are subject to taxation. Also, should spending on
the particular goods or services that are subject to the special tax decline,
the municipality may be under no obligation to increase the rate of the
special tax to ensure that sufficient revenues are raised from the shrinking
taxable base.
Tax Allocation Bonds. Tax allocation bonds are typically secured by
incremental tax revenues collected on property within the areas where
redevelopment projects, financed by bond proceeds are located ("project
areas"). Such payments are expected to be made from projected increases in
tax revenues derived from higher assessed values of property resulting from
development in the particular project area and not from an increase in tax
rates. Special risk considerations include: reduction of, or a less than
anticipated increase in, taxable values of property in the project area,
caused either by economic factors beyond the Issuer's control (such as a
relocation out of the project area by one or more major property owners) or by
destruction of property due to natural or other disasters; successful appeals
by property owners of assessed valuations; substantial delinquencies in the
payment of property taxes; or imposition of any constitutional or legislative
property tax rate decrease.
Transit Authority Bonds. Mass transit is generally not self-supporting
from fare revenues. Therefore, additional financial resources must be made
available to ensure operation of mass transit systems as well as the timely
payment of debt service. Often such financial resources include Federal and
state subsidies, lease rentals paid by funds of the state or local government
or a pledge of a special tax such as a sales tax or a property tax. If fare
revenues or the additional financial resources do not increase appropriately
to pay for rising operating expenses, the ability of the issuer to adequately
service the debt may be adversely affected.
Convention Facility Bonds. The Portfolio of a State Trust and Umbrella
Series may contain Bonds of issuers in the convention facilities category.
Bonds in the convention facilities category include special limited obligation
securities issued to finance convention and sports facilities payable from
rental payments and annual governmental appropriations. The governmental
agency is not obligated to make payments in any year in which the monies have
not been appropriated to make such payments. In addition, these facilities
are limited use facilities that may not be used for purposes other than as
convention centers or sports facilities.
Puerto Rico. The Portfolio may contain bonds of issuers which will be
affected by general economic conditions in Puerto Rico. The economy of Puerto
Rico is closely integrated with that of the mainland United States. During
fiscal year 1995, approximately 89% of Puerto Rico's exports were to the
United States mainland, which was also the source of 65% of Puerto Rico's
imports. In fiscal 1995, Puerto Rico experienced a $4.6 billion positive
adjusted trade balance. The economy of Puerto Rico is dominated by the
manufacturing and service sectors. The manufacturing sector has experienced a
basic change over the years as a result of increased emphasis on higher wage,
high technology industries such as pharmaceuticals, electronics, computers,
microprocessors, professional and scientific instruments, and certain high
technology machinery and equipment. The service sector, including finance,
insurance and real estate, wholesale and retail trade, and hotel and related
services, also plays a major role in the economy. It ranks second only to
manufacturing in contribution to the gross domestic product and leads all
sectors in providing employment. In recent years, the service sector has
experienced significant growth in response to and paralleling the expansion of
the manufacturing sector. Since fiscal 1985, personal income, both aggregate
and per capita, has increased consistently in each fiscal year. In fiscal
1995, aggregate personal income was $27.0 billion ($22.5 billion in 1987
prices) and personal income per capita was $7,296 ($6,074 in 1987 prices).
Personal income includes transfer payments to individuals in Puerto Rico under
various social programs. Total federal payments to Puerto Rico, which include
many types in addition to federal transfer payments, are lower on a per capita
basis in Puerto Rico than in any state. Transfer payments to individuals in
fiscal 1994 were $5.9 billion, of which $4.0 billion, or 67.6%, represent
entitlement to individuals who had previously performed services or made
contributions under programs such as Social Security, Veterans Benefits and
Medicare. The number of persons employed in Puerto Rico during fiscal 1995
averaged 1,051,000, an increase of 4.0% over fiscal 1994. The unemployment
rate in Puerto Rico for fiscal 1995 decreased from 16.0% to 13.8%. The Puerto
Rico Planning Board's most recent gross product forecast for fiscal 1996, made
in February 1995, showed an increase of 2.7%. The Planning Board's Economic
Activity Index, a composite index for thirteen economic indicators, increased
2.7% for the first seven months of fiscal 1995 compared to the same period of
fiscal 1994, which period showed an increase of 1.7% over the same period of
fiscal 1993. During the first four months of fiscal 1996 the Index increased
1.8% compared to the same period of fiscal 1995, which period showed an
increase of 2.7% over the same period of fiscal 1994. Growth in the Puerto
Rico economy in fiscal 1996 depends on several factors, including the state of
the United States economy and the relative stability in the price of oil
imports, the exchange value of the U.S. dollar, the level of federal transfers
and the cost of borrowing.
Insurance. Certain Bonds (the "Insured Bonds") may be insured or
guaranteed by AMBAC Indemnity Corporation ("AMBAC"), Asset Guaranty
Reinsurance Company ("Asset Guaranty"), Capital Guaranty Insurance Company
("CGIC"), Capital Markets Assurance Corp. ("CAPMAC"), Connie Lee Insurance
Company ("Connie Lee"), Financial Guaranty Insurance Company ("Financial
Guaranty"), Financial Security Assurance Inc. ("FSA"), or MBIA Insurance
Corporation ("MBIA") (collectively, the "Insurance Companies"). The
claims-paying ability of each of these companies, unless otherwise indicated,
is rated AAA by Standard & Poor's or another acceptable national rating
service. The ratings are subject to change at any time at the discretion of
the rating agencies. In determining whether to insure bonds, the Insurance
Companies severally apply their own standards. The cost of this insurance is
borne either by the issuers or previous owners of the bonds or by the Sponsor.
The insurance policies are non-cancellable and will continue in force so long
as the Insured Bonds are outstanding and the insurers remain in business. The
insurance policies guarantee the timely payment of principal and interest on
but do not guarantee the market value of the Insured Bonds or the value of the
Units. The insurance policies generally do not provide for accelerated
payments of principal or, except in the case of any portfolio insurance
policies, cover redemptions resulting from events of taxability. If the
issuer of any Insured Bond should fail to make an interest or principal
payment, the insurance policies generally provide that the Trustee or its
agent shall give notice of nonpayment to the Insurance Company or its agent
and provide evidence of the Trustee's right to receive payment. The Insurance
Company is then required to disburse the amount of the failed payment to the
Trustee or its agent and is thereafter subrogated to the Trustee's right to
receive payment from the issuer.
The following are brief descriptions of certain of the insurance
companies that may insure or guarantee certain Bonds. The financial
information presented for each company has been determined on a statutory
basis and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by
the Office of the Commissioner of Insurance of the State of Wisconsin and
licensed to do business in 50 states, the District of Columbia and the
Commonwealth of Puerto Rico, with admitted assets of approximately
$2,505,000,000 (unaudited) and statutory capital of approximately
$1,384,000,000 (unaudited) as of June 30, 1996. Statutory capital consists of
AMBAC's policyholders' surplus and statutory contingency reserve. AMBAC is a
wholly owned subsidiary of AMBAC Inc., a 100% publicly-held company. Moody's
and Fitch have each assigned a triple-A claims-paying ability rating to AMBAC.
AMBAC has obtained a ruling from the Internal Revenue Service to the
effect that the insuring of an obligation by AMBAC will not affect the
treatment for federal income tax purposes of interest on such obligation and
that insurance proceeds representing maturing interest paid by AMBAC under
policy provisions substantially identical to those contained in its municipal
bond insurance policy shall treated for federal income tax purposes in the
same manner as if such payments were made by the issuer of the Bonds.
Asset Guaranty is a New York State insurance company licensed to write
financial guarantee, credit, residual value and surety insurance. Asset
Guaranty commenced operations in mid-1988 by providing reinsurance to several
major monoline insurers. Asset Guaranty also issued limited amounts of
primary financial guaranty insurance, but not in direct competition with the
primary mono-line companies for which it acts as a reinsurer. The parent
holding company of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with
Enhance Financial Services (EFS) in June, 1990 to form Enhance Financial
Services Group Inc. (EFSG). The two main, 100%-owned subsidiaries of EFSG,
Asset Guaranty and Enhance Reinsurance Company (ERC), share common management
and physical resources. As of April 30, 1996 EFSG is 55.3% owned by the
public, 30.2% owned by US West Inc., 8.9% by senior management and 5.6% by
Swiss Reinsurance Company by senior management. Both ERC and Asset Guaranty
are rated "AAA" for claims paying ability by Duff & Phelps. ERC is rated
triple-A for claims-paying ability by both Standard & Poor's and Moody's.
Asset Guaranty received a "AA" claims-paying-ability rating from Standard &
Poor's during August 1993, but remains unrated by Moody's. As of March 31,
1996 Asset Guaranty had admitted assets of approximately $187,000,000 and
policyholders' surplus of approximately $82,000,000.
CAPMAC commenced operations in December 1987, as the second mono-line
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned
subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank
(New York State) to a group of 12 investors led by the following: Dillon
Read's Saratoga Partners II; L.P. (Saratoga), an acquisition fund; Caprock
Management, Inc., representing Rockefeller family interests; Citigrowth Fund,
a Citicorp venture capital group; and CAPMAC senior management and staff.
These groups control approximately 70% of the stock of CHI. CAPMAC had
traditionally specialized in guaranteeing consumer loan and trade receivable
asset-backed securities. Under the new ownership group CAPMAC intends to
become involved in the municipal bond insurance business, as well as their
traditional non-municipal business. As of March 31, 1995 CAPMAC's admitted
assets were approximately $210,000,000 and its policyholders' surplus was
approximately $138,000,000.
FSA is a monoline insurance company incorporated in 1984 under the laws
of the State of New York and is licensed to engage in the financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
FSA is a wholly owned subsidiary of Financial Security Assurance
Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company. Major
shareholders of Holdings include Fund American Enterprises Holdings, Inc., US
WEST Capital Corporation and Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of FSA or any claim under
any insurance policy issued by FSA or to make any additional contribution to
the capital of FSA.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by FSA or any of its
domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitation. In addition, FSA reinsures a portion of its liabilities under
certain of its financial guaranty insurance policies with other reinsurers
under various quota-share treaties and on a transaction-by-transaction base.
Such reinsurance is utilized by FSA as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter or
limit FSA's obligations under any financial guaranty insurance policy. As of
June 30, 1996, total shareholders equity of FSA and its wholly-owned
subsidiaries was (unaudited) $785,072,000 and total unearned premium reserves
was (unaudited) $351,180,000.
Connie Lee, a stock insurance company incorporated in Wisconsin, is a
wholly-owned subsidiary of College Construction Loan Insurance Association, a
stockholder-owned District of Columbia Insurance holding company whose
creation was authorized by the 1986 amendments to the Higher Education Act.
The United States Department of Education and Student Loan Marketing
Association are founding shareholders of College Construction Loan Insurance
Association. As a federally authorized company, Connie Lee's structure and
operational authorities are subject to revisions by amendments to the Higher
Education Act or other federal enactments. CONNIE LEE IS NOT AN AGENCY OR
INSTRUMENTALITY OF THE UNITED STATES GOVERNMENT, ALTHOUGH THE UNITED STATES
GOVERNMENT IS A STOCKHOLDER OF COLLEGE CONSTRUCTION LOAN INSURANCE
ASSOCIATION. THE OBLIGATIONS OF CONNIE LEE ARE NOT OBLIGATIONS OF THE UNITED
STATES GOVERNMENT. As of June 30, 1996, its total admitted assets were
approximately $219,098,333 (unaudited) and total policyholders' surplus was
approximately $112,734,947 (unaudited), as reported to the Commissioner of
Insurance of the State of Wisconsin.
Financial Guaranty, a New York stock insurance company, is a
wholly-owned subsidiary of FGIC Corporation which is wholly-owned by General
Electric Capital Corporation. The investors in the FGIC Corporation are not
obligated to pay the debts of or the claims against Financial Guaranty.
Financial Guaranty commenced its business of providing insurance and financial
guarantees for a variety of investment instruments in January 1984 and is
currently authorized to provide insurance in 50 states and the District of
Columbia. It files reports with state regulatory agencies and is subject to
audit and review by those authorities. As of June 30, 1996, its total
admitted assets were approximately $2,377,900,000 and its policyholders'
surplus was approximately $1,069,597.
MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety Company,
The Fund American Companies, Inc., subsidiaries of CIGNA Corporation and
Credit Local de France, CAECL, S.A. These principal shareholders now own
approximately 13% of the outstanding common stock of MBIA Inc., following a
series of four public equity offerings over a five-year period. MBIA 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 Northern Mariana Islands, the
Virgin Islands of the United States and the Territory of Guam. As of June 30,
1996, MBIA had admitted assets of approximately $4.2 billion (unaudited),
total liabilities of approximately $2.8 billion (unaudited), and
policyholders' surplus of approximately $1.4 billion (unaudited), prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. As of December 31, 1995, MBIA had admitted
assets of approximately $3.8 billion (audited), total liabilities of
approximately $2.5 billion (audited) and policyholders' surplus of
approximately $1.3 billion (audited).
Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters.
Regulatory agencies require that premium rates not be excessive, inadequate or
unfairly discriminatory. Insurance regulation in many states also includes
"assigned risk" plans, reinsurance facilities, and joint underwriting
associations, under which all insurers writing particular lines of insurance
within the jurisdiction must accept, for one or more of those lines, risks
unable to secure coverage in voluntary markets. A significant portion of the
assets of insurance companies is required by law to be held in reserve against
potential claims on policies and is not available to general creditors.
Although the Federal government does not regulate the business of
insurance, Federal initiatives can significantly impact the insurance
business. Current and proposed Federal measures which may significantly
affect the insurance business include pension regulation (ERISA), controls on
medical care costs, minimum standards for no-fault automobile insurance,
national health insurance, personal privacy protection, tax law changes
affecting life insurance companies or the relative desirability of various
personal investment vehicles and repeal of the current antitrust exemption for
the insurance business. (If this exemption is eliminated, it will
substantially affect the way premium rates are set by all property-liability
insurers.) In addition, the Federal government operates in some cases as a
co-insurer with the private sector insurance companies.
Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks
and benefits for which insurance is sought and provided. These include
judicial redefinitions of risk exposure in areas such as products liability
and state and Federal extension and protection of employee benefits, including
pension, workers' compensation, and disability benefits. These developments
may result in short-term adverse effects on the profitability of various lines
of insurance. Longer-term adverse effects can often be minimized through
prompt repricing of coverages and revision of policy terms. In some
instances, these developments may create new opportunities for business
growth. All insurance companies write policies and set premiums based on
actuarial assumptions about mortality, injury, the occurrence of accidents and
other insured events. These assumptions, while well supported by past
experience, necessarily do not take account of future events. The occurrence
in the future of unforeseen circumstances could affect the financial condition
of one or more insurance companies. The insurance business is highly
competitive and with the deregulation of financial service businesses, it
should become more competitive. In addition, insurance companies may expand
into non-traditional lines of business which may involve different types of
risks.
The above financial information relating to the Insurance Companies has
been obtained from publicly available information. No representation is made
as to the accuracy or adequacy of the information or as to the absence of
material adverse changes since the information was made available to the
public.
Litigation and Legislation. To the best knowledge of the Sponsor, there
is no litigation pending as of the Initial Date in respect of any Bonds which
might reasonably be expected to have a material adverse effect upon the State
Trust and Umbrella Series. At any time after the Initial Date of Deposit,
litigation may be initiated on a variety of grounds, or legislation may be
enacted, with respect to Bonds in the Trust. Litigation, for example,
challenging the issuance of pollution control revenue bonds under
environmental protection statutes may affect the validity of Bonds or the
tax-free nature of their interest. While the outcome of litigation of this
nature can never be entirely predicted, opinions of bond counsel are delivered
on the date of issuance of each Bond to the effect that the Bond has been
validly issued and that the interest thereon is exempt from Federal income
tax. In addition, other factors may arise from time to time which potentially
may impair the ability of issuers to make payments due on the Bonds.
Under the Federal Bankruptcy Act, a political subdivision or public
agency or instrumentality of any state, including municipalities, may proceed
to restructure or otherwise alter the terms of its obligations, including
those of the type comprising the State Trust and Umbrella Series' Portfolio.
The Sponsor are unable to predict what effect, if any, this legislation might
have on the State Trust and Umbrella Series.
From time to time Congress considers proposals to tax the interest on
state and local obligations, such as the Bonds. The Supreme Court clarified
in South Carolina v. Baker (decided April 20, 1988) that the U.S. Constitution
does not prohibit Congress from passing a nondiscriminatory tax on interest on
state and local obligations. This type of legislation, if enacted into law,
could adversely affect an investment in Units. Holders are urged to consult
their own tax advisers.
Tax Exemption. In the opinion of bond counsel rendered on the date of
issuance of each Bond, the interest on each Bond is excludable from gross
income under existing law for regular Federal income tax purposes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of the
Bonds may become subject to regular Federal income tax, perhaps retroactively
to their date of issuance, as a result of changes in Federal law or as a
result of the failure of issuers (or other users of the proceeds of the Bonds)
to comply with certain ongoing requirements.
Moreover, the Internal Revenue Service is expanding its examination
program with respect to tax-exempt bonds. The expanded examination program
will consist of, among other measures, increased enforcement against abusive
transactions, broader audit coverage (including the expected issuance of audit
guidelines) and expanded compliance achieved by means of expected revisions to
the tax-exempt bond information return forms. At this time, it is uncertain
whether the tax exempt status of any of the Bonds would be affected by such
proceedings, or whether such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on the Bond
should ultimately be determined to be taxable, the Bond would become due and
payable by its issuer, and, in addition, may provide that any related letter
of credit or other security could be called upon if the issuer failed to
satisfy all or part of its obligation. In other cases, however, a Bond may
not provide for the acceleration or redemption of the Bond or a call upon the
related letter of credit or other security upon a determination of taxability.
In those cases in which a Bond does not provide for acceleration or
redemption or in which both the issuer and the bank or other entity issuing
the letter of credit or other security are unable to meet their obligations to
pay the amounts due on the Bond as a result of a determination of taxability,
the Trustee would be obligated to sell the Bond and, since it would be sold as
a taxable security, it is expected that it would have to be sold at a
substantial discount from current market price. In addition, as mentioned
above, under certain circumstances Holders could be required to pay income tax
on interest received prior to the date on which the interest is determined to
be taxable.
Potential purchasers of the Units of a State Trust or Umbrella Series
should consider the fact that the Trust's Portfolio consists primarily of
Bonds issued by the state for which such State Trust is named or its
municipalities or authorities and realize the substantial risks associated
with an investment in such Bonds. Moreover, the California Trust, the
Connecticut Trust, the Florida Trust, the Maryland Trust, the Massachusetts
Trust, the Minnesota Trust, the Missouri Trust, the New Jersey Trust, the New
York Trust, the North Carolina Trust, the Ohio Trust, the Pennsylvania Trust
and the Texas Trust are subject to certain additional state risk factors. The
Sponsor believe the discussions of risk factors summarized below describe some
of the more significant aspects of the State Trusts. The sources of such
information are the official statements of issuers as well as other publicly
available documents. While the Sponsor have not independently verified this
information, they have no reason to believe that such information is not
correct in all material respects. Investments in a State Trust or an Umbrella
Series containing State Trusts should be made with an understanding that the
value of the underlying Portfolio may decline with increases in interest
rates.
California Trust
Beginning in the 1990-91 fiscal year, the State has faced the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
were severely affected. Job losses have been estimated to exceed 800,000
worst of any post-war recession and.
The recession has seriously affected State tax revenues. It has also
faced increased expenditures for health and welfare programs. The State has
also faced a structural imbalance in its budget with the largest programs
supported by the General Fund--K-14 education (kindergarten through community
college), health, welfare and corrections--growing at rates significantly
higher than the growth rates for the principal revenue sources of the General
Fund. The State experienced a period of chronic budget imbalance, with
expenditures exceeding revenues for four of the last six fiscal years.
Revenues declined in 1990-91 over 1989-90, the first time since the 1930s. By
June 30, 1993, the State's General Fund had an accumulated deficit, on a
budget basis, of approximately $2.8 billion. (Special Funds account for
revenues obtained from specific revenue sources, and which are legally
restricted to expenditures for specific purposes.) The 1993-94 Budget Act
incorporated a Deficit Reduction Plan to repay this deficit over two years.
The original budget for 1993-94 reflected revenues which exceeded expenditures
by approximately $2.8 billion. As a result of continuing recession, the
excess of revenues over expenditures for the fiscal year is now expected to be
less than $300 million. The accumulated budget deficit at June 30, 1994 was
not retired by June 30, 1995 as planned. The accumulated budget deficits over
the past several years, together with expenditures for school funding which
have not been reflected in the budget, and the reduction of available internal
borrowable funds, have combined to significantly depleted the State's cash
resources to pay as ongoing expenses. In order to meet its cash needs, the
State has had to rely for several years on a series of external borrowings,
including borrowings past the end of a fiscal year. At the end of its 1995-96
fiscal year, however, the State did not borrow moneys into the subsequent
fiscal year.
Since the severe recession, California's economy has been recovering.
Employment has grown by over 500,000 in 1994 and 1995, and the prerecession
level of total employment is expected to be matched by early 1996. The
strongest growth has been in export-related industries, business services,
electronics, entertainment and tourism, all of which have offset the
recession-related losses which were heaviest in aerospace and defense-related
industries (accounting for approximately two-thirds of the job losses),
finance and insurance. Residential housing construction, with new permits for
under 100,000 annual new unites issued in 1994 and 1995, is weaker than in
previous recoveries, but has been growing slowly since 1993.
Sectors which are now contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. These trends are expected to continue, and by next year,
most of the restructuring in the finance and utilities industries should be
nearly completed. As a result of these factors, average 1994 non-farm
employment exceeded expectations and grew beyond 1993 levels.
Many California counties continue to be under severe fiscal stress.
Such stress has impacted smaller, rural counties and larger urban counties
such as Los Angeles, and Orange County, which declared bankruptcy in 1994.
Orange County has implemented significant reductions in services and
personnel, and continues to face fiscal constraints in the aftermath of its
bankruptcy.
1994-95 Budget. The 1994-95 fiscal year represented the fourth
consecutive year the Governor and Legislature were faced with a very difficult
budget environment to produce a balanced budget. Many program cuts and
budgetary adjustments have already been made in the last three years. The
Governor's May Revision to his Budget proposal recognized that the accumulated
deficit could not be repaid in one year, and proposed a two-year solution.
The May Revision sets forth revenue and expenditure forecasts and revenue and
expenditure proposals which result in operating surpluses for the budget for
both 1994-95 and 1995-96, and lead to the elimination of the accumulated
deficit, estimated at about $2 billion at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projected revenues and transfers of $41.9 billion, about $2.1 billion higher
than revenues in 1993-94. This reflects the Administration's forecast of an
improved economy. Also included in this figure is the projected receipt of
about $360 million from the Federal Government to reimburse the State for the
cost of incarcerating undocumented immigrants. The Legislature took no action
on a proposal in the Governor s January Budget to undertake expansion of the
transfer of certain programs to counties, which would also have transferred to
counties 0.5% of the State current sales tax. The Budget Act projected
Special Fund revenues of $12.1 billion, a decrease of 2.4% from 1993-94
estimated levels.
The 1994-95 Budget Act projected General Fund expenditures of $40.9
billion, an increase of $1.6 billion over 1993-94. The Budget Act also
projected Special Fund expenditures of $13.7 billion, a 5.4% increase over
1993-94 estimated expenditures. The principal features of the Budget Act were
the following:
1. Reductions of approximately $1.1 billion in health and welfare
programs.
2. A General Fund increase of approximately $38 million in support
for the University of California and $65 million for the California State
University. It is anticipated that student fees for the U.C. and the C.S.U
will increase up to 10%.
3. Proposition 98 funding for K-14 schools is increased by $526
million from the 1993-94 levels, representing an increase for enrollment
growth and inflation. Consistent with previous budget agreements, Proposition
98 funding provides approximately $4,217 per student for K-12 schools, equal
to the level in the past three years.
4. Legislation enacted with the Budget Act clarifies laws passed in
1992 and 1993 requiring counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented programs providing less moneys to schools if there were
redevelopment agencies projects. The legislation bans this method of
transfers. If all counties had implemented this method, General Fund aid to
K12 schools would have increased by $300 million in each of the 1994-95 and
1995-96 Fiscal Years.
5. The Budget Act provides funding for anticipated growth in the
State's prison inmate population, including provisions for implementing recent
legislation (the so-called "Three Strikes" law) which requires mandatory life
sentences for certain third-time felony offenders.
6. Additional miscellaneous cuts ($500 million) and fund transfers
($255 million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contained no tax increases. Under legislation
enacted for the 1993-94 Budget, the renters' tax credit was suspended for 1993
and 1994. A ballot proposition to permanently restore the renters' credit
after this year failed at the June 1994 election. The Legislature enacted a
further one-year suspension of the renters' tax credit, saving about $390
million in the 1995-96 fiscal year. The 1994-95 Budget assumed that the State
will use a cash flow borrowing program in 1994-95 which combines one-year
notes and warrants. Issuance of the warrants would allow the State to defer
repayment of approximately $1 billion of its accumulated budget deficit into
the 1995-96 Fiscal Year.
May 1995 reports by the Department of Finance indicated that General
Fund revenues for the 1994-95 Fiscal Year exceeded projections, and
expenditures were lower than projected due to slower than anticipated
health/welfare caseload growth and school enrollments. The overall effect was
to improve the budget by approximately $500 million, leaving an estimated
deficit of about $630 million as of June 30, 1995.
Department of Finance analysis of the 1994-95 Fiscal Year budget
indicated that approximately $98 million was appropriated for the State to
offset costs of incarcerating illegal immigrants, in contrast to the $356
million assumed for this purpose by the State's 1994-95 Budget Act.
Approximately $33 million of these funds were estimated to be received by the
State during the 1994-95 Fiscal Year, with the remainder to be received the
following fiscal year. Departing from 1994-95 Fiscal Year assumptions, the
federal budget contains $400 million in additional funding for refugee
assistance and health costs. However, the Department of Finance did not
expect that the State would continue its efforts to obtain all or a portion of
these federal funds.
1995-96 Budget. The state began in 1995-96 Fiscal Year with
strengthening revenues based on an improving economy and the smallest nominal
"budget gap" to be closed in many years.
The 1995-96 Budget Act, signed by the Governor on August 3, 1995,
projects General Fund revenues and transfers of $44.1 billion, about $2.2
billion higher than projected revenues in 1994-95. The Budget Act projects
Special Fund revenues of $12.7 billion, an increase from $12.1 billion
projected in 1994-95.
The Department of Finances released updated projections for the 1995-96
fiscal year in May 1996, estimating that revenues and transfers to be $46.1
billion, approximately $2 billion over the original fiscal year estimate.
Expenditures also increased, to an estimated $45.4 billion, as a result of the
requirement to expend revenues for schools under Proposition 98, and, among
other things, failure of the federal government to budget new aid for illegal
immigrant costs which had been counted on to allow reductions in costs.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community colleges will
increase by about $1 billion (General Fund) and $1.2 billion total above
revised 1994-95 levels. Because of higher than projected revenues in 1994-95,
an additional $543 million is appropriated to the 1994-95 Proposition 98
entitlement. A significant component of this amount is a block grant of about
$54 per pupil for any one-time purposes. Per-pupil expenditures are projected
to increase by another $126 in 1995-96 to $4,435. A full 2.7% cost of living
allowance is funded for the first time in several years. The budget
compromise anticipated a settlement of the CTA v. Gould litigation.
2. Cuts in health and welfare costs totaling about $900 million, some
of which would require federal legislative approval.
3. A 3.5% increase in funding for the University of California ($90
million General Fund) and the California State University system ($24 million
General Fund), with no increases in student fees.
4. The updated Budget assumes receipt of $494 million in new federal
aid for costs of illegal immigrants, in excess of federal government
commitments.
5. General Fund support for the Department of Corrections is
increased by about 8 per cent over 1994-95, reflecting estimates of increased
prison population. This amount is less than was proposed in the 1995
Governor's Budget.
1996-97 Budget. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, and projected General Fund revenues and transfer of
approximately $47.64 billion and General Fund expenditures of approximately
$47.25 billion. The Governor vetoed about $82 million of appropriations (both
General Fund and Special Fund) and the State has implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue
Anticipation Notes to mature on or before June 30, 1997. The 1996-97 Budget
Act appropriated a budget reserve in the Special Fund for Economic
Uncertainties of $305 million, as of June 30, 1997. The Department of Finance
projects that, on June 30, 1997, the State's available internal borrowable
(cash) resources will be approximately $2.9 billion, after payment of all
obligations due by that date, so that no cross-fiscal year borrowing will be
needed.
The State Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting
on June 1, 1997. As a result, revenues for the Fiscal Year will be an
estimated $550 million higher than projected in the May Revision to the 1996-
97 Budget, and are now estimated to total $47.643 billion, a 3.3 percent
increase over the final estimated 1995-96 revenues. Special Fund revenues are
estimated to be $13.3 billion.
The Budget Act contains General Fund appropriations totaling $47.251
billion, a 4.0 percent increase over the final estimated 1995-96 expenditures.
Special Fund expenditures are budgeted at $12.6 billion.
The following are the principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion total above
revised 1995-96 level periods. Almost half of this money was budgeted to fund
class-size reduction in kindergarten and grades 1-3. Also, for the second
year in a row, the full cost of living allowance (3.2 percent) was funded.
The Proposition 98 increases have brought K-12 expenditures to almost $4,800
per pupil (also called per ADA, or Average Daily Attendance), an almost 15%
increase over the level prevailing during the recession years. Community
colleges will receive an increase in funding of $157 million for 1996-97 out
of this $1.6 billion total.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts require federal law changes (including welfare reform), federal
waivers, or federal budget appropriations in order to be achieved. The 1996-
97 Budget Act assumes approval/action by October, 1996, with the savings to be
achieved beginning in November, 1996. The 1996-97 Budget Act was based on
continuation of previously approved assistance levels for Aid to Families with
Dependent Children and other health and welfare programs, which had been
reduced in prior years, including suspension of State authorized cost of
living increases. Part of the federal actions referred to above is approval
to maintain reduced assistance levels in 1996-97. The Legislature did not
approve the Governor's proposal for further cuts in these assistance levels.
The Budget Act does include some $92 million for a variety of preventive
programs in health and social services areas such as the prevention of teenage
pregnancy and domestic violence.
3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system ($101
million General Fund), with no increases in student fees, maintaining the
second year of the Governor's four-year "Compact" with the State's higher
education units.
4. The 1996-97 Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs
of illegal immigrants. These funds reduce appropriations in these categories
that would otherwise have to be paid from the General Fund. (For purposes of
cash flow projections, the Department of Finance expects $540 million of this
amount to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was
increased by about 7 percent over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new
programs included in the 1996-97 Budget Act are $100 million in grants to
cities and counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile crime.
The 1996-97 Budget Act also assumed that legislation will be adopted to
revise the Trial Court Funding program, so that future increases in trial
court costs will be funded by the State; this change will not have a
significant impact in 1996-97.
The 1996-97 Budget Act did not contain any tax increases. As noted,
there was a reduction in corporate taxes. In addition, the Legislature
approved another one-year suspension of the Renters Tax Credit, saving $520
million in expenditures.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION PROVIDER BY THE STATE OF CALIFORNIA. THE STATE INDICATED THAT ITS
DISCUSSION OF THE BUDGETARY INFORMATION WAS BASED ON ESTIMATES AND PROJECTIONS
OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE ESTIMATES
AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY
NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE
NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE
ACHIEVED.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"), and is prohibited from spending "appropriations
subject to limitation" in excess of the Appropriations Limit. Article XIIIB,
originally adopted in 1979, was modified substantially by Propositions 98 and
111 in 1988 and 1990, respectively. "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 reasonable
cost of providing the regulation, product or service. The Appropriations
Limit is based on the limit for the prior year, adjusted annually for certain
changes, and is tested over consecutive two-year periods. Any excess of the
aggregate proceeds of taxes received over such two-year period above the
combined Appropriation Limits for those two years is divided equally between
transfers to K-14 districts and refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax
revenues dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in cases of
emergency arising from civil disturbance or natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so declared
and approved, the Appropriations Limit for the next three years must be
reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-92
revenues were smaller than expected, thus reducing the payment owed to schools
in 1991-92 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the 1991-
92 and 1992-93 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to schools
but which exceeded the reduced appropriation was treated as a non-Proposition
98 short-term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion of
the amount budgeted to K-14 schools was designated to "repay" the prior year
loan, thereby reducing cash outlays in 1992-93 by that amount. To maintain
per-average daily attendance ("ADA") funding, the 1992-93 Budget included
loans of $732 million to K-12 schools and $241 million to community colleges,
to be repaid from future Proposition 98 entitlements. The 1993-94 Budget also
provided new loans of $609 million to K-12 schools and $178 million to
community colleges to maintain ADA funding. These loans have been combined
with the 1992-93 fiscal year loans into one loan of $1.760 billion, to be
repaid from future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers' Association,
et al. v Gould, et al., ruled that the 1992-93 loans to K-12 schools and
community colleges violate Proposition 98. As part of the negotiation leading
to the 1995-96 Budget Act, an oral agreement was reached to settle this case.
The parties reached a conditional final settlement of the case in April,
1996. The settlement required adoption of legislation satisfactory to the
parties to implement its terms, which has occurred, and final approval by the
court, which was pending in early July, 1996.
The settlement provides, among other things, that both the State and K-
14 schools share in the repayment of prior years' emergency loans to schools.
Of the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as expenditures above the
current Proposition 98 base circulation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Propositions 98
guarantee, or from "below" the current base. Repayments are to be spread over
the eight-year period beginning 1994-95 through 2002-03. Once the Director of
Finance certifies that a settlement has occurred, approximately $377 million
in appropriations from the 1995-96 fiscal year to schools will be disbursed.
Because of the complexities of Article XIIIB, the ambiguities and
possible inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsor cannot predict the impact of this or related legislation on the Bonds
in the California Trust Portfolio. Other Constitutional amendments affecting
state and local taxes and appropriations have been proposed from time to time.
If any such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate revenues
as mandated by such initiatives. Propositions such as Proposition 98 and
others that may be adopted in the future, may place increasing pressure on the
State's budget over future years, potentially reducing resources available for
other State programs, especially to the extent the Article XIIIB spending
limit would restrain the State's ability to fund such other programs by
raising taxes.
State Indebtedness. As of July 1, 1996, the State had over $18.20
billion aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately $4.31
billion remained unissued as of July 1, 1996. The State also builds and
acquires capital facilities through the use of lease purchase borrowing. As
of July 1, 1996, the State had approximately $5.85 billion of outstanding
Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $20.77 billion aggregate principal amount of
revenue bonds and notes outstanding as of June 30, 1996. Revenue bonds
represent both obligations payable from State revenue-producing enterprises
and projects, which are not payable from the General Fund, and conduit
obligations payable only from revenues paid by private users of facilities
financed by such revenue bonds. Such enterprises and projects include
transportation projects, various public works and exposition projects,
education facilities (including the California State University and University
of California systems), housing health facilities and pollution control
facilities.
Litigation. The State is a party to numerous legal proceedings. In
addition, the State is involved in certain other legal proceedings that, if
decided against the State, might require the State to make significant future
expenditures or impair future revenue sources. Examples of such cases include
challenges to the State's method of taxation of certain businesses, challenges
to certain vehicle license fees, and challenges to the State's use of Public
Employee Retirement System funds to offset future State and local pension
contributions. Other cases which could significantly impact revenue or
expenditures involve reimbursement to school districts for voluntary school
desegregation and state mandated costs, challenges to Medi-Cal eligibility,
recovery for flood damages, and liability for toxic waste cleanup. Because of
the prospective nature of these proceedings, it is not presently possible to
predict the outcome of such litigation or estimate the potential impact on the
ability of the State to pay debt service on its obligations.
Ratings. During 1996, the ratings of California's general obligation
bonds was upgraded by the following rating agencies. Recently Standard &
Poor's Ratings Group upgraded its rating of such debt to A+; the same rating
has been assigned to such debt by Fitch Investors Service. Moody's Investors
Service has assigned such debt an A1 rating. Any explanation of the
significance of such ratings may be obtained only from the rating agency
furnishing such ratings. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised
downward or withdrawn entirely if, in the judgment of the particular rating
agency, circumstances so warrant.
The Sponsor believes the information summarized above describes some of
the more significant aspects relating to the California Trust. The sources of
such information are Preliminary Official Statements and Official Statements
relating to the State's general obligation bonds and the State's revenue
anticipation notes, or obligations of other issuers located in the State of
California, or other publicly available documents. Although the Sponsor has
not independently verified this information, it has no reason to believe that
such information is not correct in all material respects.
Connecticut Trust
The Sponsor believes the information summarized below describes some of
the more significant aspects of the Connecticut Trust. The sources of such
information are the official statements of issuers as well as other publicly
available documents. While the Sponsor have not independently verified this
information, they no reason to believe that such information is not correct in
all material respects.
Potential purchasers of the Units of the Connecticut Trust should
consider the fact that the Trust's Portfolio consists primarily of Bonds
issued by the State of Connecticut (the "State") or its municipalities or
authorities, and realize the substantial risks associated with an investment
in such Bonds.
Connecticut's manufacturing industry has historically been of prime
economic importance to Connecticut. The manufacturing industry is
diversified, with transportation equipment (primarily aircraft engines,
helicopters and submarines) dominant followed by fabricated metal products,
non-electrical machinery and electrical machinery. From 1970 to 1994,
however, there was a rise in employment in service-related industries. During
this period, manufacturing employment declined 35.5%, while employment in non-
agricultural establishments (including government) increased 66.3%,
particularly in the service, trade and finance categories. In 1994,
manufacturing accounted for only 18.5% of total non-agricultural employment in
Connecticut. Defense-related business plays an important role in the
Connecticut economy. On a per capita basis, defense awards to Connecticut
have traditionally been among the highest in the nation. Reductions in
defense spending have had a substantial adverse impact on Connecticut's
economy. Moreover, the State's largest defense contractors have announced
substantial labor force reductions scheduled to occur over the next four
years.
The annual average unemployment rate (seasonally adjusted) in
Connecticut decreased from 6.9% in 1982 to a low of 3.0% in 1988 but rose to
6.6% in 1993, however, as of June 1995, it has decreased to 5.2%. These rates
were lower than those recorded for the U.S. as a whole for the same periods,
(as of June, 1995, the estimated rate of unemployment in Connecticut in
connection on a seasonally adjusted basis was 5.2%, compared to only 5.6% for
the United States as a whole), and in addition, pockets of significant
unemployment and poverty exist in some of Connecticut's cities and towns.
The State derives over seventy percent of its revenues from taxes
imposed by the State. The major taxes have been the personal income tax
(enacted in 1991), sales and use taxes and the corporation business tax, each
of which is sensitive to changes in the level of economic activity in the
State.
The State's General Fund budget for fiscal year 1986-87 (ending June 30)
anticipated appropriations and revenues of approximately $4,300,000,000. The
General Fund ended fiscal year 1986-87 with a surplus of $365,200,000. The
General Fund budget for fiscal year 1987-88 anticipated appropriations and
revenues of approximately $4,915,800,000. However, the General Fund ended
fiscal year 1987-88 with a deficit of approximately $115.6 million. The
General Fund budget for fiscal year 1988-89 anticipated that General Fund
expenditures of $5,551,000,000 and certain educational expenses of
$206,700,000 not previously paid through the General Fund would be financed in
part from surpluses of prior years and in part from higher tax revenues
projected to result from tax laws in effect for fiscal year 1987-88 and
stricter enforcement thereof; a substantial deficit was projected during the
third quarter of fiscal year 1988-89, but, largely because of tax law changes
that took effect before the end of the fiscal year, the deficit was kept to
$28,000,000. The General Fund budget for fiscal year 1989-90 anticipated
appropriations of approximately $6,224,500,000 and, by virtue of tax increases
enacted to take effect generally at the beginning of the fiscal year, revenues
slightly exceeded such amount. However, largely because of tax revenue
shortfalls, the General Fund ended fiscal year 1989-90 with a deficit for the
year of $259,000,000, wiping out reserves for such events built up in prior
years. The General Fund ended fiscal year 1990-91 with a deficit of
$809,000,000, primarily because of significant declines in tax revenues and
unanticipated expenditures reflective of economic adversity.
A General Fund budget was not enacted for fiscal year 1991-92 until
August 22, 1991. This budget anticipated General Fund expenditures of $
7,007,861,328 and revenues of $ 7,426,390,000. Anticipated decreases in
revenues resulting from a 25% reduction in the sales tax rate effective
October 1, 1991, the repeal of the taxes on the capital gains and interest and
dividend income of resident individuals for years starting after 1991, and the
phase-out of the corporation business tax surcharge over two years commencing
with years starting after 1991 were expected to be more than offset by a new
general income tax imposed at effective rates not to exceed 4.5% on the
Connecticut taxable income of resident and non-resident individuals, trusts
and estates. The Comptroller's annual report for fiscal year 1991-92
reflected a General Fund operating surplus of $110,000,000. A General Fund
budget for fiscal year 1992-93 anticipated General Fund expenditures of
$7,372,062,859 and revenues of $7,372,210,000 and the General Fund ended
fiscal year 1992-93 with an operating surplus of $113,500,000. Balanced
General Fund budgets for the biennium ending June 30, 1995, have been adopted
appropriating expenditures of $7,828,900,000 for fiscal year 1993-94 and
$8,266,000,000 for fiscal year 1994-95.
The adopted budget for fiscal 1995-96 anticipates General Fund revenues
of $8,837.0 million and General Fund expenditures of $8,836.8 million
resulting in a projected surplus of $0.2 million. For fiscal 1996-97, the
adopted budget anticipates General Fund revenues of $9,158.0 million and
General Fund expenditures of $9,157.8 million resulting in a projected surplus
of $0.2 million.
The primary method for financing capital projects by the State 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. As of September 15,
1995, there was a total legislatively authorized bond indebtedness of
$10,379,052,000, of which $9,047,076,000 had been approved for issuance by
the State Bond Commission and $7,604,295,000 had been issued.
To fund operating cash requirements, prior to fiscal year 1991-92 the
State borrowed up to $750,000,000 pursuant to authorization to issue
commercial paper, and on July 29, 1991, it issued $200,000,000 General
Obligation Temporary Notes, none of which temporary borrowing were outstanding
as of July 1, 1993. To fund the cumulative General Fund deficit for fiscal
years 1989-90 and 1990-91, the legislation enacted August 22, 1991, authorized
the State Treasurer to issue Economic Recovery Notes up to the aggregate
amount of such deficit, which must be payable no later than June 30, 1996; at
least $50,000,000 of such Notes, but no more than a cap amount, is to be
retired each fiscal year commencing with fiscal year 1991-92, and any
unappropriated surplus up to $205,000,000 in the General Fund at the end of
each of the three fiscal years commencing with fiscal year 1991-92 must be
applied to retire such Notes as may remain outstanding at those times. On
September 25, 1991 and October 24, 1991, the State issued $640,710,000 and
$325,002,000, respectively, of such Economic Recovery Notes, of which
$555,610,000 were outstanding as of November 1, 1994.
To meet the need for reconstructing, repairing, rehabilitating, and
improving the State transportation system (except Bradley International
Airport), the State adopted legislation which provides for, among other
things, the issuance of special tax obligation ("STO") bonds the proceeds of
which will be used to pay for improvements to the State's transportation
system. The STO bonds are special tax obligations of the State payable solely
from specified motor fuel taxes, motor vehicle receipts and licenses, permit
and fee revenues pledged therefor and deposited in the special transportation
fund. The twelve-year cost of the infrastructure program which began in 1984,
to be met from federal, state and local funds, is currently estimated at $9.5
billion. To finance a portion of the State's share of such cost, the State
expects to issue $3.7 billion of STO bonds over the twelve-year period.
As of November 1, 1994, the General Assembly has authorized STO bonds
for the program in the aggregate amount of $3,794,938,104, of which
$3,144,650,752 had been issued. It is anticipated that additional STO bonds
will be authorized by the General Assembly annually in an amount necessary to
finance and to complete the infrastructure program. Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged coverage
requirements of the STO indenture controlling the issuance of such bonds are
met. The State expects to continue to offer bonds for this program.
The State, its officers and employees are defendants in numerous
lawsuits. According to the Attorney General's Office, an adverse decision in
any of the cases which are summarized herein could materially affect the
State's financial position: (i) litigation on behalf of black and hispanic
school children in the City of Hartford seeking "integrated education" within
the greater Hartford metropolitan area; (ii) litigation involving claims by
Indian tribes to less than 1/10 of 1% of the State's land area; (iii)
litigation challenging the State's method of financing elementary and
secondary public schools on the ground that it denies equal access to
education; (iv) an action in which two retarded persons seek placement outside
a State hospital, new programs and damages on behalf of themselves and all
mentally retarded patients at the hospital; (v) litigation involving claims
for refunds of taxes by several cable television companies; (vi) an action on
behalf of all persons with retardation or traumatic brain injury, claiming
that their constitutional rights are violated by placement in State hospitals
alleged not to provide adequate treatment and training, and seeking placement
in community residential settings with appropriate support services; (vii) an
action by the Connecticut Hospital Association and 33 hospitals seeking to
require the State to reimburse hospitals for in-patient medical services on a
basis more favorable to them; (viii) a class action by the Connecticut
Criminal Defense Lawyers Association claiming a campaign of illegal
surveillance activity and seeking damages and injunctive relief; (ix) two
actions for monetary damages brought by a former patient at a state mental
hospital stemming from an attempted suicide that left her brain-damaged; (x)
an action challenging the validity of the State's imposition of surcharges on
hospital charges to finance certain uncompensated care costs incurred by
hospitals and (xi) an action to enforce the spending cap provision of the
State's constitution by seeking to require that the General Assembly define
certain terms used therein and to enjoin certain increases in "general budget
expenditures" until this is done; (xii) an action challenging the validity of
the State's imposition of gross earnings taxes on hospital revenues to finance
certain uncompensated care costs; and (xiii) an action by inmates of the
Department of Correction seeking damages and injunctive relief with respect to
alleged violations of statutory and constitutional rights as a result of the
monitoring and recording of their telephones from the State's correctional
institutions. In addition, a number of corporate taxpayers have filed refund
requests for corporation business tax asserting that interest on federal
obligations may not be included in the measure of that tax, alleging that to
do so violates federal law because interest on certain State of Connecticut
obligations is not included in the measure of the tax.
As a result of the State's budget problems, the ratings of its general
obligation bonds were reduced by Standard & Poor's from AA+ to AA on March 29,
1990, and by Moody's from Aa1 to Aa on April 9, 1990. Moreover, because of
these problems, on February 5, 1991, Standard & Poor's placed the State's
general obligation bonds and certain other obligations that depend in part on
the creditworthiness of the State on CreditWatch with negative implications.
On March 7, 1991, Moody's downgraded its ratings of the revenue bonds of four
Connecticut hospitals because of the effects of the State's restrictive
controlled reimbursement environment under which they have been operating. On
September 13, 1991 the ratings of the State's general obligation bonds and
certain other obligations were lowered by Standard & Poor's from AA to AA- and
removed from CreditWatch.
General obligation bonds issued by Connecticut municipalities are
payable primarily only from ad valorem taxes on property subject to taxation
by the municipality. Certain Connecticut municipalities have experienced
severe fiscal difficulties and have reported operating and accumulated
deficits in recent years. The most notable of these is the City of
Bridgeport, which filed a bankruptcy petition on June 7, 1991; the State
opposed the petition. The United States Bankruptcy Court for the District of
Connecticut has held that Bridgeport had authority to file such a petition but
that its petition should be dismissed on the grounds that Bridgeport was not
insolvent when the petition was filed. Regional economic difficulties,
reductions in revenues, and increased expenses could lead to further fiscal
problems for the State and its political subdivisions, authorities, and
agencies. This could result in declines in the value of their outstanding
obligations, increases in their future borrowing costs, and impairment of
their ability to pay debt service on their obligations.
Florida Trust
In 1980, Florida was the seventh most populous state in the U.S. The
State has grown dramatically since then an as of April 1, 1993, ranks fourth
with an estimated population of 13.5 million. Florida's attraction, as both a
growth and retirement state, has kept net migration fairly steady with an
average of 292,988 new residents a year from 1983 through 1993. The U.S.
average population increase since 1982 is about 1% annually, while Florida's
average annual rate of increase is about 2.5%. Florida continues to be the
fastest growing of the ten largest states. This strong population growth is
one reason the State's economy is performing better than the nation as a
whole. In addition to attracting senior citizens to Florida as a place for
retirement, the State is also recognized as attracting a significant number of
working age individuals. Since 1985, the prime working age population (18-44)
has grown at an average annual rate of 2.2%. The share of Florida's total
working age population (18-59) to total State population is approximately 54%.
This share is not expected to change appreciably into the twenty-first
century.
The State's personal income has been growing strongly the last several
years and has generally out performed both the U.S. as a whole and the
southeast in particular, according to the U.S. Department of Commerce and the
Florida Consensus Economic Estimating Conference. This is due to the fact
that Florida's population has been growing at a very strong pace and, since
the early 70's the State's economy has diversified so as to provide greater
insulation from national economic downturns. As a result, Florida's real per
capita personal income has tracked closely with the national average and has
tracked above the southeast. From 1985 through 1994, the State's real per
capita income rose an average 5.1% a year, while the national real per capita
income increased at an average 5.0%.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest and rent) and transfer payments (Social
Security and pension benefits among other sources of income) are relatively
more important sources of income. For example, Florida's total wages and
salaries and other labor income in 1994 was 61.5% of total personal income,
while a similar figure for the nation for 1990 was 72.6%. Transfer payments
are typically less sensitive to the business cycle than employment income and,
therefore, act as stabilizing forces in weak economic periods.
The State's per capita personal income in 1994 of $21,677 was slightly
above the national average of $21,809 and significantly ahead of that for the
southeast United States, which was $19,649. Real personal income in the State
is estimated to increase 4.7% in 1995-96 and 3.8% in 1996-97. The Florida
economy appears to be performing in line with the US economy and is expected
to experience steady if unspectacular growth.
Since 1980, the State's job creation rate is well over twice the rate
for the nation as a whole, and its growth rate in new non-agricultural jobs is
the fastest of the 11 most populous states and second only to California in
the absolute number of new jobs created. Contributing to the State's rapid
rate of growth in employment and income is international trade. In addition,
since 1980, the State's unemployment rate has generally tracked below that of
the Nation's unemployment rate. However, as the State's economic growth has
slowed from its previous highs, the State's unemployment rate has tracked
above the national average. The average rate in Florida since 1985 has been
6.3% while the national average is 6.4%. According to the U.S. Department of
Commerce, the Florida Department of Labor and Employment Security, and the
Florida Consensus Economic Estimating Conference (together the
"Organization") the State's unemployment rate was 5.4% during 1995. As of
November 1995, the Organization estimates that the unemployment rate will be
5.9% for 1996-97 and 5.9% in 1997-98.
The State's economy is expected to decelerate along with the nation, but
is expected to outperform the nation as a whole. Total non-farm employment in
Florida is expected to increase 3.1% in 1995-96 and rise 2.8% in 1996-97.
Trade and services, the two largest, account for more than half of the total
non-farm employment. Employment in the service sectors should experience an
increase of 5.6% in 1995-96, while growing 4.9% in 1995-96. Trade is expected
to expand 3.1% in 1996 and 2.5% in 1997. The service sector is now the State's
largest employment category.
Construction. The State's economy has in the past been highly dependent
on the construction industry and construction related manufacturing. This
dependency has declined in recent years and continues to do so as a result of
continued diversification of the State's economy. The State is still somewhat
at the mercy of the construction and construction related manufacturing
industries. For example, in 1980, total contract construction employment as a
share of total non-farm employment was just over 7%, and in 1995, the share
had edged downward to 5%. This trend is expected to continue as the State's
economy continues to diversify. Florida, nevertheless, has a dynamic
construction industry, with single and multi-family housing starts accounting
for 8.5% of total U.S. housing starts in 1995 while the State's population is
5.4% of the U.S. total population. Florida's housing starts since 1985, have
averaged 148,500 a year.
A driving force behind the State's construction industry has been the
State's rapid rate of population growth. Although the State currently is the
fourth most populous state, its annual population growth is now projected to
decline as the number of people moving into the State is expected to hover
near the mid 230,000 range annually throughout the 1990s. This population
trend should provide fuel for business and home builders to keep construction
activity lively in Florida for some time to come. However, other factors do
influence the level of construction in the State. For example, federal tax
reform in 1986 and other changes to the federal income tax code have
eliminated tax deductions for owners of more than two residential real estate
properties and have lengthened depreciation schedules on investment and
commercial properties. Economic growth and existing supplies of homes also
contribute to the level of construction in the State.
Single and multi-family housing starts in 1995-96 are projected to reach
a combined level of 117,500, decreasing to 108,900 next year. Lingering
recessionary effects on consumers and tight credit are some of the reasons for
relatively slow core construction activity, as well as lingering effects from
the 1986 tax reform legislation discussed above.
The State has continuously been dependent on the highly cyclical
construction and construction related manufacturing industries. While that
dependency has decreased, the State is still somewhat at the mercy of the
construction related manufacturing industries. The construction industry is
driven to a great extent by the State's rapid growth in population. There can
be no assurance that population growth will continue throughout the 1990's in
which case there could be an adverse impact on the State's economy through the
loss of construction and construction related manufacturing jobs. Also, while
interest rates remain low currently, an increase in interest rates could
significantly adversely impact the financing of new construction within the
State, thereby adversely impacting unemployment and other economic factors
within the State. In addition, available commercial office space has tended to
remain high over the past few years. So long as this glut of commercial rental
space continues, construction of this type of space will likely continue to
remain slow.
Tourism. Tourism is one of State's most important industries.
Approximately 40.7 million tourists visited the State in 1995, as reported by
the Florida Department of Commerce. In terms of business activities and state
tax revenues, tourists in Florida in 1995 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive slightly more by
air than car. The State's tourist industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality.
Revenues and Expenses. Estimated fiscal year 1995-96 General Revenue
plus Working Capital funds available to the State total $15,311.3 million, a
3.3% increase over 1994-95. Of the total General Revenue plus Working Capital
funds available to the State, $14,538.8 million of that is Estimated Revenues
(excluding the Andrew impact) which represents an increase of 6.5% over the
previous year's Estimated Revenues. With effective General Revenues plus
Working Capital Fund appropriations at $14,808.2 million, unencumbered
reserves at the end of 1995-96 are estimated at $325.1 million. Estimated,
fiscal year 1996-97 General Revenue plus Working Capital and Budget
Stabilization funds available total $15,997.6 million, a 4.5% increase over
1994-95. The $15,269.4 million in Estimated Revenues represents an increase
of 5.0% over the previous year's Estimated Revenues.
In fiscal year 1994-95, approximately 66% of the State's total direct
revenue to its three operating funds were derived from State taxes, with
Federal grants and other special revenue accounting for the balance. State
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax amounted to 6%, 7%, 4% and 4%, respectively, of total General
Revenue Funds available during fiscal 1994-95. In that same year,
expenditures for education, health and welfare, and public safety amounted to
approximately 49%, 32%, and 12%, 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 (by referendum) assess a 0.5% or a 1.0% discretionary sales surtax
within their county. Proceeds from this local option sales tax are earmarked
for funding local infrastructure programs and acquiring land for public
recreation or conservation or protection of natural resources as provided
under applicable Florida law. Certain charter counties have other taxing
powers. In addition, and non-consolidated counties with a population in
excess of 800,000 may levy a local option sales tax to fund indigent health
care. It alone cannot exceed 0.5% and when combined with the infrastructure
surtax cannot exceed 1.0%. For the fiscal year ended June 30, 1995, sales
and use tax receipts (exclusive of the tax on gasoline and special fuels)
totalled $10,672.0 million, an increase of 6.0% over fiscal year 1993-1994.
The second largest source of State tax receipts is the tax on motor
fuels. However, these revenues are almost entirely dedicated trust funds for
specific purposes and are not included in the State's General Revenue Fund.
The State imposes an alcoholic beverage, wholesale tax (excise tax) on
beer, wine, and liquor. This tax is one of the State's major tax sources,
with revenues totalling $437.3 million in fiscal year ending June 30, 1995.
Alcoholic beverage tax receipts decreased 1.0% from the previous year's total.
The revenues collected from this tax are deposited into the State's General
Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year
ended June 30, 1995, receipts from this source were $1,063.5 million, and
increase of 1.5% from fiscal year 1993-94.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The
documentary stamp tax collections totalled $695.3 million during fiscal year
1994-95, an 11.4% decrease from the previous fiscal year. Beginning in
fiscal year 1995-96, 62.63% of these taxes are to be deposited to the General
Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas and
telecommunications services. All gross receipts utilities tax collections are
credited to the State's Public Education Capital Outlay and Debt Service Trust
Fund. In fiscal year, 1993-94, down 15% from the previous year. Currently,
60% of this amount is transferred to the General Revenue Fund.
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 alien on Florida
real property. The annual rate of tax is 2 mils. Second, the State imposes
a non-recurring 2 mil tax on mortgages and other obligations secured by liens
on Florida real property. In fiscal year 1994-95, total intangible personal
property tax collections were $818.0 million, a 2.1% decrease over the prior
year. Of the tax proceeds, 66.5% are distributed to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that
lottery revenues be distributed 50% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0% for costs of administering the
lottery. Fiscal year 1994-95 lottery ticket sales totalled $2.19 billion,
providing education with approximately $853.2 million.
Debt-Balanced Budget Requirement. At the end of fiscal 1995,
approximately $6.83 billion in principal amount of debt secured by the full
faith and credit of the State was outstanding. In addition, since July 1,
1995, the State issued about $0.76 billion in principal amount of full faith
and credit bonds.
The State Constitution and statutes mandate that the State budget, as a
whole, and each separate fund within the State budget, be kept in balance
form currently available revenues each fiscal year. If the Governor or
Comptroller believes a deficit will occur in any State fund, by statute, he
must certify his opinion to the Administrative Commission, which then is
authorized to reduce all State agency budgets and releases by a sufficient
amount to prevent a deficit in any fund. Additionally, the State Constitution
prohibits issuance of State obligations to fund State operations.
Litigation. Currently under litigation are several issues relating to
State actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that any of such
matters, individually or in the aggregate, will not have a immaterial adverse
affect on the State's financial position.
The State maintains a rating of Aa, AA and AA from Moody's Investors
Service, Standard & Poors Corporation and Fitch, respectively, on the
majority of its general obligation bonds, although the rating of a particular
series of revenue bonds relates primarily to the project, facility, or other
revenues source from which such series derives funds for repayment. While
these ratings and some of the information presented above indicate that the
State is in satisfactory economic health, there can be no assurance that there
will not be a decline in economic conditions or that particular conditions or
that particular Bonds purchased by the Trust will not be adversely affected
by any such changes.
The sources for the information presented above include official
statements and financial statements of the State of Florida. While the
Sponsor has not independently verified this information, the Sponsor has no
reason to believe that the information is not correct in all material
respects.
Maryland Trust
The Public indebtedness of the State of Maryland and its instrumentalities is
divided into three general types. The State issues general obligation bonds
for capital improvements and for various State projects, to the payment of
which the State ad valorem property tax is exclusively pledged. In addition,
the Maryland Department of Transportation issues for transportation purposes
its 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.
General obligation bonds of the State are authorized and issued primarily to
provide funds for State-owned capital improvements, including institutions of
higher learning, and the construction of locally owned public schools. Bonds
have also been issued for local government improvements, including grants and
loans for water quality improvement projects and correctional facilities, to
provide funds for repayable loans or outright grants to private, non-profit
cultural or educational institutions, and to fund certain loan and grant
programs.
The Maryland Constitution prohibits the contracting of State debt unless it is
authorized by a law levying an annual tax or taxes sufficient to pay the debt
service within 15 years and prohibiting the repeal of the tax or taxes or
their use for another purpose until the debt is paid. As a uniform practice,
each separate enabling act which authorizes the issuance of general obligation
bonds for a given object or purpose has specifically levied and directed the
collection of an ad valorem property tax on all taxable property in the State.
The Board of Public Works is directed by law to fix by May 1 of each year the
precise rate of such tax necessary to produce revenue sufficient for debt
service requirements of the next fiscal year, which begins July 1. However,
the taxes levied need not be collected if or to the extent that funds
sufficient for debt service requirements in the next fiscal year have been
appropriated in the annual State budget. Accordingly, the Board, in annually
fixing the rate of property tax after the end of the regular legislative
session in April, takes account of appropriations of general funds for debt
service.
In the opinion of counsel, the courts of Maryland have jurisdiction to
entertain proceedings and power to grant mandatory injunctive relief to (i)
require the Governor to include in the annual budget a sufficient
appropriation to pay all general obligation bond debt service for the ensuing
fiscal year; (ii) prohibit the General Assembly from taking action to reduce
any such appropriation below the level required for that debt service; (iii)
require the Board of Public Works to fix and collect a tax on all property in
the State subject to assessment for State tax purposes at a rate and in an
amount sufficient to make such payments to the extent that adequate funds are
not provided in the annual budget; and (iv) provide such other relief as might
be necessary to enforce the collection of such taxes and payment of the
proceeds of the tax collection to the holders of general obligation bonds,
pari passu, subject to the inherent constitutional limitations referred to
below.
It is also the opinion of counsel that, while the mandatory injunctive
remedies would be available and while the general obligation bonds of the
State are entitled to constitutional protection against the impairment of the
obligation of contracts, such constitutional protection and the enforcement of
such remedies would not be absolute. Enforcement of a claim for payment of
the principal of or interest on the bonds could be subject to the provisions
of any statutes that may be constitutionally enacted by the United States
Congress or the Maryland General Assembly extending the time for payment or
imposing other constraints upon enforcement.
There is no general debt limit imposed by the Maryland Constitution or public
general laws, but a special committee created by statute annually submits to
the Governor an estimate of the maximum amount of new general obligation debt
that prudently may be authorized. Although the committee's responsibilities
are advisory only, the Governor is required to give due consideration to the
committee's findings in preparing a preliminary allocation of new general debt
authorization for the next ensuing fiscal year.
Consolidated Transportation Bonds are limited obligations issued by the
Maryland Department of Transportation, the principal of which must be paid
within 15 years from the date of issue, for highway, port, transit, rail or
aviation facilities or any combination of such facilities. Debt service on
Consolidated Transportation Bonds is payable from those portions of the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling tax,
all mandatory motor vehicle registration fees, motor carrier fees, and the
corporate income tax as are credited to the Maryland Department of
Transportation, plus all departmental operating revenues and receipts.
Holders of such bonds are not entitled to look to other sources for payment.
The Maryland Department of Transportation also issues its bonds to
provide financing of local road construction and various other county
transportation projects and facilities. Debt service on these bonds is
payable from the subdivisions' share of highway user revenues held to their
credit in a special State fund. On November 9, 1994, the Maryland
Transportation Authority issued $162.6 million of special obligation revenue
bonds to fund projects at the Baltimore/Washington International Airport
secured by revenues from the passenger facility charges received by the
Maryland Aviation Administration and from the general account balance of the
Transportation Authority. As of March 31, 1996, $397.6 million of the
Transportation Authority's revenue bonds were outstanding.
The Maryland Transportation Authority operates certain highway, bridge
and tunnel toll facilities in the State. The tolls and other revenues
received from these facilities are pledged as security for revenue bonds of
the Authority issued under and secured by a trust agreement between the
Authority and a corporate trustee.
Certain other instrumentalities of the State government are authorized
to borrow money under legislation which expressly provides that the loan
obligations shall not be deemed to constitute a debt or a pledge of the faith
and credit of the State. The Community Development Administration of the
Department of Housing and Community Development, the Board of Trustees of St.
Mary's College of Maryland, the Maryland Environmental Service, the Board of
Regents of the University of Maryland System, the Board of Regents of Morgan
State University, and the Maryland Food Center Authority have issued and have
outstanding bonds of this type. The principal of and interest on bonds issued
by these bodies are payable solely from various sources, principally fees
generated from use of the facilities or enterprises financed by the bonds.
Under a Comprehensive Plan of Financing, as amended, of the Maryland
Stadium Authority, the Authority is authorized to finance the acquisition and
construction of sports facilities at a site within the City of Baltimore.
Currently, the Stadium Authority operates Oriole Park at Camden Yards which
opened in 1992. The Authority's financings are lease-backed revenue
obligations, payment of which is secured by, among other things, an assignment
of revenues to be received under a lease of the sports facilities from the
Authority to the State of Maryland; rental payments due from the State under
that lease will be subject to annual appropriation by the Maryland General
Assembly.
In October 1995, the Stadium Authority and the Baltimore Ravens
(formally known as the Cleveland Browns) executed a Memorandum of Agreement
which commits the Ravens to occupy a to be constructed football stadium in
Baltimore City. The Agreement was approved by the Board of Public Works and
constitutes a "long-term lease with a National Footbal League team" as
required by statute for the issuance of Stadium Authority bonds. The Stadium
Authority sold $87.565 million in lease-backed revenue bonds on May 1, 1996.
The proceeds from the bonds, along with cash available from State lottery
proceeds, investment earnings, and other sources will be used to pay project
design and construction expenses of approximately $200 million. The bonds are
solely secured by an assignment of revenues received under a lease of the
project from the Stadium Authority to the State.
The Water Quality Revolving Loan Fund is administered by the Water
Quality Financing Administration in the Department of the Environment. The
Fund may be used to provide loans, subsidies and other forms of financial
assistance to local government units for wastewater treatment projects as
contemplated by the 1987 amendments to the Federal Water Pollution Control
Act. The Administration is authorized to issue bonds secured by revenues of
the Fund, including loan repayments, federal capitalization grants, and
matching State grants.
The University of Maryland System, Morgan State University, and St.
Mary's College of Maryland are authorized to issue revenue bonds for the
purpose of financing academic and auxiliary facilities. Auxiliary facilities
are any facilities that furnish a service to students, faculty, or staff, and
that generate income. Auxiliary facilities include housing, eating,
recreational, campus, infirmary, parking, athletic, student union or activity,
research laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive Order assigning to
the Department of Budget and Fiscal Planning responsibility to review certain
proposed issuances of revenue and enterprise debt other than private activity
bonds. The Executive Order also provides that the Governor may establish a
ceiling of such debt to be issued during the fiscal year, which ceiling may be
amended by the Governor.
Although the State has authority to make short-term borrowing in
anticipation of taxes and other receipts up to a maximum of $100 million, in
the past it has not issued short-term tax anticipation and bond anticipation
notes or made any other similar short-term borrowing. However, the State has
recently issued certain obligations in the nature of bond anticipation notes
for the purpose of assisting several savings and loan associations in
qualifying for Federal insurance and in connection with the assumption by a
bank of the deposit liabilities of an insolvent savings and loan association.
The State has financed the construction and acquisition of various
facilities through unconditional purchase, sale-leaseback, and similar
transactions. By statute, all of the lease payments under these arrangements
are subject to an annual appropriation by the Maryland General Assembly. In
the event that appropriations are not made, the State may not be held
contractually liable for the payments.
Local Subdivision Debt. The counties and incorporated municipalities in
Maryland issue general obligation debt for general governmental purposes. The
general obligation debt of the counties and incorporated municipalities is
generally supported by ad valorem taxes on real estate, tangible personal
property and intangible personal property subject to taxation. The issuer
typically pledges its full faith and credit and unlimited taxing power to the
prompt payment of the maturing principal and interest on the general
obligation debt and to the levy and collection of the ad valorem taxes as and
when such taxes become necessary in order to provide sufficient funds to meet
the debt service requirements. The amount of debt which may be authorized may
in some cases be limited by the requirement that it not exceed a stated
percentage of the assessable base upon which such taxes are levied.
In the opinion of counsel, the issuer may be sued in the event that it
fails to perform its obligations under the general obligation debt to the
holders of the debt, and any judgments resulting from such suits would be
enforceable against the issuer. Nevertheless, a holder of the debt who has
obtained any such judgment may be required to seek additional relief to compel
the issuer to levy and collect such taxes as may be necessary to provide the
funds from which a judgment may be paid. Although there is no Maryland law on
this point, it is the opinion of counsel that the appropriate courts of
Maryland have jurisdiction to entertain proceedings and power to grant
additional relief, such as mandatory injunction, if necessary, to enforce the
levy and collection of such taxes and payment of the proceeds of the
collection of the taxes to the holders of general obligation debt, pari passu,
subject to the same constitutional limitations on enforcement, as described
above, as apply to the enforcement of judgments against the State.
Local subdivisions, including counties and municipal corporations, are
also authorized by law to issue special and limited obligation debt for
certain purposes other than general governmental purposes. The source of
payment of that debt is limited to certain revenues of the issuer derived from
commercial activities operated by the issuer, payments made with respect to
certain facilities or loans, and any funds pledged for the benefit of the
holders of the debt. That special and limited obligation debt does not
constitute a debt of the State, the issuer or any other political subdivision
of either within the meaning of any constitutional or statutory limitation.
Neither the State nor the issuer or any other political subdivision of either
is obligated to pay the debt or interest on the debt except from the revenues
of the issuer specifically pledged to the payment of the debt. Neither the
faith and credit nor the taxing power of the State, the issuer or any other
political subdivision of either is pledged to the payment of the debt. The
issuance of the debt is not directly or indirectly or contingently an
obligation, moral or other, of the State, the issuer or any other political
subdivision of either to levy any tax for its payment.
Washington Suburban Sanitary District Debt. The Washington Suburban
Sanitary District operates as a public corporation of the State to provide, as
authorized, water, sewerage and drainage systems, including water supply,
sewage disposal, and storm water drainage facilities for Montgomery County,
Maryland and Prince George's County, Maryland. For the purpose of paying the
principal of and interest on bonds of the District, Maryland law provides for
the levy, annually, against all the assessable property within the District by
the County Council of Montgomery County and the County Council of Prince
Georges County of ad valorem taxes sufficient to pay such principal and
interest when due and payable.
Storm water drainage bonds for specific projects are payable from ad
valorem tax upon all of the property assessed for county tax purposes within
the portion of the District situated in the county in which the storm water
project was, or is to be, constructed. Storm water drainage bonds of the
District are also guaranteed by such county, which guaranty operates as a
pledge of the full faith and credit of the county to the payment of the bonds
and obligates the county council to the extent that the tax revenues referred
to above and any other money available or to become available are inadequate
to provide the funds necessary to pay the principal of and the interest on the
bonds, to levy upon all property subject to taxation within the county ad
valorem taxes in rate and in amount sufficient to make up any such deficiency.
Substantially all of the debt service on the bonds, except storm water
drainage bonds, is being paid from revenues derived by the District from water
consumption charges, from foot benefit charges, and sewage usage charges.
Notwithstanding the payment of principal of and interest on those bonds from
those charges, the underlying security of all bonds of the District is the
levy of ad valorem taxes on the assessable property as stated above.
Special Authority Debt. The State and local governments have created
several special authorities with the power to issue debt on behalf or the
State of local government for specific purposes, such as providing facilities
for non-profit health care and higher educational institutions, facilities for
the disposal of solid waste, funds to finance single family and low-to-
moderate income housing, and similar purposes. The Maryland Health and Higher
Educational Facilities Authority, the Northeast Maryland Waste Disposal
Authority, the Housing Opportunities Commission of Montgomery County, and the
Housing Authority of Prince Georges County are some of the special authorities
which have issued and have outstanding debt of this type.
The debts of the authorities issuing debt on behalf of the State and the
local governments are limited obligations of the authorities payable solely
from and secured by a pledge of the revenues derived from the facilities or
loans financed with the proceeds of the debt and from any other funds and
receipts pledged under an indenture with a corporate trustee. The debt does
not constitute a debt, liability or pledge of the faith and credit of the
State or of any political subdivision or of the authorities. Neither the
State nor any political subdivision thereof nor the authorities shall be
obligated to pay the debt or the interest on the debt except from such
revenues, funds and receipts. Neither the faith and credit nor the taxing
power of the State or of any political subdivision of the State or the
authorities is pledged to the payment of the principal of or the interest on
such debt. The issuance of the debt is not directly or indirectly an
obligation, moral or other, of the State or of any political subdivision of
the State or of the authority to levy or to pledge any form of taxation
whatsoever, or to make any appropriation, for their payment. The authorities
have no taxing power.
Hospital Bonds. The rates charged by non-governmental Maryland
hospitals are subject to review and approval by the Maryland Health Services
Cost Review Commission. Maryland hospitals subject to regulation by the
Commission are not permitted to charge for services at rates other than those
established by the Commission. In addition, the Commission is required to
permit any nonprofit institution subject to its jurisdiction to charge
reasonable rates which will permit the institution to provide, on a solvent
basis, effective and efficient service in the public interest.
Under an agreement between Medicare and the Commission, Medicare agrees
to pay Maryland hospitals on the basis of Commission-approved rates, less a 6%
differential. Under this so-called "Medicare Waiver", Maryland hospitals are
exempt from the Medicare Prospective Payment System which pays hospitals fixed
amounts for specific services based upon patient diagnosis. No assurance can
be given that Maryland will continue to meet any current or future tests for
the continuation of the Medicare Waiver.
In setting hospital rates, the Commission takes into account each
hospital's budgeted volume of services and cash financial requirements for the
succeeding year. It then establishes the rates of the hospital for the
succeeding year based upon the projected volume and those financial
requirements of the institution which the Commission has deemed to be
reasonable. Financial requirements allowable for inclusion in rates generally
include budgeted operating costs, a "capital facilities allowance", other
financial considerations (such as charity care and bad debts) and discounts
allowed certain payers for prompt payment. Variations from projected volumes
of services are reflected in the rates for the succeeding year. The
Commission, on a selective basis by the application of established review
criteria, grants Maryland hospitals increases in rates to compensate for
inflation experienced by hospitals and for other factors beyond the hospitals'
control.
Regulations of the Commission provide that overcharges will in certain
circumstances be deducted from prospective rates. Similarly, undercharges
will in certain circumstances not be recoverable through prospective rates.
The Commission has entered into agreements with certain hospitals to
adjust rates in accordance with a prospectively approved, guaranteed inpatient
revenue per admission program. Those agreements are in addition to the rate
adjustment methodology discussed above. Under the program, a hospital's
revenue per admission is compared to the revenue per admission, as adjusted,
for a base year. Variations from the adjusted base year revenues per
admission are added or deducted, as the case may be, from the hospital's gross
revenue and rates for the following year.
There can be no assurance that the Commission will continue to utilize
its present rate-setting methodology or approve rates which will be sufficient
to ensure payment on an individual hospital's obligations. Future actions by
the Commissions or the loss of the Medicare Waiver may adversely affect the
operations of individual hospitals.
Massachusetts Trust
The Commonwealth of Massachusetts and certain of its cities and towns
have at certain times in the recent past undergone serious financial
difficulties which have adversely affected and, to some degree, continue to
adversely affect their credit standing. These financial difficulties could
adversely affect the market values and marketability of, or result in default
in payment on, outstanding bonds issued by the Commonwealth or its public
authorities or municipalities, including the Bonds deposited in the Trust.
The following description highlights some of the more significant financial
problems of the Commonwealth and the steps taken to strengthen its financial
condition.
The effect of the factors discussed below upon the ability of
Massachusetts issuers to pay interest and principal on their obligations
remains unclear and in any event may depend on whether the obligation is a
general or revenue obligation bond (revenue obligation bonds being payable
from specific sources and therefore generally less affected by such factors)
and on what type of security is provided for the bond. In order to constrain
future debt service costs, the Executive Office for Administration and Finance
established in November, 1988 an annual fiscal year limit on capital spending
of $925 million, effective fiscal 1990. In January, 1990, legislation was
enacted to impose a limit on debt service in Commonwealth budgets beginning in
fiscal 1991. The law provides that no more than 10% of the total
appropriations in any fiscal year may be expended for payment of interest and
principal on general obligation debt of the Commonwealth (excluding the Fiscal
Recovery Bonds discussed below). It should also be noted that Chapter 62F of
the Massachusetts General Laws establishes a state tax revenue growth limit
and does not exclude principal and interest due on Massachusetts debt
obligations from the scope of the limit. It is possible that other measures
affecting the taxing or spending authority of Massachusetts or its political
subdivisions may be approved or enacted in the future.
The Commonwealth has waived its sovereign immunity and consented to be
sued under contractual obligations including bonds and notes issued by it.
However, the property of the Commonwealth is not subject to attachment or levy
to pay a judgment, and the satisfaction of any judgment generally requires
legislative appropriation. Enforcement of a claim for payment of principal of
or interest on bonds and notes of the Commonwealth may also be subject to
provisions of federal or Commonwealth statutes, if any, hereafter enacted
extending the time for payment or imposing other constraints upon enforcement,
insofar as the same may be constitutionally applied. The United States
Bankruptcy Code is not applicable to states.
Cities and Towns. During recent years limitations were placed on the
taxing authority of certain Massachusetts governmental entities that may
impair the ability of the issuers of some of the Bonds in the Massachusetts
Trust to maintain debt service on their obligations. Proposition 2.5, passed
by the voters in 1980, led to large reductions in property taxes, the major
source of income for cities and towns. As a result, between fiscal 1981 and
fiscal 1989, the aggregate property tax levy declined in real terms by 15.6%.
Since Proposition 2.5 did not provide for any new state or local taxes
to replace the lost revenues, in lieu of substantial cuts in local services,
the Commonwealth began to increase local aid expenditures. In 1981 constant
dollars, total direct local aid expenditures increased by 58.5% between fiscal
years 1981 and 1989, or 5.9% per year. During the same period, the total of
all other local revenue sources declined by 5.87% or 0.75% per year. Despite
the substantial increases in local aid from fiscal 1981 to fiscal 1989, local
spending increased at an average rate of 1% per year in real terms. Direct
local aid for fiscal 1987, 1988, and 1989 was $2.601 billion, $2.769 billion,
and $2.961 billion, respectively. Direct local aid declined in the three
subsequent years to $2.937 billion in fiscal 1990, $2.608 billion in 1991 and
$2.328 billion in 1992 and increased to $2.547 billion in 1993. It is
estimated that fiscal 1994 expenditures for direct local aid will be $2.737
billion, which is an increase of approximately 7.5% above the fiscal 1993
level. The additional amount of indirect local aid provided over and above
the direct local aid is estimated to have been $1.313 billion in fiscal 1991,
$1.265 billion in fiscal 1992 and $1.717 billion in fiscal 1993 and is
estimated to be approximately $1.717 billion in fiscal 1994.
Many communities have responded to the limitations imposed by
Proposition 2.5 through statutorily permitted overrides and exclusions.
Override activity peaked in fiscal 1991, when 182 communities attempted votes
on one of the three types of referenda questions (override of levy limit,
exclusion of debt service, or exclusion of capital expenditures) and 100
passed at least one question, adding $58.5 million of their levy limits. In
fiscal 1992, 67 of 143 communities had successful votes totalling $31.0
million. In fiscal 1993, 59 communities attempted a vote; two-thirds of them
(56) passed questions aggregating $16.3 million. In fiscal 1994, only 48
communities had successful override referenda which added $8.4 million to
their levy limits and in fiscal 1995, 32 communities added $8.8 million.
Although proposition 2.5 will continue to constrain local property tax
revenues, significant capacity exists overrides in nearly all cities and
towns.
A statewide voter initiative petition which would effectively mandate
that, commencing with fiscal 1992, no less than 40% of receipts from personal
income taxes, sales and use taxes, corporate excise taxes and lottery fund
proceeds be distributed to certain cities and towns in local aid was approved
in the general election held November 6, 1990. Pursuant to this petition, the
local aid distribution to each city or town was to equal no less than 100% of
the total local aid received for fiscal 1989. Distributions in excess of
fiscal 1989 levels were to be based on new formulas that would replace the
current local aide distribution formulas. If implemented in accordance with
its terms (including appropriation of the necessary funds), the petition as
approved would shift several hundred million dollars to direct local aid.
However, local aid payments explicitly remain subject to annual appropriation,
and fiscal 1992 and fiscal 1993 appropriations for local aid did not meet, and
fiscal 1994 appropriations for local aid do not meet, the levels set forth in
the initiative law.
Pension Liabilities. The Commonwealth had funded its two pension
systems on essentially a pay-as-you-go basis. The funding schedule is based
on actuarial valuations of the two pension systems as of January 1. 1990, at
which time the unfunded accrued liability for such systems operated by the
Commonwealth (and including provision for Boston teachers) totalled $8.865
billion. The unfunded liability for the Commonwealth related to cost of
living increases for local retirement systems was estimated to be an
additional $2.004 billion as of January 1, 1990. An actuarial valuation as of
January 1, 1993 shows that, as of such date, the total unfunded actuarial
liability for such systems, including cost-of-living allowances, was
approximately $9.651 billion.
The amount in the Commonwealth's pension reserve, established to address
the unfunded liabilities of the two state systems, has increased significantly
in recent years due to substantial appropriations and changes in law relating
to investment of retirement system assets. Total appropriations and transfers
to the reserve in fiscal years 1985, 1986, 1987 and 1988 amounted to
approximately $680 million. Comprehensive pension legislation approved in
January 1988 committed the Commonwealth, beginning in fiscal 1989, to normal
cost funding of its pension obligations and to a 40-year amortization schedule
for its unfunded pension liabilities. Total pension costs increased from
$659.7 million in fiscal 1989 to $868.2 million in fiscal 1993. Pension
funding is estimated to be $951.0 million, $959.9 million, $1.007 billion,
$1.061 billion and $1.128 billion, for the fiscal years 1994, 1995, 1996, 1997
and 1998, respectively. As of December 31, 1994, the Commonwealth's pension
reserves had grown to approximately $4.925 billion.
State Budget and Revenues. The Commonwealth's Constitution requires, in
effect, that its budget be balanced each year. The Commonwealth's fiscal year
ends June 30. The General Fund is the Commonwealth's primary operating fund;
it also functions as a residuary fund to receive otherwise unallocated
revenues and to provide monies for transfers to other funds as required. The
condition of the General Fund is generally regarded as the principal
indication of whether the Commonwealth's operating revenues and expenses are
in balance; the other principal operating funds (the Local Aid Fund and the
Highway Fund) are customarily funded to at least a zero balance.
Limitations on Commonwealth tax revenues have been established by
enacted legislation and by public approval of an initiative petition which has
become law. The two measures are inconsistent in several respects, including
the methods of calculating the limits and the exclusions from the limits. The
initiative petition does not exclude debt service on the Commonwealth's notes
and bonds from the limits. State tax revenues in fiscal 1988 through fiscal
1993 were lower than the limits. The Executive Office for Administration and
Finance currently estimates that state tax revenues will not reach the limit
imposed by either the initiative petition or the legislative enactment in
fiscal 1994.
Budgeted expenditures for fiscal 1989 totalled approximately $12.643
billion. Budgeted revenues totalled approximately $11.970 billion,
approximately $672.5 million less than total expenditures. Under the
budgetary basis of accounting, after taking account of certain fund balances,
fiscal 1989 ended with a deficit of $319.3 million. Under the GAAP basis of
accounting, excluding fiduciary accounts and enterprise funds, the
Commonwealth ended fiscal 1989 with a deficit of $946.2 million. This deficit
reflected an operating gain in the capital projects funds due to the
additional borrowing to reduce prior year deficits. If the capital project
funds are excluded, the Comptroller calculated a GAAP deficit of $1.002
billion in fiscal 1989.
Fiscal 1989 tax revenues were adversely affected by the economic
slowdown that began in mid-1988. In June, 1988, the fiscal 1989 tax revenue
estimate was for 10.9% growth over fiscal 1988. Fiscal 1989 ended with actual
tax revenue growth of 6.5%.
The fiscal 1989 budgetary deficit caused a cash deficit in the
Commonwealth operating accounts on June 30, 1989 in the amount of
approximately $450 million. The State Treasurer was forced to defer until
early July certain fiscal 1989 expenditures including the payment of
approximately $305 million in local aid due June 30, and with legislative
authorization, issued temporary notes in July in the amount of $1.1 billion to
pay fiscal 1989 and fiscal 1990 costs.
Fiscal year 1990 resulted in total expenditures of approximately $13.260
billion. Budgeted revenues and other services for fiscal 1990 were
approximately $12.008 billion. Tax revenues for fiscal 1990 were
approximately $8.517 billion, a decrease of approximately $314 million or 3.6%
from fiscal 1989. The Commonwealth suffered an operating loss of
approximately $1.25 billion and ended fiscal 1990 with a budgetary deficit of
$1.104 billion. The Commonwealth had a cash surplus of $99.2 million on June
30, 1990 as a result of deferring until fiscal 1991 the payment of
approximately $1.26 billion of local aid due June 30, 1990.
On July 28, 1990, the legislature enacted Chapter 151 which provides,
among other matters, for the Commonwealth Fiscal Recovery Loan Act of 1990 and
grants authorization for the Commonwealth to issue bonds in an aggregate
amount up to $1.42 billion for purposes of funding the Commonwealth's fiscal
1990 deficit and certain prior year Medicaid reimbursement payments. Chapter
151 also provides for the establishment of the Commonwealth Fiscal Recovery
Fund, deposits for which are derived from a portion of the Commonwealth's
personal income tax receipts, are dedicated for this purpose and are to be
deposited in trust and pledged to pay the debt service on these bonds. Under
Chapter 151, the Commonwealth issued $1.363 billion of Dedicated Income Tax
Bonds to cover the anticipated fiscal 1990 deficit.
Total expenditures for fiscal 1991 are estimated to have been $13.659
billion. Total revenues for fiscal 1991 are estimated to have been $13.634
billion, resulting in an estimated $21.2 million operating loss. Application
of the adjusted fiscal 1990 fund balances of $258.3 million resulted in a
final fiscal 1991 budgetary surplus of $237.1 million. State finance law
required that approximately $59.2 million of the fiscal year surplus be placed
in the Stabilization Fund described above. Amounts credited to the
Stabilization Fund are not generally available to defray current year expenses
without subsequent specific legislative authorization.
After payment in full of the local aid distribution of $1.018 billion
due on June 28, 1991, retirement of all of the Commonwealth's outstanding
commercial paper and repayment of certain other short-term borrowing, as of
the period of fiscal 1991, the Commonwealth had a cash balance of $182.3
million. The fiscal 1991 year-end cash position compared favorably to the
Commonwealth's cash position at the end of the prior fiscal year, June 30,
1990, when the Commonwealth's cash shortfall would have exceeded $1.1 billion
had payment of local aid not been postponed.
Upon taking office in January 1991, the new Governor undertook a
comprehensive review of the Commonwealth's budget. Based on projected
spending of $14.105 billion, it was then estimated that $850 million in budget
balancing measures would be needed prior to the close of fiscal 1991. At that
time, estimated tax revenues were revised to $8.845 billion, $903 million less
than was estimated at the time the fiscal 1991 budget was adopted. The
Governor proposed a series of legislative and administrative actions, designed
to eliminate the projected deficit. The legislature adopted a number of the
Governor's recommendations and the Governor took certain other administrative
actions, not requiring legislative approval, including $65 million in savings
from the adoption of a state employee furlough program. It is estimated that
spending reductions achieved through savings incentives and withholding of
allotments totalled $484.3 million in the aggregate for fiscal 1991.
In addition to recommending spending reductions to close the projected
budget deficit, the administration, in May 1991, filed an amendment to its
Medicaid state plan that enabled it to claim 50% Federal reimbursement on
uncompensated care payments provided to certain hospitals in the Commonwealth.
In fiscal 1992, Medicaid accounted for more than half of the
Commonwealth's appropriations for health care. It is the largest item in the
Commonwealth's budget. It has also been one of the fastest growing budget
items. During fiscal years 1989, 1990 and 1991, Medicaid expenditures were
$1.83 billion, $2.12 billion and $2.77 billion, respectively. A substantial
amount of expenditures in recent years was provided through supplemental
appropriations, repeating the experience that Medicaid expenditures have
exceeded initial appropriation amounts. These annual amounts, however, do not
take account of the practice of retroactive settlement of many provider
payments after audit review and certification by the Rate Setting Commission.
In fiscal 1990, payments of approximately $488 million were made to hospitals
and nursing homes for rate settlements dating back as far as 1980, through the
Medical Assistance Liability Fund established to fund certain Medicaid
liabilities incurred, but not certified for payment, in prior years. This
amount is not factored into the annual totals for Medicaid expenditures listed
above. Including retroactive provider settlements, Medicaid expenditures for
fiscal 1992 were $2.818 billion and for fiscal 1993 were $3.151 billion. The
Executive Office for Administration and Finance estimates that fiscal 1994
Medicaid expenditures will be approximately $3.252 billion, an increase of
3.9% over fiscal 1993 expenditures. For fiscal 1994, no supplemental Medicaid
appropriations are currently expected to be necessary. The Governor had
proposed a managed care program to be implemented commencing in January, 1992
in order to address the considerable annual cost increases in the Medicaid
program. Medicaid is presently 50% funded by federal reimbursements.
In fiscal 1992, total revenues and other sources of the budgeted
operating funds totalled $13.728 billion, an increase over fiscal 1991
revenues of .7%. (Actual fiscal 1992 tax revenues exceeded original estimates
and totalled $9.484 billion, an increase over fiscal 1991 collections of
5.4%). Fiscal 1992 expenditures and other uses of budgeted operating funds
totalled approximately $13.420 billion, a decrease from fiscal 1991
expenditures by 1.7%. Fiscal year 1992 revenues and expenditures resulted in
an operating gain of $312.3 million. Through the use of the prior year ending
fund balances of $312.3 million, fiscal 1992 budgetary fund balances totalled
$549.4 million. Total fiscal 1992 spending authority continued into fiscal
1993 is $231.0 million.
After payment in full of the quarterly local aid distribution of $514
million due on June 30, 1992, retirement of the Commonwealth's outstanding
commercial paper (except for approximately $50 million of bond anticipation
notes) and certain other short-term borrowings, as of June 30, 1992, the
Commonwealth showed a year-end cash position of approximately $731 million for
fiscal year 1992. The ending balance compares favorably with the cash balance
of $182.3 million at the end of fiscal 1991. As of June 1993, the
Commonwealth showed a year-end cash position of $622.2 million for fiscal year
1993. As of January 19, 1994, the Commonwealth estimates a 1994 year-end cash
position of approximately $725.4 million.
The budgeted operating funds of the Commonwealth ended fiscal 1993 with
a surplus of revenues and other sources over expenditures and other uses of
$13.1 million and aggregate ending fund balances in the budgeted operating
funds of the Commonwealth of approximately $562.5 million. Budgeted revenues
and other sources for fiscal 1993 totalled approximately $14.710 billion,
including tax revenues of $9.930 billion. Total revenues and other sources
increased by approximately 6.9% from fiscal 1992 to fiscal 1993, while tax
revenues increased by 4.7% for the same period. In July 1992, tax revenues
had been estimated to be approximately $9.685 billion for fiscal 1993. This
amount was subsequently revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other used in fiscal 1993
totalled approximately $14.696 billion, which is $1.280 billion or
approximately 9.6% higher than fiscal 1992 expenditures and other uses.
Fiscal 1993 budgeted expenditures were $23 million lower than the initial July
1992 estimates of fiscal 1993 budget expenditures.
The Commonwealth is in the process of closing its fiscal 1995 financial
records. Financial information for fiscal 1995 is unaudited and provided by
the Comptroller based upon the Preliminary Financial Report of the
Commonwealth issued on September 15, 1995.
Fiscal 1995 tax revenue collections were approximately $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal
year 1995 tax revenue estimate of $10.151 billion and $544 million, or 5.3%
above fiscal 1994 revenues of $10.607 billion. Budgeted revenues and other
sources, including non-tax revenues, collected in fiscal 1995 were
approximately $16.392 billion, approximately $842 million, or 5.4%, above
fiscal 1994 budgeted revenues of $15.550. Budgeted expenditures and other
uses of funds in fiscal 1995 were approximately $16.259 billion, approximately
$736 million, or 4.7%, above fiscal 1994 budgeted expenditures and uses of
$15.523 billion.
The fiscal 1996 budget is based on numerous spending and revenue
estimates, the achievement of which cannot be assured. The budget was enacted
by the Legislature on June 12, 1995 and signed by the Governor on June 21,
1995. Fiscal 1996 appropriations in the Annual Appropriations Act total
approximately $16.847 billion, including approximately $25 million in
gubernatorial vetoes overridden by the legislature. In the final supplemental
budget for fiscal 1995, approved on August 24, 1995, another $71.1 million of
appropriations were continued for use in fiscal 1996. The Executive Office
for Administration and Finance projects that fiscal 1996 spending will total
approximately $16.998 billion, a $739 million, or 4.5%, increase over fiscal
1995 spending. The largest single spending increase in the fiscal 1996 budget
is approximately $232 million to continue funding the comprehensive education
reform legislation enacted in 1993.
Budgeted revenues and other sources to be collected in fiscal 1996 are
estimated by the Executive Office for Administration and Finance to be
approximately $16.778 billion. This amount includes estimated fiscal 1996 tax
revenues of $11.653 billion, which is approximately $490 million, or 4.3%,
higher than fiscal 1995 tax revenues. The tax revenue projection is based
upon the consensus estimate of approximately $11.639 billion, adjusted for
certain revenue maximization initiatives included in the fiscal 1996 budget
totaling $16 million and tax reductions of approximately $2 million resulting
from enactment of bank tax reform legislation in July, 1995. Through
September, 1995, tax revenue collections have totalled approximately $2.805
billion, approximately $169.8 million, or 6.5%, greater than tax revenue
collections for the same period in fiscal 1995.
Fiscal 1996 non-tax revenues are projected to total approximately $5.173
billion, approximately $55 million, or 1.1%, less than fiscal 1995 non-tax
revenues of approximately $5.228 billion. Federal reimbursements are
projected to increase by approximately $22 million, or 0.7%, from
approximately $2.960 billion in fiscal 1995 to approximately $2.982 billion in
fiscal 1996, primarily as a result of increased reimbursements for Medicaid
spending, offset by a reduction in reimbursements received in fiscal 1995 for
one-time Medicaid expenses incurred in fiscal 1994 and fiscal 1995.
The liabilities of the Commonwealth with respect to outstanding bonds
and notes payable as of October 1, 1995 totalled $12.566 billion. These
liabilities consisted of $8.644 billion of general obligation debt, $619
million of dedicated income tax debt (the Fiscal Recovery Bonds), $395 million
of special obligation debt, $2.655 billion of supported debt, and $253 million
of guaranteed debt.
Capital spending by the Commonwealth was approximately $595 million in
fiscal 1987, $632 million in fiscal 1988 and $971 million in fiscal 1989. In
November 1988, the Executive Office for Administration and Finance established
an administrative limit on state financed capital spending in the Capital
Projects Funds of $925.0 million per fiscal year. Capital expenditures
decreased to $847 million, $694.1 million, $575.9 million, $760.6 million and
$902.2 million in fiscal 1991, 1992, 1993, 1994 and 1995, respectively.
Capital expenditures are expected to be approximately $894.0 million in fiscal
1996. The growth in capital spending accounts for a significant rise in debt
service during the period. Payments for the debt service on Commonwealth
general obligation bonds and notes have risen at an average annual rate of
20.4% from $649.8 million in fiscal 1989 to $942.3 million in fiscal 1991.
Debt Service payments in fiscal 1992 were $898.3 million, representing a 4.7%
decrease from fiscal 1991. This decrease resulted from a $261 million one-
time reduction achieved through the issuance of refunding bonds in September
and October of 1991. Debt service expenditures were $1.139 billion for fiscal
1993, $1.149 billion for fiscal 1994 $1.230 billion for fiscal 1995 and
projected to be $1.196 billion for fiscal 1996. These amounts represent debt
service payments on direct Commonwealth debt and do not include debt service
on notes issued to finance the fiscal 1989 deficit and certain Medicaid-
related liabilities, which were paid in full from non-budgeted funds. Also
excluded are debt service contract assistance to certain state agencies and
the municipal school building assistance program projected to total of $359.7
million in the aggregate in fiscal 1994. In addition to debt service on
bonds issued for capital purposes, the Commonwealth is obligated to pay the
principal of and interest on the Fiscal Recovery Bonds described above. The
estimated debt service on such bonds currently outstanding (a portion of which
were issued as variable rate bonds) ranges from approximately $279 million
(interest only) in fiscal 1994 through fiscal 1997 and approximately $130
million in fiscal 1998, at which time the entire amount of the Fiscal Recovery
Bonds will be retired.
In January 1990 legislation was enacted to impose a limit on debt
service in Commonwealth budgets beginning in fiscal 1991. The law provides
that no more than 10% of the total appropriations in any fiscal year may be
expended for payment of interest and principal on general obligation debt
(excluding the Fiscal Recovery Bonds) of the Commonwealth. This law may be
amended or appealed by the legislature or may be superseded in the General
Appropriation Act for any year. From fiscal year 1987 through fiscal year
1995 estimated this percentage has been substantially below the limited
established by this law.
Legislation enacted in December 1989 imposes a limit on the amount of
outstanding direct bonds of the Commonwealth. The limit for fiscal 1994 is
$7.872 billion. The law provides that the limit for each subsequent fiscal
year shall be 105% of the previous fiscal year's limit. The Fiscal Recovery
Bonds will not be included in computing the amount of bonds subject to this
limit.
In August 1991, the Governor announced a five-year capital spending
plan. The plan, which represents the Commonwealth's first centralized multi-
year capital plan, sets forth, by agency, specific projects to receive capital
spending allocations over the next five fiscal years and annual capital
spending limits. Capital spending by the Commonwealth, which exceeded $900
million annually in fiscal 1989, 1990 and 1991, declined to $694.1 million in
fiscal 1992 and $575.9 in fiscal 1993. For fiscal 1994 through 1998, the plan
forecasts annual capital spending for the Commonwealth of between $813 million
and $886 million per year, exclusive of spending by the Massachusetts Bay
Transit Authority. Total expenditures are forecast at $4.25 billion, an
amount less than the total amount of agency capital spending requests for the
same period. Planned spending is also significantly below legislatively
authorized spending levels.
Unemployment. From 1980 to 1989, the Massachusetts unemployment rate
was significantly lower than the national average. Between 1990 and 1992,
however the Massachusetts unemployment rate was considerably higher than the
national average. Unemployment rates in Massachusetts since 1993 have
declined faster than the national average (6.9% compared to 6.8% in 1993 and
6.0% compared to 6.1% in 1994).
The balance in the Massachusetts Unemployment Compensation Trust Fund
had been exhausted as of September 1991 due to the continued high levels of
unemployment. As of December 31, 1992, the Massachusetts Unemployment
Compensation Trust Fund balance was in deficit by $377 million. As of
November 30, 1993, the Fund was in deficit by $163 million. The deficit is
now expected to be approximately $120 million by the end of calendar 1993.
Benefit payments in excess of contributions are being financed by use of
repayable advances from the federal unemployment loan account. Legislation
enacted in May 1992 increased employer contributions in order to reduce
advances from the federal loan account. All federal advances were paid in May
1994 and interest on Federal advances of $4.7 million was paid in September.
Since that time, the balance in the trust fund has been positive. As of
October 31, 1995, the private contributory sector of the Massachusetts
Unemployment Trust Fund contained a balance of $469 million.
Litigation. The Attorney General of the Commonwealth is not aware of
any cases involving the Commonwealth which in his opinion would affect
materially its financial condition. However, certain cases exist containing
substantial claims, among which are the following:
The United States has brought an action on behalf of the U.S.
Environmental Protection Agency alleging violations of the Clean Water Act and
seeking to enforce the clean-up of Boston Harbor. The Massachusetts Water
Resources Authority (the "MWRA") has assumed primary responsibility for
developing and implementing a court approved plan and time table for the
construction of the treatment facilities necessary to achieve compliance with
the federal requirements. The MWRA currently projects that total cost of
construction of the waste water facilities required under the court's order as
approximately $3.5 billion in current dollars. Under the Clean Water Act, the
Commonwealth may be liable for any costs of complying with any judgment in
this case to the extent that the MWRA or a municipality is prevented by state
law from raising revenues necessary to comply with such a judgment.
In a recent suit filed against the Department of Public Welfare,
plaintiffs allege that the Department has unlawfully denied personal care
attendant services to severely disabled Medicaid recipients. The Court has
denied plaintiffs' motion for a preliminary injunction and has not yet acted
on plaintiffs' motion for reconsideration of that decision. If plaintiffs
prevail on their claims, the suit could cost the Commonwealth as much as $200
million.
In a suit filed against the Commissioner of Revenue, plaintiffs
challenge the inclusion of income from tax exempt obligations in the measure
of the bank excise tax. The Appellate Tax Board issued a finding of fact and
report in favor of the Commissioner of Revenue on September 30, 1993. An
appeal has been filed. Approximately $400 million is at issue.
There are also several tax matters in litigation which may result in an
aggregate liability in excess of $195 million.
Ratings. Beginning on May 17, 1989, Standard & Poor's downgraded its
ratings on Massachusetts general obligation bonds and certain agency issues
from AA+ to AA. The ratings were downgraded three additional times to a low
of BBB on December 31, 1989. On July 14, 1989, Standard & Poor's also
downgraded its rating on temporary general obligation notes and various agency
notes from SP-1 + to SP-1 and on general obligation short-term notes and on
short-term agency debt from SP-1 to SP-2. Bonds rated BBB may have
speculative characteristics. The rating remained at BBB until September 9,
1992 when Standard & Poor's raised its rating to A. At this same time, such
bonds were removed from CreditWatch. On October 14, 1993, Standard & Poor's
raised its rating from A to A+.
On June 21, 1989, Moody's Investors Service downgraded its rating on
Massachusetts general obligation bonds Aa to A. The ratings were further
reduced on two occasions to a low on March 19, 1990 of Baa where it remained
until September 10, 1992 when Moody's increased its rating to A.
Fitch Investors Service, Inc. lowered its rating on the Commonwealth's
bonds from AA to A on September 29, 1989. As of December 5, 1991, its
qualification of the bonds changed from Uncertain Trends to Stabilizing Credit
Trend. On October 13, 1993, Fitch Investors raised its rating from A to A+.
Ratings may be changed at any time and no assurance can be given that
they will be not be revised or withdrawn by the rating agencies, if in their
respective judgments, circumstances should warrant such action. Any downward
revision or withdrawal of a rating could have an adverse effect on market
prices of the bonds.
The Sponsor are unable to predict what effect, if any, such factors may
have on the Bonds in the Massachusetts Trust. Nevertheless, investors should
be aware that if there should be a financial crisis relating to Massachusetts,
its public bodies or municipalities (including the city of Boston), the market
value and marketability of all outstanding bonds issued by the Commonwealth
and its public authorities or municipalities, including the Bonds in the
Massachusetts Trust, could be adversely affected.
Minnesota Trust
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a
whole. There are, however, employment concentrations in durable goods and non-
durable goods manufacturing, particularly industrial machinery instruments and
miscellaneous food, paper and related industries and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of employment growth in Minnesota exceeded
the rate of national growth, however, in the period of 1990 to 1995. Since
1980, Minnesota per capita income generally has remained above the national
average. During 1994 and 1995, the State's monthly unemployment rate was
generally less than the national unemployment rate.
The State of Minnesota (the "State") relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve,
imposing a sales tax on purchases by local governmental units, and making
other budgetary adjustments. The Minnesota Department of Finance April 1996
Estimates project that, under current laws, the State will complete its
current biennium June 30, 1997 with a $1 million surplus, plus a $350 million
cash flow account balance, plus a $270 million budget reserve. Total General
Fund expenditures and transfers for the biennium are projected to be $18.9
billion. Planning estimates (extrapolations) for the biennium ending June 30,
1999 show a General Fund deficit of $71 million, after funding a $350 million
cash flow account plus a $270 million budget reserve, if current law is not
changed. Accordingly, there may be additional revenue increases or spending
cuts relative to current law. Furthermore, under current law spending caps,
State expenditures for education finance (K-12) and corrections in the
biennium ending June 30, 1999 are not anticipated to be sufficient to maintain
program levels of the previous biennium. The State is party to a variety of
civil actions that could adversely affect the State's General Fund. In
addition, substantial portions of State and local revenues are derived from
federal expenditures, and reductions in federal aid to the State and its
political subdivisions and other federal spending cuts may have substantial
adverse effects on the economic and fiscal condition of the State and its
local governmental units. The Department of Finance February 1996 Forecast
states that possible federal spending cuts could reduce federal aid to
Minnesota's State and local governments by a total of $3.2 billion over seven
years. Risks are inherent in making revenue and expenditure forecasts.
Economic or fiscal conditions less favorable than those reflected in State
budget forecasts and planning estimates may create additional budgetary
pressures.
The Minnesota Supreme Court held on April 1, 1994 that numerous banks
are entitled to refunds of Minnesota bank excise taxes paid for tax years 1979
through 1983, on the grounds that interest on federal obligations was
unlawfully included in the computation of the tax for such years. The trial
court has been directed to calculate the amounts to be refunded. The taxes and
interest are estimated to be in excess of $188 million. The State will be
permitted to pay the refunds over a four-year period. the State of Minnesota
also is a party to a variety of other civil actions which could adversely
affect the State's General Fund.
Recent Minnesota tax legislation could have an adverse effect on the
value of the Minnesota Bonds and the Minnesota Trust's units. See "Minnesota
taxes."
State grants and aids represent a large percentage of the total revenues
of cities, towns, counties and school districts in Minnesota. Even with
respect to Bonds that are revenue obligations of the issuer and not general
obligations of the State, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability
of the Bonds or the ability of the respective obligors to pay interest on and
principal of the Bonds.
Missouri Trust
The following discussion regarding constitutional limitations and the
economy of the State of Missouri is included for the purpose of providing
general information that may or may not affect issuers of the Bonds in
Missouri.
In November 1981, the voters of Missouri adopted a tax limitation
amendment to the constitution of the State of Missouri (the "Amendment"). The
Amendment prohibits increases in local taxes, licenses, or fees by political
subdivisions without approval of the voters of such political subdivision.
The Amendment also limits the growth in revenues and expenditures of the State
to the rate of growth in the total personal income of the citizens of
Missouri. The limitation may be exceeded if the General Assembly declares an
emergency by a two-thirds vote. The Amendment did not limit revenue growth at
the state level in fiscal 1982 through 1991 with exception of fiscal 1984.
Management Report No. 85-20, which was issued on March 5, 1985 by State
Auditor Margaret Kelly, indicates that state revenues exceeded the allowable
increase by $30.52 million in fiscal 1984.
The economy of Missouri is diverse and includes manufacturing, retail
and wholesale trade, services, agriculture, tourism, and mining. According to
the Business and Public Administration Research Center of the College of
Business and Public Administration, University of Missouri at Columbia, real
per capita personal income in Missouri, adjusted for inflation, is projected
to increase 5.9% during 1993. As a result of the State's weak economic
outlook, Missouri General Fund Revenues are currently projected to increase by
only 3.1% for the 1992-1993 fiscal year. According to the Missouri Department
of Labor and Industrial Relations, the unemployment rate in Missouri for
December 1992 was 5.3 percent, compared to 6.0 percent in December 1991, and
4.8 percent in November 1992. There can be no assurance that the general
economic conditions or the financial circumstances of Missouri or its
political subdivisions will not adversely affect the market value of the Bonds
or the ability of the obligor to pay debt service on such Bonds.
Currently, Moody's Investors Service rates Missouri general obligation
bonds "Aaa" and Standard & Poor's Corporation rates Missouri general
obligation bonds "AAA". Although these ratings indicate that the State of
Missouri is in relatively good economic health, there can be, of course, no
assurance that this will continue or that particular bond issues may not be
adversely affected by changes in the State or local economic or political
conditions.
The foregoing information constitutes only a brief summary of some of
the general factors which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. It is not possible 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.
Nebraska Trust
Nebraska's Economy. Approximately 1.5 million people live in Nebraska.
About four-fifths of Nebraskans live in Nebraskans live in the eastern third
of the state. The economy of western Nebraska continues to revolve around crop
and livestock production, although food processing and other types of
manufacturing are becoming more prevalent. Eastern Nebraska, which includes
the cities of Omaha with about 335,00 people and Lincoln with about 190,000
residents, has a more diversified economy. The economy of eastern Nebraska
includes foodprocessing, general manufacturing, insurance, financial services,
telemarketing, education, government and a large military base outside of
Omaha. The economy of the state as a whole is vulnerable to downturns in crop
and livestock prices, reductions in government farm subsidies, changes in
interest rates and decisions at the federal level, including decisions
regarding Offutt Air Force Base. Any one of these factors, or other
developments could adversely affect any, or all issues of Nebraska tax-exempt
securities.
According to the Federal Reserve Bank of Kansas City, economic growth in
Nebraska was flat in 1992. Nonagricultural employment dipped slightly after a
gain in 1991. the civilian unemployment rate climbed to 3.2% in the third
quarter from 2.9% at the end of 1991. Still Nebraska's unemployment rate
remained below the national average of 7.6%. Real nonfarm income grew twice as
fast as in 1991, but not as fast as in surrounding states. Nebraska's
manufacturing sector remained stable in 1992. Manufacturing employment,
dominated by nondurables such as food processing, fell slightly. Nondurable
industries added jobs, offsetting continuing job losses in durable goods
industries. Nebraska construction sector was strong in 1992, with the value of
construction contracts awarded in the first three quarters up considerably
from the year before. Permits for single-family homes increased, as did
contract awards for nonresidential buildings and public structures, such as
roads and bridges. Nevertheless, the increase in construction activity did not
translate into new jobs. In fact, construction employment fell 1.4% after
rising slightly in 1991. Nebraska's non-goods-producing sectors slipped as in
1991. Employment in retail and wholesale trade fell 4.6%. While service
employment held up better, there has been essentially no job growth in this
sector in the past two years.
Nebraska's utilities engaged in the production of electric power are
either publicly-owned or consumer-owned cooperatives and are subject to
limited regulation.
Nebraska Developments Relating to Property Taxation. The validity of
Nebraska's system of assessing and taxing real and personal property for
support of local political subdivisions has been the subject of numerous court
challenges and a recent constitutional amendment. In a series of decisions
beginning in 1989, the Nebraska Supreme Court (the "Court") held that
Nebraska's personal property tax scheme which exempted from taxation
approximately of 75% of Nebraska's commercial and industrial personal
property, but taxed railcars, gas pipelines and other property, violated the
Uniformity Clause of the Nebraska Constitution. These decisions arguably
required either that all tangible personal and real property be taxed or that
all such property be removed from the tax rolls.
On May 12, 1992, the people of Nebraska voted to amend the Uniformity
Clause of the Nebraska Constitution. The amendment granted the Nebraska
Legislature (the "Legislature") greater authority to administer the property
tax in a nonuniform manner and allow real and personal property to be treated
as separate classes of tangible property for taxation purposes. Pursuant to
the amendment, the Legislature enacted legislation, which incorporated into
the statutes the provisions of the amendment and placed certain personal
property, including business and agricultural equipment and breeding
livestock, on the personal property tax rolls. These actions should have
placed the state's system of property taxation on a firm constitutional
footing.
The most serious threat to Nebraska's political subdivisions as a result
of the Court's Uniformity Clause decisions has been the prospect that
subdivisions would be required to refund large amounts of property taxes
received between the years 1989 and 1992. However, in 1993 the Court held that
taxpayers were not entitled to refunds of 100% of taxes paid under the pre-
1993 tax structure. Rather, the Court affirmed an award to a taxpayer of
approximately 18% of the taxpayer's 1990 personal property taxes, which
reduced the taxpayer's effective tax rate for 1990 on the taxpayer's tangible
personal property to the level which the taxpayer would have paid if all
improperly exempted property had been taxed. This 1993 decision, which the
United States Supreme Court refused to review, is expected to significantly
reduce the amount of taxes which subdivisions must refund.
Recently, in a decision unrelated to its Uniformity Clause decisions,
the Court held that Nebraska's system of funding public education, which
relies heavily on ad valorem taxes and results in wide disparities in funding
between rich and poor school districts, does not violate the right to "free
instruction" enshrined in the Nebraska Constitution. In this case, the Court
rejected the plaintiff's argument that Nebraska should follow decisions by the
Courts of Texas, Kentucky, New Jersey and other states which had held that
similar systems of funding education violated their respective state
constitutions.
Statutory Property Tax Receipts Limitations. Legislation adopted in 1991
imposes a 0% limit on the annual increase of anticipated property tax receipts
budgeted by local political subdivisions with several exceptions, including
(1) property taxes collected for the retirement of bonded indebtedness and (2)
tax receipts collected with respect to property annexed by the political
subdivision or to revenue received as a result of growth (including revenues
due to the taxation of previously exempt personal property). In addition, (i)
upon an affirmative vote of the majority of the governing body of a political
subdivision, the anticipated property tax receipts may be increased by the
percentage change in the CPI- All Urban Consumers for the previous calendar
year up to a maximum of 5% over the anticipated property tax receipts for the
prior fiscal year; (ii) if the increase based on the CPI is less than 5%, upon
an affirmative vote of 75% of the governing body, the anticipated tax receipts
may be increased up to a maximum of 5% over the previous fiscal year; and
(iii) upon an affirmative majority vote of those voting in a special election
called by the governing body, the limitation may be exceeded by the amount
approved. This limitation provision terminates for fiscal years beginning on
or after July 1, 1995.
New Jersey Trust
Risk Factors: Prospective investors should consider the recent
financial difficulties and pressures which the State of New Jersey (the
"State") and certain of its public authorities have undergone.
The State's 1996 fiscal year budget became law on June 30, 1995.
Effective January 1, 1994, New Jersey personal income tax rates were cut
by 5% for all taxpayers. Effective January 1, 1995, the personal income tax
rates were cut by an additional 10% for most taxpayers. By a bill signed into
law on July 4, 1995, New Jersey personal income tax rates have been further
reduced so that coupled with the prior rate reductions, beginning with tax
year 1996, personal income tax rates will be , depending on a taxpayer's level
of income and filing status, 30%, 15% or 9% lower than 1993 rates. At this
time, the effect of the tax reductions cannot be evaluated.
Reflecting the downturn, the rate of unemployment in the State rose from
a low of 3.6% during the first quarter of 1989 to a recessionary peak of 9.3%
during 1992. Since then, the unemployment rate fell to 6.7% during the fourth
quarter of 1993. The jobless rate averaged 7.1% during the first nine months
of 1994, but this estimate is not comparable to those prior to January
because of major changes in the federal survey from which these statistics are
obtained. Since then, the unemployment rate fell to 6.9% during the first
quarter.
In the first nine months of 1994, relative to the same period a year
ago, job growth took place in services (3.5%) and construction (5.7%), more
moderate growth took place in trade (1.9%), transportation and utilities
(1.2%) and finance/insurance/real estate (1.4%), while manufacturing and
government declined by 1.5% and 0.1%, respectively. The net result was a 1.6%
increase in average employment during the first nine months of 1994 compared
to the first nine months of 1993.
The insured unemployment rate, i.e. the number of individuals claiming
benefits as a percentage of the number of workers covered by Unemployment
Insurance, stopped rising in the winter of 1991 and had been stable at about
4.0 percent through June of 1992 before beginning a gradual decline to its
December, 1994 level of 3.0 percent. It has since stabilized at about that
level. After paying out approximately $125 million, the State's Emergency
Unemployment Benefits Program ended on November 17, 1991 with the enactment of
the Federal Emergency Unemployment Compensation (EUC) Program. Through the
expiration of the EUC program on April 30, 1994, over $2.1 billion has been
disbursed to claimants who exhausted their entitlement under the regular state
program. Benefits under EUC are financed 100 percent by the federal
government and thus do not impact the State's trust fund.
The economic recovery is likely to be slow and uneven in both New
Jersey. Some sectors, like commercial and industrial construction, will
undoubtedly lag because of continued excess capacity. Also, employers in
rebounding sectors can be expected to remain cautious about hiring until they
become convinced that improved business will be sustained. Other firms will
continue to merge or downsize to increase profitability. As a result, job
gains will probably come grudgingly and unemployment will recede at a
corresponding slow pace.
Pursuant to the State Constitution, no money may be drawn from the State
Treasury except for appropriations made by law. In addition, all monies for
the support of State purposes must be provided for in one general
appropriation law covering one and the same fiscal year.
In addition to the Constitutional provisions, the New Jersey statutes
contain provisions concerning the budget and appropriation system. Under
these provisions, each unit of the State requests an appropriation from the
Director of Division of Budget and Accounting, who reviews the budget requests
and forwards them with his recommendation to the Governor. The Governor then
transmits his recommended expenditures and sources of anticipated revenue to
the legislature, which reviews the Governor's Budget Message and submits an
appropriations bill to the Governor for his signing by July 1 of each year.
At the time of signing the bill, the Governor may revise appropriations or
anticipated revenues. That action can be reversed by a two-thirds vote of
each House. No supplemental appropriation may be enacted after adoption of
the act, except where there are sufficient revenues on hand or anticipated, as
certified by the Governor, to meet the appropriation. Finally, the Governor
may, during the course of the year, prevent the expenditure of various
appropriations when revenues are below those anticipated or when he determines
that such expenditure is not in the best interest of the State.
One of the major reasons for cautious optimism is found in the
construction industry. Total construction contracts awarded in New Jersey have
turned around, rising by 11.8% in first two months of 1995 compared with 1994.
By far, the largest boost came from residential construction awards which
increased by 32.8% in 1995 compared with 1994. In addition, non residential
building construction awards have turned around, posting a 2.3% gain.
Nonbuilding construction awards increased approximately 4% in the first two
months of 1995 compared with the same period in 1994.
In addition to increases in construction contract awards, another reason
for cautious optimism is rising new light truck registrations. New passenger
car registrations issued during 1994 were virtually unchanged in New Jersey
from a year earlier. However, registrations of new light trucks and vans (up
to 10,000 lbs.) advanced strongly in 1994 increasing 19% during 1994. Retail
sales for 1994 were up 7.5% compared to 1993. Retailers, such as those
selling appliances and home furnishings should benefit from increased
residential construction. Car, light truck and van dealers should also
benefit from the high (eight years) average age of autos on the road.
Looking further ahead, prospects for New Jersey are favorable, although
a return to the pace of the 1980s is highly unlikely. Although growth is
likely to be slower than in the nation, the locational advantages that have
served New Jersey well for many years will still be there. Structural changes
that have been going on for years can be expected to continue, with job
creation concentrated most heavily in the service sectors.
State Aid to Local Governments is the largest portion of fiscal year
1996 appropriations. In fiscal year 1996, $6,423.5 million of the State's
appropriations consisted of funds which are distributed to municipalities,
counties and school districts. The largest State Aid appropriation, in the
amount of $4,750.8 million, was provided for local elementary and secondary
education programs. Of this amount, $2,731.1 million is provided as
foundation aid to school districts by formula based upon the number of
students and the ability of a school district to raise taxes from its own
base. In addition, the State provided $601.0 million for special education
programs for children with disabilities. A $292.9 million program was also
funded for pupils at risk of educational failure, including basic skills
improvement. The State appropriated $612.9 million on behalf of school
districts as the employer share of the teachers' pension and benefits
programs, $249.48 million to pay for the cost of pupil transportation and
$38.2 million for transition aid, which guaranteed school districts a 6.5%
increase over the aid received in fiscal year 1991 and is being phased out
over six years.
Appropriations to the Department of Community Affairs ("DCA") total
$837.9 million in State Aid monies for fiscal year 1996. Many of the DCA
State Aid programs and many Treasury State Aid appropriations to the State
Department of the Treasury total $85.1 million in State Aid monies for fiscal
year 1996. The principal programs funded by these appropriations: the cost of
senior citizens, disabled and veterans property tax deductions and exemptions
($57.9 million); aid to densely populated municipalities ($17.0 million).
Other appropriations of State aid in fiscal year 1996 include: welfare
programs ($467.1 million); aid to county colleges ($128.0 million); and aid to
county mental hospitals ($88.8 million).
The second largest portion of appropriations in fiscal 1996 is applied
to Direct State Services: the operation of State government's 17 departments,
the Executive Office, several commissions, the State Legislature and the
Judiciary. In fiscal 1996, appropriations for Direct State Services aggregate
$5,179.6 million. Some of the major appropriations for Direct State Services
during fiscal 1996 are detailed below.
$606.6 million was appropriated for programs administered by the
Department of Human Services. The Department of Labor is appropriated $57.9
million for the administration of programs for workers' compensation,
unemployment and disability insurance, manpower development, and health safety
inspection.
The Department of Health was appropriated $33.3 million for the
prevention and treatment of diseases, alcohol and drug abuse programs,
regulation of health care facilities, and the uncompensated care program.
$76.1 million was appropriated to the Department of Higher Education for
the support of nine State colleges, Rutgers University, the New Jersey
Institute of Technology, and the University of Medicine and Dentistry of New
Jersey.
$869.9 million was appropriated to the Department of Law and Public
Safety and the Department of Corrections.
$184.3 million was appropriated to the Department of Transportation for
the various programs it administers, such as the maintenance and improvement
of the State highway systems and subsidies for railroads and bus companies.
$182.2 million was appropriated to the Department of Environmental
Protection for the protection of air, land, water, forest, wildlife and
shellfish resources and for the provision of outdoor recreational facilities.
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. State tax revenues and certain
other fees are pledged to meet the principal and interest payments required to
pay the debt fully. No general obligation debt can be issued by the State
without prior voter approval, except that no voter approval is required for
any law authorizing the creation of a debt for the purpose of refinancing all
or a portion of outstanding debt of the State, so long as such law requires
that the refinancing provide a debt service savings.
New York Trust
The information set forth below is derived from the official statements
and/or preliminary drafts of official statements prepared in connection with
the issuance of New York State and New York City municipal bonds. The Sponsor
has not independently verified this information.
Economic Trends. Over the long term, the State of New York (the
"State") and the City of New York (the "City") face serious potential economic
problems. The City accounts for approximately 41% of the State's population
and personal income, and the City's financial health affects the State in
numerous ways. The State historically has been one of the wealthiest states
in the nation. For decades, however, the State has grown more slowly than the
nation as a whole, gradually eroding its relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes
to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation,
in combination with the many other causes of regional economic dislocation,
has contributed to the decisions of some businesses and individuals to
relocate outside, or not locate within, the State.
Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced budgets,
reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.3
million, is an international center of business and culture. Its non-
manufacturing economy is broadly based, with the banking and securities, life
insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the City's
total employment earnings. Additionally, the City is the nation's leading
tourist destination. The City's manufacturing activity is conducted primarily
in apparel and printing.
The national economic downturn which began in July 1990 adversely
affected the local economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and real Gross City
Product ("GCP") fell in those two years. Beginning in calendar year 1992, the
improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year-end and real GCP increased, boosted by
strong wage gains. After noticeable improvements in the City's economy during
calendar year 1994, economic growth sowed in calendar year 1995, and the
City's current four-year financial plan assumes that moderate economic growth
will continue through calendar year 2000.
For each of the 1981 through 1995 fiscal years, the City achieved
balanced operating results as reported in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in recent years in order to maintain balanced operating results.
For fiscal year 1995, the City adopted a budget which halted the trend in
recent years of substantial increases in City-funded spending from one year to
the next. There can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional tax or other
revenue increases or reductions in City services, which could adversely affect
the City's economic base.
Pursuant to the laws of the State, the City prepares an annual four-year
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The
City's current four-year financial plan projects substantial budget gaps for
each of the 1998 through 2000 fiscal years, before implementation of the
proposed gap-closing program contained in the current financial plan. The
City is required to submit its financial plans to review bodies, including the
New York State Financial Control Board ("Control Board").
The fourth quarter modification to the City's financial plan for the
1996 fiscal year, submitted to the Control Board on June 21, 1996 (the "1996
Modification"), projects a balanced budget in accordance with GAAP for the
1996 fiscal year, after taking into account a discretionary transfer of $243
million. The 1996 Modification assumes $119 million of savings from a
proposed increase in the investment earnings assumptions for pension assets,
$39 million of which, relating to the police pension fund, the City currently
does not expect to be achieved. The Financial Plan for the 1997 through 2000
fiscal years, submitted to the Control Board on June 21, 1996, which relates
to the City, the Board of Education ("BOE") and the City University of New
York ("CUNY"), is based on the City's expense and capital budgets for the
City's 1997 fiscal year, which were adopted on June 12, 1996, and includes
proposed actions by the City for the 1997 fiscal year to close substantial
projected budget gaps resulting from lower than projected tax receipts and
other revenues and greater than projected expenditures.
Although the City has maintained balance budgets in each of its last
fifteen fiscal years, and is projected to achieve balanced operating results
for the 1996 fiscal year, there can be no assurance that the gap-closing
actions proposed in the Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax
increases and reductions in essential City services could adversely affect the
City's economic base.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. The State's 1995-1996
Financial Plan projects a balanced General Fund. There can be no assurance
that there will not be reductions in State aid to the City from amounts
currently projected or that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline and that such reductions or delays
will not have adverse effects on the City's cash flow or expenditures. In
addition, the Federal Budget negotiation process could result in a reduction
in or a delay in the receipt of Federal grants in the City's 1997 fiscal year
which could have additional adverse effects on the City's cash flow or
revenues.
The Mayor is responsible for preparing the City's four-year financial
plan, including the City's current financial plan for the 1997 through 2000
fiscal years (the "1996-1999 Financial Plan" or "Financial Plan"). The City's
projections set forth in the Financial Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes
in major assumptions could significantly affect the City's ability to balance
its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the
condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees
consistent with those assumed in the Financial Plan, employment growth, the
results of a pending actuarial audit of the City's pension system which is
expected to significantly increase the City's annual pension costs, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, which may require in certain cases the cooperation of
the City's municipal unions, the ability of the New York City Health and
Hospitals Corporation ("HHC") and the Board of Education ("BOE") to take
actions to offset reduced revenues, the ability to complete revenue generating
transactions and provision of State and Federal aid and mandate relief and the
impact on City revenues of proposals for Federal and State welfare reform.
Implementation of the Financial Plan 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 1997 through 2000 contemplates
the issuance of $5.7 billion of general obligation bonds and $4.5 billion of
bonds to be issued by the proposed New York City Infrastructure Finance
Authority ("Infrastructure Finance Authority") primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make other
capital investments. The creation of the Infrastructure Finance Authority,
which is subject to the enactment of State legislation, is being proposed by
the City as party of the City's effort to avoid conflict with the forecast
level of the constitutional restrictions on the amount of debt the City is
authorized to issue. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes and Infrastructure
Finance Authority bonds will be subject to prevailing market conditions, and
no assurance can be given that such sales will be completed. If the City were
unable to sell its general obligation bonds and notes or bonds of the proposed
Infrastructure Finance Authority, it would be prevented from meeting its
planned capital and operating expenditures. Future developments concerning
the City and public discussion of such developments, as well as prevailing
market conditions, may affect the market for outstanding City general
obligation bonds and notes.
The 1997-2000 Financial Plan projects revenues and expenditures for the
1997 fiscal year balanced in accordance with GAAP. The projections for the
1997 fiscal year reflect proposed actions to close a previously projected gap
of approximately $2.6 billion for the 1997 fiscal year. The proposed actions
for the 1997 fiscal year include: (i) additional agency actions totaling $1.2
billion; (ii) a revised tax reduction program which would increase projected
tax revenues by $385 million due to the four-year extension of the 12.5%
personal income tax surcharge and other actions; (iii) savings resulting from
cost containment in entitlement programs to reduce City expenditures and
additional proposed State aid of $75 million; (iv) the assumed receipt of
revenues relating to rent payments for the City's airports totaling $269
million, which are currently the subject of a dispute with the Port Authority;
(v) the sale of the City's television station for $207 million; and (vi)
pension cost savings totaling $134 million resulting from a proposed increase
in the earnings assumption for pension assets from 8.5% to 8.75%, $40 million
of which the City currently does not expect to be achieved.
The Financial Plan also sets forth projections for the 1998 through 2000
fiscal years and projects gaps of $1.7 billion, $2.7 billion and $3.4 billion
for the 1998, 1999 and 2000 fiscal years, respectively.
The 1997-2000 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1997-2000 Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 1997 through 2000 fiscal years; continuation of
projected interest earnings assumptions for pension fund assets and current
assumptions with respect to wages for City employees affecting the City's
required pension fund contributions; the willingness and ability of the State,
in the context of the State's current financial condition, to provide the aid
contemplated by the Financial Plan and to take various other actions to assist
the City; the ability of HHC, BOE and other such agencies to maintain balanced
budgets; the willingness of the Federal government to provide the amount of
Federal aid contemplated in the Financial Plan; adoption of the City's budgets
by the City Council in substantially the forms submitted by the Mayor; the
ability of the City to implement proposed reductions in City personnel and
other cost reduction initiatives, and the success with which the City controls
expenditures; the impact of conditions in the real estate market on real
estate tax revenues; the City's ability to market its securities successfully
in the public credit markets; and unanticipated expenditures that may be
incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
The projections for the 1997 through 2000 fiscal years also assume (i)
approval by the Governor and the State Legislature of the extension of the
12.5% personal income tax surcharge, which is projected to provide revenue of
$171 million, $447 million, $478 million and $507 million in the 1997 through
2000 fiscal years, respectively; (ii) collection of the projected rent
payments for the City's airports, which may depend on the successful
completion of negotiations with the Port Authority or the enforcement of the
City's rights under the existing leases thereto through pending legal actions;
(iii) the ability of HHC and BOE to identify actions to offset substantial
City and State revenue reductions and the receipt by BOE of additional State
aid; and (iv) State approval of the cost containment initiatives and State aid
proposed by the City. The Financial Plan does not reflect any increased costs
which the City might incur as a result of welfare legislation recently enacted
by Congress.
In connection with the Financial Plan, the City has outlined a gap-
closing program for the 1998 through 2000 fiscal years to substantially reduce
the remaining $1.7 billion, $2.7 billion and $3.4 billion projected budget
gaps for such fiscal years. This program, which is not specified in detail,
assumes additional agency programs to reduce expenditures or increase revenues
by $674 million, $959 million and $1.1 billion in the 1998 through 2000 fiscal
years, respectively; additional reductions in entitlement cost of $400
million, $750 million and $1.0 billion in the 1998 through 2000 fiscal years,
respectively; additional savings of $250 million, $300 million and $500
million in the 1998 through 2000 fiscal years, respectively, resulting from
restructuring City government by consolidating operations, privatization and
mandate management and other initiatives; additional proposed Federal and
State aid of $105 million, $200 million and $300 million in the 1998 through
2000 fiscal years, respectively; additional revenue initiatives and asset
sales of $155 million, $350 million and $400 million in the 1998 through 2000
fiscal years, respectively; and the availability in each of the 1998 through
2000 fiscal years of $100 million of the General Reserve.
The City's projected budget gaps for the 1999 and 2000 fiscal years do
not reflect the savings expected to result from prior years' programs to close
the gaps set forth in the Financial Plan. Thus, for example, recurring
savings anticipated from the actions which the City proposes to take to
balance the fiscal year 1998 budget are not taken into account in projecting
the budget gaps for the 1999 and 2000 fiscal years.
The City's financial plans have been the subject of extensive public
comment and criticism. On July 16, 1996, the staff of the City Comptroller
issued a report on the Financial Plan. The report concluded that the City's
fiscal situation remains serious, and that the City faces budgetary risks of
approximately $787 million to $941 million for the 1997 fiscal year, which
increase to $4.16 billion to $4.31 billion for the fiscal year 2000.
On July 10, 1995, Standard & Poor's revised downward its rating on City
general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's 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 Standard &
Poor's 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 the Financial Plan,
optimistic projections of additional federal and State aid or mandate relief,
a history of cash flow difficulties caused by State budget delays and
continued high debt levels.
On March 1, 1996, Moody's stated that the rating for City general
obligation bonds remains under review pending the outcome of the adoption of
the City's budget for the 1997 fiscal year, and, in light of the status of the
debate on public assistance and Medicaid reform; the enactment of a State
budget, upon which major assumptions regarding State aid are dependent, which
may be extensively delayed; and the seasoning of the City's economy with
regard to its strength and direction in the face of a potential national
economic slowdown. Since July 15, 1993, Fitch Investors Service, L.P. has
rated City bonds A-. On February 28, 1996, Fitch placed the City's general
obligation bonds on FitchAlert with negative implications.
New York State and its Authorities. The State's current fiscal year
commenced on April 1, 1996, and ends on March 31, 1997, and is referred to
herein as the State's 1996-97 fiscal year. The State's budget for the 1996-97
fiscal year was enacted by the Legislature on July 13, 1996, more than three
months after the start of the fiscal year. The State Financial Plan for the
1996-97 fiscal year was formulated on July 25, 1996 and is based on the
State's budget as enacted by the Legislature and signed into law by the
Governor, as well as actual results for the first quarter of the current
fiscal year. The State's prior fiscal year commenced on April 1, 1995, and
ended on March 31, 1996, and is referred to herein as the State's 1995-96
fiscal year. The State's budget for the 1995-96 fiscal year was enacted by
the Legislature on June 7, 1995, more than two months after the start of the
fiscal year. The State Financial Plan for the 1995-96 fiscal year was
formulated on June 20, 1995 and is based on the State's budget as enacted by
the Legislature and signed into law by the Governor.
The State closed projected budget gaps of $5.0 billion and $3.9 billion
for its 1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap was
projected at $1.44 billion, based on the Governor's proposed budget of
December 1995. As a result of changes made in the enacted budget, that gap is
now expected to be larger. However, the gap is not expected to be as large as
those faced in the prior two fiscal years. The Governor has indicated that he
will propose to close any potential imbalance primarily through General Fund
expenditure reductions and without increases in taxes or deferrals of
scheduled tax reductions.
The 1996-97 State Financial Plan is projected to be balanced on a cash
basis. As compared to the Governor's proposed budget as revised on March 20,
1996, the State's adopted budget for 1996-97 increases General Fund spending
by $842 million, primarily from increases for education, special education and
higher education ($563 million). The balance represents funding increases to
a variety of other programs, including community projects and increased
assistance to fiscally distressed cities. Resources used to fund these
additional expenditures include $540 million in increased revenues projected
for 1996-97 based on higher-than-projected tax collections during the first
half of calendar 1996, $110 million in projected receipts from a new State tax
amnesty program, and other resources including certain non-recurring
resources. The total amount of non-recurring resources included in the 1996-
97 State budget is projected by the State Division of the Budget ("DOB") to be
$1.3 billion, or 3.9 percent of total General Fund receipts.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can
be very complex, may vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be
no assurance that the State economy will not experience results that are worse
than predicted, with corresponding material and adverse effects on the State's
financial projections.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which
they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth below, and those
projections may be changed materially and adversely from time to time.
The State Financial Plan is based on a June 1996 projection by DOB of
national and State economic activity. The national economy has resumed a more
robust rate of growth after a "soft landing" in 1995, with over 11 million
jobs added nationally since early 1992. The State economy has continued to
expand, but growth remains somewhat slower than in the nation. Although the
State has added approximately 240,000 jobs since late 1992, employment growth
in the State has been hindered during recent years by significant cutbacks in
the computer and instrument manufacturing, utility, defense, and banking
industries. Government downsizing has also moderated these job gains. DOB
forecasts that national economic growth will be quite strong in the first half
of calendar 1996, but will moderate considerably as the year progresses. The
overall growth rate of the national economy during calendar year 1996 is
expected to be just slightly below the "consensus" of a widely followed survey
of national economic forecasters. Growth in real Gross Domestic Product
during 1996 is projected to be moderate at 2.1 percent, with anticipated
declines in federal spending and net exports more than offset by increases in
consumption and investment. Inflation, as measured by the Consumer Price
Index, is projected to be contained at about 3 percent due to moderate wage
growth and foreign competition. Personal income and wages are projected to
increase by about 5 percent.
The forecast of the State's economy shows modest expansion during the
first half of calendar 1996, but some slowdown is projected during the second
half of the year. Although industries that export goods and services are
expected to continue to do well, growth is expected to be slowed by government
cutbacks at all levels and by tight fiscal constraints on health and social
services. On an average annual basis, employment growth in the State is
expected to be up slightly from the 1995 rate. Personal income is expected to
record moderate gains in 1996. Bonus payments in the securities industry are
expected to increase further from last year's record level.
The forecast for continued slow growth, and any resultant impact on the
State's 1996-97 Financial Plan, contains some uncertainties. Stronger-than-
expected gains in employment could lead to a significant improvement in
consumption spending. Investments could also remain robust. Conversely, the
prospect of a continuing deadlock on federal budget deficit reduction or fears
of excessively rapid economic growth could create upward pressures on interest
rates. In addition, the State economic forecast could over- or underestimate
the level of future bonus payments or inflation growth, resulting in
forecasted average wage growth that could differ significantly from actual
growth. Similarly, the State forecast could fail to correctly account for
expected declines in government and banking employment and the direction of
employment change that is likely to accompany telecommunications deregulation.
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1996-97 fiscal year, the General Fund is expected to
account for approximately 47 percent of total governmental-fund receipts and
71 percent of total governmental-fund disbursements. General Fund moneys are
also transferred to other funds, primarily to support certain capital projects
and debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds are
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Fund disbursements and transfers to other funds
are projected to be $33.12 billion, an increase of $444 million from the total
in the prior fiscal year.
The State reported a General Fund operating surplus of $380 million for
the 1995-96 fiscal year, as compared to an operating deficit of $1.43 billion
for the prior fiscal year. The 1995-96 fiscal year surplus reflects several
major factors, including the cash-basis surplus and the benefit of $529
million in Local Government Assistance Corporation ("LGAC") bond proceeds
which were used to fund various local assistance programs. This was offset in
part by a $437 million increase in tax refund liability primarily resulting
from the effects of ongoing tax reductions and (to a lesser extent) changes in
accrual measurement policies, and increases in various other expenditure
accruals. Revenues increased $530 million (nearly 1.7 percent) over the prior
fiscal year with an increase in personal income taxes and miscellaneous
revenues offset by decreases in business and other taxes. Expenditures
decreased $716 million (2.2 percent) from the prior fiscal year with the
largest decrease occurring in State aid for social services programs and State
operations spending. Net other financing sources nearly tripled, increasing
$561 million, due primarily to an increase in bonds issued by LGAC, a transfer
from the Mass Transportation Operating Assistance Fund and transfers from
public benefit corporations.
On January 13, 1992, Standard & Poor's reduced its ratings on the
State's general obligation bonds from A to A-and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. Standard & Poor's also continued its negative
rating outlook assessment on State general obligation debt. On April 26,
1993, Standard & Poor's revised the rating outlook assessment to stable. On
February 14, 1994, Standard & Poor's raised its outlook to positive and, on
October 3, 1995, confirmed its A- rating. On January 6, 1992, Moody's reduced
its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On October 2, 1995, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness.
Litigation. The court actions in which the State is a defendant
generally involve State programs and miscellaneous tort, real property, and
contract claims. While the ultimate outcome and fiscal impact, if any, on the
State of those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon
the State's ability to carry out the 1996-1997 Financial Plan.
The claims involving the City other than routine litigation incidental
to the performance of their governmental and other functions and certain other
litigation arise out of alleged constitutional violations, torts, breaches of
contract and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the City of those 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
the 1997-2000 Financial Plan. The City has estimated that its potential
future liability on account of outstanding claims against it as of June 30,
1995 amounted to approximately $2.5 billion.
North Carolina Trust
The Sponsor believes the information summarized below describes some of
the more significant developments relating to Securities of (i) municipalities
or other political subdivisions or instrumentalities of the State of North
Carolina (the "State") which rely, in whole or in part, on ad valorem real
property taxes and other general funds of such municipalities or political
subdivisions or (ii) the State of North Carolina, which are general
obligations of the State payable from appropriations from the State's General
Fund. The sources of such information include official reports from the
Department of the Treasurer, as well as other publicly available documents.
The Sponsor have not independently verified any of the information contained
in such official reports, but are not aware of any facts which would render
such information inaccurate.
State Economic Profile. North Carolina is basically a rural state,
having only five municipalities with populations in excess of 100,000. The
economic profile of North Carolina consists of a combination of industry,
agriculture, and tourism. Nonagricultural wage and salary employment
accounted for approximately 3,452,700 jobs as of June 1995. The largest
nonagricultural segment of jobs was the approximately 784,900 persons employed
in trade, with textiles as the largest manufacturing segment employing
approximately 201,000 people. The United States Department of Labor estimates
that as of May, 1995, North Carolina ranked tenth among the states in
nonagricultural employment, eighth in manufacturing employment, and eleventh
in trade. During the period 1980 through 1992, per capita income in North
Carolina grew from $7,999 to $17,667, an increase of approximately 121%. The
North Carolina Employment Security Commission estimated the unadjusted
unemployment rate in June 1995, to be 4.7% of the labor force, as compared
with an unemployment rate of 5.8% nationwide. Gross agricultural income
(excluding farm forest products) in 1993 was $5.457 billion. This places
North Carolina ninth in the nation in gross agricultural income. Tobacco
production is the leading source of agricultural crop income in the State,
accounting for approximately 18.9% of gross agricultural income in 1993.
State Financial Condition. The State's two principal operating accounts
are the General Fund and the Highway Fund. The principal sources of General
Fund tax revenues are the income tax and the sales and use tax. The State
Constitution limits the income tax to a rate of 10% of total net income; the
State actually imposed a maximum rate of 7.75% during the 1994 calendar year.
The State had (audited) General Fund balances at the June 30th year-end
of approximately $254 million, $124 million, $112 million (deficit balance),
$235 million and $681 million for, respectively, the 1989, 1990, 1991, 1992
and 1993 fiscal years. For the year ended June 30, 1993, the State had total
budgeted appropriations from the General Fund of approximately $10.613
billion.
The State Highway Fund had an ending credit balance of approximately
$308 million as of June 30, 1993, with total expenditures of approximately
$1.410 billion.
State Debt. As of June 30, 1994, approximately $936 million aggregate
principal amount of the State's general obligation bonds and $55 million of
its highway fund general obligation bonds were outstanding. The highway fund
bonds are payable from the Highway Fund.
In addition, 16 constituent institutions of the University of North
Carolina and 8 agencies or public authorities of the State had approximately
$9.705 billion principal amount of revenue bonds outstanding as of June 30,
1994. There are no bonds of the State outstanding, and no State statutes
which would authorize the issuance of any bonds, which contemplate the
appropriation by the General Assembly of such amount as would be necessary to
make up any deficiency in a debt service reserve fund.
Local governmental units in the State had approximately $5.118 billion
principal amount of general obligation bonds and $2.337 billion of revenue
bonds (excluding industrial revenue bonds of county authorities) outstanding
as of June 30, 1994. The State has no financial responsibility with respect
to this debt.
Ohio Trust
The Ohio Trust will invest substantially all of its net assets in Ohio
Obligations. The Ohio Trust is therefore susceptible to political, economic
and regulatory factors that may affect issuers of Ohio Obligations. The
following information constitutes only a brief summary of some of the complex
factors that may affect the financial situation of issuers in Ohio, and is not
applicable to "conduit" obligations on which the public issue itself has no
financial responsibility.
The creditworthiness of obligations issued by local Ohio issuers may be
unrelated to the creditworthiness of obligations issued by the State, and
generally there is no responsibility on the part of the State to make payments
on those local obligations. There may be specific factors that are applicable
in connection with investment in particular Ohio Obligations or in the
obligations of particular Ohio issuers, and it is possible the investment will
be in Ohio Obligations or in obligations of particular issuers as to which
such specific factors are applicable. However, the information set forth
below is intended only as a general summary and not a discussion of any such
specific factors that may affect any particular issuer or issue of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census Count of
10,847,000 indicating a 0.5% population increase from 1980.
The economy of Ohio, while diversifying more into the service and other
non-manufacturing areas, continues to rely in part on durable goods
manufacturing, which is largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general
economic activity in Ohio, as in many other industrially-developed states,
tends to be more cyclical than in some other states and in the nation as a
whole. Agriculture also is an important segment of the economy in the State,
and the State has instituted several programs to provide financial assistance
to farmers. The State's economy, has had varying effects on different
geographic areas of the State and the political subdivisions located within
those geographic areas.
In prior years, the State's overall unemployment rate is commonly
somewhat higher than the national average However, for the years 1991 through
1994 the State rate (6.4%, 7.2%, 6.5% and 5.5%, respectively) was below the
national rate(6.7%, 7.4%, 6.8% and 6.1%); the State rate for 1995 (through
November 1995) (range from 4.4% to 5.3%) was also below the national rate
(range from 5.2% to 6.2%). The unemployment rate, and its effects, vary among
particular geographic areas of the State.
There can be no assurance that future state-wide or regional 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 portfolio of the Ohio Trust or the ability of the 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 a fiscal
year or biennium in a deficit position. Most operations are financed through
the General Reserve Fund (GRF), with personal income and sales-use taxes being
the major GRF sources.
Growth and depletion of GRF ending fund balances show a consistent
pattern related to national economic conditions, with the June 30 (end of
fiscal year) balance reduced during less favorable national economic periods
and increased during more favorable economic times.
Key end of biennium fund balances at June 30, 1991 were $135,365,000
(unaudited) (GRF) and approximately $300,000,000 (Budget Stabilization Fund
(BSF), a cash and budgetary management fund). Necessary corrective steps were
taken in fiscal year 1991 to respond to lower than estimated receipts and
higher expenditures in certain categories. Those steps included the transfer
of $64,000,000 from the BSF to the GRF. The State reported biennium ending
fund balances of $135.3 million (GRF) and $300 million (BSF).
The State has established procedures for, and has timely taken,
necessary actions to ensure a resource/expenditures balance during less
favorable economic periods. These include general and selected reductions in
appropriations spending; none have been applied to appropriations needed for
debt service or lease rentals on any State obligations.
To allow time to complete the resolution of certain Senate and House
differences in the budget and appropriations for the current biennium
(beginning July 1, 1991), an interim appropriations act was enacted, effective
July 1; it included debt service and lease rental appropriations for the
entire 1992-93 biennium, while continuing most other appropriations for 31
days at 97% of fiscal year 1991 monthly levels. The general appropriations
act for the entire biennium was passed on July 11, 1991 and signed by the
Governor. It authorized the transfer, which has been made, of $200 million
from the BSF to the GRF and provided for transfers in fiscal year 1993 back to
the BSF if revenues are sufficient for the purpose (which the State Office of
Budget and Management, OBM, at present thinks unlikely).
Based on updated fiscal year financial results and economic forecast for
the State, in light of the continuing uncertain nationwide economic situation,
OBM projected, and was timely addressed, a fiscal year 1992 imbalance in GRF
resources and expenditures. GRF receipts were significantly below original
forecasts, a shortfall resulting primarily from lower collections of certain
taxes, particularly sales and use taxes. Higher than earlier projected
expenditure levels totaling approximately $143,000,000 resulted from higher
spending in certain areas, particularly human services, including Medicaid.
As an initial action, the Governor ordered most State agencies to reduce GRF
appropriations spending in the final six months of fiscal year 1992 by a total
of approximately $184 million (debt service and lease rental obligations were
not affected). The General Assembly authorized, and OBM made in June 1992,
the transfer to the GRF of the $100.4 million BSF balance and additional
amounts from certain other funds. Other administrative revenue and spending
actions resolved the remaining GRF imbalance, resulting in positive GRF fiscal
year 1992 ending fund and cash balances.
A significant GRF shortfall, approximately $520 million, was then
projected for fiscal year 1993. It had been addressed by appropriate
legislative and administrative actions. As a first step the Governor ordered,
effectively July 1, 1992, $300 million in selected GRF spending reductions.
Executive and legislative action in December 1992 (a combination of tax
revisions and additional appropriations spending reductions) is projected by
OBM to balance GRF resources and expenditures in this biennium and provide a
better base for the appropriations for the next biennium. Those actions
included tax revisions estimated to produce an additional $194,500,000 this
fiscal year, and additional appropriations spending reductions totaling
approximately $50,000,000 are provided for in that legislation and subsequent
action by the Governor.
For the last complete fiscal biennium (ended June 30, 1995) the GRF
ending fund balance was $928,000,000 of which $535,200,000 was transferred
into the Budget Stabilization Fund (which has a current balance of over
$828,000,000). In addition, the GRF cash balance was $1.3 billion.
Litigation filed on February 1, 1993 seeks to have a new tax on soft
drinks, included in those tax revisions, declared invalid and its collection
enjoined. The trial court's preliminary injunction has been stayed by the
Ohio Supreme Court on procedural grounds, and that tax is for now being
collected. OBM had estimated approximately $18,500,000 being collected from
that tax this fiscal year, representing less than 10% of the projected
additional tax revenues. Several bases for invalidity were asserted,
including a claim that the bill in which this and other elements of the tax
package ( as well as certain capital appropriations and financing
authorizations ) were included did not comply with a constitutional "one-
subject" procedural requirement.
Supplementing the general authorization for the Governor's spending
reduction orders described above and exercised several times in this biennium,
the biennial appropriations act authorizes the OBM Trustee to implement up to
1% fiscal year reduction in GRF amounts appropriated if on March 1 of either
fiscal year of the biennium receipts for that fiscal year are for any reason
more than $150,000,000 under estimates and the then estimated GRF ending fund
balance is less than $50,000,000. Expressly, excerpted from this cutback
authorization are debt service and lease rental appropriations. In light of
the other corrective actions described above, this supplemental spending
reduction authorization was not implemented in fiscal year 1992 and is not
expected to be implemented in fiscal year 1993.
The incurrence or assumption of debt by the State without a popular vote
is, with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures
in revenues or to meet expenses not otherwise provided for, but limited in
amount to $750,000. The State is expressly precluded from assuming the debts
of any local government or corporation. (An exception in both cases is made
for any debt incurred to repel invasion, suppress insurrection, or defend the
State in war.)
By thirteen constitutional amendments , Ohio voters have authorized the
incurrence of State debt to which taxes or excesses were pledged for payment.
At January 31, 1995, $777.9 million (excluding certain highway bonds payable
primarily from highway use charges) of this debt was outstanding or awaiting
delivery. The only such State debt then still authorized to be incurred are
portions of the highway bonds and the following: (a) up to $55 million of
obligations for coal research and development may be outstanding at any one
time; (b) $1.2 billion of obligations authorized for local infrastructure
improvements, no more than $120 million may be issued in any calendar year
($839.98 million outstanding or awaiting delivery, plus the Series 1996 Bonds
issued in January 1996). A November 1995 constitutional amendment extends
this authority to an additional 10 years and $1.2 billion; and (c) up to
$138.6 million in general obligation bonds for capital improvements for
elementary and secondary public school facilities purposes ( $68,640,000
issued).
A 1990 constitutional amendment authorized greater State and political
subdivision participation in the provision of individual and family housing,
including borrowing for this purpose. The General Assembly may authorize the
issuance of State obligations secured by a pledge of all or such portion as it
authorizes of State revenues or receipts, although the obligations may not be
supported by the State's full faith and credit.
State and local agencies issue revenue obligations that are payable from
revenues of revenue-producing facilities or categories of facilities, which
obligations are not "debt" within constitutional provisions or payable from
taxes. In general, lease payment obligations under lease-purchase agreements
of Ohio issuers (in connection with which certificates of participation may be
issued) are limited in duration to the issuer's fiscal period, and are
renewable only upon appropriations being made available for the subsequent
fiscal periods.
Local school districts in Ohio receive a major portion (on a statewide
basis, historically approximately 44%) of their operating moneys from State
subsidies (known as the Foundation Program), but are dependent on local ad
valorem property taxes and in, 88 districts, income taxes for significant
portions of their budgets. Litigation has recently been filed, similar to
that in other states, questioning the constitutionality of Ohio's system of
school funding. 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
(Emergency School Advancement Fund) provided for school district cash-need
borrowing directly from commercial lenders, with State diversion of subsidy
distributions to repayment if needed; 26 districts borrowed a total of $41.8
million in fiscal year 1991 under this program, in fiscal year 1992,
borrowings totaled $68.6 million (including over $46.6 million by one
district);in fiscal year 1993, 43 districts borrowed approximately $94.5
million (including $75 million for one district) and in fiscal year 1994 loan
approvals totaled at January 31, 1994, $9.90 million for 16 districts.
This program has been replaced with enhanced provisions for individual
direct local borrowing, including direct application of Foundation Program
distributions to repayment if needed. Experience through Fiscal Year 1995
demonstrates that not all applying for loan approval borrow the amounts
authorized.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations, and, with other local
governments, receive local government support and property tax relief monies
distributed by the State. Procedures have been established for those few
municipalities that have on occasion faced significant financial problems,
which include establishment of a joint State/local commission to monitor the
municipality's fiscal affairs, with a financial plan developed to eliminate
deficits and cure any defaults. Since inception in 1979, these procedures
have been applied to 23 cities and villages, in 19 of which the fiscal
situation has been resolved and the procedures terminated.
At present the State itself does not levy any ad valorem taxes on real
or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since
1934 limited the amount of the aggregate levy of ad valorem property taxes,
without a vote of the electors or municipal charter provision, to 1% of true
value in money, and statutes limit the amount of the aggregate levy without a
vote or charter provision 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 unlimited as to amount or rate.
Although revenue obligations of the State or its political subdivisions may be
payable from a specific project or source, including lease rentals, there can
be no assurance that future economic difficulties and the resulting impact on
State and local government finances will not adversely affect the market value
of Ohio obligations held in the portfolio of the Trust or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
The outstanding Bonds issued by the Sinking Fund are rated Aa by Moody's
Investors Service ("Moody's") and AAA by Standard & Poor's Corporation
("S&P"). In January 1982, S&P adjusted its rating on certain of the State's
general obligation bonds from AA+ to AA. Previously, in November 1979, the
ratings on general obligation debt of the State were changed by Moody's and
S&P from Aaa and AAA to Aa and AA+, respectively. S&P did not at either time
change its AAA ratings on the Bonds. The outstanding State Bonds issued by
the Ohio Public Facilities Commission and the Ohio Building Authority are
rated A+ by S&P and A by Moody's.
Pennsylvania Trust
Potential purchasers of shares of the Pennsylvania Trust should
consider the fact that it consists of primarily of securities issued by the
Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize the substantial risks associated with an
investment in such securities. Although the General Fund of the Commonwealth
(the principal operating fund of the Commonwealth) experienced deficits in
fiscal 1990 and 1991, tax increases and spending decreases helped return the
General Fund balance to a surplus at June 30, 1992 of $87.5 million and at
June 30, 1993 of $698.9 million. As of June 30, 1994, the General Fund
balance increased $194.0 million due largely to an increased reserve for
encumbrances and an increase in other designated funds. The deficit in the
Commonwealth's unreserved/undesignated funds of prior years also was reversed
to a surplus of $64.4 million as of June 30, 1993. The unreserved-
undesignated balance increased by $14.8 million to $79.2 million as of June
30, 1994.
Commonwealth revenues for the fiscal year 1995 were above estimate and
exceeded fiscal year expenditures and encumbrances. Fiscal 1995 was the
fourth consecutive fiscal year the Commonwealth reported an increase in the
fiscal year-end unappropriated balance.
Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services.
Agricultural industries continue to be an important part of the economy,
including not only the production of diversified food and livestock products,
but substantial economic activity in agribusiness and food-related industries.
Service industries currently employ the greatest share of non-agricultural
workers, followed by the categories of trade and manufacturing. Future
economic difficulties in any of these industries could have an adverse impact
on the finances of the Commonwealth or its municipalities, and could adversely
affect the market value of the Bonds in the Pennsylvania Portfolio or the
ability of the respective obligors to make payments of interest and principal
due on such Bonds.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations, including suits relating to the following matters: (i) the ACLU
has filed suit in federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia,
because of that settlement. The district court has denied class certification
to the ACLU, and the parties have stipulated to a judgment against the
plaintiffs to allow plaintiffs to appeal the denial of a class certification
to the Third Circuit; (ii) in 1987, the Supreme Court of Pennsylvania held
that the statutory scheme for county funding of the judicial system to be in
conflict with the Constitution of the Commonwealth but stayed judgment pending
enactment by the legislature of funding consistent with the opinion and the
legislature has yet to consider legislation implementing the judgment; (iii)
several banks have filed suit against the Commonwealth contesting the
constitutionality of a law enacted in 1989 imposing a bank shares tax; in July
1994, the Commonwealth Court en banc upheld the constitutionality of the 1989
bank shares tax law but struck down a companion law to provide credits against
the bank shares tax for new banks; cross appeals from that decision to the
Pennsylvania Supreme Court have been filed; (iv) litigation has been filed in
both state and federal court by an association of rural and small schools and
several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending resolution of the state
case and the state case is in the pre-trial state (no available estimate of
potential liability); (v) the ACLU has brought a class action on behalf of
inmates challenging the conditions of confinement in thirteen of the
Commonwealth's correctional institutions; a proposed settlement agreement has
been submitted to the court and members of the class, but the court has not
yet set a date for hearing on the terms of the agreement (no available
estimate of potential cost of complying with the injunction sought but capital
and personnel costs might cost millions of dollars) and (vi) on April 12,
1995, Envirotest Systems Corporation, Envirotest Partners and the Commonwealth
entered into a Standstill Agreement pursuant to which the parties will proceed
to discuss the resolution of claims which Envirotest might have against the
Commonwealth arising from the suspension of the emissions testing program.
Envirotest filed a Statement of Claim with the Pennsylvania Board of Claims by
May 10, 1995 and filed a complaint with the Commonwealth Court on May 15, 1995
to preserve its position. In those pleadings, Envirotest asserted damages in
excess of $350 million. The Office of General Counsel believes it is
premature at this time to estimate the nature and size of Envirotest's
potential recovery in this matter.
The Commonwealth's general obligation bonds have been rated AA- by
Standard & Poor's and A1 by Moody's for more than the last five years.
The City of Philadelphia (the "City") has experienced severe financial
difficulties which has impaired its access to public credit markets and a
long-term solution to the City's financial crisis is still being sought. The
City experienced a series of General Fund deficits for fiscal years 1988
through 1992. However, the audited General Fund balance of the City as of June
30, 1994, showed a surplus of approximately $15.4 million, up from
approximately $3 million as of June 30, 1993. City preliminary unaudited
General Fund financial statements at June 30, 1995 project a surplus
approximating $59.6 million.
The City has no legal authority to issue deficit reduction bonds on its
own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority to provide fiscal oversight for
Pennsylvania cities (primarily Philadelphia) suffering recurring financial
difficulties. The Authority is broadly empowered to assist cities in avoiding
defaults and eliminating deficits by encouraging the adoption of sound
budgetary practices and issuing bonds. In order for the Authority to issue
bonds on behalf of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority with certain
oversight powers with respect to the fiscal affairs of the City, and the
Authority approved a five-year financial plan prepared by the City. On June
16, 1992, the Authority issued a $474,555,000 bond issue on behalf of the
City. The Authority approved the latest update of the five-year financial plan
on May 2, 1994. The City reported a surplus of approximately $15 million for
fiscal year ending June 30, 1994. In July 1993, the Authority issued
$643,430,000 of bonds to refund certain general obligation bonds of the City
and to fund additional capital projects. In September 1993, the Authority
issued $178,675,000 of bonds to advance refund certain of the bonds of the
City and to fund additional capital projects.
Texas Trust
Potential purchasers of the Units of the Texas Trust should consider the
fact that the Texas Trust's Portfolio consists of securities issued by the
State of Texas, or its municipalities or authorities (the "Texas Securities")
and realize the substantial risks associated with an investment in such Texas
Securities. The following information is a brief summary and does not purport
to be a complete description of conditions, developments and risk factors that
may adversely affect the Texas Securities and hence the value of the Units.
The information is drawn principally from publicly available documents. While
the Sponsor have not independently verified such information, they have no
reason to believe that such information is inaccurate.
Economic Factors. Geographic, cultural, climatic and geological
differences within the State of Texas have produced six generally distinct
geographic regions in which economic developments, such as changes in oil
prices, the value of the Mexican peso, and defense spending can be expected to
have varying effects on each region.
Texas experienced a severe economic recession in the 1980's commencing
with a decline of the energy industry which in turn led to a depression of the
real estate industry, financial institution failures and declines in most
sectors of the Texas economy. As the Texas economy began to level off in the
late 1980's, its dependence on certain industry segments began to shift. The
energy industry currently comprises approximately 11% of the State's total
economic output compared to a peak of 27% in 1981. Service-producing sectors
(which include transportation and public utilities; finance and insurance;
trade; services and government) are the major sources of job growth in Texas,
now accounting for 80% of total nonfarm employment and over 90% of employment
growth since 1990. Texas' location and transportation and accessibility have
made it a distribution center for the southwestern United States as well as an
international center for finance and distribution. The high-technology sector,
growth of exports and manufacturing job growth are expected to be significant
to Texas' future growth.
Since 1990, Texas has added more jobs than any other state, accounting
for one-seventh of the nation's total job growth. The annual rate of
employment growth has risen during each of the past four years and, in late
1995, ranked fourth among all states. Over the twelve months of 1995, Texas
gained more than 289,000 jobs, based on information from the U.S. Bureau of
Labor Statistics and the Texas Employment Commission. Nonfarm employment has
grown 15 percent since 1990 and reached an all-time high of 8.16 million in
December 1995.
The state's unemployment rate fell from 1992 through 1995. Since
averaging over 7.5 percent in 1992, the unemployment rate improved to 6
percent in 1995. The mix of job growth in Texas provides a strong base for
sustainable growth because the new jobs are largely in knowledge-based
services and high technology manufacturing industries. The Comptroller of
Public Accounts predicts that the overall Texas economy will out face national
economic growth over the long-term by an annual average of about one-half
percentage point. The Sponsor cannot predict the course of economic trends in
Texas.
State Finances. The State operates on a fiscal year beginning September
1, and ending August 31. The State's accounting period is a biennium covering
two fiscal years. The State is required by law to maintain its accounting and
reporting functions on a cash basis.
The economic troubles of the 1980's caused numerous budgeting
difficulties for the State and its political subdivisions due principally to a
shrinking and changing tax base. Historically, the primary sources of the
State's revenue have been sales taxes, mineral severance taxes and federal
grants. Due to the state's expansion in Medicaid spending and other Health
and Human Services programs requiring federal matching revenues, federal
receipts were the state's number one source of income in fiscal 1995 (see
Table A-5). Sales tax, which had been the main source of revenue for the
previous 12 years prior to fiscal 1993, was second. Licenses, fees, fines and
penalties are now the third largest revenue source to the state, with motor
fuels taxes and motor vehicles sales/rental taxes following as fourth largest
and fifth largest, respectively. The remainder of the states' revenues are
derived primarily from interest and investment income, lottery proceeds,
cigarette and tobacco, franchise, oil and gas severance and other taxes. The
state has no personal or corporate income tax, although the state does impose
a corporate franchise tax based on the amount of a corporation's capital and
"earned surplus," which includes corporate net income and officers' and
directors' compensation. The State imposes a corporate franchise tax based on
a corporation's taxable capital apportionable to Texas. While the State
currently has no income tax, an income tax has been and continues to be
considered and may be enacted.
For the biennium ended August 31, 1989, the State of Texas had a budget
surplus of approximately $297 million (attributable, in large part, to
increased sales tax revenue), compared to a budget deficit of approximately
$745 million for the biennium ended August 31, 1987 (attributable primarily to
the decline of the energy industry which was principally a result of lower oil
and gas prices). The above biennium end balances include approximately $300
million in oil overcharge funds which amounts are restricted to energy
conservation projects. The 72nd Legislature meeting in special session, in
the summer of 1991, approved for the Governor's signature an approximately
$9.4 billion budget increase for the fiscal 1992-93 biennium to be financed in
part by approximately $3.4 billion in new revenue measures.
The $3.4 billion in new revenues to finance the new budget came from
several new sources. A tax and fee bill raised a total of $2.1 billion in new
revenues for the state. A fiscal management bill added another $779 million.
Legislative approval of a lottery is expected to add another $462 million.
Finally, another $50 million was added through a change in the Permanent
School Fund investment strategy, which will make additional short-term
earnings available to help fund public schools during the biennium.
The most important component of the tax bill was a major overhaul of the
State's franchise tax, which includes a new measure of business activity
referred to as "earned surplus." A part of the change was a lowering of the
tax rate on capital from $5.25 to $2.50 per $1,000. An additional surtax on
"earned surplus," which includes federal net corporate income and officers'
and directors' compensation of 4.5%, was added. Essentially, corporations pay
a tax on capital or a tax on "earned surplus," whichever is higher.
1992-93 Budget. When the Legislature convened in January 1991,
estimated revenues for the 1992-93 biennium fell considerably short of those
needed to fund the services currently provided by the state. Official
estimates placed the shortfall at $4.8 billion, with some saying the shortfall
could be more if all the spending needs for education, prisons, health and
human services were met. Work on the 1992-93 budget was delayed until a
summer special session.
In late June 1991, the Comptroller outlined in his first Texas
Performance Review (TPR) report, Breaking the Mold: New Ways to Govern Texas,
that he had found substantial general revenue related savings that could be
used to reduce the 1992-93 shortfall. The Comptroller also reported several
ways to reorganize state government in the areas of human services, natural
resources, and state licensing boards. After the release of the TPR report,
the Legislature was called into a special session to deal sequentially with
the reorganization of state government, the budget, taxes and fees. In mid-
August, the Legislature approved an all funds budgets of $60.1 billion and a
general revenue related budget of $34.6 billion and $3.4 billion in new
revenue measures to pay for it.
The new budget contained significant increases in funding for health and
human services, education, and public safety and corrections. The health and
human services budget increased by $5.1 billion because of increasing client
loads and expanding federal mandates in Medicaid and other areas. Funding for
education increased by $2.3 billion, which included complete funding for a
revised public school funding formula. Funding for public safety and
corrections increased by over $700 million because of increased prison
construction and related operating costs.
The $3.4 billion in new general revenue related revenues to finance the
budget came from several sources. A tax bill raised a total of $2.1 billion
for the state. A fiscal management bill added another $779 million.
Legislative approval of a lottery added another $462 million. Finally,
another $50 million was added through a change in the Permanent School Fund
investment strategy, which made additional short-term earnings available to
help fund public schools during the biennium.
The most important component of the tax bill was a major overhaul of the
state's franchise tax, which included a new measure of business activity
referred to as "earned surplus". A part of the change was a lowering of the
tax rate on capital from $5.25 to $2.50 per $1,000. An additional surtax on
"earned surplus", which includes federal net corporate income and officers'
and directors' compensation of 4.5 percent, was added. Essentially,
corporations pay tax on capital or tax on "earned surplus", whichever is
higher.
1994-95 Budget. The 73rd Legislature convened for its regular session
on January 12, 1993, and adjourned on May 31, 1993. For the 1994-95 biennium,
the Legislature approved a budget of approximately $70.1 billion, including
about $38.8 billion in general revenue related appropriations. General
revenue funding increased 10.6 percent over 1992-93, the smallest increase
since 1988-89. The shape of the budget reflects the pressures to prove an
adequate level of services without increasing taxes. The "no new taxes" them
placed lawmakers in the position of finding alternative ways to finance
increased funding. This was accomplished by incorporating proposals contained
in the Governor's report, Working for Texas, and the Comptroller's Texas
Performance Review report, Against the Grain: High-Quality Low-Cost Government
for Texas. Also, the state continued to expand its use of federal funding in
health, human services, and education programs. Federal funds are estimated
to reach $19.8 billion during the 1994-95 biennium.
In 1993, Texas became the first state to adopt a performance-based
budget, using a strategic planning budget system that ties funding levels to
results for every aspect of state government. The new system allows
legislators to analyze state agency needs in terms of outcomes.
With the repeal of one-time delays by the 74th Legislature, 1994-95
estimated general revenue related spending is $40.0 billion.
1996-97 Budget. When the 74th Legislature convened on January 10,
1995, state elected officials had already made a commitment to pass a state
budget without raising additional taxes. While this was an extremely
challenging task due to demands for additional funding for public education
and other governmental services, it became much easier with the Comptroller's
January 1995 release of the 1996-97 Biennial Revenue Estimate detailing
significant growth in state revenues and an estimated balance of $3.0 billion
from the 1994-95 biennium.
The Texas Constitution prohibits the State from levying ad valorem taxes
on property for general revenue purposes and limits the rate of such taxes for
other purposes to $.35 per $100 of valuation. The Constitution also permits
counties to levy, in addition to all other ad valorem taxes permitted by the
Constitution, ad valorem taxes on property within the county for flood control
and road purposes in an amount not to exceed $.30 per $100 of valuation. The
Constitution prohibits counties, cities and towns from levying a tax rate
exceeding $.80 per $100 of valuation for general fund and other specified
purposes.
With certain specific exceptions, the Texas Constitution generally
prohibits the creation of debt by or on behalf of the State unless the voters
of the State, by constitutional amendment, authorize the issuance of debt
(including general obligation indebtedness backed by the State's taxing power
and full faith and credit). In excess of $7.3 billion of general obligation
bonds have been authorized in Texas and almost $2.81 billion of such bonds are
currently outstanding. Of these, over 37% were issued by the Veterans' Land
Board.
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.
From the time Standard & Poor's Corporation began rating Texas general
obligation bonds in 1956 until early 1986, the firm gave such bonds its
highest rating, "AAA." In April 1986, in response to the State economic
problems, Standard & Poor's downgraded its rating of Texas general obligation
bonds to "AA+." Such rating was further downgraded in July 1987 to "AA."
Moody's Investors Service, Inc. has rated Texas bonds since prior to the Great
Depression. Moody's upgraded its rating of Texas general obligation bonds in
1962 from "Aa" to "Aaa", its highest rating, following the imposition of a
statewide sales tax by the Legislature. Moody's downgraded such rating to
"Aa" in March 1987. No prediction can be made concerning future changes in
ratings by national rating agencies of Texas general obligation bonds or
concerning the effect of such ratings changes on the market for such issues.
The same economic and other factors affecting the State of Texas and its
agencies also have affected cities, counties, school districts and other
issuers of bonds located throughout the State. Declining revenues caused by
the downturn in the Texas economy in the mid-1980s forced these various other
issuers to raise taxes and cut services to achieve the balanced budget
mandated by their respective charters or applicable State law requirements.
Standard & Poor's Corporation and Moody's Investors Service, Inc. assign
separate ratings to each issue of bonds sold by these other issuers. Such
ratings may be significantly lower than the ratings assigned by such rating
agencies to Texas general obligation bonds.
Litigation. The State is a party to various legal proceedings relating
to its operations and governmental functions but, unrelated to the Bonds or
the security for the Bonds. In the opinion of the State Comptroller of Public
Accounts, based on information provided by the State Attorney General, none of
such proceedings, if finally decided adversely to the State, would have a
materially adverse effect on the long-term financial condition of the State.
The Sponsor believes the information summarized above describes some of
the more significant aspects relating to the State Trust and Umbrella Series.
The sources of such information are the official statements of issuers
located in each of the respective States as well as other publicly available
documents. While the Sponsor has not independently verified this information,
they have no reason to believe that such information is not correct in all
material respects.
The Units
On the date of this Prospectus, each Unit in a State Trust and Umbrella
Series represented a fractional undivided interest in the principal and net
income of such State Trust and Umbrella Series as is set forth in the "Summary
of Essential Information" of Part A. If any Units are redeemed after the date
of this Prospectus by the Trustee, the principal amount of the Bonds in the
affected State Trust and Umbrella Series will be reduced by an amount
allocable to redeemed Units and the fractional undivided interest in the
affected State Trust and Umbrella Series represented by each unredeemed Unit
will be increased. Units will remain outstanding until redeemed upon tender
to the Trustee by any Unit holder, which may include the Sponsor, or until the
termination of the Trust Agreement. (See "Amendment and Termination of the
Trust Agreement--Termination".) References in this Prospectus to "Units" are
to Units which represented the fractional undivided interest indicated in the
"Summary of Essential Information" of Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are customarily offered
to investors on a "yield price" basis (as contrasted to a "dollar price"
basis) at the lesser of the yield as computed to maturity of the bonds or to
an earlier redemption date and which takes into account not only the interest
payable on the bonds but also the amortization or accretion to a specified
date of any premium over or discount from the par (maturity) value in the
bond's purchase price. Since Units of each State Trust and Umbrella Series
are offered on a dollar price basis, the rate of return on an investment in
Units of a State Trust and Umbrella Series is stated in terms of "Estimated
Current Return", computed by dividing the Net Annual Income per Unit by the
Public Offering Price per Unit. Any change in either the Net Annual Income
per Unit or the Public Offering Price per Unit will result in a change in the
Estimated Current Return. The Net Annual Income per Unit of a State Trust and
Umbrella Series is determined by dividing the total annual interest income to
such State Trust and Umbrella Series, less estimated annual fees and expenses
of the Trustee, the Sponsor, and the Evaluator, by the number of Units of such
State Trust and Umbrella Series outstanding. The Net Annual Income per Unit
of a State Trust and Umbrella Series will change as the income or expenses of
such State Trust and Umbrella Series changes and as Bonds are redeemed, paid,
sold or exchanged. For a statement of the Net Annual Income per Unit and the
Estimated Current Return based on the Public Offering Price, see Part A under
"Summary of Essential Information".
The Estimated Long-Term Return for a State Trust and Umbrella Series is
a measure of the return to the investor over the estimated life of a State
Trust and Umbrella Series. The Estimated Long-Term Return represents an
average of the yields to maturity (or call) of the Bonds in a State Trust and
Umbrella Series' portfolio calculated in accordance with accepted bond
practice and adjusted to reflect expenses and sales charges. In calculating
Estimated Long-Term Return, the average yield for a State Trust and Umbrella
Series' portfolio is derived by weighing each Bond's yield by the market value
of the Bond and by the amount of time remaining to the date to which the Bond
is priced. Once the average portfolio yield is computed, this figure is then
reduced to reflect estimated expenses and the effect of the maximum sales
charge paid by investors.
A State Trust and Umbrella Series may experience expenses and portfolio
charges different from those assumed in the calculation of Estimated Long-Term
Return. There thus can be no assurance that the Estimated Current Returns or
Estimated Long-Term Returns quoted for a State Trust and Umbrella Series will
be realized in the future. Since both Estimated Current Return and 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.
TAXES
The following discussion addresses only the tax consequences of Units
held as capital assets and does not address the tax consequences of Units held
by dealers, financial institutions or insurance companies.
In the opinion of Battle Fowler, LLP, special counsel for the Sponsor,
under existing law:
The Trust is not an association taxable as a corporation for Federal
income tax purposes, and income received by the Trust will be treated as the
income of the Unit holders ("Holders") in the manner set forth below.
Each Holder of Units of a Trust will be considered the owner of a pro
rata portion of each Bond in the State Trust and Umbrella Series under the
grantor trust rules of Sections 671-679 of the Internal Revenue Code of 1986,
as amended (the "Code"). In order to determine the face amount of a Holder's
pro rata portion of each Bond on the Date of Deposit, see "Aggregate
Principal" under "Portfolio of Securities". The total cost to a Holder of his
Units, including sales charges, is allocated to his pro rata portion of each
Bond, in proportion to the fair market values thereof on the date the Holder
purchases his Units, in order to determine his tax basis for his pro rata
portion of each Bond. In order for a Holder who purchases his Units on the
Date of Deposit to determine the fair market value of his pro rata portion of
each Bond on such date, see "Cost of Securities to Trust" under "Portfolio of
Securities".
Each Holder of Units of a Trust will be considered to have received the
interest on his pro rata portion of each Bond when interest on the Bond is
received by the State Trust and Umbrella Series. In the opinion of bond
counsel (delivered on the date of issuance of each Bond), such interest will
be excludable from gross income for regular Federal income tax purposes
(except in certain limited circumstances referred to below). Amounts received
by the State Trust and Umbrella Series pursuant to a bank letter of credit,
guarantee or insurance policy with respect to payments of principal, premium
or interest on a Bond in the State Trust and Umbrella Series will be treated
for Federal income tax purposes in the same manner as if such amounts were
paid by the issuer of the Bond.
The State Trust and Umbrella Series may contain Bonds which were
originally issued at a discount ("original issue discount"). The following
principles will apply to each Holder's pro rata portion of any Bond originally
issued at a discount. In general, original issue discount is defined as the
difference between the price at which a debt obligation was issued and its
stated redemption price at maturity. Original issue discount on a tax-exempt
obligation issued after September 3, 1982, is deemed to accrue as tax-exempt
interest over the life of the obligation under a formula based on the
compounding of interest. Original issue discount on a tax-exempt obligation
issued before July 2, 1982 is deemed to accrue as tax-exempt interest ratably
over the life of the obligation. Original issue discount on any tax-exempt
obligation issued during the period beginning July 2, 1982 and ending
September 3, 1982 is also deemed to accrue as tax-exempt interest over the
life of the obligation, although it is not clear whether such accrual is
ratable or is determined under a formula based on the compounding of interest.
If a Holder's tax basis for his pro rata portion of a Bond issued with
original issue discount is greater than its "adjusted issue price" but less
than its stated redemption price at maturity (as may be adjusted for certain
payments), the Holder will be considered to have purchased his pro rata
portion of the Bond at an "acquisition premium." A Holder's adjusted tax basis
for his pro rata portion of a Bond issued with original issue discount will
include original issue discount accrued during the period such Holder held his
Units. Such increases to the Holder's tax basis in his pro rata portion of the
Bond resulting from the accrual of original issue discount, however, will be
reduced by the amortization of any such acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond exceeds the
redemption price at maturity thereof (subject to certain adjustments), the
Holder will be considered to have purchased his pro rata portion of the Bond
with "amortizable bond premium". The Holder is required to amortize such bond
premium over the term of the Bond. Such amortization is only a reduction of
basis for his pro rata portion of the Bond and does not result in any
deduction against the Holder's income. Therefore, under some circumstances, a
Holder may recognize taxable gain when his pro rata portion of a Bond is
disposed of for an amount equal to or less than his original tax basis
therefor.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Bond is disposed of by the State Trust and Umbrella Series
for an amount greater or less than his adjusted tax basis. Any such taxable
gain or loss will be capital gain or loss, except that any gain from the
disposition of a Holder's pro rata portion of a Bond acquired by the Holder at
a "market discount" (i.e., where the Holder's original tax basis for his pro
rata portion of the Bond (plus any original issue discount which will accrue
thereon until its maturity) is less than its stated redemption price at
maturity) would be treated as ordinary income to the extent the gain does not
exceed the accrued market discount. Capital gains are generally taxed at the
same rate as ordinary income. However, the excess of net long-term capital
gains over net short-term capital losses may be taxed at a lower rate than
ordinary income for certain noncorporate taxpayers. A capital gain or loss is
long-term if the asset is held for more than one year and short-term if held
for one year or less. The deduction of capital losses is subject to
limitations. A Holder will also be considered to have disposed of all or part
of his pro rata portion of each Bond when he sells or redeems all or some of
his Units.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for his pro rata share of fees and expenses of the
State Trust and Umbrella Series because the fees and expenses are incurred in
connection with the production of tax-exempt income. Further, if borrowed
funds are used by a Holder to purchase or carry Units of the State Trust and
Umbrella Series, interest on such indebtedness will not be deductible for
Federal income tax purposes. In addition, under rules used by the Internal
Revenue Service, the purchase of Units may be considered to have been made
with borrowed funds even though the borrowed funds are not directly traceable
to the purchase of Units. Similar rules may be applicable for state tax
purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on the
tax-exempt status of the Bonds. It is impossible to predict whether any
legislation in respect of the tax status of interest on such obligations may
be proposed and eventually enacted at the Federal or state level.
The foregoing discussion relates only to Federal and certain aspects of
New York State and City income taxes. Depending on their state of residence,
Holders may be subject to state and local taxation and should consult their
own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will be
a preference item for purposes of the alternative minimum tax ("AMT"). The
Sponsor believe that interest (including any original issue discount) on the
Bonds should not be subject to the AMT for individuals or corporations under
this rule. A corporate Holder should be aware, however, that the accrual or
receipt of tax-exempt interest not subject to the AMT may give rise to an
alternative minimum tax liability (or increase an existing liability) because
the interest income will be included in the corporation's "adjusted current
earnings" for purposes of the adjustment to alternative minimum taxable income
required by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section 59A of the
Code, which is based on an alternative minimum taxable income.
In addition, interest on the Bonds must be taken into consideration in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an investment
in Units.
At the time of issuance of each Bond, an opinion relating to the
validity of the Bond and to the exemption of interest thereon from regular
Federal income taxes was or will be rendered by bond counsel. Neither the
Sponsor nor Battle Fowler LLP nor any of the special counsel for state tax
matters have made or will make any review of the proceedings relating to the
issuance of the Bonds or the basis for these opinions. The tax exemption is
dependent upon the issuer's (and other users') compliance with certain ongoing
requirements, and the opinion of bond counsel assumes that these requirements
will be complied with. However, there can be no assurance that the issuer (and
other users) will comply with these requirements, in which event the interest
on the Bond could be determined to be taxable retroactively to the date of
issuance.
In the case of certain of the Bonds, 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 such Bonds, or persons related
thereto, for periods while such Bonds are held by such a user or related
person, will not be exempt from regular Federal income taxes, although
interest on such Bonds received by others would be exempt from regular Federal
income taxes. "Substantial user" is defined under U.S. Treasury Regulations to
include only a person whose gross revenue derived with respect to the
facilities financed by the issuance of bonds is more than 5% of the total
revenue derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" are defined to include certain related natural persons, affiliated
corporations, partners and partnerships. Similar rules may be applicable for
state tax purposes.
After the end of each calendar year, the Trustee will furnish to each
Holder an annual statement containing information relating to the interest
received by the State Trust and Umbrella Series on the Bonds, the gross
proceeds received by the Trust from the disposition of any Bond (resulting
from redemption or payment at maturity of any Bond or the sale by the State
Trust and Umbrella Series of any Bond), and the fees and expenses paid by the
State Trust and Umbrella Series. The Trustee will also furnish annual
information returns to each Holder and to the Internal Revenue Service.
Holders are required to report to the Internal Revenue Service the amount of
tax-exempt interest received during the year.
The description of Federal tax consequences applies separately for each
State Trust and Umbrella Series. Below, arranged alphabetically by state, is a
description of certain state and local tax consequences for residents of the
state and locality for which such State Trust is named.
California Trust
In the opinion of LeBoeuf, Lamb, Greene & MacRae LLP, Los Angeles,
California, special counsel on California tax matters, under existing law:
The California Trust is not taxable as a corporation for California tax
purposes. Interest on the underlying Securities owned by the California Trust
that is exempt from personal income taxes imposed by the State of California
will retain its status as interest exempt from personal income tax imposed by
the State of California when subject to tax in the hands of the Unit Holders.
Each Unit Holder of the California Trust will recognize gain or loss on
the sale, redemption or other disposition of Securities within the California
Trust, or on the sale or other disposition of Unit Holders interest in the
California Trust. As a result, a Unit Holder may incur California tax
liability upon the sale, redemption or other disposition of Securities within
the California Trust or upon the sale or other disposition of his or her
Units.
The exemption of interest income with respect to Securities within the
California Trust under the California personal income tax law does not
necessarily result in exemption under the income tax laws of the federal
government or any other state or political subdivision. The laws of state and
local taxing authorities vary with respect to the taxation of such obligations
and each Unit Holder should consult his or her own tax advisor as to the tax
consequences of his or her investment in the California Trust under other
applicable federal, state and local tax laws.
Connecticut Trust
On the Date of Deposit for each Connecticut Trust, Messrs. Day, Berry
and Howard, special Connecticut counsel on Connecticut tax matters, rendered
an opinion which was based explicitly on the opinion of Messrs. Cahill Gordon
& Reindel regarding Federal income tax matters, under then existing
Connecticut law substantially to the effect that:
The Connecticut Trust is not subject to the Connecticut corporation
business tax or any other tax on or measured by net income imposed by the
State of Connecticut;
Interest income of the Connecticut Trust from obligations issued by or
on behalf of the State of Connecticut, any political subdivision thereof, or
any agency, instrumentality, authority, or district of either (a "Connecticut
Issuer"), or from obligations of United States territories or possessions and
their public authorities the interest on which Federal law would prohibit
Connecticut from taxing if received directly by a Unit holder from the issuer
thereof, is not taxable under the Connecticut income tax on the Connecticut
taxable income of individuals, trusts and estates (the "Connecticut Income
Tax"), when received by the Connecticut Trust or when distributed by it to
such a Unit holder;
Gains and losses recognized by a Unit holder for Federal income tax
purposes upon the sale, redemption, or other disposition of Units of the
Connecticut Trust held by a Unit holder are taken into account as gains or
losses, respectively, for purposes of the Connecticut Income Tax, except that,
in the case of a unit holder holding a Unit of the Connecticut Trust as a
capital asset, such gains and losses recognized upon the sale or exchange of a
Connecticut Bond held by the Connecticut Trust are excluded from gains and
losses taken into account for purposes of such tax and no opinion is expressed
as to the treatment for purposes of such tax of gains and losses recognized
upon the maturity or redemption of a Connecticut Bond held by the Connecticut
Trust or, to the extent attributable to Connecticut Bonds, of gains and losses
recognized upon the redemption, sale, or other disposition by a Unit holder of
a Unit of the Connecticut Trust held by him;
The portion of any interest or capital gain of the Connecticut Trust
that is allocable to a Unit holder that is subject to the Connecticut
corporation business tax is includible in the gross income of such Unit holder
for purposes of such tax; and
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 includible
in his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
The Connecticut Income Tax was enacted in August 1991. Generally, under
this tax as enacted, a Unit holder recognizes gain or loss upon the maturity,
redemption, sale, or other disposition by the Connecticut Trust of an
obligation held by it, or upon the redemption, sale, or other disposition of a
Unit of the Connecticut Trust held by the Unit holder, to the same extent that
gain or loss is recognized by the Unit holder thereupon for Federal income tax
purposes. However, on June 19, 1992, Connecticut legislation was adopted that
provides that gains and losses from the sale or exchange of Connecticut Bonds
held as capital assets will not be taken into account for purposes of the
Connecticut Income Tax for taxable years starting on or after January 1, 1992.
It is not clear whether this provision would apply to gain or loss recognized
by a Unit holder upon the maturity or redemption of a Connecticut Bond held by
the Connecticut Trust or, to the extent attributable to Connecticut Bonds held
by the Connecticut Trust, to gain or loss recognized by a Unit holder upon the
redemption, sale, or other disposition of a Unit of the Connecticut Trust held
by the Unit holder. Unit holders are urged to consult their own tax advisers
in this regard.
By legislation adopted May 19, 1993, as amended by legislation adopted
June 25, 1993, Connecticut enacted the net Connecticut minimum tax,
retroactive to taxable years beginning on or after January 1, 1993, which is
applicable to individuals, trusts, and estates that are subject to the Federal
alternative minimum tax. Income of the Connecticut Trust that is subject to
the Federal alternative minimum tax in the case of such Unit holders may also
be subject to the net Connecticut minimum tax.
Florida Trust
On the Date of Deposit for each Florida Trust, Messrs. Carlton, Fields,
Ward, Emmanuel, Smith & Cutler, P.A., special Florida counsel on Florida tax
matters, rendered an opinion, under then existing law substantially to the
effect that:
The Florida Trust will not be subject to the Florida income tax imposed
by Chapter 220 so long as the Florida Trust transacts no business in Florida
or has no income subject to federal income taxation. In addition, political
subdivisions of Florida do not impose any income taxes.
Non-Corporate Unit holders will not be subject to any Florida income
taxation on income realized by the Florida Trust. Corporate Unit holders with
commercial domiciles in Florida will be subject to Florida income taxation on
income realized by the Trust. Other corporate Unit holders will be subject to
Florida income taxation on income realized by the Florida Trust only to the
extent that the income realized is other than "non-business income" as defined
by Chapter 220.
Florida Trust Units will be subject to Florida estate tax if owned by
Florida residents and may be subject to Florida estate tax if owned by other
decedents at death. 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 the Florida sales or use tax.
The Florida Trust will not be subject to Florida intangible personal
property tax. In addition, Units of the Florida Trust will not be subject to
Florida intangible personal property tax.
The issuance and sale of the Units by the Florida Trust will not subject
either the Florida Trust or the Unit holders to the Florida documentary stamp
tax.
The transfer of Units by a Unit holder will not be subject to the
Florida documentary stamp tax.
In the event Bonds issued by the government of Puerto Rico, the
government of Guam, or the government of the United States Virgin Islands are
included in the Florida Trust, the opinions expressed above will be unchanged.
For the purposes of the foregoing opinion, the following terms have the
following meanings:
(a) "Non-Corporate Unit holder" -- a Unit holder of the Florida Trust
who is an individual not subject to the Florida state income tax on
corporations under Chapter 220, Florida Statutes (1989 and Supp. 1990) as
amended by Chapter 91-112, Laws of Florida ("Chapter 220").
(b) "Corporate Unit holder" -- a Unit holder of the Florida Trust that
is a corporation subject to the Florida state income tax on corporations under
Chapter 220.
Maryland Trust
Messrs. Venable, Baetjer and Howard acted as special Maryland counsel to
Maryland Trust 75 and all prior Maryland Trusts. Messrs. Weinberg & Green
acted as special Maryland counsel to Maryland Trust 76 and all subsequent
Maryland Trusts. On the Date of Deposit for each Maryland Trust, the
respective counsel to the Trusts rendered an opinion for Maryland State and
local income tax purposes and under then existing law, substantially to the
effect that:
The Maryland Trust will not be treated as an association taxable as a
corporation, and the income of the Maryland Trust will be treated as the
income of the Holders. The Maryland Trust is not a "financial institution"
subject to the Maryland Franchise Tax measured by net earnings. The Maryland
Trust is not subject to Maryland property taxes imposed on the intangible
personal property of certain corporations.
Except as described below in the case of interest paid on private
activity bonds constituting a tax preference for federal income tax purposes,
a Holder will not be required to include such Holder's pro-rata share of the
earnings of, or distributions from, the Maryland Trust in such Holder's
Maryland taxable income to the extent that such earnings or distributions
represent interest excludable from gross income for federal income tax
purposes received by the Maryland Trust on obligations of the State of
Maryland, the Government of Puerto Rico, or the Government of Guam and their
respective political subdivisions and authorities. Interest on Debt
Obligations is subject to the Maryland Franchise Tax imposed on "financial
institutions" and measured by net earnings.
In the case of taxpayers who are individuals, Maryland presently imposes
an income tax on items of tax preference with reference to such items as
defined in the Internal Revenue Code, as amended, for purposes of calculating
the federal alternative minimum tax. Interest paid on certain private
activity bonds is a preference item for purposes of calculating the federal
alternative minimum tax. Accordingly, if the Maryland Trust holds such bonds,
50% of the interest on such bonds in excess of a threshold amount is taxable
by Maryland.
A Holder will recognize taxable gain or loss, except in the case of an
individual Holder who is not a Maryland resident, when the Holder disposes of
all or part of such Holder's pro-rata portion of the Debt Obligations in the
Maryland Trust. A Holder will be considered to have disposed of all or part
of such Holder's pro-rata portion of each Debt Obligation when the Holder
sells or redeems all or some of such Holder's Units. A Holder will also be
considered to have disposed of all or part of such Holder's pro-rata portion
of a Debt Obligation when all or part of the Debt Obligation is disposed of by
the Maryland Trust or is redeemed or paid at maturity. Gain included in the
gross income of Holders for federal income tax purposes is, however,
subtracted from income for Maryland income tax purposes to the extent that the
gain is derived from the disposition of Debt Obligations issued by the State
of Maryland and its political subdivisions. Profits realized on the sale or
exchange of Debt Obligations are subject to the Maryland Franchise Tax imposed
on "financial institutions" and measured by net earnings.
Units of the Maryland Trust will be subject to Maryland inheritance and
estate tax only if held by Maryland residents.
Neither the Debt Obligations nor the Units will be subject to Maryland
personal property tax.
The sales of Units in Maryland or the holding of Units in Maryland will
not be subject to Maryland Sales or Use Tax.
Massachusetts Trust
On the Date of Deposit for each Massachusetts Trust, Messrs. Palmer and
Dodge, special Massachusetts counsel on Massachusetts tax matters, rendered an
opinion, which is based explicitly on the opinion of Messrs. Cahill Gordon &
Reindel regarding Federal income tax matters, under then existing
Massachusetts law substantially to the effect that:
Tax-exempt interest for Federal income tax purposes received by or
through the Massachusetts Trust, or by or through a Previous Trust in which
the Massachusetts Trust owns an interest, on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, by the government of Puerto Rico or by its
authority or by the government of Guam or by its authority, will not result in
a Massachusetts income tax liability for the Massachusetts Trust or for Unit
holders who are subject to Massachusetts income taxation under Massachusetts
General Laws, Chapter 62.
Capital gain and capital loss realized by the Massachusetts Trust and
included in the Federal gross income of Unit holders who are subject to
Massachusetts income taxation under General Laws, Chapter 62 will be included
as capital gains and losses in the Unit holder's Massachusetts gross income,
except where capital gain is specifically exempted from income taxation under
the Massachusetts statute authorizing issuance of the obligations held by the
Massachusetts Trust or held by the Previous Trusts in which the Massachusetts
Trust owns an interest, and will not result in a Massachusetts income tax
liability for the Massachusetts Trust.
Gains and losses realized on sale or redemption of Units by Unit holders
who are subject to Massachusetts income taxation under Massachusetts General
Laws, Chapter 62 will be includible in their Massachusetts gross income.
Minnesota Trust
On the Date of Deposit for each Minnesota Trust, Messrs. Dorsey &
Whitney, a partnership including professional corporations, special Minnesota
counsel on Minnesota tax matters, rendered an opinion under then existing law
substantially to the effect that:
The Minnesota Trust is not an association taxable as a corporation for
purposes of Minnesota income taxation. Minnesota taxable net income is, with
certain modifications, determined with reference to federal taxable income.
Each Unit holder of the Minnesota Trust will be treated as the owner of a pro
rata portion of the Minnesota Trust (including the ownership interest of the
Minnesota Trust in property comprising previously issued Series) for purposes
of Minnesota income taxation, and the income of the Minnesota Trust will be
treated as the income of the Unit holders under Minnesota law. Interest on
Bonds that would be excluded from Minnesota taxable net income when paid
directly to an individual, estate or trust will be excluded from Minnesota
taxable net income of Unit holders that are individuals, estates or trusts
when received by the Minnesota Trust (or by a previously issued Series in
which the Minnesota Trust has an ownership interest) and when distributed to
such Unit holders. Interest on Bonds that would be included in Minnesota
"alternative minimum taxable income" when paid directly to a noncorporate
taxpayer will be included in Minnesota "alternative minimum taxable income" of
Unit holders that are individuals, estates or trusts for purposes of the
Minnesota alternative minimum tax.
Any such Unit holder that is subject to Minnesota income taxation will
realize taxable gain or loss when the Minnesota Trust (or a previously issued
Series in which the Minnesota Trust has an ownership interest) disposes of a
Bond or an ownership interest in a previously issued Series (whether by sale,
exchange, redemption or payment at maturity) or when the Unit holder redeems
or sells Units at a price that differs from original cost, as adjusted for
amortization of bond premium and other basis adjustments. The total tax cost
of each Unit to a Unit holder is allocated proportionately (by value) among
each of the Bonds held in the Minnesota Trust. Tax cost reduction
requirements relating to amortization of bond premium may, under some
circumstances, result in the realization of taxable gain by Unit holders when
their Units (or underlying Bonds) are sold or redeemed for an amount equal to
or less than their original cost. Minnesota has repealed the favorable
treatment of capital gains, but preserved limitations on the deductibility of
capital losses.
Interest income attributable to Bonds that are "industrial development
bonds" or "private activity bonds," as such terms are defined in the Internal
Revenue Code, will be taxable under Minnesota law to a Unit holder that 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 Unit holder.
Minnesota law does not permit a deduction for interest on indebtedness
incurred or continued by individuals, estates and trusts to purchase or carry
Units. Minnesota law also restricts the deductibility of other expenses
allocable to Units.
With limited exceptions, interest on Bonds in the Minnesota Trust will
be included in taxable income for purposes of the Minnesota franchise tax on
corporations and financial institutions. No opinion is expressed as to other
Minnesota tax effects on Unit holders that are corporations or financial
institutions.
The 1995 Minnesota Legislature has enacted a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota income
tax purposes if a court determines that Minnesota's exemption of such interest
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is so included.
This provision applies to taxable years that begin during or after the
calendar year in which any such court decision becomes final, irrespective of
the date on which the obligations were issued. A Trust is not aware of any
judicial decision holding that a state's exemption of interest on its own
bonds or those of its political subdivisions or Indian tribes, but not of
interest on the bonds of other states or their political subdivisions or
Indian tribes, unlawfully discriminates against interstate commerce or
otherwise contravenes the United States Constitution. Nevertheless, a Trust
cannot predict the likelihood that interest on the Minnesota Bonds held by a
Trust would become taxable under this Minnesota statutory provision.
Missouri Trust
Messrs. Bryan, Cave, McPheeters & McRoberts acted as special Missouri
counsel to Missouri Trust 75 and all prior Missouri Trusts. Messrs. Blackwell
Sanders Matheny Weary & Lombardi acted as special Missouri counsel to Missouri
Trust 76 and all subsequent Missouri Trusts. On the Date of Deposit for each
Missouri Trust, the respective counsel to the Trusts rendered an opinion under
then existing law substantially to the effect that:
For Missouri income tax purposes under Chapters 143 of the Missouri
Revised Statutes, the Missouri Trust will be treated as having the same
organizational characteristics as it is accorded for Federal Income Tax
purposes. In reliance upon the opinion of Cahill Gordon & Reindel as
described above, we are therefore of the opinion that the Missouri Trust is
not an association taxable as a corporation under Missouri law, that each Unit
holder will be treated as the owner of a proportionate, undivided interest in
the Missouri Trust, and the income of the Missouri Trust will be treated as
the income of such Unit holders.
Under Missouri law, interest income received by the Missouri Trust from
(i) obligations of the State of Missouri, its political subdivisions and
authorities, or (ii) bonds issued by the Government of Puerto Rico, or by its
authority, and which is excluded from Federal gross income by Federal law or
on which Missouri is prohibited by Federal law from imposing an income tax,
will be excluded from the Missouri taxable income of the Unit holders to the
extent that the interest is exempt from income tax under Missouri law when
received by the Missouri Trust.
Gains and losses from the Missouri Trust treated for Federal Income Tax
purposes as the gains and losses of the Unit holders, to the extent included
in Federal gross income, will be included in the Missouri taxable income of
Unit holders who are individuals, except to the extent that (i) such Unit
holders are non-residents of Missouri and (ii) such gains and losses of such
non-resident Unit holders are derived from sources wholly without Missouri.
Such gains or losses, to the extent included in determining the Federal
taxable income of a corporate Unit holder after Missouri adjustments, are
allocated or apportioned to Missouri in order to determine Missouri taxable
income.
Nebraska Trust
In the opinion of Kutak, Rock, Omaha, Nebraska, special counsel on
Nebraska's tax matters, with respect to the Nebraska Trust, under existing law
applicable to individuals, corporations, estates and trusts who are Nebraska
residents:
1. under Nebraska income tax law, each Unitholder of the Nebraska
Trust will be treated as the owner of a pro rata portion of the Nebraska Trust
and income of the Nebraska Trust will be treated as income of the respective
Unitholders. Interest on Securities in the Nebraska Trust that is exempt from
personal and corporate income tax under the income tax law of the State of
Nebraska when received by such Nebraska Trust will retain its tax-exempt
status when distributed to the Unitholders.
2. Each Unitholder of the Nebraska Trust will have a taxable event
when the Nebraska Trust disposes of a security (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or sells its
certificates. For purposes of determining gain or loss, the total tax cost of
each Unit to a Unitholder is allocated among the underlying Securities(in
accordance with the proportion of the Nebraska Trust's assets comprised by
such Security), in order to determine the Unitholder's per Unit tax cost for
each Security.
3. Title 48 U.S.C. Section 745 provides that bonds issued by the
Government of Puerto Rico, or by its authority, shall be exempt from taxation
by any state or by any county, municipality or other municipal subdivision of
any state. Accordingly, the interest on any such obligations held by the
Nebraska Trust would be exempt from the Nebraska corporate and individual
income taxes applicable to resident corporations, resident trusts, residents
estates and resident individuals.
4. Upon the death of a Unitholder, the value of the Unit will be
included in the estate of such deceased Unitholder and will be subject to
Nebraska inheritance tax.
New Jersey Trust
On the Date of Deposit for each New Jersey Trust, Messrs. Shanley &
Fisher, P.C., special New Jersey counsel on New Jersey tax matters, rendered
an opinion under then existing law substantially to the effect that:
The proposed activities of the New Jersey Trust will not cause it to be
subject to the New Jersey Corporation Business Tax Act.
The income of the New Jersey Trust will be treated as the income of
individuals, estates and trusts who are the Holders of Units of the New Jersey
Trust for purposes of the New Jersey Gross Income Tax Act, and interest which
is exempt from tax under the New Jersey Gross Income Tax Act when received by
the New Jersey Trust will retain its status as tax-exempt in the hands of such
Unit Holders. Gains arising from the sale or redemption by a Holder of his
Units or from the sale, exchange, redemption or payment at maturity of a Bond
by the New Jersey Trust are exempt from taxation under the New Jersey Gross
Income Tax Act (P.L. 1976 C. 47), as enacted and construed on the date hereof,
to the extent such gains are attributable to Bonds, the interest on which is
exempt from tax under the New Jersey Gross Income Tax Act. Any loss realized
on such disposition may not be utilized to offset gains realized by such Unit
Holder on the disposition of assets the gain on which is subject to the New
Jersey Gross Income Tax Act.
Units of the New Jersey Trust may be subject, in the estates of New
Jersey residents, to taxation under the Transfer Inheritance Tax Law of the
State of New Jersey.
North Carolina Trust
In the opinion of Messrs. Petree Stockton, special North Carolina
counsel on North Carolina tax matters, with respect to the North Carolina
Trust, under then existing law applicable to persons who are North Carolina
residents:
The State of North Carolina imposes a tax upon the taxable income
of individuals, corporations, estates, and trusts. Nonresident
individuals are generally taxed only on income from North Carolina
sources. Corporations doing business within and without North Carolina
are entitled to allocate and apportion their income if they have income
from business activity which is taxable in another state. The mere
ownership of Units will not subject a nonresident Unit holder to the tax
jurisdiction of North Carolina.
Counsel has been advised that for Federal income tax purposes the
North Carolina Trust will be a grantor trust and not an association
taxable as a corporation. Upon this assumption, counsel is of the
opinion that the North Carolina Trust will be treated as a grantor trust
for North Carolina income tax purposes and not as an association taxable
as a corporation. Each participant in the North Carolina Trust must
report his share of the taxable income of the North Carolina Trust.
The calculation of North Carolina taxable income of an individual,
corporation, estate or trust begins with Federal taxable income.
Certain modifications are specified, but no such modification requires
the addition of interest on the obligations of the State of North
Carolina, its political subdivisions, or nonprofit educational
institutions organized or chartered under the laws of North Carolina.
As a general rule, gain (or loss) from the sale of obligations
held by the North Carolina Trust (whether as a result of the sale of
such obligations by the North Carolina Trust or as a result of the sale
of a unit by a Unit holder) is includible (or deductible) in the
calculation of the Unit holder's North Carolina taxable income. Under
the language of certain enabling legislation such as the North Carolina
Hospital Authorities Act, the North Carolina Health Care Facilities
Finance Act, the North Carolina Housing Finance Agency Act, the act
establishing the North Carolina State Ports Authority, the North
Carolina Joint Municipal Electric Power and Energy Act, the act
authorizing the organization of business development corporations, the
North Carolina Higher Education Facilities Finance Act, the North
Carolina Agricultural Finance Act, and the act establishing the North
Carolina Solid Waste Management Loan Program, profits made on the sale
of obligations issued by authorities created thereunder are made
expressly exempt from North Carolina income taxation. The exemption of
such profits from North Carolina income taxation does not require a
disallowance of any loss incurred on the sale of such obligations in the
calculation of North Carolina income taxes.
For Federal income tax purposes, interest on North Carolina
obligations that would otherwise be exempt from taxation may in certain
circumstances be taxable to the recipient. North Carolina law provides
that the interest on North Carolina obligations shall maintain its
exemption from North Carolina income taxation notwithstanding that such
interest may be subject to federal income taxation.
North Carolina imposes a tax on persons for the privilege of
ownership of items of intangible personal property. The tax is
generally imposed at the rate of $.25 per $100 of the value of each item
of intangible personal property at December 31 of each year. Bonds and
other evidences of indebtedness of the State of North Carolina,
political subdivisions of the State, agencies of such governmental
units, or nonprofit educational institutions organized or chartered
under the laws of North Carolina are exempt from the intangible personal
property tax.
This exemption does not extend to units of ownership of an
investment trust that owns obligations which would be exempt from the
intangible personal property tax if owned directly by the Unit holders
of the investment trust. However, the North Carolina Department of
Revenue by regulation has announced that the taxable value of units of
ownership in an investment trust may be reduced by a percentage equal to
the ratio of direct obligations of the United States Government and
direct obligations of the State of North Carolina and its political
subdivisions held in the trust on December 31. Thus, if the assets then
held by the North Carolina Trust consist entirely of direct obligations
of the United States Government and direct obligations of the State of
North Carolina and its political subdivisions, the entire value of the
North Carolina Trust Units will not be subject to the intangible
personal property tax under this regulation.
North Carolina imposes a tax on transfers which occur by reason of
death or by gift. Transfers of obligations of North Carolina, its
political subdivisions, agencies of such governmental units, or
nonprofit educational institutions organized or chartered under the laws
of North Carolina are not exempt from the North Carolina inheritance and
gift taxes.
48 U.S.C. 745 provides that bonds issued by the Government of
Puerto Rico, or by its authority, shall be exempt from taxation by any
State or by any county, municipality, or other municipal subdivision of
any State. Accordingly, interest on any such obligations held by the
North Carolina Trust would be exempt from the North Carolina corporate
and individual income taxes. The North Carolina Department of Revenue
takes the position that gains from the sale or other disposition of such
obligations are subject to the North Carolina corporate and individual
income taxes. Such obligations would be treated as obligations of the
United States for purposes of the intangible personal property tax and
the application of such tax to units of ownership in an investment
trust.
Ohio Trust
On the Date of Deposit for each Ohio Trust, Squire, Sanders & Dempsey,
special Ohio counsel on Ohio tax matters, rendered an opinion under then
existing law substantially to the effect that:
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 Unit
holders for purposes of the Ohio personal income tax, Ohio school district
income taxes, Ohio municipal income taxes and the Ohio corporation franchise
tax in proportion to the respective interest therein of each Unit holder.
Interest on Ohio Obligations held by the Ohio Trust is exempt from the
Ohio personal income tax and Ohio school district income taxes, and is
excluded from the net income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unit holders.
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 Ohio
school district income taxes, and are excluded from the net income base of the
Ohio corporation franchise tax when distributed or deemed distributed to Unit
holders.
Except as stated in the next sentence, Ohio municipalities may not
impose income taxes on interest on or profit made on the sale of intangible
property, including Ohio Obligations. The municipalities of Indian Hill,
Wickliffe and Wyoming are authorized by state law to, and do, impose a tax on
certain intangible income; however, it is not clear that such municipalities
may tax interest on or profit made on the sale, exchange or other disposition
of Ohio Obligations. In addition, specific Ohio statutes authorizing the
issuance of certain Ohio Obligations generally provide that the interest on
and, in some cases, gain or profit from the sale or other disposition of such
Ohio Obligations are exempt from all taxation in the State. Interest on and
gain or profit from the sale or other disposition of obligations issued
pursuant to such statutes are exempt from all Ohio municipal income taxes.
Pennsylvania Trust
On the Date of Deposit for each Pennsylvania Trust, Messrs. Drinker
Biddle & Reath, special Pennsylvania counsel on Pennsylvania tax matters,
rendered an opinion under then existing law substantially to the effect that:
Units evidencing fractional undivided interests in the Pennsylvania
Trust are not subject to any of the personal property taxes presently in
effect in Pennsylvania to the extent that the Trust is comprised of bonds
issued by the Commonwealth of Pennsylvania, any public authority, commission,
board or other agency created by the Commonwealth of Pennsylvania or any
public authority created by any such political subdivision ("Pennsylvania
Bonds"). The taxes referred to include the County Personal Property Tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as
amended, and the additional personal property taxes imposed on Pittsburgh
residents by the School District of Pittsburgh under the Act of June 20, 1947,
P.L. 733, as amended, and by the City of Pittsburgh under Ordinance No. 599 of
December 28, 1967. The portion, if any, representing Pennsylvania Bonds held
by Units in a Prior Trust are also not subject to such taxes. The portion, if
any, of such Units representing bonds or other obligations issued by the
Government of Guam or by its authority, bonds issued by the Government of
Puerto Rico or by its authority, and bonds issued by the Government of the
Virgin Islands or by a municipality thereof (collectively, "Possession Bonds")
is not expressly exempt from taxation under the foregoing Pennsylvania Acts.
However, such bonds are expressly relieved from state taxation by United
States statutes. Therefore, Units in the Pennsylvania Trust are not subject
to Personal Property Tax to the extent that the Trust is comprised of
Possession Bonds. Pennsylvania Trust Units may be subject to tax in the
estate of a resident decedent under the Pennsylvania inheritance and estate
taxes.
Income received by a Unit holder attributable to interest realized by
the Pennsylvania Trust from Pennsylvania Bonds, Possession Bonds, and Prior
Trust Units is not taxable to individuals, estates or trusts under the
Personal Income Tax imposed by Article III of the Tax Reform Code of 1971; to
corporations under the Corporate Net Income tax imposed by Article IV of the
Tax Reform Code of 1971; nor to individuals under the Philadelphia School
District Net Income Tax ("School District Tax") imposed on Philadelphia
resident individuals under the authority of the Act of August 9, 1963, P.L.
640.
Income received by a Unit holder attributable to gain on the sale or
other disposition by the Pennsylvania Trust of Pennsylvania Bonds, Possession
Bonds and Prior Trust Units is not taxable to individuals, estates or trusts
under the Personal Income Tax. Nor is such gain taxable under the Corporate
Net Income Tax or under the School District Tax, except that gain on the sale
or other disposition of Possession Bonds and that portion of Prior Trust Units
attributable to such investments held for six months or less may be taxable
under the School District tax.
To the extent that gain on the disposition of a Unit represents gain
realized on Pennsylvania or Possession Bonds held by the Pennsylvania Trust or
held by Prior Trust Units, such gain may be subject to the Personal Income Tax
and Corporate Net Income Tax. Such gain may also be subject to the School
District Tax, except that gain realized with respect to a Unit held for more
than six months is not subject to the school District Tax.
No opinion is expressed regarding the extent, if any, to which Units, or
interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax).
Texas Trust
The opinion of Akin, Gump, Strauss, Hauer & Feld, special Texas counsel
on Texas tax matters with respect to the Texas Trust, given on the Date of
Deposit under then existing Texas law which is subject to change includes the
following:
(1) Neither the State nor any political subdivision of the State
currently imposes an income tax on individuals. Therefore, no portion of any
distribution received by an individual Unitholder of the Trust in respect of
his Units, including a distribution of the proceeds of insurance in respect of
such Units, is subject to income taxation by the State or any political
subdivision of the State;
(2) Except in the case of certain transportation businesses, savings
and loan associations and insurance companies, no Unit of the Trust is taxable
under any property tax levied in the State;
(3) The "inheritance tax" of the State, imposed upon certain transfers
of property of a deceased resident individual Unitholder, may be measured in
part upon the value of Units of the Trust included in the estate of such
Unitholder; and
(4) With respect to any Unitholder which is subject to the State
corporate franchise tax, Units in the Trust held by such Unitholder, and
distributions received thereon, will be taken into account in computing the
"taxable capital" of the Unitholder allocated to the State, one of the bases
by which such franchise tax is currently measured (the other being a
corporation's "net capital earned surplus," which is, generally, its net
corporate income plus officers and directors income).
EXPENSES AND CHARGES
Initial Expenses. At no cost to the State Trust and Umbrella Series,
the Sponsor has borne all the expenses of creating and establishing each
Multistate Trust or Umbrella Series with a Date of Deposit prior to June 22,
1995, including the cost of the initial preparation and execution of the Trust
Agreement, initial preparation and printing of the certificates for Units, the
fees of the Evaluator during the initial public offering, legal expenses,
advertising and selling expenses and other out-of-pocket expenses. All or
some portion of the expenses incurred in establishing each Multistate Trust or
Umbrella Series with a Date of Deposit on or after June 22, 1995, including
the cost of the initial preparation of documents relating to a Trust, Federal
and State registration fees, the initial fees and expenses of the Trustee,
legal expenses and any other out-of-pocket expenses have been paid by the
Trust, and amortized over five years. The costs of maintaining the secondary
market, such as printing, legal and accounting, will be borne by the Sponsor
except as otherwise provided in the Trust Agreement.
Trustee's, Sponsor's and Evaluator's Fees--The Trustee will receive for
its ordinary recurring services to each Multistate Trust or Umbrella Series an
annual fee in the amount set forth in the "Summary of Essential Information"
of Part A. For a discussion of the services performed by the Trustee pursuant
to its obligations under the Trust Agreement, see "Rights of Unit Holders".
The Trustee will receive the benefit of any reasonable cash balances in the
Interest and Principal accounts.
The Portfolio supervision fee (the "Supervision Fee"), which is earned
for Portfolio supervisory services is based upon the greatest face amount of
Bonds in the Trust at any time during the calendar year with respect to which
the fee is being computed. The Supervision Fee has been incurred by
Portfolios which have come into existence after August 14, 1991, beginning
with Series 345, initially, and each Series, in existence, thereafter.
The Supervision Fee, which is not to exceed the amount set forth in Part
A--"Summary of Essential Information", may exceed the actual costs of
providing Portfolio supervisory services for such Trust, but at no time will
the total amount the Sponsor receives for Portfolio supervisory services
rendered to all series of Tax Exempt Securities Trust in any calendar year
exceed the aggregate cost to them of supplying such services in such year. In
addition, the Sponsor may also be reimbursed for bookkeeping and other
administrative services provided to the Trust in amounts not exceeding their
costs of providing these services.
The Evaluator determines the aggregate bid price of the underlying
securities on a daily basis at a fee in the amount set forth under Part A,
"Summary of Essential Information," for each evaluation of the Bonds in a
State Trust and Umbrella Series. For a discussion of the services performed
by the Evaluator pursuant to its obligations under the Trust Agreement, see
"Evaluator--Responsibility" and "Public Offering--Offering Price".
Any of such fees may be increased without approval of the Unit holders
by amounts not exceeding proportionate increases in consumer prices for
services as measured by the United States Department of Labor's Consumer Price
Index entitled "All Services Less Rent" or, if such Index is no longer
published, in a similar index to be determined by the Trustee and the Sponsor.
In addition, at the time of any such increase, the Trustee shall also be
entitled to charge thereafter an additional fee at a rate or amount to be
determined by the Trustee and the Sponsor based upon the face amount of
Deposited Units in a Trust, for the Trustee's services in maintaining such
Deposited Units. The approval of Unit holders shall not be required for
charging of such additional fee.
Other Charges--The following additional charges are or may be incurred
by a State Trust and Umbrella Series: all expenses of the Trustee (including
fees and expenses of counsel and auditors) incurred in connection with its
activities under the Trust Agreement, including reports and communications to
Unit holders; expenses and costs of any action undertaken by the Trustee to
protect the Multistate Trust or Umbrella Series and the rights and interests
of the Unit holders; fees of the Trustee for any extraordinary services
performed under the Trust Agreement; indemnification of the Trustee for any
loss or liability accruing to it without gross negligence, bad faith or
willful misconduct on its part, arising out of or in connection with its
acceptance or administration of a State Trust and Umbrella Series; in the case
of certain trusts, to the extent lawful, expenses (including legal, accounting
and printing expenses) of maintaining registration or qualification of the
Units and/or a State Trust and Umbrella Series under Federal or state
securities laws subsequent to initial registration so long as the Sponsor are
maintaining a market for the Units; and all taxes and other governmental
charges imposed upon the Bonds or any part of a State Trust and Umbrella
Series (no such taxes or charges are being levied or made or, to the knowledge
of the Sponsor, contemplated). The above expenses, including the Trustee's
fee, when paid by or owing to the Trustee, are secured by a lien on such State
Trust and Umbrella Series. In addition, the Trustee is empowered to sell
Bonds in order to make funds available to pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the respective State Trust
and Umbrella Series is determined by adding to the Evaluator's determination
of the aggregate bid price of the Bonds per Unit a sales charge equal to the
percentage of the Public Offering Price indicated for the Trust in Part A,
"Summary of Essential Information". The aggregate bid price of the underlying
Bonds may be expected to be less than the aggregate offering price of the
Bonds. (See "Method of Evaluation".) A proportionate share of accrued and
undistributed interest on the Bonds in a State Trust and Umbrella Series at
the date of delivery of the Units of such State Trust and Umbrella Series to
the purchaser is also added to the Public Offering Price.
Units of a State Trust and Umbrella Series are available to employees of
certain of the Sponsor, pursuant to employee benefit plans, at a Public
Offering Price equal to the Evaluator's determination of the aggregate bid
price of Bonds of a State Trust and Umbrella Series per Unit plus a sales
charge of 1.25% of the Public Offering Price. Sales through such plans to
employees of the Sponsor require less selling effort and selling expenses than
sales to the general public.
Method of Evaluation
The aggregate bid price of the Bonds (which is used to calculate the
price at which the Sponsor repurchase and sell Units in the secondary market
and the Redemption Price at which Units may be redeemed) will be determined by
the Evaluator (1) on the basis of the current bid prices for the Bonds* , (2)
if bid prices are not available for any Bonds, on the basis of current bid
prices of comparable securities, (3) by appraisal, or (4) by any combination
of the above. Such determinations will be made each business day as of the
Evaluation Time set forth in the "Summary of Essential Information" of Part A,
effective for all sales made subsequent to the last preceding determination.
The term "business day," as used herein, shall exclude Saturdays, Sundays and
any day on which the New York Stock Exchange is closed. The difference
between the bid and offering prices of the Bonds may be expected to average
approximately 1.5 % of principal amount. In the case of actively traded
securities, the difference may be as little as 0.5 of 1%, and in the case of
inactively traded securities, such difference will usually not exceed 3%. The
price at which Units may be repurchased by the Sponsor in the secondary market
could be less than the price paid by the Unit holder. For information
relating to the calculation of the Redemption Price per Unit, which is also
based on the aggregate bid price of the underlying Bonds and which may be
expected to be less than the Public Offering Price per unit, see "Rights of
Unit Holders--Redemption of Units".
Distribution of Units
Units acquired in the secondary market (see "Public Offering--Market for
Units") may be offered by this Prospectus at the Public Offering Price
determined in the manner provided above (see "Public Offering--Offering
Price"). The Sponsor will allow a discount on Units sold to members of the
National Association of Securities Dealers, Inc. Such discount is subject to
change from time to time.
Sales will be made only with respect to whole Units, and the Sponsor
reserve the right to reject, in whole or in part, any order for the purchase
of Units. A purchaser does not become a Unit holder (Certificate holder) or
become entitled to exercise the rights of a Unit holder (including the right
to redeem his Units) until he has paid for his Units. Generally, such payment
must be made within five business days after an order for the purchase of
Units has been placed. The price paid by a Unit holder is the Public Offering
Price in effect at the time his order is received, plus accrued interest (see
"Public Offering--Method of Evaluation"). This price may be different from
the Public Offering Price in effect on any other day, including the day on
which the Unit holder pays for the Units.
Market for Units
Although not obligated to do so, the Sponsor presently intend to
maintain a market for the Units of the respective State Trust and Umbrella
Series and to continuously offer to purchase such Units at prices based upon
the aggregate bid price of the underlying Bonds which may be less than the
price paid by the Unit holder. For information relating to the method and
frequency of the Evaluator's determination of the aggregate bid price of the
underlying Bonds, see "Public Offering--Method of Evaluation". The costs of
maintaining the secondary market, such as printing, legal and accounting, will
be borne by the Sponsor except as otherwise provided in the Trust Agreement.
The Sponsor may cease to maintain such a market at any time and from time to
time without notice if the supply of Units of any of the respective State
Trusts of the Multistate Trust or Umbrella Series exceeds demand, or for any
other reason. In this event the Sponsor may nonetheless purchase Units, as a
service to Unit holders, at prices based on the current Redemption Price of
those Units. In the event that a market is not maintained for the Units of
any of the State Trust and Umbrella Series, a Unit holder of such State Trust
and Umbrella Series desiring to dispose of his Units may be able to do so only
by tendering such Units to the Trustee for redemption at the Redemption Price,
which is also based upon the aggregate bid price of the underlying Bonds.
(See "Rights of Unit Holders--Redemption of Units".)
Exchange Option
Unit holders may elect to exchange any or all of their Units of this
series for units of one or more of any series of Tax Exempt Securities Trust
(the "Exchange Trust") available for sale in the state in which the Unit
holder resides at a Public Offering Price for the units of the Exchange Trust
to be acquired based on a fixed sales charge of $25 per unit. The Sponsor
reserve the right to modify, suspend or terminate this plan at any time
without further notice to Unit holders. Therefore, there is no assurance that
a market for units will in fact exist on any given date on which a Unit holder
wishes to sell his Units of this series and thus there is no assurance that
the Exchange Option will be available to a Unit holder. Exchanges will be
effected in whole units only. Any excess proceeds from Unit holders' Units
being surrendered will be returned and Unit holders will not be permitted to
advance any new money in order to complete an exchange.
An exchange of Units pursuant to the Exchange Option for units of an
Exchange Trust will generally constitute a "taxable event" under the Code,
i.e., a Holder will recognize a gain or loss at the time of exchange.
However, an exchange of Units of this Trust for units of any other similar
series of the Tax Exempt Securities Trust which are grantor trusts for U.S.
federal income tax purposes will not constitute a taxable event to the extent
that the underlying securities in each trust do not differ materially either
in kind or in extent. Unit holders are urged to consult their own tax
advisors as to the tax consequences to them of exchanging Units in particular
cases.
Units of the Exchange Trust will be sold under the Exchange Option at
the bid prices of the underlying securities in the particular portfolio
involved per unit plus a fixed charge of $25 per unit. As an example, assume
that a Unit holder, who has three units of a trust with a current price of
$1,020 per unit based on the bid prices of the underlying securities, desires
to exchange his Units for units of a series of an Exchange Trust with a
current price of $880 per unit based on the bid prices of the underlying
securities. In this example, the proceeds from the Unit holder's units will
aggregate $3,060. Since only whole units of an Exchange Trust may be
purchased under the Exchange Option, the Unit holder would be able to acquire
three units in the Exchange Trust for a total cost of $2,715 ($2,640 for the
units and $75 for the sales charge). The remaining $345 would be returned to
the Unit holder in cash.
Reinvestment Programs
Distributions of interest and principal, if any, are made to Unit
holders monthly. The Unit holder will have the option of either receiving his
monthly income check from the Trustee or participating in one of the
reinvestment programs offered by certain of the Sponsor provided such unit
holder meets the minimum qualifications of the reinvestment program and such
program lawfully qualifies for sale in the jurisdiction in which the Unit
holder resides. Upon enrollment in a reinvestment program, the Trustee will
direct monthly interest distributions and principal distributions, if any, to
the reinvestment program selected by the Unit holder. Since each Sponsor has
arranged for different reinvestment alternatives, Unit holders should contact
the Sponsor for more complete information, including charges and expenses.
The appropriate prospectus will be sent to the Unit holder. The Unit holder
should read the prospectus for a reinvestment program carefully before
deciding to participate. Participation in the reinvestment program will apply
to all Units of a State Trust and Umbrella Series owned by a Unit holder and
may be terminated at any time by the Unit holder, or the program may be
modified or terminated by the Trustee or the program's Sponsor.
Sponsor's Profits
For their services the Sponsor receives a gross commission equal to a
percentage of the Public Offering Price of the Units. In maintaining a market
for the Units of the respective State Trust and Umbrella Series (see "Public
Offering--Market for Units"), the Sponsor also realizes profits or sustain
losses in the amount of any difference between the price at which they buy
such Units and the price at which they resell or redeem such Units (see
"Public Offering--Offering Price").
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the respective State Trust and Umbrella Series is
evidenced by registered certificates executed by the Trustee and the Sponsor.
A Certificate is transferable by presentation and surrender of the
Certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer. Certificates may be issued in
denominations of one Unit or any multiple thereof. A Unit holder may be
required to pay $2.00 per certificate reissued or transferred, and to pay any
governmental charge that may be imposed in connection with each such transfer
or interchange. For new certificates issued to replace destroyed, stolen or
lost certificates, the Unit holder must furnish indemnity satisfactory to the
Trustee and must pay such expenses as the Trustee may incur. Mutilated
certificates must be surrendered to the Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each State Trust and Umbrella Series
will be distributed on each Monthly Distribution Date on a pro rata basis to
Unit holders in such State Trust and Umbrella Series of record as of the
preceding Record Date. All distributions will be net of applicable expenses
and funds required for the redemption of Units and, if applicable,
reimbursements to the Trustee for interest payments advanced to Unit holders
on previous Monthly Distribution Dates. (See Part A, "Summary of Essential
Information" and "Tax Exempt Securities Trust--Expenses and Charges" and
"Rights of Unit Holders--Redemption of Units" in this Section.)
The Trustee will credit to the Interest Account of each respective State
Trust and Umbrella Series all interest received by such State Trust and
Umbrella Series, including that part of the proceeds of any disposition of
Bonds of such State Trust and Umbrella Series which represents accrued
interest. Other receipts will be credited to the Principal Account of the
affected State Trust and Umbrella Series. The pro rata share of the Interest
Account and the pro rata share of cash in the Principal Account represented by
each Unit of a Trust will be computed by the Trustee each month as of the
Record Date. (See Part A, "Summary of Essential Information".) Proceeds
received from the disposition of any of the Bonds subsequent to a Record Date
and prior to the next succeeding Distribution Date will be held in the
Principal Account and will not be distributed until the following Distribution
Date. The distribution to Unit holders as of each Record Date will be made on
the following Distribution Date or shortly thereafter, and shall consist of an
amount substantially equal to one-twelfth of such holders' pro rata share of
the estimated annual income to the Interest Account after deducting estimated
expenses (the "Monthly Interest Distribution") plus such holders' pro rata
share of the cash balance in the Principal Account computed as of the close of
business on the preceding Record Date. Persons who purchase Units between a
Record Date and a Distribution Date will receive their first distribution on
the second Distribution Date following their purchase of Units. No
distribution need be made from the Principal Account if the balance therein is
less than an amount sufficient to distribute $1.00 per Unit. The Monthly
Interest Distribution per Unit as of the date shown in the "Summary of
Essential Information" in Part A for the particular State Trust and Umbrella
Series will change as the income and expenses of the respective State Trust
and Umbrella Series change and as Bonds are exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of each State Trust and
Umbrella Series is paid on a semi-annual basis. Because Bond interest is not
received by the State Trust and Umbrella Series at a constant rate throughout
the year, any Monthly Interest Distribution may be more or less than the
amount credit to the Interest Account as of the Record Date. In order to
eliminate fluctuations in Monthly Interest Distributions resulting from such
variances, the Trustee is required by the Trust Agreement to advance such
amounts as may be necessary to provide Monthly Interest Distributions of
approximately equal amounts. The Trustee will be reimbursed, without
interest, for any such advances from funds available from the Interest Account
on the next ensuing Record Date or Record Dates, as the case may be. If all
or a portion of the Bonds for which advances have been made subsequently fail
to pay interest when due, the Trustee may recoup advances made by it in
anticipation of receipt of interest payments on such Bonds by reducing the
amount distributed per Unit in one or more Monthly Interest Distributions. If
units are redeemed subsequent to such advances by the Trustee, but prior to
receipt by the Trustee of actual notice of such failure to pay interest, the
amount of which was so advanced by the Trustee, each remaining Unit holder
will be subject to a greater pro rate reduction in his Monthly Interest
Distribution than would have occurred absent such redemptions. Funds which
are available for future distributions, payments of expenses and redemptions
are in accounts which are non-interest bearing to Unit holders and are
available for use by The Chase Manhattan Bank (National Association), pursuant
to normal banking procedures. The Trustee is entitled to the benefit of
holding any reasonable cash balances in the Interest and Principal Accounts.
The Trustee anticipates that the average cash balance in the Interest Account
will be approximately 2% in excess of the amounts anticipated to be required
for Monthly Distributions to Unit holders. In addition, because of the
varying interest payment dates of the Bonds comprising each State Trust and
Umbrella Series portfolio, accrued interest at any point in time will be
greater than the amount of interest actually received by a particular State
Trust and Umbrella Series and distributed to Unit holders. The excess accrued
but undistributed interest amount is known as the accrued interest carryover.
If a Unit holder sells or redeems all or a portion of his Units, a portion of
his sale proceeds will be allocable to his proportionate share of the accrued
interest carryover. Similarly, if a Unit holder redeems all or a portion of
his Units, the Redemption Price per Unit which he is entitled to receive from
the Trustee will include his accrued interest carryover on the Bonds. It
should be noted that any Series formed later Series 384 (including Series 384)
that accrued interest carryover no longer is implemented. (See "Rights of Unit
Holders--Redemption of Units--Computation of Redemption Price Per Unit.")
As of the first day of each month the Trustee will deduct from the
Interest Account of each State Trust and Umbrella Series and, to the extent
funds are not sufficient therein, from the Principal Account of such State
Trust and Umbrella Series, amounts necessary to pay the expenses of such State
Trust and Umbrella Series. (See "Tax Exempt Securities Trust--Expenses and
Charges".) The Trustee also may withdraw from said accounts such amounts, if
any, as it deems necessary to establish a reserve for any governmental charges
payable out of a State Trust and Umbrella Series. Amounts so withdrawn shall
not be considered a part of a State Trust and Umbrella Series' assets until
such time as the Trustee shall return all or any part of such amounts to the
appropriate account. In addition, the Trustee may withdraw from the Interest
Account and the Principal Account such amounts as may be necessary to cover
redemption of Units by the Trustee. (See "Rights of Unit Holders--Redemption
of Units".) The Trustee is also entitled to withdraw from the Interest
Account, and, to the extent funds are not sufficient therein, from the
Principal Account, on one or more Record Dates as may be appropriate, amounts
sufficient to recoup advances which the Trustee has made in anticipation of
the receipt by a Trust of interest in respect of Bonds which subsequently fail
to pay interest when due.
Reports and Records
The Trustee shall furnish Unit holders in connection with each
distribution a statement of the amount of interest, if any, and the amount of
other receipts, if any, which are being distributed, expressed in each case as
a dollar amount per Unit. In the event that the issuer of any of the Bonds
fails to make payment when due of any interest or principal and such failure
results in a change in the amount that would otherwise be distributed as a
monthly distribution, the Trustee will, with the first such distribution
following such failure, set forth in an accompanying statement, the issuer and
the Bonds, the amount of the reduction in the distribution per Unit resulting
from such failure, the percentage of the aggregate principal amount of Bonds
which such Bond represents and, to the extent then determined, information
regarding any disposition or legal action with respect to such Bond. Within a
reasonable time after the end of each calendar year, the Trustee will furnish
to each person who at any time during the calendar year was a Unit holder of
record, a statement (1) as to the Interest Account: interest received
(including amounts representing interest received upon any disposition of
Bonds), deductions for payment of applicable taxes and for fees and expenses
of a State Trust and Umbrella Series, redemptions of Units 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; (2) as to the
Principal Account: the dates of disposition of any Bonds and the net proceeds
received therefrom (excluding any portion representing interest), deductions
for payments of applicable taxes and for fees and expenses of a State Trust
and Umbrella Series, redemptions of Units, 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; (3) a list of the Bonds held and
the number of Units outstanding on the last business day of such calendar
year; (4) the Redemption Price per Unit based upon the last computation
thereof made during such calendar year; and (5) 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. The
accounts of such State Trust and Umbrella Series will be audited not less
frequently than annually by independent auditors designated by the Sponsor,
and the report of such auditors shall be furnished by the Trustee to Unit
holders upon request.
The Trustee shall keep available for inspection by Unit holders at all
reasonable times during usual business hours, books of record and account of
its transactions as Trustee including records of the names and addresses of
Unit holders, certificates issued or held, a current list of Bonds in the
Portfolio of a State Trust and Umbrella Series and a copy of the Trust
Agreement.
Redemption of Units
Units may be tendered to the Trustee for redemption at its unit
investment trust office at 770 Broadway, New York, New York 10003, upon
payment of any relevant tax. At the present time there are no specific taxes
related to the redemption of the Units. No redemption fee will be charged by
the Sponsor or the Trustee. Units redeemed by the Trustee will be canceled.
Certificates for Units to be redeemed must be properly endorsed or
accompanied by a written instrument of transfer. Unit holders must sign
exactly as their name appears on the face of the certificate with the
signature guaranteed by an officer of a national bank or trust company or by a
member of either the New York, Midwest or Pacific Stock Exchange. In certain
instances the Trustee may require additional documents such as, but not
limited to, trust instruments, certificates of death, appointments as executor
or administrator or certificates of corporate authority.
Within seven calendar days following such tender, the Unit holder will
be entitled to receive in cash an amount for each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time set forth in the
"Summary of Essential Information" in Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit".) The "date
of tender" is deemed to be the date on which Units are received by the
Trustee, except that as regards Units received after the close of trading on
the New York Stock Exchange, the date of tender is the next day on which such
Exchange is open for trading, and such Units will be deemed to have been
tendered to the Trustee on such day for redemption at the Redemption Price
computed on that day. For information relating to the purchase by the Sponsor
of Units tendered to the Trustee for redemption at prices which may be, in
certain circumstances in excess of the Redemption Price, see "Redemption of
Units--Purchase by the Sponsor of Units Tendered for Redemption."
Accrued interest paid on redemption shall be withdrawn from the Interest
Account, or, if the balance therein is insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn from the
Principal Account. The Trustee is empowered to sell Bonds in order to make
funds available for redemption. Such sales, if required, could result in a
sale of Bonds by the Trustee at a loss. To the extent Bonds are sold, the
size and diversity of a State Trust and Umbrella Series will be reduced.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than weekend and
holiday closings, or trading on that Exchange is restricted or during which
(as determined by the Securities and Exchange Commission) an emergency exists
as a result of which disposal or evaluation of the underlying Bonds is not
reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted.
Computation of Redemption Price per Unit--The Redemption Price per Unit
of a State Trust and Umbrella Series is determined by the Trustee on the basis
of the bid prices of the Bonds in such State Trust and Umbrella Series as of
the Evaluation Time on the date any such determination is made. The
Redemption Price per Unit of a State Trust and Umbrella Series is each Unit's
pro rata share, determined by the Trustee, of: (1) the aggregate value of the
Bonds in such State Trust and Umbrella Series on the bid side of the market
(determined by the Evaluator as set forth under "Public Offering--Method of
Evaluation"), (2) cash on hand in such State Trust and Umbrella Series, and
accrued and unpaid interest on the Bonds as of the date of computation, less
(a) amounts representing taxes or governmental charges payable out of such
State Trust and Umbrella Series, (b) the accrued expenses of such State Trust
and Umbrella Series, and (c) cash held for distribution to Unit holders of
such State Trust and Umbrella Series of record as of a date prior to the
evaluation. The Evaluator may determine the value of the Bonds in the Trust
(i) on the basis of current bid prices for the Bonds, (ii) if bid prices are
not available for any Bonds, on the basis of current bid prices for comparable
securities, (iii) by appraisal, or (iv) by any combination of the above.
The difference between the bid and offering prices of the Bonds may be
expected to average approximately 1.5% of the principal amount. In the case of
actively traded securities, the difference may be as little as 0.5 of 1.0%,
and in the case of inactively traded securities such difference usually will
not exceed 3.0%. The price at which Units may be redeemed could be less than
the price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under Part A, "Summary of
Essential Information".
Purchase by the Sponsor of Units Tendered for Redemption--The Trust
Agreement requires that the Trustee notify the Sponsor of any tender of Units
for redemption. So long as the Sponsor are maintaining a bid in the secondary
market, the Sponsor, prior to the close of business on the second succeeding
business day, will purchase any Units tendered to the Trustee for redemption
at the price so bid by making payment therefor to the Unit holder in an amount
not less than the Redemption Price not later than the day on which the Units
would otherwise have been redeemed by the Trustee. (See "Public Offering--
Market for Units".) Units held by the Sponsor may be tendered to the Trustee
for redemption as any other Units, provided that the Sponsor shall not receive
for Units purchased as set forth above a higher price than they paid, plus
accrued interest.
The offering price of any Units resold by the Sponsor will be the Public
Offering Price determined in the manner provided in this Prospectus. (See
"Public Offering--Offering Price".) Any profit resulting from the resale of
such Units will belong to the Sponsor which likewise will bear any loss
resulting from a lower offering or redemption price subsequent to their
acquisition of such Units. (See "Public Offering--Sponsor's Profits".)
SPONSOR
Smith Barney Inc. 388 Greenwich Street, New York, New York 10013 ("Smith
Barney"), was incorporated in Delaware in 1960 and traces its history through
predecessor partnerships to 1873. Smith Barney, an investment banking and
securities broker-dealer firm, is a member of the New York Stock Exchange,
Inc. and other major securities and commodities exchanges, the National
Association of Securities Dealers, Inc. and the Securities Industry
Association. Smith Barney is an indirect wholly-owned subsidiary of Travelers
Group Inc.
Smith Barney or an affiliate is investment adviser, principal
underwriter or distributor of 60 open-end investment companies and investment
manager of 12 closed-end investment companies. Smith Barney also sponsors all
Series of Corporate Securities Trust, Government Securities Trust and Harris,
Upham Tax-Exempt Fund and acts as co-sponsor of certain trusts of The Equity
Income Fund, Concept Series. The Sponsor has acted previously as managing
underwriter of other investment companies. In addition to participating as a
member of various underwriting and selling groups or as agent of other
investment companies, the Sponsor also executes orders for the purchase and
sale of securities of investment companies and sell securities to such
companies in its capacities as broker or dealer in securities.
Limitations on Liability
The Sponsor is liable for the performance of its obligations arising
from their responsibilities under the Trust Agreement, but will be under no
liability to Unit holders for taking any action or refraining from any action
in good faith or for errors in judgment or responsible in any way for
depreciation or loss incurred by reason of the sale of any Bonds, except in
cases of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties. (See "Tax Exempt Securities Trust--
Portfolio" and "Sponsor--Responsibility".)
Responsibility
Although the Trusts are not actively managed as mutual funds are, the
portfolios are reviewed periodically on a regular cycle. The Sponsor is
empowered to direct the Trustee to dispose of Bonds or deposited Units of
other trusts when certain events occur that adversely affect the value of the
Bonds, including default in payment of interest or principal, default in
payment of interest or principal on other obligations of the same issuer,
institution of legal proceedings, default under other documents adversely
affecting debt service, decline in price or the occurrence of other market or
credit factors, or decline in projected income pledged for debt service on
revenue bonds and advanced refunding that, in the opinion of the Sponsor, may
be detrimental to the interests of the Unit holders.
The Sponsor intends to provide portfolio services for each State Trust
and Umbrella Series in order to determine whether the Trustee should be
directed to dispose of any such Bonds.
It is the responsibility of the Sponsor to instruct the Trustee to
reject any offer made by an issuer of any of the Bonds to issue new
obligations in exchange and substitution for any Bonds pursuant to a refunding
or refinancing plan, except that the Sponsor may instruct the Trustee to
accept such an offer or to take any other action with respect thereto as the
Sponsor may deem proper if the issuer is in default with respect to such Bonds
or in the judgment of the Sponsor the issuer will probably default in respect
to such Bonds in the foreseeable future.
Any obligations so received in exchange or substitution will be held by
the Trustee subject to the terms and conditions of the Trust Agreement to the
same extent as Bonds originally deposited thereunder. Within five days after
the deposit of obligations in exchange or substitution for underlying Bonds,
the Trustee is required to give notice thereof to each Unit holder,
identifying the Bonds eliminated and the Bonds substituted therefor. Except
as stated in this paragraph, the acquisition by a Multistate Trust or Umbrella
Series of any securities other than the Bonds initially deposited in that
particular State Trust is prohibited.
Resignation
If Sponsor resigns or otherwise fails or becomes unable to perform its
duties under the Trust Agreement, and no express provision is made for action
by the Trustee in such event, the Trustee may appoint a successor sponsor or
terminate the Trust Agreement and liquidate the affected State Trusts.
TRUSTEE
The Trustee is The Chase Manhattan Bank with its principal executive
office located at 270 Park Avenue, New York, New York 10017 and its unit
investment trust office at 770 Broadway, New York, New York 10003. Effective
on or shortly after October 28, 1996 the address of the Trustee's unit
investment trust office will be 4 New York Plaza, New York, New York 10004.
The customer service number will not change. The Trustee is subject to
supervision and examination by the Superintendent of Banks of the State of New
York, the Federal Deposit Insurance Corporation and the Board of Governors of
the Federal Reserve System. In connection with the storage and handling of
certain Bonds deposited in any of the State Trust and Umbrella Series, the
Trustee may use the services of The Depository Trust Company. These services
may include safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery services. The Depository Trust Company is
a limited purpose trust company organized under the Banking Law of the State
of New York, a member of the Federal Reserve System and a clearing agency
registered under the Securities Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way for
depreciation or loss incurred by reason of the disposition of any moneys,
securities or certificates or in respect of any evaluation or for any action
taken in good faith reliance on prima facie properly executed documents except
in cases of willful misfeasance, bad faith, gross negligence or reckless
disregard for its obligations and duties. In addition, the Trustee shall not
be personally liable for any taxes or other governmental charges imposed upon
or in respect of any State Trust and Umbrella Series which the Trustee may be
required to pay under current or future law of the United States or any other
taxing authority having jurisdiction. (See "Tax Exempt Securities
Trust--Portfolio".) For information relating to the responsibilities and
indemnification of the Trustee under the Trust Agreement, reference is made to
the material set forth under "Rights of Unit Holders", "Sponsor--Resignation"
and "Other Charges".
Resignation
By executing an instrument in writing and filing the same with the
Sponsor, the Trustee and any successor may resign. In such an event the
Sponsor is obligated to appoint a successor trustee as soon as possible. If
the Trustee becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, the Sponsor may remove the Trustee and
appoint a successor as provided in the Trust Agreement. Such resignation or
removal shall become effective upon the acceptance of appointment by the
successor trustee. If no successor has accepted the appointment within thirty
days after notice of resignation, the retiring trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The resignation or
removal of a trustee becomes effective only when the successor trustee accepts
its appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
EVALUATOR
The Evaluator is Kenney S&P Evaluation Services, Inc., a business unit
of J.J. Kenny Company, Inc. with main offices located at 65 Broadway, New
York, New York 10006. J.J. Kenny Company, Inc. is a subsidiary of The
McGraw-Hill Companies, Inc.
Limitations on Liability
The Trustee, Sponsor and Unit holders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. Determinations by the Evaluator under the Trust Agreement shall be
made in good faith upon the basis of the best information available to it;
provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsor or Unit holders for errors in judgment. But this
provision shall not protect the Evaluator in cases of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
Responsibility
The Trust Agreement requires the Evaluator to evaluate the Bonds of a
State Trust and Umbrella Series on the basis of their bid prices on the last
business day of June and December in each year, on the day on which any Unit
of such State Trust and Umbrella Series is tendered for redemption and on any
other day such evaluation is desired by the Trustee or is requested by the
Sponsor. For information relating to the responsibility of the Evaluator to
evaluate the Bonds on the basis of their bid prices see "Public Offering--
Offering Price."
Resignation
The Evaluator may resign or may be removed by the joint action of the
Sponsor and the Trustee, and in such event, the Sponsor and the Trustee are to
use their best efforts to appoint a satisfactory successor. Such resignation
or removal shall become effective upon the acceptance of appointment by a
successor evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within thirty days after notice of resignation, the
Evaluator may apply to a court of competent jurisdiction for the appointment
of a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
Amendment
The Sponsor and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unit holders when such an amendment is (1)
to cure any ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein, or (2) to make such other provisions as shall not adversely
affect the interests of the Unit holders; provided, that the Trust Agreement
is not amended to increase the number of Units issuable thereunder or to
permit the deposit or acquisition of securities either in addition to or in
substitution for any of the Bonds initially deposited in the respective State
Trust and Umbrella Series, except for the substitution of certain refunding
securities for such Bonds or to permit the Trustee to engage in business or
investment activities not specifically authorized in the Trust Agreement as
originally adopted. In the event of any amendment, the Trustee is obligated
to notify promptly all Unit holders of the substance of such amendment.
Termination
The Trust Agreement provides that if the principal amount of Bonds is
less than 50% of the principal amount of the Bonds originally deposited in
such State Trust and Umbrella Series, the Trustee may in its discretion and
will, when directed by the Sponsor, terminate such State Trust and Umbrella
Series. Each State Trust and Umbrella Series may be terminated at any time by
100% of the Unit holders. See Part A for additional optional and mandatory
termination provisions. However, in no event may any State Trust and Umbrella
Series continue beyond the Mandatory Termination Date set forth under Part A
"Summary of Essential Information." In the event of termination, written
notice thereof will be sent by the Trustee to all Unit holders. Within a
reasonable period after termination, the Trustee will sell any Bonds remaining
in the affected State Trust and Umbrella Series, and, after paying all
expenses and charges incurred by such State Trust and Umbrella Series, will
distribute to each Unit holder, upon surrender for cancellation of his
certificate for Units, his pro rata share of the balances remaining in the
Interest Account and Principal Account of such State Trust and Umbrella
Series.
LEGAL OPINIONS
Certain legal matters in connection with the Units offered hereby have
been passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York
10022, as special counsel for the Sponsor.
AUDITORS
The Statements of Financial Condition and Portfolios of Securities of
each State Trust and/or Umbrella Series included in this Prospectus have been
audited by KPMG Peat Marwick LLP, independent auditors, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
BOND RATINGS*
All ratings except those identified otherwise are by Standard & Poor's.
Standard & Poor's
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
A summary of the meaning of the applicable ratings symbols as published
by Standard & Poor's follows:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and in the majority of instances they differ from AAA issues only
in small degrees.
A--Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse affects
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 weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in the higher-rated
categories.
BB, B, CCC, CC, C--Debt rated BB, B, CCC, CC, and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "CCC" 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" following a rating indicates 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,
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.
Conditional rating(s), indicated by "con" are given to bonds for which
the continuance of the security rating is contingent upon Standard & Poor's
receipt of an executed copy of escrow agreement or closing documentation
confirming investments and cash flows and/or the security rating is
conditional upon the issuance of insurance by the respective insurance
company.
Moody's Investors Service
A brief description of the applicable Moody's Investors Service's rating
symbols and their meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of 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.
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. Aa bonds 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.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
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.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1, respectively. In addition, Moody's
applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category. Although industrial Revenue Bonds and Environmental Control
Revenue Bonds are tax-exempt issues, they are included in the corporate bond
rating system.
Conditional ratings, indicated by "Con" are given to bonds for which the
security depends upon the completion of some act or the fulfillment of some
condition. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. A parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
Fitch Investors Service, Inc.
A brief description of the applicable Fitch Investors Service, Inc.
rating symbols and their meanings is as follows:
AAA--Bonds which are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA--Bonds which are 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.
A--Bonds which are 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 which are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse impact
on these bonds, and therefore impair timely payment. The likelihood that
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the 'AAA', 'DDD', 'DD' or 'D'
categories.
Conditional--A conditional rating is promised on the successful
completion of a project of the occurrence of a specific event.
NOTE: NR indicates, among other things, that no rating has been
requested, that there is insufficient information on which to base a rating,
or that Standard & Poor's Corporation, Moody's Investors Service and Fitch
Investors Service, Inc. do not rate a particular type of obligation as a
matter of policy. Subsequent to the Date of Deposit, the credit
characteristics of the Issuers of Securities may have changed. Currently,
certain of the Securities in the Portfolio of a Trust may be unrated and have
credit characteristics comparable to securities rated below the minimum
requirements of such Trust for acquisition of a Security. See Part A--
"Portfolio of Securities" herein to ascertain the ratings on the Securities,
if any, on the date of the Portfolios of Securities.
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating Co. rating
symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A-Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
NR- Not rated (credit characteristics comparable to A or better on the
Date of Deposit).
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
<TABLE>
Prospectus
This Prospectus contains information concerning the Trust and the
Sponsors, but does not contain all the information set forth in the
registration statements and exhibits relating thereto, which the Trust
has filed with the Securities and Exchange Commission, Washington,
D.C. under the Securities Act of 1933 and the Investment Company
Act of 1940, and to which reference is hereby made.
<S>
<C>
Index:
Page
Summary of Essential Information . . . . . . . . . . . . . . . . . .A-2
Financial and Statistical Information. . . . . . . . . . . . . . . A- 4
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . A- 5
Report of Independent Public Auditors. . . . . . . . . . . . . . . A- 9
Portfolios of Securities . . . . . . . . . . . . . . . . . . . . . A-10
16,250 Units
Tax Exempt Securities Trust. . . . . . . . . . . . . . . . . . . . 1
The Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PROSPECTUS
Additional Considerations Regarding the Trusts . . . . . . . . . .2
Dated
August 23, 1996
State Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 16
The Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Estimated Current Return and Estimated Long-Term Return. . . . . .69
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Expenses and Charges . . . . . . . . . . . . . . . . . . . . . . 83
Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . 84
Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . 84
Method of Evaluation . . . . . . . . . . . . . . . . . . . . . . 85
Sponsors
Distribution of Units. . . . . . . . . . . . . . . . . . . . . . 85
Market for Units . . . . . . . . . . . . . . . . . . . . . . . . 85
SMITH BARNEY INC.
Exchange Option. . . . . . . . . . . . . . . . . . . . . . . . . 86
Reinvestment Programs. . . . . . . . . . . . . . . . . . . . . . 86
388 Greenwich Sreet
Sponsor's Profits. . . . . . . . . . . . . . . . . . . . . . . . 87New
York, New York 10013
Rights of Unit Holders . . . . . . . . . . . . . . . . . . . . . . 87
(800) 298-UNIT
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Distribution of Interest and Principal . . . . . . . . . . . . . 87
Reports and Records. . . . . . . . . . . . . . . . . . . . . . . 88
Redemption of Units. . . . . . . . . . . . . . . . . . . . . . . 89
Sponsor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Limitations on Liability . . . . . . . . . . . . . . . . . . . . 91
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . 91
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Limitations on Liability . . . . . . . . . . . . . . . . . . . . 92
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Evaluator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Limitations on Liability . . . . . . . . . . . . . . . . . . . . 93
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . 93
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Amendment and Termination of the Trust Agreement . . . . . . . . . 93
Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Bond Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Standard & Poor's Corporation. . . . . . . . . . . . . . . . . . 94
Moody's Investors Service, Inc . . . . . . . . . . . . . . . . . .95
Fitch Investors Service, Inc . . . . . . . . . . . . . . . . . . .96
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.
</TABLE>
<PAGE>
<PAGE> PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement
on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The cross-reference sheet.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Signatures.
Written consents of the following persons:
KPMG Peat Marwick
Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc.
(included in Exhibit 4.6A)
The following exhibits:
*4.6A - Consent of Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc. as Evaluator.
* Filed herewith.
II-1
<PAGE>
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York, 10006-2511
Telephone 212/770-4000
Smith Barney Incorporated
388 Greenwich Street
New York, NY 10013
RE:Tax Exempt Securities Trust
NationalCaliforniaMinnesotaNew York
Trust 207Trust 141Trust 114Trust 144
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-xx for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings
indicated in the above-referenced Amendment to the Registration
Statement for the respective bonds comprising the trust portfolio
are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Sincerely,
John R. Fitzgerald
Vice President
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated August 21, 1996 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
August 23, 1996
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust,
certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York,
and State of New York on the 23rd day of August, 1996.
Signatures appear on pages II-3.
A majority of the members of the Board of Directors of Smith
Barney Inc. have signed this Post-Effective Amendment
pursuant to Powers of Attorney authorizing the person signing
this Post-Effective Amendment to do so on behalf of such members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Inc. :
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert H. Lessin
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
