File No. 333-57620 CIK #1024894
Securities and Exchange Commission
Washington, D.C. 20549-1004
Post-Effective
Amendment No. 4
to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Van Kampen Focus Portfolios, Municipal Series 346
(Exact Name of Trust)
VAN KAMPEN FUNDS INC.
(Exact Name of Depositor)
1221 Avenue of the Americas
New York, New York 10020
(Complete address of Depositor's principal executive offices)
VAN KAMPEN FUNDS INC. CHAPMAN AND CUTLER LLP
Attention: Amy R. Doberman Attention: Mark J. Kneedy
1221 Avenue of the Americas 111 West Monroe Street
New York, New York 10020 Chicago, Illinois 60603
(Name and complete address of agents for service)
( X ) Check if it is proposed that this filing will become effective
on July 25, 2005 pursuant to paragraph (b) of Rule 485.
Van Kampen Focus Portfolios,
Municipal Series 346
IM-IT/430 New York IM-IT/150
California IM-IT/185
--------------------------------------------------------------------------------
PROSPECTUS PART ONE
NOTE: Part I of this Prospectus may not be distributed unless accompanied
by Part II.
Please retain both parts of this Prospectus for future reference.
--------------------------------------------------------------------------------
THE FUND
This series of Van Kampen Focus Portfolios, Municipal Series (the "Fund")
consists of underlying separate unit investment trusts described above. Each
Trust consists of an insured portfolio of interest-bearing obligations (the
"Bonds" or "Securities") issued by or on behalf of municipalities and other
governmental authorities, the interest on which is, in the opinion of recognized
bond counsel to the issuing governmental authority, exempt from all Federal
income taxes under existing law. In addition, the interest income of each State
Trust is, in the opinion of counsel, exempt to the extent indicated from state
and local taxes, when held by residents of the state where the issuers of Bonds
in such Trust are located.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units of each Trust includes the aggregate
bid price of the Securities in such Trust, an applicable sales charge, cash, if
any, in the Principal Account held or owned by such Trust, and accrued interest,
if any. See "Summary of Essential Financial Information".
ESTIMATED CURRENT AND LONG-TERM RETURNS
Estimated Current and Long-Term Returns to Unitholders are indicated under
"Summary of Essential Financial Information". The methods of calculating
Estimated Current Returns and Estimated Long-Term Return are set forth in Part
II of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is July 25, 2005
Van Kampen
VAN KAMPEN
INVESTMENTS
SHINE
VAN KAMPEN FOCUS PORTFOLIOS, MUNICIPAL SERIES 346
Summary of Essential Financial Information
As of May 18, 2005
Sponsor: Van Kampen Funds Inc.
Evaluator: Standard & Poor's Securities Evaluations, Inc.
Supervisor: Van Kampen Asset Management (4)
Trustee: The Bank of New York
The income, expense and distribution data set forth below have been
calculated for Unitholders electing to receive monthly distributions.
Unitholders choosing a different distribution plan (if available) will receive a
slightly higher net annual interest income because of the lower Trustee's fees
and expenses under such plan.
<TABLE>
<CAPTION>
California New York
IM-IT IM-IT IM-IT
Trust Trust Trust
-------------- --------------- --------------
<S> <C> <C> <C>
General Information
Principal Amount (Par Value) of Securities.......................... $ 8,440,000 $ 2,875,000 $ 2,585,000
Number of Units..................................................... 8,401 2,868 2,594
Fractional Undivided Interest in Trust per Unit..................... 1/8,401 1/2,868 1/2,594
Public Offering Price:
Aggregate Bid Price of Securities in Portfolio................ $ 8,941,665.85 $ 2,960,595.65 $ 2,724,931.80
Aggregate Bid Price of Securities per Unit.................... $ 1,064.36 $ 1,032.29 $ 1,050.47
Sales charge of 3.626% (3.50% of Public Offering Price excluding
principal cash) for the IM-IT Trust, 4.931% (4.70% of Public Offering
Price excluding principal cash) for the California IM-IT Trust and
4.602% (4.40% of Public Offering Price excluding principal cash)
for the New York IM-IT Trust.................................. $ 38.59 $ 50.91 $ 48.35
Principal Cash per Unit....................................... $ (.38) $ 1.67 $ .01
Public Offering Price per Unit (1)............................ $ 1,102.57 $ 1,084.87 $ 1,098.83
Redemption Price per Unit........................................... $ 1,063.98 $ 1,033.96 $ 1,050.48
Excess of Public Offering Price per Unit over
Redemption Price per Unit..................................... $ 38.59 $ 50.91 $ 48.35
Minimum Value of the Trust under which Trust
Agreement may be terminated................................... $ 1,807,000.00 $ 600,000.00 $ 600,000.00
Annual Premium on Portfolio Insurance............................... $ -- $ -- $ --
Evaluator's Annual Evaluation Fee (3)............................... $ 3,117 $ 1,064 $ 1,052
Special Information
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit..................... $ 51.40 $ 49.20 $ 49.79
Less: Estimated Annual Expense excluding Insurance............ $ 2.06 $ 2.56 $ 2.55
Less: Annual Premium on Portfolio Insurance................... $ -- $ -- $ --
Estimated Net Annual Interest Income per Unit................. $ 49.34 $ 46.64 $ 47.24
Calculation of Estimated Interest Earnings per Unit:
Estimated Net Annual Interest Income.......................... $ 49.34 $ 46.64 $ 47.24
Divided by 12................................................. $ 4.11 $ 3.89 $ 3.94
Estimated Daily Rate of Net Interest Accrual per Unit............... $ .13706 $ .12955 $ .13123
Estimated Current Return Based on Public Offering Price (2)......... 4.47% 4.31% 4.30%
Estimated Long-Term Return (2)...................................... 3.22% 3.63% 3.19%
</TABLE>
--------------------------------------------------------------------------------
(1) Plus accrued interest to the date of settlement (three business days
after purchase) of $1.78, $1.69 and $1.70 for the IM-IT, California
IM-IT and New York IM-IT Trusts, respectively.
(2) The Estimated Current Returns and Estimated Long-Term Returns are
described under "Estimated Current and Long-Term Returns" in Part II.
(3) Notwithstanding information to the contrary in Part II of this
Prospectus, as compensation for its services, the Evaluator shall
receive a fee of $.36 per $1,000 principal amount of Bonds per Trust
annually. This fee may be adjusted for increases in consumer prices for
services under the category "All Services Less Rent of Shelter" in the
Consumer Price Index.
(4) Notwithstanding anything to the contrary in Prospectus Part II, the
Supervisor is Van Kampen Asset Management.
Summary of Essential Financial Information (continued)
Evaluations for purpose of sales, purchase or redemption of Units are made as
of the close of trading on the New York Stock Exchange on days such Exchange is
open next following receipt of an order for a sale or purchase of Units or
receipt by The Bank of New York of Units tendered for redemption.
Minimum Principal Distribution........... $1.00 per Unit
Date of Deposit.......................... April 19, 2001
Supervisor's Annual Supervisory Fee...... Maximum of $.25 per Unit
Sponsor's Annual Bookkeeping
and Administrative Services Fee....... Maximum of $.15 per Unit
Record and Computation Dates............. TENTH day of the month as follows:
monthly - each month; semi-annual - June and December for
the IM-IT Trust, January and July for the California IM-IT
Trust and May and November for the New York IM-IT Trust.
Distribution Dates....................... TWENTY-FIFTH day of the month as
follows: monthly - each month; semi-annual - June and
December for the IM-IT Trust, January and July for the
California IM-IT Trust and May and November for the New York
IM-IT Trust.
Trustee's Annual Fee..................... $.91 and $.51 per $1,000 principal
amount of Bonds respectively, for those portions of the
Trusts under the monthly and semi-annual distribution plans.
<TABLE>
PORTFOLIO
As of March 31, 2005, the Insured Municipals Income Trust, Series 430
consists of 13 issues which are payable from the income of a specific project or
authority. The portfolio is divided by purpose of issue as follows: General
Obligation, 2 (14%); Health Care, 3 (25%); Pre-refunded, 2 (10%); Retail
Electic/Gas/Telephone, 1 (11%); Transportation, 4 (28%) and Water and Sewer, 1
(12%). The portfolio consists of 13 Bond issues in 9 states. See "Portfolio"
herein.
<CAPTION>
PER UNIT INFORMATION
2002 (1) 2003 2004 2005
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period............ $ 951.00 $ 945.62 $ 1,019.32 $ 1,052.17
============ ============ ============ ============
Net asset value per Unit at end of period.................. $ 945.62 $ 1,019.32 $ 1,052.17 $ 1,043.10
============ ============ ============ ============
Distributions to Unitholders of investment income
including accrued interest paid on Units redeemed
(average Units outstanding for entire period) (2)....... $ 41.22 $ 49.32 $ 49.94 $ 49.69
============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......................... $ -- $ -- $ -- $ 1.28
============ ============ ============ ============
Unrealized appreciation (depreciation) of Bonds
(per Unit outstanding at end of period)................. $ (10.30) $ 73.80 $ 27.50 $ (9.44)
============ ============ ============ ============
Distributions of investment income by frequency
of payment (2)
Monthly.............................................. $ 43.04 $ 49.17 $ 49.49 $ 49.52
Semiannual........................................... $ 31.10 $ 49.57 $ 49.92 $ 49.87
Units outstanding at end of period......................... 8,963 8,927 8,537 8,430
--------------------------------------------------------------------------------
(1) For the period from April 19, 2001 (date of deposit) through March 31,
2002.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
<TABLE>
PORTFOLIO
As of March 31, 2005, the California Insured Municipals Income Trust, Series
185 consists of 8 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows:
Certificate of Participation, 2 (24%); General Obligation, 1 (9%); Public
Building, 1 (5%); Tax District, 1 (17%) and Water and Sewer, 3 (45%). See
"Portfolio" herein.
<CAPTION>
PER UNIT INFORMATION
2002 (1) 2003 2004 2005
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period............ $ 951.00 $ 943.66 $ 1,018.19 $ 1,027.81
============ ============ ============ ============
Net asset value per Unit at end of period.................. $ 943.66 $ 1,018.19 $ 1,027.81 $ 1,020.58
============ ============ ============ ============
Distributions to Unitholders of investment income
including accrued interest paid on Units redeemed
(average Units outstanding for entire period) (2)....... $ 47.31 $ 47.02 $ 47.44 $ 47.20
============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......................... $ -- $ -- $ -- $ 1.47
============ ============ ============ ============
Unrealized appreciation (depreciation) of Bonds
(per Unit outstanding at end of period)................. $ (11.75) $ 74.45 $ 9.38 $ (7.00)
============ ============ ============ ============
Distributions of investment income by frequency
of payment (2)
Monthly.............................................. $ 41.10 $ 46.95 $ 47.25 $ 47.05
Semiannual........................................... $ 33.61 $ 47.34 $ 47.66 $ 47.44
Units outstanding at end of period......................... 2,974 2,961 2,917 2,868
--------------------------------------------------------------------------------
(1) For the period from April 19, 2001 (date of deposit) through March 31,
2002.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
<TABLE>
PORTFOLIO
As of March 31, 2005, the New York Insured Municipals Income Trust, Series
150 consists of 8 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows: General
Purpose, 1 (3%); Health Care, 1 (14%); Higher Education, 1 (14%); Pre-refunded,
3 (31%); Retail Electric/Gas/Telephone, 1 (19%) and Water and Sewer, 1 (19%).
See "Portfolio" herein.
<CAPTION>
PER UNIT INFORMATION
2002 (1) 2003 2004 2005
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period............ $ 951.00 $ 940.73 $ 1,011.47 $ 1,067.27
============ ============ ============ ============
Net asset value per Unit at end of period.................. $ 940.73 $ 1,011.47 $ 1,067.27 $ 1,045.82
============ ============ ============ ============
Distributions to Unitholders of investment income
including accrued interest paid on Units redeemed
(average Units outstanding for entire period) (2)....... $ 38.87 $ 47.40 $ 46.66 $ 47.71
============ ============ ============ ============
Distributions to Unitholders from Bond
redemption proceeds (average Units
outstanding for entire period).......................... $ -- $ -- $ -- $ --
============ ============ ============ ============
Unrealized appreciation (depreciation) of Bonds
(per Unit outstanding at end of period)................. $ (15.95) $ 71.22 $ 48.56 $ (34.10)
============ ============ ============ ============
Distributions of investment income by frequency
of payment (2)
Monthly.............................................. $ 41.14 $ 46.81 $ 47.26 $ 47.38
Semiannual........................................... $ 25.79 $ 47.27 $ 47.50 $ 47.78
Units outstanding at end of period......................... 3,010 3,004 2,861 2,652
--------------------------------------------------------------------------------
(1) For the period from April 19, 2001 (date of deposit) through March 31,
2002.
(2) Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Van Kampen Funds Inc. and the Unitholders of Van
Kampen Focus Portfolios, Municipal Series 346:
We have audited the accompanying statements of condition (including the
analyses of net assets) and the related portfolio of Van Kampen Focus
Portfolios, Municipal Series 346 (IM-IT, California IM-IT and New York IM-IT
Trusts) as of March 31, 2005, and the related statements of operations and
changes in net assets for each of the three years ended March 31, 2005. These
statements are the responsibility of the Trustee and the Sponsor. Our
responsibility is to express an opinion on such statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Trust is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Trust's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by the Trustee and Sponsor, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of obligations owned at March 31, 2005 by correspondence with the Trustee. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Van Kampen Focus Portfolios,
Municipal Series 346 (IM-IT, California IM-IT and New York IM-IT Trusts) as of
March 31, 2005, and the results of operations and changes in net assets for each
of the three years ended March 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
GRANT THORNTON LLP
Chicago, Illinois
May 27, 2005
<TABLE>
VAN KAMPEN FOCUS PORTFOLIOS, MUNICIPAL SERIES 346
Statements of Condition
March 31, 2005
<CAPTION>
California New York
IM-IT IM-IT IM-IT
Trust Trust Trust
----------- ----------- -----------
<S> <C> <C> <C>
Trust property
Cash ................................................................... $ -- $ -- $ --
Tax-exempt securities at market value, (cost $8,028,301,
$2,716,311 and $2,543,502, respectively) (note 1)..................... 8,750,041 2,909,106 2,757,925
Accrued interest......................................................... 91,907 20,199 30,638
Receivable for securities sold........................................... -- -- --
------------ ------------ -----------
$ 8,841,948 $ 2,929,305 $ 2,788,563
============ ============ ===========
Liabilities and interest to Unitholders
Cash overdraft........................................................... $ 48,620 $ 2,274 $ 15,047
Redemptions payable...................................................... -- -- --
Interest to Unitholders.................................................. 8,793,328 2,927,031 2,773,516
------------ ------------ -----------
$ 8,841,948 $ 2,929,305 $ 2,788,563
============ ============ ===========
Analyses of Net Assets
Interest of Unitholders (8,430, 2,868 and 2,652 Units, respectively of
fractional undivided interest outstanding) Cost to original investors of
9,015, 2,982 and
3,016 Units, respectively (note 1).................................... $ 9,015,000 $ 2,982,000 $ 3,016,000
Less initial underwriting commission (note 3)......................... 441,699 146,105 147,773
------------ ------------ -----------
8,573,301 2,835,895 2,868,227
Less redemption of Units (585, 114 and
364 Units, respectively)........................................... 609,668 114,401 383,861
------------ ------------ -----------
7,963,633 2,721,494 2,484,366
Undistributed net investment income
Net investment income................................................. 1,709,856 547,814 548,568
Less distributions to Unitholders..................................... 1,667,252 534,701 530,862
------------ ------------ -----------
42,604 13,113 17,706
Realized gain (loss) on Bond sale or redemption.......................... 76,180 3,867 57,021
Unrealized appreciation (depreciation) of Bonds (note 2)................. 721,740 192,795 214,423
Distributions to Unitholders of Bond sale or redemption proceeds......... (10,829) (4,238) --
------------ ------------ -----------
Net asset value to Unitholders..................................... $ 8,793,328 $ 2,927,031 $ 2,773,516
============ ============ ===========
Net asset value per Unit (Units outstanding of 8,430,
2,868 and 2,652, respectively)........................................... $ 1,043.10 $ 1,020.58 $ 1,045.82
============ ============ ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
INSURED MUNICIPALS INCOME TRUST, SERIES 430
Statements of Operations
Years ended March 31,
<CAPTION>
2003 2004 2005
------------ ------------ -----------
<S> <C> <C> <C>
Investment income
Interest income.......................................................... $ 459,438 $ 446,712 $ 435,867
Expenses
Trustee fees and expenses............................................. 12,766 11,686 11,135
Evaluator fees........................................................ 3,244 3,201 3,117
Insurance expense..................................................... -- -- --
Supervisory fees...................................................... 1,142 974 1,195
------------ ------------ -----------
Total expenses..................................................... 17,152 15,861 15,447
------------ ------------ -----------
Net investment income................................................. 442,286 430,851 420,420
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. 44,098 406,725 131,536
Cost..................................................................... 43,962 341,740 120,241
------------ ------------ -----------
Realized gain (loss).................................................. 136 64,985 11,295
Net change in unrealized appreciation (depreciation) of Bonds............... 658,843 234,778 (79,578)
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 1,101,265 $ 730,614 $ 352,137
============ ============ ===========
Statements of Changes in Net Assets
Years ended March 31,
2003 2004 2005
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 442,286 $ 430,851 $ 420,420
Realized gain (loss) on Bond sale or redemption.......................... 136 64,985 11,295
Net change in unrealized appreciation (depreciation) of Bonds............ 658,843 234,778 (79,578)
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 1,101,265 730,614 352,137
Distributions to Unitholders from:
Net investment income.................................................... (441,495) (433,638) (421,260)
Bonds sale or redemption proceeds........................................ -- -- (10,829)
Redemption of Units...................................................... (35,959) (414,071) (109,058)
------------ ------------ -----------
Total increase (decrease)............................................. 623,811 (117,095) (189,010)
Net asset value to Unitholders
Beginning of period...................................................... 8,475,622 9,099,433 8,982,338
------------ ------------ -----------
End of period (including undistributed net investment income of
$46,231, $43,444 and $42,604, respectively)........................... $ 9,099,433 $ 8,982,338 $ 8,793,328
============ ============ ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
CALIFORNIA INSURED MUNICIPALS INCOME TRUST, SERIES 185
Statements of Operations
Years ended March 31,
<CAPTION>
2003 2004 2005
------------ ------------ -----------
<S> <C> <C> <C>
Investment income
Interest income.......................................................... $ 146,775 $ 145,703 $ 142,838
Expenses
Trustee fees and expenses............................................. 5,503 5,133 5,050
Evaluator fees........................................................ 1,079 1,069 1,064
Insurance expense..................................................... -- -- --
Supervisory fees...................................................... 378 326 407
------------ ------------ -----------
Total expenses..................................................... 6,960 6,528 6,521
------------ ------------ -----------
Net investment income................................................. 139,815 139,175 136,317
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. 14,176 40,110 69,166
Cost..................................................................... 13,955 39,189 66,441
------------ ------------ -----------
Realized gain (loss).................................................. 221 921 2,725
Net change in unrealized appreciation (depreciation) of Bonds............... 220,457 27,360 (20,077)
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 360,493 $ 167,456 $ 118,965
============ ============ ===========
Statements of Changes in Net Assets
Years ended March 31,
2003 2004 2005
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 139,815 $ 139,175 $ 136,317
Realized gain (loss) on Bond sale or redemption.......................... 221 921 2,725
Net change in unrealized appreciation (depreciation) of Bonds............ 220,457 27,360 (20,077)
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 360,493 167,456 118,965
Distributions to Unitholders from:
Net investment income.................................................... (139,455) (139,560) (136,507)
Bonds sale or redemption proceeds........................................ -- -- (4,238)
Redemption of Units...................................................... (12,634) (44,630) (49,310)
------------ ------------ -----------
Total increase (decrease)............................................. 208,404 (16,734) (71,090)
Net asset value to Unitholders
Beginning of period...................................................... 2,806,451 3,014,855 2,998,121
------------ ------------ -----------
End of period (including undistributed net investment income of
$13,688, $13,303 and $13,113, respectively)........................... $ 3,014,855 $ 2,998,121 $ 2,927,031
============ ============ ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
NEW YORK INSURED MUNICIPALS INCOME TRUST, SERIES 150
Statements of Operations
Years ended March 31,
<CAPTION>
2003 2004 2005
------------ ------------ -----------
<S> <C> <C> <C>
Investment income
Interest income.......................................................... $ 149,013 $ 145,918 $ 139,743
Expenses
Trustee fees and expenses............................................. 6,044 5,107 4,829
Evaluator fees........................................................ 1,080 1,073 1,052
Insurance expense..................................................... -- -- --
Supervisory fees...................................................... 383 330 404
------------ ------------ -----------
Total expenses..................................................... 7,507 6,510 6,285
------------ ------------ -----------
Net investment income................................................. 141,506 139,408 133,458
Realized gain (loss) from Bond sale or redemption
Proceeds................................................................. -- 160,503 221,244
Cost..................................................................... -- 135,816 188,910
------------ ------------ -----------
Realized gain (loss).................................................. -- 24,687 32,334
Net change in unrealized appreciation (depreciation) of Bonds............... 213,951 138,919 (90,445)
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................................... $ 355,457 $ 303,014 $ 75,347
============ ============ ===========
Statements of Changes in Net Assets
Years ended March 31,
2003 2004 2005
------------ ------------ -----------
Increase (decrease) in net assets Operations:
Net investment income.................................................... $ 141,506 $ 139,408 $ 133,458
Realized gain (loss) on Bond sale or redemption.......................... -- 24,687 32,334
Net change in unrealized appreciation (depreciation) of Bonds............ 213,951 138,919 (90,445)
------------ ------------ -----------
Net increase (decrease) in net assets resulting from operations....... 355,457 303,014 75,347
Distributions to Unitholders from:
Net investment income.................................................... (142,624) (137,142) (134,006)
Bonds sale or redemption proceeds........................................ -- -- --
Redemption of Units...................................................... (5,981) (150,888) (221,271)
------------ ------------ -----------
Total increase (decrease)............................................. 206,852 14,984 (279,930)
Net asset value to Unitholders
Beginning of period...................................................... 2,831,610 3,038,462 3,053,446
------------ ------------ -----------
End of period (including undistributed net investment income of
$15,988, $18,254 and $17,706, respectively)........................... $ 3,038,462 $ 3,053,446 $ 2,773,516
============ ============ ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
VAN KAMPEN FOCUS PORTFOLIOS, MUNICIPAL SERIES 346
INSURED MUNICIPALS INCOME TRUST PORTFOLIO AS OF MARCH 31, 2005
----------------------------------------------------------------------------------------------------------------------
PORT- REDEMPTION MARKET
FOLIO AGGREGATE RATING FEATURE VALUE
ITEM PRINCIPAL NAME OF ISSUER, TITLE, INTEREST RATE AND MATURITY DATE (NOTE 2) (NOTE 2) (NOTE 1)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A $ 370,000 Matanuska-Susitna Borough, Alaska, 2011 @ 100
General Obligation School Bonds, AAA 2016 @ 100 S.F. $ 152,889
Series 2001A (FGIC Insured) 2011 @ 100
145M-5.125% Due 03/01/21 2016 @ 100 S.F.
225M-5.125% Due 03/01/21 AAA 2011 @ 100 P.R. 244,130
----------------------------------------------------------------------------------------------------------------------
B 990,000 Matagorda County, Texas, Navigation District Number 1,
Revenue Refunding Bonds (Reliant Energy,
Incorporated Project) Series 1999A
(AMBAC Assurance Insured)
5.250% Due 06/01/26 AAA 2009 @ 101 1,035,263
----------------------------------------------------------------------------------------------------------------------
C 500,000 Washington, Central Puget Sound Regional Transit Authority,
Sales Tax and Motor Vehicle Excise Tax Revenue Bonds,
Series 1999 (FGIC Insured) 2009 @ 101
4.750% Due 02/01/28 AAA 2022 @ 100 S.F. 500,610
----------------------------------------------------------------------------------------------------------------------
D 1,000,000 Honolulu, Hawaii, City and County Wastewater System
Revenue Bonds, 2nd Board Resolution, Junior Series
(FGIC Insured) 2009 @ 101
4.500% Due 07/01/28 AAA 2024 @ 100 S.F. 975,980
----------------------------------------------------------------------------------------------------------------------
E 490,000 Illinois, Metropolitan Pier & Exposition Authority, Dedicated
State Tax Revenue Bonds (McCormick Place Expansion
Project) FGIC Insured 2009 @ 101
5.250% Due 12/15/28 AAA 2025 @ 100 S.F. 510,340
----------------------------------------------------------------------------------------------------------------------
F 1,000,000 Indiana, Health Facilities Financing Authority, Hospital
Revenue Bonds (Clarion Health Obligated Group)
MBIA Insured 2010 @ 101.50
5.500% Due 02/15/30 AAA 2027 @ 100 S.F. 1,066,220
----------------------------------------------------------------------------------------------------------------------
G 500,000 St. Joseph County, Indiana, Hospital Authority Health System
Revenue Bonds, Memorial Health System (AMBAC
Assurance Insured) 2011 @ 100
5.625% Due 08/15/33 AAA 2021 @ 100 S.F. 541,310
----------------------------------------------------------------------------------------------------------------------
H 630,000 Illinois, Health Facilities Authority, Revenue Bonds (Edward
Hospital Obligated Group) Series B (FSA Insured) 2011 @ 101
5.250% Due 02/15/34 AAA 2026 @ 100 S.F. 654,614
----------------------------------------------------------------------------------------------------------------------
I 1,000,000 Massachusetts, State Turnpike Authority, Highway System
Revenue Bonds, Subordinate Series A (AMBAC
Assurance Insured) 2009 @ 101
5.000% Due 01/01/39 AAA 2035 @ 100 S.F. 1,014,690
----------------------------------------------------------------------------------------------------------------------
J 585,000 Jefferson County, Alabama, Sewer Revenue Bonds, Capital
Improvement, Waters, Series A (FGIC Insured) 2009 @ 101
5.125% Due 02/01/39 AAA 2009 @ 101 P.R. 628,939
----------------------------------------------------------------------------------------------------------------------
K 400,000 Las Vegas, Nevada, Director, Department of Business &
Industry, Monorail Project, Revenue Bonds, First Tier
(AMBAC Assurance Insured) 2010 @ 100
5.375% Due 01/01/40 AAA 2035 @ 100 S.F. 413,136
----------------------------------------------------------------------------------------------------------------------
L 1,000,000 Chicago, Illinois, Project and Refunding General Obligation
Bonds, Series A (MBIA Insured) 2011 @ 101
5.000% Due 01/01/41 AAA 2039 @ 100 S.F. 1,011,920
------------- ------------
$ 8,465,000 $ 8,750,041
============= ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
VAN KAMPEN FOCUS PORTFOLIOS, MUNICIPAL SERIES 346
CALIFORNIA INSURED MUNICIPALS INCOME TRUST PORTFOLIO AS OF MARCH 31, 2005
----------------------------------------------------------------------------------------------------------------------
PORT- REDEMPTION MARKET
FOLIO AGGREGATE RATING FEATURE VALUE
ITEM PRINCIPAL NAME OF ISSUER, TITLE, INTEREST RATE AND MATURITY DATE (NOTE 2) (NOTE 2) (NOTE 1)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A $ 140,000 Sacramento, California, City Financing Authority, Lease
Revenue Bonds (California Epa Building) Series A 2008 @ 101
4.750% Due 05/01/23 AAA 2020 @ 100 S.F. $ 140,951
----------------------------------------------------------------------------------------------------------------------
B 485,000 Corona, California, Public Financing Authority, Water Revenue
Bonds (FGIC Insured) 2008 @ 102
4.750% Due 09/01/28 AAA 2024 @ 100 S.F. 485,897
----------------------------------------------------------------------------------------------------------------------
C 515,000 Westlands, California, Water District Revenue, Certificates of
Participation Bonds, Series A (AMBAC Assurance Insured) 2009 @ 101
5.000% Due 03/01/29 AAA 2022 @ 100 S.F. 525,012
----------------------------------------------------------------------------------------------------------------------
D 250,000 California, General Obligation Bonds (MBIA Insured) 2009 @ 101
5.000% Due 08/01/29 AAA 2025 @ 100 S.F. 254,312
----------------------------------------------------------------------------------------------------------------------
E 300,000 California, Statewide Communitys Developmental Authority,
Certificates of Participation Bonds (Childrens Hospital
Los Angeles) MBIA Insured 2009 @ 101
5.250% Due 08/15/29 AAA 2020 @ 100 S.F. 312,207
----------------------------------------------------------------------------------------------------------------------
F 400,000 Palmdale, California, Certificates of Participation Bonds
(Courthouse & City Hall Project) AMBAC
Assurance Insured 2009 @ 102
4.750% Due 09/01/29 AAA 2020 @ 100 S.F. 399,984
----------------------------------------------------------------------------------------------------------------------
G 485,000 San Jose, California, Redevelopment Agency, Tax Allocation
Revenue Bonds, Merged Area Redevelopment Project
(AMBAC Assurance Insured)
4.750% Due 08/01/30 AAA 2008 @ 101 484,971
----------------------------------------------------------------------------------------------------------------------
H 300,000 Los Angeles, California, Department of Water and Power
Waterworks, Revenue Bonds, Series A (FGIC Insured) 2011 @ 100
5.125% Due 07/01/41 AAA 2033 @ 100 S.F. 305,772
------------- ------------
$ 2,875,000 $ 2,909,106
============= ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
VAN KAMPEN FOCUS PORTFOLIOS, MUNICIPAL SERIES 346
NEW YORK INSURED MUNICIPALS INCOME TRUST PORTFOLIO AS OF MARCH 31, 2005
----------------------------------------------------------------------------------------------------------------------
PORT- REDEMPTION MARKET
FOLIO AGGREGATE RATING FEATURE VALUE
ITEM PRINCIPAL NAME OF ISSUER, TITLE, INTEREST RATE AND MATURITY DATE (NOTE 2) (NOTE 2) (NOTE 1)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A $ 205,000 New York, Urban Development Corporation, Correctional
Facilities Service Contract, Revenue Bonds, Series B 2009 @ 101
(AMBAC Assurance Insured) 2026 @ 100 S.F.
4.750% Due 01/01/28 AAA 2009 @ 101 P.R. $ 218,630
----------------------------------------------------------------------------------------------------------------------
B 500,000 Long Island, New York, Power Authority, Electric System
General Revenue Bonds, Series 2001A (FSA Insured)
5.250% Due 09/01/28 AAA 2011 @ 100 525,630
----------------------------------------------------------------------------------------------------------------------
C 395,000 New York State Dormitory Authority, Lease Revenue Bonds,
Municipal Health Facilities Improvement Project, Series 1
(FSA Insured) 2009 @ 101
4.750% Due 01/15/29 AAA 2024 @ 100 S.F. 396,560
----------------------------------------------------------------------------------------------------------------------
D 195,000 New York City, New York, Transitional Finance Authority, 2009 @ 101
Revenue Bonds, Future Tax Secured, Series C AAA 2026 @ 100 S.F. 81,934
(AMBAC Assurance Insured) 2009 @ 101
80M-5.000% Due 05/01/29 2026 @ 100 S.F.
115M-5.000% Due 05/01/29 AAA 2009 @ 101 P.R. 124,115
----------------------------------------------------------------------------------------------------------------------
E 500,000 New York State Dormitory Authority, Revenue Bonds, Canisius 2010 @ 100
College (MBIA Insured) 2025 @ 100 S.F.
5.250% Due 07/01/30 AAA 2010 @ 100 P.R. 546,370
----------------------------------------------------------------------------------------------------------------------
F 355,000 New York State Dormitory Authority, Yeshiva University,
Insured Revenue Bonds, Series 2001 (AMBAC
Assurance Insured) 2011 @ 100
5.000% Due 07/01/30 AAA 2027 @ 100 S.F. 363,776
----------------------------------------------------------------------------------------------------------------------
G 500,000 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Series A
(FGIC Insured) 2008 @ 101
4.750% Due 06/15/31 AAA 2030 @ 100 S.F. 500,910
------------- ------------
$ 2,650,000 $ 2,757,925
============= ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
VAN KAMPEN FOCUS PORTFOLIOS,
MUNICIPAL SERIES 346
Notes to Financial Statements March 31, 2003, 2004 and 2005
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation - Tax-exempt municipal securities are stated at the value
determined by the Evaluator. The Evaluator may determine the value of the Bonds
(1) on the basis of current bid prices of the Bonds obtained from dealers or
brokers who customarily deal in Bonds comparable to those held by each of the
Trusts, (2) on the basis of bid prices for comparable Bonds, (3) by determining
the value of the Bonds by appraisal or (4) by any combination of the above.
Security Cost - The original cost to each of the Trusts (IM-IT, California
IM-IT and New York IM-IT) was based on the determination by J.J. Kenny Co. of
the offering prices of the Bonds on the date of deposit (April 19, 2001). Since
the valuation is based upon the bid prices, such Trusts (IM-IT, California IM-IT
and New York IM-IT) recognized downward adjustments of $43,543, $15,695 and
$20,122, respectively, on the date of deposit resulting from the difference
between the bid and offering prices. These downward adjustments were included in
the aggregate amount of unrealized depreciation reported in the financial
statements for each Trust for the period ended March 31, 2002.
Unit Valuation - The redemption price per Unit is the pro rata share of each
Unit in each Trust based upon (1) the cash on hand in such Trust or monies in
the process of being collected, (2) the Bonds in such Trust based on the value
determined by the Evaluator and (3) interest accrued thereon, less accrued
expenses of the Trust, if any.
Federal Income Taxes - The Trust is not a taxable entity for Federal income
tax purposes. Each Unitholder is considered to be the owner of a pro rata
portion of such Trust and, accordingly, no provision has been made for Federal
income taxes.
Other - The financial statements are presented on the accrual basis of
accounting. Any realized gains or losses from securities transactions are
reported on an identified cost basis.
NOTE 2 - PORTFOLIO
Ratings - The source of all ratings, exclusive of those designated N/R or *
is Standard & Poor's, A Division of the McGraw-Hill Companies. Ratings marked *
are by Moody's Investors Service, Inc. as these Bonds are not rated by Standard
& Poor's, A Division of the McGraw-Hill Companies. N/R indicates that the Bond
is not rated by Standard & Poor's, A Division of the McGraw-Hill Companies or
Moody's Investors Service, Inc. The ratings shown represent the latest published
ratings of the Bonds. For a brief description of rating symbols and their
related meanings, see "Description of Securities Ratings" in the Information
Supplement.
Redemption Feature - There is shown under this heading the year in which each
issue of Bonds is initially or currently callable and the call price for that
year. Each issue of Bonds continues to be callable at declining prices
thereafter (but not below par value) except for original issue discount Bonds
which are redeemable at prices based on the issue price plus the amount of
original issue discount accreted to redemption date plus, if applicable, some
premium, the amount of which will decline in subsequent years. "S.F." indicates
a sinking fund is established with respect to an issue of Bonds. "P.R."
indicates a bond has been prerefunded. Redemption pursuant to call provisions
generally will, and redemption pursuant to sinking fund provisions may, occur at
times when the redeemed Bonds have an offering side evaluation which represents
a premium over par. To the extent that the Bonds were deposited in the Trust at
a price higher than the price at which they are redeemed, this will represent a
loss of capital when compared with the original Public Offering Price of the
Units. Conversely, to the extent that the Bonds were acquired at a price lower
than the redemption price, this will represent an increase in capital when
compared with the original Public Offering Price of the Units. Distributions
will generally be reduced by the amount of the income which would otherwise have
been paid with respect to redeemed Bonds and there will be distributed to
Unitholders the principal amount in excess of $1 per Unit semi-annually and any
premium received on such redemption. However, should the amount available for
distribution in the Principal Account exceed $10.00 per Unit, the Trustee will
make a special distribution from the Principal Account on the next succeeding
monthly distribution date to holders of record on the related monthly record
date. The Estimated Current Return in this event may be affected by such
redemptions. For the Federal tax effect on Unitholders of such redemptions and
resultant distributions, see "Federal Tax Status" in Part II.
Insurance - Insurance coverage providing for the timely payment when due of
all principal and interest on the Bonds in the IM-IT, California IM-IT and New
York IM-IT Trusts has been obtained by the Trusts or by one of the Preinsured
Bond Insurers (as indicated in the Bond name). Such insurance does not guarantee
the market value of the Bonds or the value of the Units. For Bonds covered under
the Trust's insurance policy the insurance is effective only while Bonds thus
insured are held in the Trust and the insurance premium, which is a Trust
obligation, is paid on a monthly basis. The premium for insurance which has been
obtained from various insurance companies by the issuer of the Bond involved is
payable by the issuer. Insurance expense for the period reflects adjustments for
redeemed or sold Bonds.
NOTE 2 - PORTFOLIO (continued)
An Accounting and Auditing Guide issued by the American Institute of
Certified Public Accountants states that, for financial reporting purposes,
insurance coverage of the type acquired by the Trust does not have any
measurable value in the absence of default of the underlying Bonds or indication
of the probability of such default. In the opinion of the Evaluator, there is no
indication of a probable default of Bonds in the portfolio as of the date of
these financial statements.
Unrealized Appreciation and Depreciation - An analysis of net unrealized
appreciation (depreciation) at March 31, 2005 is as follows:
California New York
IM-IT IM-IT IM-IT
Trust Trust Trust
-------- -------- --------
Unrealized Appreciation $721,740 $192,795 $214,423
Unrealized Depreciation -- -- --
-------- -------- --------
$721,740 $192,795 $214,423
======== ======== ========
NOTE 3 - OTHER
Marketability - Although it is not obligated to do so, the Sponsor intends to
maintain a market for Units and to continuously offer to purchase Units at
prices, subject to change at any time, based upon the aggregate bid price of the
Bonds in the portfolio of each Trust, plus interest accrued to the date of
settlement. If the supply of Units exceeds demand, or for other business
reasons, the Sponsor may discontinue purchases of Units at such prices. In the
event that a market is not maintained for the Units, a Unitholder desiring to
dispose of his Units may be able to do so only by tendering such Units to the
Trustee for redemption at the redemption price.
Cost to Investors - The cost to original investors was based on the
Evaluator's determination of the aggregate offering price of the Bonds per Unit
on the date of an investor's purchase, plus a sales charge of 4.9% of the public
offering price which is equivalent to 5.152% of the aggregate offering price of
the Bonds. The secondary market cost to investors is based on the Evaluator's
determination of the aggregate bid price of the Bonds per Unit on the date of an
investor's purchase plus a sales charge based upon the years to average maturity
of the Bonds in the portfolio. The sales charge ranges from 1.0% of the public
offering price (1.010% of the aggregate bid price of the Bonds) for a Trust with
a portfolio with less than two years to average maturity to 5.40% of the public
offering price (5.708% of the aggregate bid price of the Bonds) for a Trust with
a portfolio with twenty-one or more years to average maturity.
Compensation of Evaluator and Supervisor - The Supervisor receives a fee for
providing portfolio supervisory services for the Trust ($.25 per Unit, not to
exceed the aggregate cost of the Supervisor for providing such services to the
Trust). In addition, the Evaluator receives an annual fee for regularly
evaluating each of the Trust's portfolios. Both fees may be adjusted for
increases under the category "All Services Less Rent of Shelter" in the Consumer
Price Index.
NOTE 4 - REDEMPTION OF UNITS
Units were presented for redemption as follows:
Years ended March 31,
2003 2004 2005
-------------- -------------- --------------
IM-IT Trust 36 390 107
California IM-IT Trust 13 44 49
New York IM-IT Trust 6 143 209
NOTE 5 - FINANCIAL HIGHLIGHTS
IM-IT/430
2004 2005
------------ ------------
Per Share Operating Performance:
Net asset value, beginning of period.... $ 1,019.32 $ 1,052.17
------------ ------------
Income from investment operations:
Net investment income................ 49.61 49.59
Net realized and unrealized gain (loss)
on investment transactions (a) 33.18 (7.69)
------------ ------------
Total from investment operations........ 82.79 41.90
------------ ------------
Distributions to Unitholders from:
Net investment income................... (49.94) (49.69)
Bond sale and redemption proceeds....... -- (1.28)
------------ ------------
Total distributions to Unitholders...... (49.94) (50.97)
------------ ------------
Net asset value, end of period.......... $ 1,052.17 $ 1,043.10
============ ============
Total Return (b):.......................... 8.30% 4.15%
Ratios as a Percentage of Average Net Assets (b):
Expenses................................ 0.18% 0.18%
Net investment income................... 4.81% 4.82%
California IM-IT/185
2004 2005
------------ ------------
Per Share Operating Performance:
Net asset value, beginning of period.... $ 1,018.19 $ 1,027.81
------------ ------------
Income from investment operations:
Net investment income................ 47.31 47.13
Net realized and unrealized gain (loss)
on investment transactions (a).... 9.75 (5.69)
------------ ------------
Total from investment operations........ 57.06 41.44
------------ ------------
Distributions to Unitholders from:
Net investment income................... (47.44) (47.20)
Bond sale and redemption proceeds....... -- (1.47)
------------ ------------
Total distributions to Unitholders...... (47.44) (48.67)
------------ ------------
Net asset value, end of period.......... $ 1,027.81 $ 1,020.58
============ ============
Total Return (b):.......................... 5.78% 4.19%
Ratios as a Percentage of Average Net Assets (b):
Expenses................................ 0.22% 0.22%
Net investment income................... 4.68% 4.69%
NOTE 5 - FINANCIAL HIGHLIGHTS (continued)
New York IM-IT/150
2004 2005
------------ ------------
Per Share Operating Performance:
Net asset value, beginning of period.... $ 1,011.47 $ 1,067.27
------------ ------------
Income from investment operations:
Net investment income................ 47.43 47.51
Net realized and unrealized gain (loss)
on investment transactions (a).... 55.03 (21.25)
------------ ------------
Total from investment operations........ 102.46 26.26
------------ ------------
Distributions to Unitholders from:
Net investment income................... (46.66) (47.71)
Bond sale and redemption proceeds....... -- --
------------ ------------
Total distributions to Unitholders...... (46.66) (47.71)
------------ ------------
Net asset value, end of period.......... $ 1,067.27 $ 1,045.82
============ ============
Total Return (b):.......................... 10.33% 2.52%
Ratios as a Percentage of Average Net Assets (b):
Expenses................................ 0.21% 0.22%
Net investment income................... 4.57% 4.57%
--------------------------------------------------------------------------------
(a) Realized and unrealized gains and losses per unit include the balancing
amounts necessary to reconcile the change in net asset value per unit. The
per unit amount may be significantly affected based on the changes in units
outstanding during the year.
(b) Not annualized for periods less than one year.
CMSPRO346
Van Kampen Investments
Prospectus Part II
September 2004
Insured Municipals Income Trust
Investors' Quality Tax-Exempt Trust
Van Kampen Focus Portfolios,
Municipal Series
Van Kampen Unit Trusts,
Municipal Series
A convenient way to invest in a diversified
portfolio of tax-exempt municipal bonds
This prospectus contains two parts.
No one may use this Prospectus Part II unless accompanied by Prospectus Part I.
You should read this prospectus and retain it for future reference.
--------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved of
the Trust Units or passed upon the adequacy or accuracy of this prospectus.
Any contrary representation is a criminal offense.
THE TRUSTS
--------------------------------------------------------------------------------
The Fund. Your Trust is one of several unit investment trusts created under
the name Insured Municipals Income Trust, Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Van Kampen Focus Portfolios, Municipal
Series or Van Kampen Unit Trusts, Municipal Series (the "Fund"). The Fund was
created under the laws of the State of New York pursuant to a Trust Indenture
and Agreement (the "Trust Agreement"), dated the Date of Deposit among Van
Kampen Funds Inc., as Sponsor, Standard & Poor's Securities Evaluations, Inc.,
as Evaluator, Van Kampen Investment Advisory Corp., as Supervisor, and The Bank
of New York, as Trustee, or their predecessors. Effective April 26, 2001,
American Portfolio Evaluation Services, a division of Van Kampen Investment
Advisory Corp., resigned as Evaluator and Standard & Poor's Securities
Evaluations, Inc. (then known as J.J. Kenny Co., Inc.) was appointed successor
Evaluator for all Trusts in existence at that time. Van Kampen Investment
Advisory Corp. continues to provide portfolio surveillance services to each
Trust as Supervisor.
The Fund consists of separate portfolios of interest-bearing
obligations issued by or on behalf of states and territories of the United
States, and political subdivisions and authorities thereof, the interest on
which is, in the opinion of recognized bond counsel to the issuing authorities,
excludable from gross income for Federal income tax purposes under existing law.
All issuers of bonds in a State Trust are located in the state for which the
Trust is named or in United States territories or possessions and their public
authorities; consequently, in the opinion of recognized bond counsel to the bond
issuers, the interest earned on the bonds is exempt to the extent indicated
herein from state and local taxes. Further, in the opinion of bond counsel to
the respective issuers, the interest income of each bond in a U.S. Territorial
IM-IT Trust is exempt from state, Commonwealth of Puerto Rico and local income
taxation. Interest on certain bonds in a National Quality AMTTrust may be a
preference item for purposes of the alternative minimum tax. Accordingly, a
National Quality AMTTrust may be appropriate only for investors who are not
subject to the alternative minimum tax. State Trusts, other than State
Intermediate Laddered Maturity Trusts or State Intermediate Trusts, are referred
to herein as "Long-Term State Trusts".
On the Date of Deposit, the Sponsor deposited the bonds with the
Trustee. The bonds initially consisted of delivery statements relating to
contracts for their purchase and cash, cash equivalents and/or irrevocable
letters of credit issued by a financial institution. Thereafter, the Trustee, in
exchange for the bonds, delivered to the Sponsor evidence of ownership of the
Units.
The portfolio of any IM-IT, Investment Grade Municipal, IM-IT Discount,
U.S. Territorial IM-IT, Long-Term State or National Quality Trust consists of
bonds maturing approximately 15 to 40 years from the Date of Deposit. The
approximate range of maturities from the Date of Deposit for bonds in any IM-IT
Laddered Series, IM-IT Limited Maturity Trust, IM-IT Intermediate Trust,
Strategic Municipal Trust Intermediate Series, State Intermediate Laddered
Maturity Trust and IM-IT Short Intermediate Trust is 10 to 30 years, 12 to 15
years, 5 to 15 years, 5 to 15 years, 5 to 10 years and 3 to 7 years,
respectively. The portfolio of any IM-IT Laddered Series is structured so that
approximately 20% of the bonds will mature every five years, beginning in
approximately the tenth year of the Trust, entitling each Unitholder to return
of principal. The portfolio of any State Intermediate Laddered Maturity Trust is
structured so that approximately 20% of the bonds will mature each year,
beginning in approximately the fifth year of the Trust, entitling each
Unitholder to a return of principal. This return of principal may offer
Unitholders the opportunity to respond to changing economic conditions and to
specific financial needs that may arise during the periods of scheduled
maturities. However, the flexibility provided by the return of principal may
also eliminate a Unitholder's ability to reinvest at a rate as high as the yield
on the bonds which matured.
Each Unit represents a fractional undivided interest in the principal
and net income of a Trust. To the extent that any Units are redeemed by the
Trustee, the fractional undivided interest in a Trust represented by each Unit
will increase, although the actual interest in the Trust will remain unchanged.
Units will remain outstanding until redeemed by Unitholders or until the
termination of the Trust Agreement.
Objectives and Bond Selection. The objectives of a Trust are income
exempt from Federal income taxation and, in the case of a State Trust, Federal
and state income taxation and conservation of capital through an investment in
diversified portfolios of Federal and state tax-exempt obligations. A State
Intermediate Laddered Maturity Trust has additional objectives of providing
protection against changes in interest rates and investment flexibility through
an investment in a laddered portfolio of intermediate-term interest-bearing
obligations with maturities ranging from approximately 5 to 10 years in which
roughly 20% of the bonds mature each year beginning in approximately the fifth
year of the Trust. There is, of course, no guarantee that the Trusts will
achieve their objectives. A Trust may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of tax-exempt fixed income
bonds with greater diversification than they might be able to acquire
individually. Insurance guaranteeing the timely payment, when due, of all
principal and interest on the bonds in each Insured Trust has been obtained from
a municipal bond insurance company. For information relating to insurance on the
bonds, see "Insurance on the Bonds in the Insured Trusts". In addition, these
bonds are often not available in small amounts.
In selecting bonds for the Trusts, the Sponsor considered the following
factors, among others: (a) either the Standard & Poor's rating of the bonds was
not less than "BBB-" ("A-" for Quality Trusts), or the Moody's Investors
Service, Inc. ("Moody's") rating of the bonds was not less than "Baa3" ("A3" for
the Quality Trusts), including provisional or conditional ratings, respectively,
(or, if not rated, the bonds had credit characteristics sufficiently similar to
the credit characteristics of interest-bearing tax-exempt bonds that were so
rated as to be acceptable for acquisition by a Trust in the opinion of the
Sponsor), (b) the prices of the bonds relative to other bonds of comparable
quality and maturity, (c) the diversification of bonds as to purpose of issue
and location of issuer and (d) with respect to the Insured Trusts, the
availability and cost of insurance. After the Date of Deposit, a bond may cease
to be rated or its rating may be reduced below the minimum required as of the
Date of Deposit. Neither event requires elimination of a bond from a Trust but
may be considered in the Sponsor's determination as to whether or not to direct
the Trustee to dispose of the bond (see "Fund Administration--Portfolio
Administration"). In particular, the ratings of the bonds in an Investment Grade
Municipal Trust could fall below "investment grade" (i.e., below "BBB-" or
"Baa3") during the Trust's life and the Trust could continue to hold the bonds.
See "The Trusts--Risk Factors".
The Bonds. Your Trust invests in municipal bonds. States, municipalities
and public authorities issue these bonds to raise money for a variety of
purposes. In selecting bonds, we seek to diversify your portfolio by bond
purpose. This section briefly describes different bond types to help you better
understand your investment. These bonds are described in greater detail in the
Information Supplement. See "Additional Information".
General obligation bonds are backed by the general taxing power of the
issuer. The issuer secures these bonds by pledging its faith, credit and
unlimited taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenue of a specific project or
authority. They are not supported by the issuer's general power to levy taxes.
The risk of default in payment of interest or principal increases if the income
of the related project falters because that income is the only source of
payment. All of the following bonds are revenue bonds.
Airport bonds are obligations of issuers that own and operate airports. The
ability of the issuer to make payments on these bonds primarily depends on the
ability of airlines to meet their obligations under use agreements. Due to
increased competition, deregulation, increased fuel costs and other factors,
some airlines may have difficulty meeting these obligations.
Bond banks are vehicles that pool various municipal obligations into larger
offerings. This reduces the cost of borrowing for the municipalities. The types
of financing projects that these obligations support vary.
Certificates of participation are generally a type of municipal lease
obligation. Lease payments of a governmental entity secure payments on these
bonds. These payments depend on the governmental entity budgeting appropriations
for the lease payments. A governmental body cannot obligate future governments
to appropriate for or make lease payments, but governments typically promise to
take action necessary to include lease payments in their budgets. If a
government fails to budget for or make lease payments, sufficient funds may not
exist to pay interest or principal on these bonds.
Health care bonds are obligations of issuers that derive revenue from
hospitals and hospital systems. The ability of these issuers to make payments on
bonds depends on factors such as facility occupancy levels, demand for services,
competition resulting from hospital mergers and affiliations, the need to reduce
costs, government regulation, costs of malpractice insurance and claims, and
government financial assistance (such as Medicare and Medicaid).
Higher education bonds are obligations of issuers that operate universities
and colleges. These issuers derive revenues from tuition, dormitories, grants
and endowments. These issuers face problems related to declines in the number of
college-age individuals, possible inability to raise tuitions and fees,
uncertainty of continued federal grants, state funding or donations, and
government legislation or regulation.
Industrial revenue bonds finance the cost of acquiring, building or
improving industrial projects. Private corporations usually operate these
projects. The ability of the issuer to make payments on these bonds depends on
factors such as the creditworthiness of the corporation operating the project,
revenues generated by the project, expenses of the project and environmental or
other regulatory restrictions.
Multi-family housing bonds are obligations of issuers that derive revenues
from mortgage loans on multiple family residences, retirement housing or housing
projects for low to moderate-income families. These bonds are generally
pre-payable at any time. It is likely that their life will be less than their
stated maturity. The ability of these issuers to make payments on bonds depends
on such factors as rental income, occupancy levels, operating expenses, mortgage
default rates, taxes, government regulations and appropriation of subsidies.
Other care bonds include obligations of issuers that derive revenue from
mental health facilities, nursing homes and intermediate care facilities. These
bonds are similar to health care bonds and the issuers face the same general
risks.
Public building bonds finance the cost of acquiring, leasing, building or
improving public buildings such as offices, recreation facilities, convention
centers, police stations, correctional institutions and parking garages. The
ability of the issuers to make payments on these bonds depends on factors such
as the government budgeting sufficient funds to make lease or mortgage payments
on the facility, user fees or rents, costs of maintenance and decreases in use
of the facility.
Public education bonds are obligations of issuers that operate primary and
secondary schools. The ability of these issuers to make payments on these bonds
depends primarily on ad valorem taxes. These issuers may also face problems
related to litigation contesting state constitutionality of public education
financing.
Retail electric/gas/telephone bonds are obligations of issuers that derive
revenues from the retail sale of utilities to customers. The ability of these
issuers to make payments on these bonds depends on factors such as the rates and
demand for these utilities, competition, government regulation and rate
approvals, overhead expenses and the cost of fuels.
Single family housing bonds are obligations of issuers that derive revenues
from mortgage loans on single family residences. Single family residences
generally include one to four-family dwellings. These bonds are similar to
multi-family housing bonds and the issuers face the same general risks.
Tax district bonds are obligations secured by a pledge of taxing power by a
municipality, such as tax increment financing or tax allocation bonds. These
bonds are similar to general obligation bonds. Unlike general obligation bonds,
however, the municipality does not pledge its unlimited taxing power to pay
these bonds. Instead, the municipality pledges revenues from a specific tax to
pay these bonds. If the tax cannot support payment of interest and principal, a
municipality may need to raise the related tax to pay these bonds. An inability
to raise the tax could have an adverse affect on these bonds.
Transportation bonds are obligations of issuers that own and operate public
transit systems, ports, highways, turnpikes, bridges and other transportation
systems. The ability of these issuers to make payments on these bonds depends on
variations in use, the degree of government subsidization, competition from
other forms of transportation and increased costs. Port authorities derive
revenues primarily from fees imposed on ships using the port facilities. These
fees can fluctuate depending on the local economy and competition from air, rail
and truck transportation. Increased fuel costs, alternative transportation modes
and competition from toll-free bridges and roads will impact revenues of issuers
that operate bridges, roads or tunnels.
Waste disposal bonds are obligations of issuers that derive revenues from
resource recovery facilities. These facilities process solid waste, generate
steam and convert steam to electricity. These issuers face problems such as
costs and delays due to environmental concerns, effects of conservation and
recycling, destruction or condemnation of a project, void or unenforceable
contracts, changes in the economic availability of raw materials, operating
supplies or facilities, and other unavoidable changes that adversely affect
operation of a project.
Water and sewer bonds are obligations of issuers that derive revenues from
user fees from the sale of water and sewerage services. These issuers face
problems such as the ability to obtain rate increases, population declines,
difficulties in obtaining new fresh water supplies and "no-growth" zoning
ordinances. These issuers also face many of the same problems of waste disposal
issuers.
Wholesale electric bonds are obligations of issuers that derive revenues
from selling electricity to other utilities. The ability of these issuers to
make payments on these bonds depends on factors such as the rates and demand for
electric utilities, competition, overhead expenses and government regulation and
rate approvals.
More About the Bonds. In addition to describing the purpose of the bonds,
other information about the bonds is also listed in the "Portfolio" in
Prospectus Part I. This information relates to other characteristics of the
bonds. This section briefly describes some of these characteristics.
Original issue discount bonds were initially issued at a price below their
face (or par) value. These bonds typically pay a lower interest rate than
comparable bonds that were issued at or above their par value. In a stable
interest rate environment, the market value of these bonds tends to increase
more slowly in early years and in greater increments as the bonds approach
maturity. The issuers of these bonds may be able to call or redeem a bond before
its stated maturity date and at a price less than the bond's par value.
Zero coupon bonds are a type of original issue discount bond. These
bonds do not pay any current interest during their life. If an investor own this
type of bond, the investor has the right to receive a final payment of the
bond's par value at maturity. The price of these bonds often fluctuates greatly
during periods of changing market interest rates compared to bonds that make
current interest payments. The issuers of these bonds may be able to call or
redeem a bond before its stated maturity date and at a price less than the
bond's par value.
"When, as and if issued" bonds are bonds that trade before they are
actually issued. This means that the Sponsor can only deliver them to your Trust
"when, as and if" the bonds are actually issued. Delivery of these bonds may be
delayed or may not occur. Interest on these bonds does not begin accruing to
your Trust until the Sponsor delivers the bond to the Trust. You may have to
adjust your tax basis if the Sponsor delivers any of these bonds after the
expected delivery date. Any adjustment would reflect interest that accrued
between the time you purchased your Units and the delivery of the bonds to your
Trust. This could lower your first year estimated current return. You may
experience gains or losses on these bonds from the time you purchase Units even
though your Trust has not yet received them.
Risk Factors. All investments involve risk. This section describes the
main risks that can impact the value of bonds in your Trust. You should
understand these risks before you invest. If the value of the bonds falls, the
value of your Units will also fall. You can lose money by investing in a Trust.
No one can guarantee that your Trust will achieve its objective or that your
investment return will be positive over any period. The Information Supplement
contains a more detailed discussion of risks related to your investment.
Market risk is the risk that the value of the bonds in your Trust will
fluctuate. This could cause the value of your Units to fall below your original
purchase price or below the par value. Market value fluctuates in response to
various factors. These can include changes in interest rates, inflation, the
financial condition of a bond's issuer or insurer, perceptions of the issuer or
insurer, or ratings on a bond. Even though the Supervisor supervises your
portfolio, you should remember that no one manages your portfolio. Your Trust
will not sell a bond solely because the market value falls as is possible in a
managed fund.
Interest rate risk is the risk that the value of bonds will fall if
interest rates increase. Bonds typically fall in value when interest rates rise
and rise in value when interest rates fall. Bonds with longer periods before
maturity are often more sensitive to interest rate changes.
Credit risk is the risk that a bond's issuer or insurer is unable to meet
its obligation to pay principal or interest on the bond.
Call risk is the risk that the issuer prepays or "calls" a bond before its
stated maturity. An issuer might call a bond if interest rates fall and the bond
pays a higher interest rate or if it no longer needs the money for the original
purpose. If an issuer calls a bond, your Trust will distribute the principal to
you but your future interest distributions will fall. You might not be able to
reinvest this principal at as high a yield. A bond's call price could be less
than the price your Trust paid for the bond and could be below the bond's par
value. This means that you could receive less than the amount you paid for your
units. If enough bonds in your Trust are called, your Trust could terminate
early. The first date that the issuer can call each bond in the portfolio is
listed in Prospectus Part I along with the price the issuer would have to pay.
Bond quality risk is the risk that a bond will fall in value if a rating
agency decreases the bond's rating.
Bond concentration risk is the risk that your Trust is less diversified
because it concentrates in a particular type of bond. When a certain type of
bond makes up 25% or more of a Trust, the Trust is considered to be
"concentrated" in that bond type. The different bond types are described under
"The Bonds".
Reduced diversification risk is the risk that your Trust will become
smaller and less diversified as bonds are sold, are called or mature. This could
increase your risk of loss and increase your share of Trust expenses.
Liquidity risk is the risk that the value of a bond will fall if trading in
the bond is limited or absent. No one can guarantee that a liquid trading market
will exist for any bond because these bonds generally trade in the
over-the-counter market (they are not listed on a securities exchange).
Litigation and legislation risk is the risk that future litigation or
legislation could affect the value of your Trust. For example, future
legislation could reduce tax rates, impose a flat tax, exempt all investment
income from tax or change the tax status of the bonds. Litigation could
challenge an issuer's authority to issue or make payments on bonds.
No FDIC Guarantee. An investment in your Trust is not a deposit of any bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
ESTIMATED CURRENT AND LONG-TERM RETURNS
--------------------------------------------------------------------------------
The Estimated Current Returns and the Estimated Long-Term Returns are
set forth in the Prospectus Part I. Estimated Current Return is calculated by
dividing the estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per Unit will vary with
changes in fees and expenses of the Trust and with the principal prepayment,
redemption, maturity, exchange or sale of bonds. The Public Offering Price will
vary with changes in the price of the bonds. Accordingly, there is no assurance
that the present Estimated Current Return will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums and
the accretion of discounts) and estimated retirements of the bonds and (2) takes
into account the expenses and sales charge associated with Units. Since the
value and estimated retirements of the bonds and the expenses of a Trust will
change, there is no assurance that the present Estimated Long-Term Return will
be realized in the future. The Estimated Current Return and Estimated Long-Term
Return are expected to differ because the calculation of Estimated Long-Term
Return reflects the estimated date and amount of principal returned while the
Estimated Current Return calculation includes only net annual interest income
and Public Offering Price.
PUBLIC OFFERING
--------------------------------------------------------------------------------
General. Units are offered at the Public Offering Price. The secondary
market public offering price is based on the bid prices of the bonds, the sales
charge described below, cash, if any, in the Principal Account and accrued
interest, if any. The minimum purchase is one Unit. Certain broker-dealers or
selling firms may charge an order handling fee for processing Unit purchases.
The secondary market sales charge is computed as described in the
following table based upon the estimated long-term return life (ELTR Life) of a
Trust's portfolio:
<TABLE>
<CAPTION>
ELTR Life Sales Charge ELTR Life Sales Charge ELTR Life Sales Charge
------------------ -------------- ------------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
1 1.010% 8 3.627% 15 5.042%
2 1.523 9 4.167 16 5.152
3 2.041 10 4.384 17 5.263
4 2.302 11 4.603 18 5.374
5 2.564 12 4.712 19 5.485
6 2.828 13 4.822 20 5.597
7 3.093 14 4.932 21 to 30 5.708
</TABLE>
For purposes of computation of the estimated long-term return life,
bonds will be deemed to mature on their expressed maturity dates unless: (a) the
bonds have been called for redemption or are subject to redemption at an earlier
call date, in which case this call date will be deemed to be the maturity date;
or (b) the bonds are subject to a "mandatory tender", in which case the
mandatory tender will be deemed to be the maturity date. The sales charges in
the above table are expressed as a percentage of the aggregate bid prices of the
bonds. Expressed as a percent of the Public Offering Price, the sales charge on
a Trust consisting entirely of bonds with 15 years to maturity would be 4.80%.
The sales charges in the table above do not apply to IM-IT Discount Trusts. The
applicable secondary market sales charges for an IM-IT Discount Trust are set
forth in the applicable Prospectus Part I.
Employees, officers and directors (including their spouses and children
under 21 living in the same household, and trustees, custodians or fiduciaries
for the benefit of such persons) of Van Kampen Funds Inc. and its affiliates and
dealers and their affiliates may purchase Units at the Public Offering Price
less the applicable dealer concession. It is your financial professional's
responsibility to alert the Sponsor of this discount when you purchase Units.
Before you purchase Units you must also inform your broker-dealer of your
qualification for this discount to be eligible for a reduced sales charge.
Reducing Your Sales Charge. The Sponsor offers a variety of ways for you to
reduce the sales charge that you pay. It is your financial professional's
responsibility to alert the Sponsor of any discount when you purchase Units.
Before you purchase Units you must also inform your broker-dealer of your
qualification for any discount or of any combined purchases to be eligible for a
reduced sales charge.
Fee Accounts. A portion of the sales charge is waived for certain accounts
described in this paragraph. Purchases by these accounts are subject only to the
portion of the sales charge that is retained by the Sponsor. Please refer to the
section called "Fee Accounts" for additional information on these purchases.
Units may be purchased in the primary or secondary market at the Public Offering
Price less the concession the Sponsor typically allows to brokers and dealers
for purchases by investors who purchase Units through registered investment
advisers, certified financial planners and registered broker-dealers who in each
case either charge periodic fees for brokerage services, financial planning,
investment advisory or asset management services, or provide such services in
connection with the establishment of an investment account for which a
comprehensive "wrap fee" charge is imposed ("Fee Accounts"). The Sponsor
reserves the right to limit or deny purchases of Units described in this
paragraph by investors or selling firms whose frequent trading activity is
determined to be detrimental to a Trust.
Employees. Employees, officers and directors (including their spouses and
children under 21 living in the same household, and trustees, custodians or
fiduciaries for the benefit of such persons) of Van Kampen Funds Inc. and its
affiliates and dealers and their affiliates may purchase Units at the Public
Offering Price less the applicable dealer concession.
Offering Price. The Public Offering Price of Units will vary from the
amounts stated under "Summary of Essential Financial Information" in Prospectus
Part I in accordance with fluctuations in the prices of the bonds. The
"Evaluation Time" is the close of trading on the New York Stock Exchange on each
day that the Exchange is open for trading. Orders received by the Trustee or
Sponsor for purchases, sales or redemptions after that time, or on a day when
the New York Stock Exchange is closed, will be held until the next determination
of price. The secondary market Public Offering Price per Unit will be equal to
the aggregate bid price of the bonds plus the applicable secondary market sales
charge and dividing the sum by the number of Units outstanding. For secondary
market purposes, this computation will be made by the Evaluator as of the
Evaluation Time for each day on which any Unit is tendered for redemption and as
necessary. The offering price of bonds may be expected to average approximately
0.5%-1% more than the bid price.
The aggregate price of the bonds is determined on the basis of bid
prices (a) on the basis of current market prices obtained from dealers or
brokers who customarily deal in bonds comparable to those held by the Fund; (b)
if these prices are not available, on the basis of current market prices for
comparable bonds; (c) by causing the value of the bonds to be determined by
others engaged in the practice of evaluation, quoting or appraising comparable
bonds; or (d) by any combination of the above. Market prices of the bonds will
generally fluctuate with changes in market interest rates. Unless bonds are in
default in payment of principal or interest or in significant risk of default,
the Evaluator will not attribute any value to the insurance obtained by an
Insured Trust, if any.
The Evaluator will consider in its evaluation of bonds which are in
default in payment of principal or interest or, in the Sponsor's opinion, in
significant risk of default (the "Defaulted Bonds") the value of any insurance
guaranteeing interest and principal payments. The value of the insurance will be
equal to the difference between (i) the market value of Defaulted Bonds assuming
the exercise of the right to obtain Permanent Insurance (less the insurance
premiums and related expenses attributable to the purchase of Permanent
Insurance) and (ii) the market value of Defaulted Bonds not covered by Permanent
Insurance. In addition, the Evaluator will consider the ability of a Portfolio
Insurer to meet its commitments under any insurance policy, including
commitments to issue Permanent Insurance. No value has been ascribed to
insurance obtained by an Insured Trust, if any, as of the date of this
prospectus.
A person will become the owner of Units on the date of settlement
provided payment has been received. Cash, if any, made available to the Sponsor
prior to the date of settlement for the purchase of Units may be used in the
Sponsor's business and may be deemed to be a benefit to the Sponsor, subject to
the limitations of the Securities Exchange Act of 1934.
Accrued Interest
Accrued Interest (Accrued Interest to Carry). Accrued interest to carry
is added to the Public Offering Price for Insured Municipals Income Trust, 151st
Insured Multi-Series and prior series and Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Multi-Series 212 and prior series. Accrued
interest to carry consists of two elements. The first element arises as a result
of accrued interest which is the accumulation of unpaid interest on a bond from
the last day on which interest thereon was paid. Interest on Securities in each
Trust is actually paid either monthly, quarterly, if applicable, or
semi-annually to such Trust. However, interest on the Securities in each Trust
is accounted for daily on an accrual basis. Because of this, each Trust always
has an amount of interest earned but not yet collected by the Trustee because of
coupons that are not yet due. For this reason, the Public Offering Price will
have added to it the proportionate share of accrued and undistributed interest
to the date of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities in
such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the Trustee
to advance its own funds in connection with such interest distributions. The
Interest Account balances are also structured so that there will generally be
positive cash balances and since the funds held by the Trustee may be used by it
to earn interest thereon, it benefits thereby. If a Unitholder sells or redeems
all or a portion of his Units or if the bonds in a Trust are sold or otherwise
removed or if a Trust is liquidated, he will receive at that time his
proportionate share of the accrued interest to carry computed to the settlement
date in the case of sale or liquidation and to the date of tender in the case of
redemption.
Purchased and Accrued Interest. Added to the Public Offering Price for
Insured Municipals Income Trust, 152nd-173rd Insured Multi-Series and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213-246 is Purchased Interest and accrued interest. Included in the Public
Offering Price for Insured Municipals Income Trust, 174th Insured Multi-Series
and subsequent series and Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 247 and subsequent series is accrued interest
only. References to "accrued interest" in this prospectus include both Purchased
Interest and accrued interest as described in this section.
Purchased Interest - Purchased Interest is a portion of the unpaid
interest that has accrued on the Securities from the later of the last payment
date on the Securities or the date of issuance thereof through the First
Settlement Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information" in this Prospectus Part I for the amount of Purchased Interest per
Unit for each Trust. Purchased Interest is an element of the price Unitholders
will receive in connection with the sale or redemption of Units prior to the
termination of a Trust.
Accrued Interest - Accrued Interest is an accumulation of unpaid
interest on securities which generally is paid semi-annually, although a Trust
accrues such interest daily. Because of this, a Trust always has an amount of
interest earned but not yet collected by the Trustee. For this reason, with
respect to sales settling after the First Settlement Date, the proportionate
share of accrued interest to the settlement date is added to the Public Offering
Price of Units. Unitholders will receive on the next distribution date of a
Trust the amount, if any, of accrued interest paid on their Units. As indicated
in "Purchased Interest", accrued interest as of the First Settlement Date
includes Purchased Interest. In an effort to reduce the amount of Purchased
Interest which would otherwise have to be paid by Unitholders, the Trustee may
advance a portion of such accrued interest to the Sponsor as the Unitholder of
record as of the First Settlement Date. Consequently, the accrued interest added
to the Public Offering Price of Units will include only accrued interest from
the First Settlement Date to the date of settlement (other than the Purchased
Interest already included therein), less any distributions from the Interest
Account after the First Settlement Date. Because of the varying interest payment
dates of the bonds, accrued interest at any point in time will be greater than
the amount of interest actually received by a Trust and distributed to
Unitholders. If a Unitholder sells or redeems all or a portion of his Units, he
will be entitled to receive his proportionate share of the Purchased Interest
and accrued interest from the purchaser of his Units. Since the Trustee has the
use of the funds (including Purchased Interest) held in the Interest Account for
distributions to Unitholders and since such Account is non-interest-bearing to
Unitholders, the Trustee benefits thereby.
Accrued Interest. Accrued interest is added to the Public Offering
Price for all Trusts not listed above. Accrued interest is an accumulation of
unpaid interest on securities which generally is paid semi-annually, although
each Trust accrues interest daily. Because of this, a Trust always has an amount
of interest earned but not yet collected by the Trustee. For this reason, with
respect to sales settling after the First Settlement Date, the proportionate
share of accrued interest as described in this paragraph to the settlement date
is added to the Public Offering Price of Units for all Trusts not mentioned
above. Unitholders will receive the amount of accrued interest paid on their
Units on the next distribution date. In an effort to reduce the accrued interest
which would have to be paid by Unitholders, the Trustee will advance the amount
of accrued interest to the Sponsor as the Unitholder of record as of the First
Settlement Date. Consequently, the accrued interest added to the Public Offering
Price of Units will include only accrued interest from the First Settlement Date
to the date of settlement, less any distributions from the Interest Account
after the First Settlement Date. Because of the varying interest payment dates
of the bonds, accrued interest at any point in time will be greater than the
amount of interest actually received by a Trust and distributed to Unitholders.
If a Unitholder sells or redeems all or a portion of his Units, he will be
entitled to receive his proportionate share of the accrued interest from the
purchaser of his Units.
Unit Distribution. Units will be distributed to the public by
broker-dealers and others at the Public Offering Price, plus accrued interest.
The Sponsor intends to qualify Units for sale in a number of states.
Broker-dealers or others will be allowed a concession or agency commission in
connection with the distribution of Units equal to 80% of the sales charge
applicable to the transaction provided that the Units are acquired from the
Sponsor. Certain commercial banks may be making Units available to their
customers on an agency basis. A portion of the sales charge paid by these
customers (equal to the agency commission referred to above) is retained by or
remitted to the banks. Any discount provided to investors will be borne by the
selling dealer or agent. The Sponsor reserves the right to reject, in whole or
in part, any order for the purchase of Units and to change the amount of the
concession or agency commission to dealers and others up to the entire amount of
the sales charge.
Sponsor Compensation. The Sponsor will receive a gross sales commission
equal to the sales charge applicable to the transaction involved. See "Public
Offering--General". In addition, the Sponsor realized a profit or loss, as a
result of the difference between the price paid for the bonds by the Sponsor and
the cost of the bonds to a Trust. The Sponsor has not participated as sole
underwriter or as manager or as a member of the underwriting syndicates from
which the bonds in the Trusts were acquired. The Sponsor may further realize
profit or loss as a result of possible fluctuations in the market value of the
bonds since all proceeds received from purchasers of Units (excluding dealer
concessions or agency commissions allowed, if any) will be retained by the
Sponsor. The Sponsor will also realize profits or losses in the amount of any
difference between the price at which Units are purchased and the price at which
Units are resold in connection with maintaining a secondary market for Units and
will also realize profits or losses resulting from a redemption of repurchased
Units at a price above or below the purchase price.
Broker-dealers of the Trusts, banks and/or others are eligible to
participate in a program in which such firms receive from the Sponsor a nominal
award for each of their representatives who have sold a minimum number of units
of unit investment trusts created by the Sponsor during a specified time period.
In addition, at various times the Sponsor may implement other programs under
which the sales forces of such firms may be eligible to win other nominal awards
for certain sales efforts, or under which the Sponsor will reallow to any such
firms that sponsor sales contests or recognition programs conforming to criteria
established by the Sponsor, or participate in sales programs sponsored by the
Sponsor, an amount not exceeding the total applicable sales charges on the sales
generated by such persons at the public offering price during such programs.
Also, the Sponsor in its discretion may from time to time pursuant to objective
criteria established by the Sponsor pay fees to qualifying firms for certain
services or activities which are primarily intended to result in sales of Units
of the Trusts. Such payments are made by the Sponsor out of its own assets, and
not out of the assets of the Trusts. These programs will not change the price
Unitholders pay for their Units or the amount that the Trusts will receive from
the Units sold. Approximately every eighteen months the Sponsor holds a business
seminar which is open to certain Underwriters that sell units of trusts it
sponsors. The Sponsor pays substantially all costs associated with the seminar,
excluding travel costs. These Underwriters are invited to send a certain number
of representatives based on the gross number of units such firm underwrites
during a designated time period.
Market for Units. Although not obligated to do so, the Sponsor intends
to maintain a market for Units and offer to purchase Units at prices, subject to
change at any time, based upon the aggregate bid prices of the bonds plus
accrued interest and any principal cash on hand, less any amounts representing
taxes or other governmental charges payable out of the Trust and less any
accrued Trust expenses. If the supply of Units exceeds demand or if some other
business reason warrants it, the Sponsor may either discontinue all purchases of
Units or discontinue purchases of Units at these prices. If a market is not
maintained and the Unitholder cannot find another purchaser, a Unitholder will
be able to dispose of Units by tendering them to the Trustee for redemption at
the Redemption Price. See "Rights of Unitholders--Redemption of Units". A
Unitholder who wishes to dispose of his Units should inquire of his broker as to
current market prices in order to determine whether there is in any price in
excess of the Redemption Price and, if so, the amount thereof. The Trustee will
notify the Sponsor of any tender of Units for redemption. If the Sponsor's bid
in the secondary market at that time equals or exceeds the Redemption Price per
Unit, it may purchase the Units not later than the day on which the Units would
otherwise have been redeemed by the Trustee.
RIGHTS OF UNITHOLDERS
--------------------------------------------------------------------------------
Distributions of Interest and Principal. Interest received by a Trust,
pro rated on an annual basis, will be distributed monthly unless a Unitholder
elects to receive quarterly or semi-annual distributions. Certain Trusts offer
only monthly distribution options while others offer only monthly and
semi-annual distribution options. The distribution options applicable to a Trust
are described in Prospectus Part I. The plan of distribution selected by a
Unitholder will remain in effect until changed. Unitholders who purchase Units
in the secondary market will receive distributions in accordance with the
election of the prior owner. Unitholders may change their distribution plan by
indicating the change on a card which may be obtained from the Trustee and
return the card to the Trustee with their certificates and other documentation
required by the Trustee. Certificates should be sent by registered or certified
mail to avoid their being lost or stolen. If the card and certificate are
properly presented to the Trustee, the change will become effective on the first
day after the next semi-annual record date and will remain effective until
changed.
Interest received by a Trust, including that part of the proceeds of
any disposition of bonds which represents accrued interest, is credited by the
Trustee to the Interest Account. Other receipts are credited to the Principal
Account. After deduction of amounts sufficient to reimburse the Trustee, without
interest, for any amounts advanced and paid to the Sponsor as the Unitholder of
record as of the First Settlement Date, interest received will be distributed on
each distribution date to Unitholders of record as of the preceding record date.
All distributions will be net of estimated expenses. Funds in the Principal
Account will be distributed on each semi-annual distribution date to Unitholders
of record as of the preceding semi-annual record date. The Trustee is not
required to pay interest on funds held in the Principal or Interest Account (but
may itself earn interest thereon and therefore benefits from the use of these
funds) nor to make a distribution from the Principal Account unless the amount
available for distribution therein shall equal at least $1.00 per Unit. However,
should the amount available for distribution in the Principal Account equal or
exceed $10.00 per Unit, the Trustee will make a special distribution from the
Principal Account on the next monthly distribution date to Unitholders of record
on the related monthly record date.
Because interest payments are not received by a Trust at a constant
rate throughout the year, interest distributions may be more or less than the
amount credited to the Interest Account as of the record date. For the purpose
of minimizing fluctuations in interest distributions, the Trustee is authorized
to advance amounts necessary to provide interest distributions of approximately
equal amounts. The Trustee is reimbursed for these advances from funds in the
Interest Account on the next record date. Persons who purchase Units between a
record date and a distribution date will receive their first distribution on the
second distribution date after the purchase, under the applicable plan of
distribution.
Reinvestment Option. Unitholders may elect to have distributions on
their Units automatically reinvested in shares of certain Van Kampen mutual
funds which are registered in the Unitholder's state of residence (the
"Reinvestment Funds"). Each Reinvestment Fund has investment objectives that
differ from those of the Trusts. The prospectus relating to each Reinvestment
Fund describes its investment policies and the procedures to follow to begin
reinvestment. A Unitholder may obtain a prospectus for the Reinvestment Funds
from Van Kampen Funds Inc. at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace,
Illinois 60181-5555.
After becoming a participant in a reinvestment plan, each Trust
distribution will automatically be applied on the applicable distribution date
to purchase shares of the applicable Reinvestment Fund at a net asset value
computed on such date. Unitholders with an existing Planned Reinvestment Option
(PRO) Program account (whereby a sales charge is imposed on distribution
reinvestments) may transfer their existing account into a new PRO account which
allows purchases of Reinvestment Fund shares at net asset value. Confirmations
of all reinvestments will be mailed to the Unitholder by the Reinvestment Fund.
A participant may elect to terminate his or her reinvestment plan and receive
future distributions in cash by notifying the Trustee in writing at least five
days before the next distribution date. Each Reinvestment Fund, its sponsor and
investment adviser have the right to terminate its reinvestment plan at any
time. Unitholders of New York Trusts who are New York residents may elect to
have distributions reinvested in shares of First Investors New York Insured Tax
Free Fund, Inc. subject to a sales charge of $1.50 per $100 reinvested (paid to
First Investors Management Company, Inc.).
Redemption of Units. A Unitholder may redeem all or a portion of his
Units by tender to the Trustee, at its Unit Investment Trust Division, 101
Barclay Street, 20th Floor, New York, New York 10286, of the certificates
representing the Units to be redeemed, duly endorsed or accompanied by proper
instruments of transfer with signature guaranteed (or by providing satisfactory
indemnity, such as in connection with lost, stolen or destroyed certificates)
and by payment of applicable governmental charges, if any. Redemption of Units
cannot occur until certificates representing the Units or satisfactory indemnity
have been received by the Trustee. No later than seven calendar days following
satisfactory tender, the Unitholder will receive an amount for each Unit equal
to the Redemption Price per Unit next computed after receipt by the Trustee of
the tender of Units. The "date of tender" is deemed to be the date on which
Units are received by the Trustee, except that as regards Units received after
the Evaluation Time on days of trading on the New York Stock Exchange, the date
of tender is the next day on which that Exchange is open and the Units will be
deemed to have been tendered to the Trustee on that day for redemption at the
Redemption Price. Certain broker-dealers or selling firms may charge an order
handling fee for processing redemption requests. Units redeemed directly through
the Trustee are not subject to such fees.
Under Internal Revenue Service regulations, the Trustee is required to
withhold a specified percentage of a Unit redemption if the Trustee has not
received the Unitholder's tax identification number as required by such
regulations. Any amount withheld is transmitted to the Internal Revenue Service
and may be recovered by the Unitholder only when filing a return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, at any time a Unitholder elects to tender
Units for redemption, the Unitholder should provide a tax identification number
to the Trustee in order to avoid this possible "back-up withholding".
The Redemption Price per Unit (as well as the secondary market Public
Offering Price) will be determined on the basis of the bid price of the bonds as
of the Evaluation Time on days of trading on the New York Stock Exchange on the
date any such determination is made. The Evaluator determines the Redemption
Price per Unit on days Units are tendered for redemption. The Redemption Price
per Unit is the pro rata share of each Unit on the basis of (i) the cash on hand
in the Trust or moneys in the process of being collected, (ii) the value of the
bonds based on the bid prices of the bonds, except for cases in which the value
of insurance has been included, (iii) accrued interest, less (a) amounts
representing taxes or other governmental charges and (b) the accrued Trust
expenses. The Evaluator may determine the value of the bonds by employing any of
the methods set forth in "Public Offering--Offering Price". In determining the
Redemption Price per Unit no value will be assigned to the portfolio insurance
maintained on the bonds in an Insured Trust unless the bonds are in default in
payment of principal or interest or in significant risk of default. For a
description of the situations in which the Evaluator may value the insurance
obtained by the Insured Trusts, see "Public Offering--Offering Price". Accrued
interest paid on redemption shall be withdrawn from the Interest Account or, if
the balance therein is insufficient, from the Principal Account. All other
amounts will be withdrawn from the Principal Account. Units so redeemed shall be
cancelled.
The price at which Units may be redeemed could be less than the price
paid by the Unitholder and may be less than the par value of the bonds
represented by the Units redeemed. The Trustee may sell bonds to cover
redemptions. When bonds are sold, the size and diversity of the Trust will be
reduced. Sales may be required at a time when bonds would not otherwise be sold
and might result in lower prices than might otherwise be realized.
The right of redemption may be suspended and payment postponed for any
period during which the New York Stock Exchange is closed, other than for
customary weekend and holiday closings, or during which the SEC determines that
trading on that Exchange is restricted or an emergency exists, as a result of
which disposal or evaluation of the bonds is not reasonably practicable, or for
other periods as the SEC may by order permit. Under certain extreme
circumstances the Sponsor may apply to the SEC for an order permitting a full or
partial suspension of the right of Unitholders to redeem their Units.
Units. Ownership of Units is evidenced in book-entry form unless a
Unitholder makes a written request to the Trustee that ownership be in
certificate form. Units are transferable by making a written request to the
Trustee and, in the case of Units in certificate form, by presentation and
surrender of the certificate to the Trustee properly endorsed or accompanied by
a written instrument or instruments of transfer. A Unitholder must sign the
written request, or certificate transfer instrument, exactly as his name appears
on the records of the Trustee and on the face of any certificate with the
signature guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or a signature guaranty program accepted by the
Trustee. The Trustee may require additional documents such as, but not limited
to, trust instruments, certificates of death, appointments as executor or
administrator or certificates of corporate authority. Certificates will be
issued in denominations of one Unit or any multiple thereof. Although no such
charge is now made, the Trustee may require a Unitholder to pay a reasonable fee
for each certificate re-issued or transferred and to pay any governmental charge
that may be imposed in connection with each transfer or interchange. Destroyed,
stolen, mutilated or lost certificates will be replaced upon delivery to the
Trustee of satisfactory indemnity, evidence of ownership and payment of expenses
incurred. Mutilated certificates must be surrendered to the Trustee for
replacement.
Reports Provided. Unitholders will receive a statement of interest and
other receipts received for each distribution. For as long as the Sponsor deems
it to be in the best interest of Unitholders, the accounts of each Trust will be
audited annually by independent certified public accountants and the report of
the accountants will be furnished to Unitholders upon request. Within a
reasonable period of time after the end of each year, the Trustee will furnish
to each person who was a registered Unitholder during that year a statement
describing the interest and principal received on the bonds, actual Trust
distributions, Trust expenses, a list of the bonds and other Trust information.
Unitholders will be furnished the Evaluator's evaluations of the bonds upon
request to the Trustee. If you have questions regarding your account or your
Trust, please contact your financial advisor or the Trustee. The Sponsor does
not have access to individual account information.
INSURANCE ON THE BONDS IN THE INSURED TRUSTS
--------------------------------------------------------------------------------
Insurance has been obtained guaranteeing prompt payment of interest and
principal, when due, in respect of the bonds in each Insured Trust. An insurance
policy obtained by an Insured Trust, if any, is non-cancelable and will continue
in force so long as the Trust is in existence, the respective Portfolio Insurer
is still in business and the bonds described in the policy continue to be held
by the Trust. Any portfolio insurance premium for an Insured Trust is paid by
the Trust on a monthly basis. The premium for any Preinsured Bond insurance has
been paid by the issuer, by a prior owner of the bonds or the Sponsor and any
policy is non-cancelable and will continue in force so long as the bonds so
insured are outstanding and the Preinsured Bond Insurer remains in business. The
Portfolio Insurers and the Preinsured Bond Insurers are described in "Portfolio"
and the notes thereto in Prospectus Part I. More detailed information regarding
insurance on the bonds and the Preinsured Bond and Portfolio Insurers is
included in the Information Supplement. See "Additional Information".
The portfolio insurance obtained by an Insured Trust, if any,
guarantees the timely payment of principal and interest on the bonds when they
fall due. For this purpose, "when due" generally means the stated payment or
maturity date for the payment of principal and interest. However, in the event
(a) an issuer defaults in the payment of principal or interest, (b) an issuer
enters into a bankruptcy proceeding or (c) the maturity of the bond is
accelerated, the affected Portfolio Insurer has the option to pay the
outstanding principal amount of the bond plus accrued interest to the date of
payment and thereby retire the bond from the Trust prior to the bond's stated
maturity date. The insurance does not guarantee the market value of the bonds or
the value of the Units. The Trustee, upon the sale of a bond covered under a
portfolio insurance policy has the right to obtain permanent insurance with
respect to the bond (i.e., insurance to maturity of the bond regardless of the
identity of the holder) (the "Permanent Insurance") upon the payment of a single
predetermined insurance premium and expenses from the proceeds of the sale of
the bond. It is expected that the Trustee would exercise the right to obtain
Permanent Insurance only if upon exercise the Trust would receive net proceeds
in excess of the sale proceeds if the bonds were sold on an uninsured basis.
Because the bonds are insured by Portfolio Insurers or Preinsured Bond
Insurers as to the timely payment of principal and interest, when due, and on
the basis of the various reinsurance agreements in effect, Standard & Poor's has
assigned to the Units of each Insured Trust its "AAA" investment rating. This
rating will be in effect for a period of thirteen months from the Date of
Deposit and will, unless renewed, terminate at the end of such period. See
"Description of Ratings" in the Information Supplement. This rating should not
be construed as an approval of the offering of the Units by Standard & Poor's or
as a guarantee of the market value of the Trust or of the Units.
Each Portfolio Insurer is subject to regulation by the department of
insurance in the state in which it is qualified to do business. Such regulation,
however, is no guarantee that each Portfolio Insurer will be able to perform on
its contract of insurance in the event a claim should be made. At the date
hereof, it is reported that no claims have been submitted or are expected to be
submitted to any of the Portfolio Insurers which would materially impair the
ability of any such company to meet its commitment pursuant to any contract of
insurance. The information relating to each Portfolio Insurer has been furnished
by such companies. The financial information with respect to each Portfolio
Insurer appears in reports filed with state insurance regulatory authorities and
is subject to audit and review by such authorities. No representation is made
herein as to the accuracy or adequacy of such information or as to the absence
of material adverse changes in such information subsequent to the dates thereof.
FUND ADMINISTRATION
--------------------------------------------------------------------------------
The Sponsor. Van Kampen Funds Inc. is the Sponsor of the Trusts. Van
Kampen Funds Inc. is a wholly owned subsidiary of Van Kampen Investments Inc.
("Van Kampen Investments"). Van Kampen Investments is a diversified asset
management company that administers more than three million retail investor
accounts, has extensive capabilities for managing institutional portfolios and
has more than $89 billion under management or supervision as of June 30, 2004.
Van Kampen Investments has more than 50 open-end funds, more than 30 closed-end
funds and more than 2,700 unit investment trusts that are distributed by
authorized dealers nationwide. Van Kampen Investments is an indirect wholly
owned subsidiary of Morgan Stanley, a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services. Morgan Stanley is a full
service securities firm engaged in securities trading and brokerage activities,
investment banking, research and analysis, financing and financial advisory
services. The Sponsor's principal office is located at 1221 Avenue of the
Americas, New York, New York 10020. As of November 30, 2003, the total
stockholders' equity of Van Kampen Funds Inc. was $175,086,426 (unaudited).
(This paragraph relates only to the Sponsor and not to the Trust or to any other
Series thereof. The information is included herein only for the purpose of
informing investors as to the financial responsibility of the Sponsor and its
ability to carry out its contractual obligations. More detailed financial
information will be made available by the Sponsor upon request.)
Van Kampen Funds Inc. and your Trust have adopted a code of ethics
requiring Van Kampen's employees who have access to information on Trust
transactions to report personal securities transactions. The purpose of the code
is to avoid potential conflicts of interest and to prevent fraud, deception or
misconduct with respect to your Trust.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or shall become bankrupt or its affairs
are taken over by public authorities, then the Trustee may (i) appoint a
successor Sponsor at rates of compensation deemed by the Trustee to be
reasonable and not exceeding amounts prescribed by the Securities and Exchange
Commission, (ii) terminate the Trust Agreement and liquidate the Trusts as
provided therein or (iii) continue to act as Trustee without terminating the
Trust Agreement.
Trustee. The Trustee is The Bank of New York, a trust company organized
under the laws of New York. The Bank of New York has its principal unit
investment trust division offices at 2 Hanson Place, 12th Floor, Brooklyn, New
York 11217, telephone (800) 221-7668. The Bank of New York is subject to
supervision and examination by the Superintendent of Banks of the State of New
York and the Board of Governors of the Federal Reserve System, and its deposits
are insured by the Federal Deposit Insurance Corporation to the extent permitted
by law.
The duties of the Trustee are primarily ministerial in nature. It did not
participate in the selection of bonds for the portfolios of any of the Trusts.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Trusts. Such
records shall include the name and address of, and the certificates issued by
the Trusts to, every Unitholder of the Trusts. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may from
time to time be required under any applicable state or Federal statute, rule or
regulation. The Trustee is required to keep a certified copy or duplicate
original of the Trust Agreement on file in its office available for inspection
at all reasonable times during the usual business hours by any Unitholder,
together with a current list of the bonds held in the Trusts.
Under the Trust Agreement, the Trustee or any successor trustee may resign
and be discharged of the trusts created by the Trust Agreement by executing an
instrument in writing and filing the same with the Sponsor. The Trustee or
successor trustee must mail a copy of the notice of resignation to all
Unitholders then of record, not less than 60 days before the date specified in
such notice when such resignation is to take effect. The Sponsor upon receiving
notice of such resignation is obligated to appoint a successor trustee promptly.
If, upon such resignation, no successor trustee has been appointed and has
accepted the appointment within 30 days after notification, the retiring Trustee
may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may remove the Trustee and appoint a successor trustee as
provided in the Trust Agreement at any time with or without cause. Notice of
such removal and appointment shall be mailed to each Unitholder by the Sponsor.
Upon execution of a written acceptance of such appointment by such successor
trustee, all the rights, powers, duties and obligations of the original trustee
shall vest in the successor. The resignation or removal of a Trustee becomes
effective only when the successor trustee accepts its appointment as such or
when a court of competent jurisdiction appoints a successor trustee. Any
corporation into which a Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a banking corporation organized under the laws of the United States or
any state and having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
Portfolio Administration. The Trusts are not managed funds and, except
as provided in the Trust Agreement, bonds generally will not be sold or
replaced. The Sponsor may, however, direct that bonds be sold in certain limited
situations to protect the Trust based on advice from the Supervisor. These
situations may include default in interest or principal payments on the bonds or
other obligations of an issuer, an advanced refunding or institution of certain
legal proceedings. In addition, the Trustee may sell bonds designated by the
Supervisor for purposes of redeeming Units or payment of expenses. The
Supervisor will consider a variety of factors in designating bonds to be sold
including interest rates, market value and marketability. Except in limited
circumstances, the Trustee must reject any offer by an issuer to issue bonds in
exchange or substitution for the bonds (such as a refunding or refinancing
plan). The Trustee will promptly notify Unitholders of any exchange or
substitution. The Information Supplement contains a more detailed description of
circumstances in which bonds may be sold or replaced. See "Additional
Information".
Replacement Bonds. No assurance can be given that a Trust will retain
its present size or composition because bonds may be sold, redeemed or mature
from time to time and the proceeds will be distributed to Unitholders and will
not be reinvested. In the event of a failure to deliver any bond that has been
purchased under a contract ("Failed Bonds"), the Sponsor is authorized under the
Trust Agreement to direct the Trustee to acquire other bonds ("Replacement
Bonds") to make up the original portfolio of a Trust. Replacement Bonds must be
purchased within 20 days after delivery of the notice of the failed contract and
the purchase price (exclusive of accrued interest) may not exceed the amount of
funds reserved for the purchase of the Failed Bonds. The Replacement Bonds must
be substantially identical to the Failed Bonds in terms of (i) the exemption
from federal and state taxation, (ii) maturity, (iii) yield to maturity and
current return, (iv) Standard & Poor's or Moody's ratings, and (v) insurance in
an Insured Trust. The Trustee shall notify all Unitholders of a Trust within
five days after the acquisition of a Replacement Bond and shall make a pro rata
distribution of the amount, if any, by which the cost of the Failed Bond
exceeded the cost of the Replacement Bond plus accrued interest. If Failed Bonds
are not replaced, the Sponsor will refund the sales charge attributable to the
Failed Bonds to all Unitholders of the Trust and distribute the principal and
accrued interest (at the coupon rate of the Failed Bonds to the date of removal
from the Trust) attributable to the Failed Bonds within 30 days after removal.
All interest paid to a Unitholder which accrued after the expected date of
settlement for Units will be paid by the Sponsor and accordingly will not be
treated as tax-exempt income. If Failed Bonds are not replaced, the Estimated
Net Annual Interest Income per Unit would be reduced and the Estimated Current
Return and Estimated Long-Term Return might be lowered. Unitholders may not be
able to reinvest their proceeds in other securities at a yield equal to or in
excess of the yield of the Failed Bonds.
Amendment of Trust Agreement. The Sponsor and the Trustee may amend the
Trust Agreement without the consent of Unitholders to correct any provision
which may be defective or to make other provisions that will not adversely
affect the interest of the Unitholders (as determined in good faith by the
Sponsor and the Trustee). The Trust Agreement may not be amended to increase the
number of Units or to permit the acquisition of bonds in addition to or in
substitution for any of the bonds initially deposited in the Trust, except for
the substitution of certain refunding bonds. The Trustee will notify Unitholders
of any amendment.
Termination of Trust Agreement. A Trust will terminate upon the
redemption, sale or other disposition of the last bond held in the Trust. A
Trust may also be terminated at any time by consent of Unitholders of 51% of the
Units then outstanding or by the Trustee when the value of the Trust is less
than 20% of the original principal amount of bonds. The Trustee will notify each
Unitholder of any termination within a reasonable time and will then liquidate
any remaining bonds. The sale of bonds upon termination may result in a lower
amount than might otherwise be realized if the sale was not required at that
time. For this reason, among others, the amount realized by a Unitholder upon
termination may be less than the principal amount of bonds per Unit or value at
the time of purchase. The Trustee will distribute to each Unitholder his share
of the balance of the Interest and Principal Accounts after deduction of costs,
expenses or indemnities. The Unitholder will receive a final distribution
statement with this distribution. When the Trustee in its sole discretion
determines that any amounts held in reserve are no longer necessary, it will
distribute these amounts to Unitholders. The Information Supplement contains
further information regarding termination of a Trust. See "Additional
Information".
Limitation on Liabilities. The Sponsor, Supervisor, Evaluator and
Trustee shall be under no liability to Unitholders for taking any action or for
refraining from taking any action in good faith pursuant to the Trust Agreement,
or for errors in judgment, but shall be liable only for their own willful
misfeasance, bad faith or gross negligence (negligence in the case of the
Trustee) in the performance of their duties or by reason of their reckless
disregard of their obligations and duties hereunder. The Trustee shall not be
liable for depreciation or loss incurred by reason of the sale by the Trustee of
any of the bonds. In the event of the failure of the Sponsor to act under the
Trust Agreement, the Trustee may act thereunder and shall not be liable for any
action taken by it in good faith under the Trust Agreement. The Trustee is not
liable for any taxes or governmental charges imposed on the bonds, on it as
Trustee under the Trust Agreement or on the Fund which the Trustee may be
required to pay under any present or future law of the United States of America
or of any other taxing authority having jurisdiction. In addition, the Trust
Agreement contains other customary provisions limiting the liability of the
Trustee. The Trustee and Sponsor may rely on any evaluation furnished by the
Evaluator and have no responsibility for the accuracy thereof. Determinations by
the Evaluator shall be made in good faith upon the basis of the best information
available to it; provided, however, that the Evaluator shall be under no
liability to the Trustee, Sponsor or Unitholders for errors in judgment.
FEDERAL TAX STATUS
--------------------------------------------------------------------------------
This section summarizes some of the main U.S. federal income tax
consequences of owning Units of a Trust. This section is current as of the date
of this prospectus. Tax laws and interpretations change frequently, and these
summaries do not describe all of the tax consequences to all taxpayers. For
example, these summaries generally do not describe your situation if you are a
non-U.S. person, a broker/dealer, or other investor with special circumstances.
In addition, this section does not describe your state or foreign taxes. As with
any investment, you should consult your own tax professional about your
particular consequences. In addition, the Internal Revenue Service issued new
withholding and reporting regulations effective January 1, 2001. Foreign
investors should consult their own tax advisors regarding the tax consequences
of these regulations.
Assets of the Trusts. Each Trust will hold various debt obligations
(the "Bonds") of state and local governmental entities. All of the assets held
by a Trust constitute the "Trust Assets." For purposes of this federal tax
discussion, it is assumed that the Bonds constitute debt the interest on which
is excluded from gross income for federal income tax purposes.
Trust Status. The Trusts will not be taxed as corporations for federal
income tax purposes. As a Unit owner, you will be treated as the owner of a pro
rata portion of the assets of your trust, and as such you will be considered to
have received a pro rata share of income (e.g., accruals of market discount and
capital gains, if any) from the Trust Assets when such income would be
considered to be received by you if you directly owned the Trust Assets. This is
true even if you elect to have your distributions automatically reinvested into
additional Units. In addition, the income from the Trust Assets which you must
take into account for federal income tax purposes is not reduced by amounts used
to pay Trust expenses (including the deferred sales charge, if any).
Exclusion from Gross Income of Interest. At the respective times of
issuance of the Bonds, opinions relating to the validity thereof and to the
exclusion of interest thereon from Federal gross income were rendered by bond
counsel to the respective issuing authorities, based on certain representations
and subject to compliance with certain covenants. In addition, with respect to
State Trusts, where applicable, bond counsel to the issuing authorities rendered
opinions as to the exemption of interest on such Bonds when held by residents of
the State in which the issuers of such Bonds are located, from State income
taxes and certain state or local intangibles and local income taxes. Neither the
Sponsor, its counsel, nor any of the Special Counsel to a Trust for State tax
matters have made any special review for a Trust of the proceedings relating to
the issuance of the Bonds, the bases for the bond counsel opinions, or
compliance with the covenants required for tax-exemption. The Internal Revenue
Service (the "Service") has an ongoing program of auditing tax-exempt
obligations to determine whether, in the view of the Service, interest on such
tax-exempt obligations is includible in the gross income of the owners thereof
for federal income tax purposes. It cannot be predicted whether or not the
Service will commence an audit of any of the Bonds. If an audit is commenced,
under current procedures of the Service, Unitholders may have no right to
participate in such procedure. If the interest on a Bond should be determined to
be taxable, the Bond would generally have to be sold at a substantial discount.
In addition, investors could be required to pay income tax on interest received
both prior to and after the date on which interest is determined to be taxable.
Your pro rata share of interest on the Bonds will be excluded from your
gross income for federal income tax purposes to the same extent that such
interest would be excluded from your gross income if you directly owned the
Bonds. However, such interest may be taken into account in computing the
alternative minimum tax, and the branch profits tax imposed on certain foreign
corporations.
Ownership of the Units may result in collateral federal income tax
consequences to certain Unitholders, including, without limitation, corporations
subject to the branch profits tax, financial institutions, certain insurance
companies, certain S corporations, individual recipients of Social Security or
Railroad Retirement benefits and Unitholders who may be deemed to have incurred
(or continued) indebtedness to purchase or carry tax-exempt obligations.
If you are a "substantial user" of the facilities financed with the
proceeds of certain Bonds, or a related person to a substantial user, you will
not be able to exclude from your gross income interest with respect to these
Bonds. "Substantial user" and "related person" are defined under federal income
tax law.
For purposes of computing the alternative minimum tax for individuals
and corporations, interest on certain bonds is included as an item of tax
preference. Except as otherwise noted in Prospectus Part I for certain Trusts,
the Trusts do not include any such bonds.
In the case of certain corporations, the alternative minimum tax
depends upon the corporation's alternative minimum taxable income ("AMTI"),
which is the corporation's taxable income with certain adjustments. One of the
adjustment items used in computing AMTI of a corporation (excluding S
Corporations, Regulated Investment Companies, Real Estate Investment Trusts,
REMICs or FASITs) is an amount equal to 75% of the excess of such corporation's
"adjusted current earnings" over an amount equal to its AMTI (before such
adjustment item and the alternative tax net operating loss deduction). "Adjusted
current earnings" includes all tax-exempt interest, including interest on all of
the Bonds in the Trusts. In addition, a branch profits tax is levied on the
"effectively connected earnings and profits" of certain foreign corporations,
which include tax-exempt interest, such as interest on the Bonds in the Trust.
Your Tax Basis and Income or Loss Upon Disposition. If your Trust
disposes of Trust Assets, you will generally recognize gain or loss. If you
dispose of your Units or redeem your Units for cash, you will also generally
recognize gain or loss. To determine the amount of this gain or loss, you must
subtract your tax basis in the related Trust Assets from your share of the total
amount received in the transaction. You can generally determine your initial tax
basis in each Trust Asset by apportioning the cost of your Units, generally
including sales charges, among each Trust Asset ratably according to their value
on the date you purchase your Units. In certain circumstances, however, you may
have to adjust your tax basis after you purchase your Units (for example, in the
case of accruals of original issue discount, market discount, premium and
accrued interest, as discussed below).
Under the recently enacted "Jobs and Growth Tax Relief Reconciliation Act
of 2003" (the "Tax Act"), if you are an individual, the maximum marginal federal
tax rate for net capital gain is generally 15% (generally 5% for certain
taxpayers in the 10% and 15% tax brackets). These new capital gains rates are
generally effective for taxable years ending on or after May 6, 2003 and
beginning before January 1, 2009. However, special effective date provisions are
set forth in the Tax Act. For example, there are special transaction rules
provided with respect to gain properly taken into account for the portion of the
taxable year before May 6, 2003. For periods not covered by these reduced rates
under the Tax Act, if you are an individual, the maximum marginal federal tax
rate for net capital gain is generally 20% (10% for certain taxpayers in the 10%
and 15% tax brackets). The 20% rate is reduced to 18% and the 10% rate is
reduced to 8% for long-term gains from most property acquired after December 31,
2000, with a holding period of more than five years.
Net capital gain equals net long-term capital gain minus net short-term
capital loss for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your Units to determine your holding period. The tax rates for capital
gains realized from assets held for one year or less are generally the same as
for ordinary income. The Internal Revenue Code, however, treats certain capital
gains as ordinary income in special situations.
Discount, Accrued Interest and Premium on Debt Obligations. Some Bonds
may have been sold with original issue discount. This generally means that the
Bonds were originally issued at a price below their face (or par) value.
Original issue discount accrues on a daily basis and generally is treated as
interest income for federal income tax purposes. Thus, the accrual of original
discount will be excluded from your gross income for federal income tax purposes
to the same extent as interest on the Bonds, as discussed above. Your basis of
each Bond which was issued with original issue discount must be increased as
original issue discount accrues.
Some Bonds may have been purchased by you or the Trust at a market
discount. Market discount is generally the excess of the stated redemption price
at maturity for the Bonds over the purchase price of the Bond. Market discount
can arise based on the price a Trust pays for a Bond or on the price you pay for
your Units. Market discount is taxed as ordinary income. You will recognize this
income when your Trust receives principal payments on the Bond, when the Bond is
disposed of or redeemed, or when you sell or redeem your Units. Alternatively,
you may elect to include market discount in taxable income as it accrues.
Whether or not you make this election will affect how you calculate your basis
and the timing of certain interest expense deductions.
Alternatively, some Bonds may have been purchased by you or your Trust
at a premium. Generally, if the tax basis of your pro rata portion of any Bond,
generally including sales charges, exceeds the amount payable at maturity, such
excess is considered premium. You must amortize bond premium on a constant yield
basis over the remaining term of the bond in a manner that takes into account
potential call dates and call prices. You cannot deduct amortized bond premium
relating to a Bond. The amortized bond premium is treated as a reduction in the
tax-exempt interest received. As bond premium is amortized, it reduces your
basis in the Bond. The tax basis reduction requirement may result in your
realizing a taxable gain when your Units are sold or redeemed for an amount
equal to or less than your cost.
If the price of your Units includes accrued interest on a Bond, you
must include the accrued interest in your tax basis in that Bond. When your
Trust receives this accrued interest, you must treat it as a return of capital
and reduce your tax basis in the Bond.
This discussion provides only the general rules with respect to the tax
treatment of original issue discount, market discount and premium. The rules,
however, are complex and special rules apply in certain circumstances. For
example, the accrual of market discount or premium may differ from the
discussion set forth above in the case of Bonds that were issued with original
issue discount.
Exchanges. If you elect to reinvest amounts received from the Trust
into a future trust, it is considered a sale for federal income tax purposes,
and any gain on the sale will be treated as a capital gain, and any loss will be
treated as a capital loss. However, any loss you incur in connection with the
exchange of your Units of your Trust for units of a future trust will generally
be disallowed with respect to this deemed sale and subsequent deemed repurchase,
to the extent the two trusts have substantially identical assets under the wash
sale provisions of the Internal Revenue Code.
Limitations on the Deductibility of Trust Expenses. Generally, for
federal income tax purposes, you must take into account your full pro rata share
of your Trust's income, even if some of that income is used to pay Trust
expenses. You may deduct your pro rata share of each expense paid by the Trust
to the same extent as if you directly paid the expense. You may, however, be
required to treat some or all of the expenses of your Trust as miscellaneous
itemized deductions. Individuals may only deduct certain miscellaneous itemized
deductions to the extent they exceed 2% of adjusted gross income. Your ability
to deduct Trust expenses is also limited to the extent the expenses are
allocable to tax-exempt interest from the Trust.
In the opinion of special counsel to the Trusts for New York tax
matters, under existing law, each Trust is not an association taxable as a
corporation and the income of each Trust will be treated as the income of the
Unitholders under the income tax laws of the State and City of New York.
Except as noted herein, the exemption of interest on state and local
obligations for Federal income tax purposes discussed above does not necessarily
result in exemption under the income or other tax laws of any state or city. The
laws of the several states vary with respect to the taxation of such
obligations.
STATE TRUST RISK FACTORS AND TAX STATUS
--------------------------------------------------------------------------------
Arizona Risk Factors. The financial condition of the State of Arizona
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Arizona risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Arizona Trust, Special
Counsel to the Fund for Arizona tax matters rendered an opinion under then
existing Arizona income tax law applicable to taxpayers whose income is subject
to Arizona income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Arizona (the "State"), its political
subdivisions and authorities (the "Arizona Bonds") and certain bonds issued by
Puerto Rico authorities (the "Possession Bonds") (collectively the Arizona Bonds
and Possession Bonds shall be referred to herein as the "Bonds"), provided the
interest on such Bonds received by the Trust is exempt from State income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
federal income tax purposes and (iii) interest on the Bonds, if received
directly by a Unitholder would be exempt from the Arizona income tax (the
"Arizona Income Tax"). We have assumed that at the respective times of issuance
of the Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, it is assumed that with respect to
the Arizona Bonds, bond counsel to the issuing authorities rendered opinions
that the interest on the Bonds is exempt from the Arizona Income Tax and, with
respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions to the effect that the interest on the Possession Bonds is
exempt from all state and local income taxation. Neither the Sponsor nor its
counsel has made any review for the Trust of the proceedings relating to the
issuance of the Bonds or of the bases for the opinions rendered in connection
therewith.
In the opinion of counsel to the Sponsor, under existing law:
For Arizona income tax purposes, each Unitholder will be treated as the
owner of a pro rata portion of the Arizona Trust, and the income of the Arizona
Trust therefore will be treated as the income of the Unitholder under State law.
For Arizona income tax purposes, interest on the Bonds which is
excludable from Federal gross income and which is exempt from Arizona income
taxes when received by the Arizona Trust, and which would be excludable from
Federal gross income and exempt from Arizona income taxes if received directly
by a Unitholder, will retain its status as tax-exempt interest when received by
the Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a
Unitholder with respect to the Arizona Bonds is excludable from Federal gross
income, such interest will not be subject to Arizona income taxes.
Interest on the Possession Bonds which is excludable from gross income
for federal tax purposes and is exempt from state and local taxation pursuant to
federal law when received by the Arizona Trust will be exempt from Arizona
income taxation and therefore will not be includible in the income of the
Unitholders for income tax purposes when distributed by the Arizona Trust and
received by the Unitholders.
Each Unitholder will receive taxable gain or loss for Arizona income
tax purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed
or paid at maturity, or when the Unitholder redeems or sells Units, at a price
that differs from original cost as adjusted for accretion of Bond discount or
amortization of premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Unitholder's settlement
date and the date such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies
issued to the Trust, if any, with respect to the Bonds in the Trust which
represent maturing interest on defaulted Bonds held by the Trustee will be
exempt from State income taxes if, and to the same extent as, such interest
would have been so exempt if paid by the issuer of the defaulted Bonds provided
that, at the time such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the Bonds, rather than the insurer, will pay debt
service on the Bonds.
Arizona law does not permit a deduction for interest paid or incurred
on indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes. Special rules
apply to financial institutions, and such institutions should consult their own
tax advisors with respect to deductions of interest.
Neither the Bonds nor the Units will be subject to Arizona property
taxes, sales tax or use tax.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Arizona law. Ownership of the Units may
result in collateral Arizona tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
Arkansas Risk Factors. The financial condition of the State of Arkansas
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. During the past several decades,
Arkansas's economic base has shifted from agriculture to light manufacturing.
Agriculture has traditionally been a major component of Arkansas's economy, but
total income from this sector continues to decrease.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Arkansas currently maintains a "AA" and "Aa2" bond rating
from Standard & Poor's and Moody's, respectively, on its general obligation
indebtedness.
Further information concerning Arkansas risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Arkansas Trust, Special
Counsel to each Arkansas Trust for Arkansas tax matters rendered an opinion
under then existing Arkansas income tax law applicable to taxpayers whose income
is subject to Arkansas income taxation substantially to the effect that:
The Arkansas Trust is not an association taxable as a corporation or
otherwise for purposes of Arkansas income taxation; Each Arkansas Unitholder
will be treated as the owner of a pro rata portion of the Arkansas Trust for
Arkansas income tax purposes, and will have a taxable event when the Arkansas
Trust disposes of a Bond or when the Unitholder sells, exchanges, redeems or
otherwise disposes of his Units;
Any gains realized upon the sale, exchange, maturity, redemption or
other disposition of Bonds held by the Arkansas Trust resulting in the
distribution of income to Arkansas Unitholders will be subject to Arkansas
income taxation to the extent that such income would be subject to Arkansas
income taxation if the Bonds were held, sold, exchanged, redeemed or otherwise
disposed of by the Arkansas Unitholders; and
Interest on Bonds, issued by the State of Arkansas, or by or on behalf
of political subdivisions, thereof, that would be exempt from Federal income
taxation when paid directly to an Arkansas Unitholder will be exempt from
Arkansas income taxation when received by the Arkansas Trust and attributed to
such Arkansas Unitholder and when distributed to such Arkansas Unitholder.
California Risk Factors. The financial condition of the State of
California is affected by various national, economic, social and environmental
policies and conditions. Additionally, limitations imposed by constitutional
amendments, legislative measures, or voter initiatives on the State and its
local governments concerning taxes, bond indebtedness and other matters may
constrain the revenue-generating capacity of the State and its local governments
and, therefore, the ability of the issuers of the Bonds to satisfy their
obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors, such as natural disasters,
complications with exports and industry deregulation.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds of the State are rated "BBB" by
Standard and Poor's and "Baa1" by Moody's. Further information concerning
California risk factors may be obtained upon request to the Sponsor as described
in "Additional Information".
Tax Status. We have examined the income tax laws of the State of
California to determine its applicability to the Trust and to the holders of
Units in the Trust who are full-time residents of the State of California
("California Unitholders"). The assets of the Trust will consist of bonds issued
by the State of California or a local government of California (the "California
Bonds") or by the Commonwealth of Puerto Rico or its authority (the "Possession
Bonds") (collectively, the "Bonds"). For purposes of the following opinions, it
is assumed that each asset of the Trust is debt, the interest on which is
excluded from gross income for federal income tax purposes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although Chapman and
Cutler LLP expresses no opinion with respect to the issuance of the Bonds, in
rendering its opinion expressed herein, it has assumed that: (i) the Bonds were
validly issued; (ii) the interest thereon is excludable from gross income for
federal income tax purposes; and (iii) interest on the Bonds, if received
directly by a California Unitholder, would be exempt from the income tax imposed
by the State of California that is applicable to individuals, trusts and estates
(the "California Personal Income Tax"). This opinion does not address the
taxation of persons other than full time residents of California. We have
assumed that, at the respective times of issuance of the Bonds, opinions that
the Bonds were validly issued and that interest on the Bonds is excluded from
gross income for Federal income tax purposes were rendered by bond counsel to
the respective issuing authorities. In addition, we have assumed that, with
respect to the California Bonds, bond counsel to the issuing authorities
rendered opinions that the interest on the California Bonds is exempt from the
California Personal Income Tax and, with respect to the Possession Bonds, bond
counsel to the issuing authorities rendered opinions that the Possession Bonds
and the interest thereon is exempt from all state and local income taxation.
Neither the Sponsor nor its counsel has made any review for the Trust of the
proceedings relating to the issuance of the Bonds or of the basis for the
opinions rendered in connection therewith.
Based upon the foregoing, and upon an investigation of such matters of
law as we considered to be applicable, we are of the opinion that, under
existing provisions of the law of the State of California as of the date hereof:
1. The Trust is not an association taxable as a corporation for
purposes of the California Corporation Tax Law, and each California Unitholder
will be treated as the owner of a pro rata portion of the Trust, and the income
of such portion of the Trust will be treated as the income of the California
Unitholders under the California Personal Income Tax.
2. Interest on the Bonds which is exempt from tax under the California
Personal Income Tax when received by the Trust and which would be excludable
from California taxable income for purposes of the California Personal Income
Tax if received directly by a California Unitholder, will be excludable from
California taxable income for purposes of the California Personal Income Tax
when received by the Trust and distributed to a California Unitholder.
3. Each California Unitholder of the Trust will generally recognize
gain or loss for California Personal Income Tax purposes if the Trustee disposes
of a Bond (whether by redemption, sale or otherwise) or when the California
Unitholder redeems or sells Units of the Trust, to the extent that such a
transaction results in a recognized gain or loss to such California Unitholder
for federal income tax purposes. However, there are certain differences between
the recognition of gain or loss for federal income tax purposes and for
California Personal Income Tax purposes, and California Unitholders are advised
to consult their own tax advisors. Tax basis reduction requirements relating to
amortization of bond premium may, under some circumstances, result in a
California Unitholder realizing taxable gain for California Personal Income Tax
purposes when a Unit is sold or redeemed for an amount equal to or less than its
original cost.
4. Under the California Personal Income Tax, interest on indebtedness
incurred or continued by a California Unitholder to purchase Units in the Trust
is not deductible for purposes of the California Personal Income Tax.
This opinion relates only to California Unitholders subject to the
California Personal Income Tax. No opinion is expressed with respect to the
taxation of California Unitholders subject to the California Corporation Tax Law
and such California Unitholders are advised to consult their own tax advisors.
Please note, however, that interest on the underlying Bonds attributed to a
California Unitholder that is subject to the California Corporation Tax Law may
be includible in its gross income for purposes of determining its California
franchise tax. We have not examined any of the Bonds to be deposited and held in
the Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and we express no opinion with respect to taxation
under any other provisions of the California law. Ownership of the Units may
result in collateral California tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences.
Colorado Risk Factors. The financial condition of the State of Colorado
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Colorado risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Colorado Trust, counsel
to the Fund for Colorado tax matters rendered an opinion under then existing
Colorado income tax law applicable to taxpayers whose income is subject to
Colorado income taxation substantially to the effect that:
The assets of the Colorado Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Colorado ("Colorado") or
counties, municipalities, authorities or political subdivisions thereof (the
"Colorado Bonds") or by the Commonwealth of Puerto Rico (the "Puerto Rico
Bonds") (collectively, the "Bonds") the interest on which is expected to qualify
as exempt from Colorado income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although counsel to the
Fund expresses no opinion with respect to the issuance of the Bonds, in
rendering its opinion expressed herein, it has assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
federal income tax purposes, and (iii) interest on the Bonds, if received
directly by a Unitholder, would be exempt from the income tax imposed by the
State that is applicable to individuals and corporations (the"State Income
Tax").
It is assumed that, at the respective times of issuance of the Bonds:
(i) opinions relating to the validity thereof and to the exemption of interest
thereon from Federal income tax were rendered by bond counsel to the respective
issuing authorities; (ii) with respect to the Colorado Bonds, bond counsel to
the issuing authorities rendered opinions that the interest on the Colorado
Bonds is exempt from the State Income Tax (the "State Income Tax") and, (iii)
with respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions that the interest on the Possession Bonds is exempt from all
state and local income taxation. Neither the Sponsor nor its counsel has made
any review for the Colorado Trust of the proceedings relating to the issuance of
the Bonds or of the bases for the opinions rendered in connection therewith.
This opinion does not address the taxation of persons other than full time
residents of Colorado.
In the opinion of counsel to the Fund, under existing Colorado law:
1. Because Colorado income tax law is based upon the Federal law, the
Colorado Trust is not an association taxable as a corporation for purposes of
Colorado income taxation.
2. With respect to Colorado Unitholders, in view of the relationship
between Federal and Colorado tax computations described above:
(i) Each Colorado Unitholder will be treated as owning a pro rata share
of each asset of the Colorado Trust for Colorado income tax purposes in the
proportion that the number of Units of such Trust held by the Unitholder bears
to the total number of outstanding Units of the Colorado Trust, and the income
of the Colorado Trust will therefore be treated as the income of each Colorado
Unitholder under Colorado law in the proportion described and an item of income
of the Colorado Trust will have the same character in the hands of a Colorado
Unitholder as it would have if the Colorado Unitholder directly owned the assets
of the Colorado Trust;
(ii) Interest on Bonds that would not be includible in income for
Colorado income tax purposes when paid directly to a Colorado Unitholder will be
exempt from Colorado income taxation when received by the Colorado Trust and
attributed to such Colorado Unitholder and when distributed to such Colorado
Unitholder;
(iii) To the extent that interest income derived from the Colorado
Trust by a Unitholder with respect to Puerto Rico Bonds is exempt from state
taxation pursuant to 48 U.S.C. 745, such interest will not be subject to the
Colorado State Income Tax.
(iv) Any proceeds paid under an insurance policy or policies. if any,
issued to the Colorado Trust with respect to the Bonds in the Colorado Trust
which represent maturing interest on defaulted Bonds held by the Trustee will be
excludable from Colorado adjusted gross income if, and to the same extent as,
such interest is so excludable for federal income tax purposes if paid in the
normal course by the issuer notwithstanding that the source of payment is from
insurance proceeds provided that, at the time such policies are purchased, the
amounts paid for such policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the Bonds, rather than the insurer,
will pay debt service on the Bonds.
(v) Each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity) or when the Colorado Unitholder redeems or sells Units at a
price that differs from original cost as adjusted for amortization of bond
discount or premium and other basis adjustments (including any basis reduction
that may be required to reflect a Colorado Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Colorado Unitholder's
settlement date and the date such Bonds are delivered to the Colorado Trust, if
later);
(vi) Tax basis reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Colorado Unitholders realizing
taxable gain when their Units are sold or redeemed for an amount equal to or
less than their original cost; and
(vii) If interest on indebtedness incurred or continued by a Colorado
Unitholder to purchase Units in the Colorado Trust is not deductible for federal
income tax purposes, it also will be non-deductible for Colorado income tax
purposes.
Unitholders should be aware that all tax-exempt interest, including
their share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
Counsel to the Fund has expressed no opinion with respect to taxation
under any other provision of Colorado law. Ownership of the Units may result in
collateral Colorado tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
Connecticut Risk Factors. The financial condition of the State of
Connecticut is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Connecticut risk factors may be obtained
upon request to the Sponsor as described in "Additional Information" .
Tax Status. At the time of the closing for each Connecticut Trust,
special counsel to the Fund for Connecticut tax matters rendered an opinion
under then existing Connecticut income tax law applicable to taxpayers whose
income is subject to Connecticut income taxation substantially to the effect
that:
The assets of the Trust will consist of obligations (the "Bonds");
certain of the Bonds have been issued by or on behalf of the State of
Connecticut or its political subdivisions or other public instrumentalities,
state or local authorities, districts, or similar public entities created under
the laws of the State of Connecticut ("Connecticut Bonds"); the balance of the
Bonds have been issued by or on behalf of entities classified for the relevant
purposes as territories or possessions of the United States, including one or
more of Puerto Rico, Guam, or the Virgin Islands, the interest on the
obligations of which Federal law would prohibit Connecticut from taxing if
received directly by the Unitholders. Certain Connecticut Bonds in the Trust
were issued prior to the enactment of the Connecticut income tax on the
Connecticut taxable income of individuals, trusts, and estates (the "Connecticut
Income Tax"); therefore, bond counsel to the issuers of such Bonds did not opine
as to the exemption of the interest on such Bonds from such tax. However, the
Sponsor and special counsel to the Trust for Connecticut tax matters believe
that such interest will be so exempt. Interest on other Bonds in the Trust, if
any, is, in the opinion of bond counsel to such issuers, exempt from state
taxation.
In the opinion of Day, Berry & Howard LLP, special counsel to the Fund
for Connecticut tax matters, which relies explicitly on the opinion of Chapman
and Cutler LLP regarding Federal income tax matters, in summary under existing
Connecticut law:
The Trust is not liable for any tax on or measured by net income imposed by
the State of Connecticut;
Interest income of the Trust from a Bond issued by or on behalf of the
State of Connecticut, any political subdivision thereof, or public
instrumentality, state or local authority, district, or similar public entity
created under the laws of the State of Connecticut (a "Connecticut Bond"), or
from a Bond issued by United States territories or possessions the interest on
which Federal law would prohibit Connecticut from taxing if received directly by
a Unitholder from the issuer thereof, is not taxable under the Connecticut tax
on the Connecticut taxable income of individuals, trusts, and estates (the
"Connecticut Income Tax"), when any such interest is received by the Trust or
distributed by it to such a Unitholder;
Insurance proceeds received by the Trust representing maturing interest
on defaulted Bonds held by the Trust are not taxable under the Connecticut
Income Tax if, and to the same extent as, such interest would not be taxable
thereunder if paid directly to the Trust by the issuer of such Bonds;
Gains and losses recognized by a Unitholder for Federal income tax
purposes upon the maturity, redemption, sale, or other disposition by the Trust
of a Bond held by the Trust or upon the redemption, sale, or other disposition
of a Unit of the Trust held by a Unitholder are taken into account as gains or
losses, respectively, for purposes of the Connecticut Income Tax, except that,
in the case of a Unitholder holding a Unit of the Trust as a capital asset, such
gains and losses recognized upon the maturity, redemption, sale, or exchange of
a Connecticut Bond held by the Trust are excluded from gains and losses taken
into account for purposes of such tax, and no opinion is expressed as to the
treatment for purposes of such tax of gains and losses recognized, to the extent
attributable to Connecticut Bonds, upon the redemption, sale, or other
disposition by a Unitholder of a Unit of the Trust held by him;
The portion of any interest income or capital gain of the Trust that is
allocable to a Unitholder that is subject to the Connecticut corporation
business tax is includible in the gross income of such Unitholder for purposes
of such tax; and
An interest in a Unit of the 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.
Generally, a Unitholder recognizes gain or loss for purposes of the
Connecticut Income Tax to the same extent as the Unitholder recognizes gain or
loss for Federal income tax purposes. Ordinarily this would mean that gain or
loss would be recognized by a Unitholder upon the maturity, redemption, sale, or
other disposition by the Trust of a Bond held by it, or upon the redemption,
sale or other disposition of a Unit of the Trust held by the Unitholder.
However, gains and losses from the sale or exchange of Connecticut Bonds held as
capital assets are not taken into account for purposes of this tax. Regulations
indicate that this rule would apply to gain or loss recognized by a Unitholder
holding a Unit of the Trust as a capital asset upon the maturity, redemption,
sale, or other disposition of a Connecticut Bond held by the Trust. However, it
is not clear whether this rule would also apply, to the extent attributable to
Connecticut Bonds held by the Trust, to gain or loss recognized by a Unitholder
upon the redemption, sale, or other disposition of a Unit of the Trust held by
such Unitholder. Unitholders are urged to consult their own tax advisors
concerning these matters.
Florida Risk Factors. The financial condition of the State of Florida
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa2 and AA+ from Moody's and
Standard & Poor's, respectively, on the majority of its general obligation
bonds, although the rating of a particular series of revenue bonds relates
primarily to the project, facility, or other revenue resource from which such
series derives funds for repayment.
Further information concerning Florida risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Florida Trust, Counsel
to each Florida Trust for Florida tax matters rendered an opinion under then
existing Florida income tax law applicable to taxpayers whose income is subject
to Florida income taxation substantially to the effect that:
The Bonds were accompanied by opinions of bond counsel to the
respective issuers thereof to the effect that the Bonds were exempt from the
Florida intangibles tax. Neither the Sponsor nor its counsel have independently
reviewed such opinions or examined the Bonds to be deposited in and held by the
Florida IM-IT Trust and have assumed the correctness as of the date of deposit
of the opinions of bond counsel and that the Bonds are and will continue to be
exemptg from such taxes. It is assumed for purposes of the opinion below the
Bonds constitute debt for Federal income tax purposes.
"Non-Corporate Unitholder" means a Unitholder of the Florida IM-IT
Trust who is an individual not subject to the Florida state income tax on
corporations under Chapter 220, Florida Statutes and "Corporate Unitholder"
means a Unitholder of the Florida IM-IT Trust that is a corporation, bank or
savings association or other entity subject to Florida state income tax on
corporations or franchise tax imposed on banks or savings associations under
Chapter 220, Florida Statutes.
In the opinion of Chapman and Cutler LLP, counsel to the Sponsor, in
summary under existing law:
For Florida state income tax purposes, the Florida IM-IT Trust will not
be subject to the Florida income tax imposed by Chapter 220, Florida Statutes.
Because Florida does not impose an income tax on individuals,
Non-Corporate Unitholders residing in Florida will not be subject to any Florida
income taxation on income realized by the Florida IM-IT Trust. Any amounts paid
to the Florida IM-IT Trust or to Non-Corporate Unitholders under an insurance
policy issued to the Florida IM-IT Trust or the Sponsor which represent maturing
interest on defaulted obligations held by the Trustee will not be subject to the
Florida income tax imposed by Chapter 220, Florida Statutes.
Corporate Unitholders with commercial domiciles in Florida will be
subject to Florida income or franchise taxation on income realized by the
Florida IM-IT Trust and on payments of interest pursuant to any insurance policy
to the extent such income constitutes "non business income" as defined by
Chapter 220, Florida Statutes or is otherwise allocable to Florida under Chapter
220. Other Corporate Unitholders will be subject to Florida income or franchise
taxation on income realized by the Florida IM-IT Trust (or on payments of
interest pursuant to any insurance policy) only to the extent that the income
realized does not constitute "non-business income" as defined by Chapter 220,
Florida Statutes and if such income is otherwise allocable to Florida under
Chapter 220, Florida Statutes.
Units will be subject to Florida estate tax only if held by Florida
residents. However, the Florida estate tax is limited to the amount of the
credit for state death taxes provided for in Section 2011 of the Internal
Revenue Code of 1986, as amended.
Neither the Bonds nor the Units will be subject to the Florida ad
valorem property tax, the Florida intangible personal property tax or the
Florida sales or use tax.
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Florida law. Ownership of the Units may
result in collateral Florida tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
Georgia Risk Factors. The financial condition of the State of Georgia
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations. Historically, the State has experienced significant
revenue shortfalls.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Weather conditions may have a
significant impact on Georgia's agricultural sector. In the past, widespread
flooding in central and southern Georgia has caused extensive damage and
destruction of farmland, private residences, businesses and local and state
government facilities.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds of the State are rated "AAA" by
Standard & Poor's and "Aaa" by Moody's. Further information concerning Georgia
risk factors may be obtained upon request to the Sponsor as described in
"Additional Information".
Tax Status. At the time of the closing for each Georgia Trust, Special
Counsel to the Fund for Georgia tax matters rendered an opinion under then
existing Georgia income tax law applicable to taxpayers whose income is subject
to Georgia income taxation substantially to the effect that:
The assets of the Georgia IM-IT Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Georgia or counties,
municipalities, authorities or political subdivisions thereof (the "Georgia
Bonds") and certain bonds issued by Puerto Rico authorities (the "Possession
Bonds," and collectively with the Georgia Bonds, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Georgia IM-IT Trust. However, although
no opinion is expressed herein regarding such matters, it is assumed that (i)
the Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unitholder would be exempt from the Georgia income tax
(the "Georgia Income Tax"). We have assumed that at the respective times of
issuance of the Bonds, opinions relating to the validity thereof and to the
exemption of interest thereon from Federal income tax were rendered by bond
counsel to the respective issuing authorities. In addition, we have assumed that
with respect to the Georgia Bonds, bond counsel to the issuing authorities
rendered opinions that interest on the Georgia Bonds is exempt from the Georgia
Income Tax and, with respect to the Possession Bonds, bond counsel to the
issuing authorities rendered opinions that the Possession Bonds and the interest
thereon is exempt from all state and local income taxation. Neither the Sponsor
nor its counsel has made any review for the Georgia IM-IT Trust of the
proceedings relating to the issuance of the Bonds or of the bases for the
opinions rendered in connection therewith.
In the opinion of Chapman and Cutler LLP, counsel to the Sponsor, in
summary under existing Georgia law:
(1) For Georgia income tax purposes, the Georgia IM-IT Trust is not an
association taxable as a corporation, and the income of the Georgia IM-IT Trust
will be treated as the income of the Unitholders. Interest on the Georgia Bonds
which is exempt from Georgia income tax when received by the Georgia IM-IT
Trust, and which would be exempt from Georgia income tax if received directly by
a Unitholder, will retain its status as a tax-exempt interest when distributed
by the Georgia IM-IT Trust and received by the Unitholders. Interest on the
Possession Bonds which is excludable from gross income for federal income tax
purposes and is exempt from state and local taxation pursuant to federal law
when received by the Georgia IM-IT Trust will be exempt from Georgia income
taxation and therefore will not be includible in the income of the Unitholder
for Georgia income tax purposes when distributed by the Georgia IM-IT Trust and
received by the Unitholders.
(2) If the Trustee disposes of a Bond (whether by sale, exchange,
payment on maturity, retirement or otherwise) or if a Unitholder redeems or
sells his Unit, the Unitholder will recognize gain or loss for Georgia income
tax purposes to the same extent that gain or loss would be recognized for
federal income tax purposes (except in the case of Bonds issued before March 11,
1987 issued with original issue discount owned by the Georgia IM-IT Trust in
which case gain or loss for Georgia income tax purposes may differ from the
amount recognized for federal income tax purposes because original issue
discount on such Bonds may be determined by accruing said original issue
discount on a ratable basis). Due to the amortization of bond premium and other
basis adjustments required by the Internal Revenue Code, a Unitholder, under
some circumstances, may realize taxable gain when his or her Units are sold or
redeemed for an amount less than or equal to their original cost.
(3) Amounts paid under an insurance policy or policies issued to the
Georgia IM-IT Trust, if any, with respect to the Bonds in the Georgia IM-IT
Trust which represent maturing interest on defaulted obligations held by the
Trustee will be exempt from State income taxes if, and to the extent as, such
interest would have been so exempt if paid by the issuer of the defaulted
obligations provided that, at the time such policies are purchased, the amounts
paid for such policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the obligations, rather than the
insurer, will pay debt service on the obligations.
(4) Neither the Bonds nor the Units will be subject to Georgia sales or use
tax.
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Georgia law. Ownership of the Units may
result in collateral Georgia tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
Kansas Risk Factors. The financial condition of the State of Kansas is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The Kansas economy is composed of
manufacturing, trade, services and agriculture. Severe weather conditions could
have a significant impact on the Kansas economy.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Kansas risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Kansas Trust, Special
Counsel to each Kansas Trust for Kansas tax matters, rendered an opinion under
then existing Kansas income tax law applicable to taxpayers whose income is
subject to Kansas income taxation, assuming interest on the Bonds is excludable
from gross income under Section 103 of the Internal Revenue Code of 1986, as
amended, substantially to the effect that:
The Kansas Trust is not an association taxable as a corporation for Kansas
income tax purposes;
Each Unitholder of the Kansas Trust will be treated as the owner of a
pro rata portion of the Kansas Trust, and the income and deductions of the
Kansas Trust will therefore be treated as income (and deductions) of the
Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas
or any of its political subdivisions will be exempt from income taxation imposed
on individuals, corporations and fiduciaries (other than banks, trust companies
or savings and loan associations). However, interest on Bonds issued prior to
January 1, 1988 by the State of Kansas or any of its political subdivisions will
not be exempt from income taxation imposed on individuals, corporations and
fiduciaries (other than banks, trust companies or savings and loan associations)
unless the laws of the State of Kansas authorizing the issuance of such Bonds
specifically exempt the interest on the Bonds from income taxation by the State
of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on the Bonds which is exempt from Kansas income taxation when
received by the Kansas Trust will continue to be exempt when distributed to a
Unitholder (other than a bank, trust company or savings and loan association);
Each Unitholder of the Kansas Trust will recognize gain or loss for
Kansas income tax purposes if the Trustee disposes of a Bond (whether by sale,
exchange, payment on maturity, retirement or otherwise) or if the Unitholder
redeems or sells Units of the Kansas Trust to the extent that such transaction
results in a recognized gain or loss for federal income tax purposes;
Interest received by the Kansas Trust on the Bonds is exempt from
intangibles taxation imposed by any counties, cities and townships pursuant to
present Kansas law; and
No opinion is expressed regarding whether the gross earnings derived
from the Units is subject to intangibles taxation imposed by any counties,
cities and townships pursuant to present Kansas law. Chapman and Cutler LLP has
expressed no opinion with respect to taxation under any other provision of
Kansas law. Ownership of the Units may result in collateral Kansas tax
consequences to certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral consequences.
Kentucky Risk Factors. The financial condition of the State of Kentucky
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Kentucky risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Kentucky Trust, the
respective counsel to the Kentucky Trusts for Kentucky tax matters rendered an
opinion under then existing Kentucky income tax law applicable to taxpayers
whose income is subject to Kentucky income taxation substantially to the effect
that:
The assets of the Kentucky Trust will consist of interest-bearing
obligations issued by or on behalf of the Commonwealth of Kentucky (the "State")
or counties, municipalities, authorities or political subdivisions thereof (the
"Kentucky Bonds") and by an authority of the Commonwealth of Puerto Rico (the
"Possession Bonds") (collectively, the "Bonds").
Although we express no opinion herein regarding such matters, we have
assumed that: (i) the Bonds were validly issued, (ii) the interest thereon is
excludable from gross income for Federal income tax purposes, (iii) interest on
the Bonds, if received directly by a Unitholder, would be exempt from the income
tax imposed by the Commonwealth of Kentucky that is applicable to individuals
and corporations (the "Kentucky State Income Tax"); and (iv) the Bonds are
exempt from the ad valorem tax imposed by the Commonwealth of Kentucky. Neither
the Sponsor nor its counsel has made any review of the proceedings relating to
the issuance of the Bonds or of the bases for the opinions, if any, rendered in
connection therewith. This opinion does not address the taxation of persons
other than full time residents of Kentucky.
In the opinion of Chapman and Cutler LLP, counsel to the Sponsor, under
existing Kentucky income tax law as of the date of this prospectus and based
upon the assumptions above:
(i) The Kentucky Trust is not an association taxable as a corporation
and each Kentucky Unitholder will be treated as the owner of a pro rata portion
of the Kentucky Trust, and the income of such portion of the Kentucky Trust will
therefore be treated as the income of the Kentucky Unitholder for Kentucky
Income Tax purposes;
(ii) For Kentucky State Income Tax purposes, interest on the Bonds
which is excludable from Federal gross income and which is also exempt from
taxation under the Kentucky State Income Tax when received by the Kentucky
Trust, and which would be excludable from Federal gross income and also exempt
from Kentucky State Income Tax if received directly by a Unitholder, will retain
its status as tax-exempt interest when received by the Kentucky Trust and
distributed to the Unitholders.
(iii) Each Kentucky Unitholder of the Kentucky Trust will recognize
gain or loss for Kentucky State Income Tax purposes if the Trustee disposes of a
Bond (whether by redemption, sale or otherwise) or if the Kentucky Unitholder
redeems or sells Units of the Kentucky Trust to the extent that such a
transaction results in a recognized gain or loss to such Unitholder for Federal
income tax purposes;
(iv) Tax reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Kentucky Unitholders realizing
taxable gain for Kentucky State Income Tax purposes when their Units are sold or
redeemed for an amount equal to or less than their original cost;
(v) State law does not permit a deduction for interest paid or incurred
on indebtedness incurred or continued to purchase or carry Units in the Kentucky
Trust, the interest on which is exempt from State income taxes.
(vi) Units of the Kentucky Trust, but only to the extent the same
represent an ownership in obligations issued by or on behalf of the Commonwealth
of Kentucky or governmental units of the Commonwealth of Kentucky, the interest
on which is excludable from gross income for federal and Kentucky State Income
Tax purposes will not be subject to ad valorem taxation by the Commonwealth of
Kentucky or any political subdivision thereof; and
(vii) Proceeds, if any, paid under individual insurance policies
obtained by issuers of Bonds that represent maturing interest on defaulted
obligations held by the Trustee will not be subject to Kentucky State Income Tax
purposes if, and to the same extent as, such interest would have not been
subject to Kentucky State Income Tax purposes if paid in the normal course by
the issuer of the defaulted obligation provided that, at the time such policies
are purchased, the amounts paid for such policies were reasonable, customary and
consistent with the reasonable expectation that the issuer of the Bonds, rather
than the insurer, will pay debt service on the Bonds.
Chapman and Cutler LLP expresses no opinion with respect to taxation
under any other provision of Kentucky law. Ownership of the Units may result in
collateral Kentucky tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
Louisiana Risk Factors. The financial condition of the State of
Louisiana is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of A+, A1 and A+ from Moody's, Standard &
Poor's and Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.),
respectively, on its general obligation indebtedness.
Further information concerning Louisiana risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Louisiana Trust,
Special Counsel to each Louisiana Trust for Louisiana tax matters rendered an
opinion under then existing Louisiana income tax law applicable to taxpayers
whose income is subject to Louisiana income taxation substantially to the effect
that:
(1) The Louisiana Trust will be treated as a trust for Louisiana income
tax purposes and not as an association taxable as a corporation.
(2) The Louisiana income tax on resident individuals is imposed upon
the "tax table income" of resident individuals. The calculation of the "tax
table income" of a resident individual begins with federal adjusted gross
income. Certain modifications are specified, but no such modification requires
the addition of interest on obligations of the State of Louisiana and its
political subdivisions, public corporations created by them and constitutional
authorities thereof authorized to issue obligations on their behalf.
Accordingly, amounts representing interest excludable from gross income for
federal income tax purposes received by the Louisiana Trust with respect to such
obligations will not be taxed to the Louisiana Trust, or, except as provided
below, to the resident individual Unitholder, for Louisiana income tax purposes.
In addition to the foregoing, interest on the respective Securities may also be
exempt from Louisiana income taxes pursuant to the statutes authorizing their
issuance.
(3) To the extent that gain from the sale, exchange or other
disposition of obligations held by the Louisiana Trust (whether as a result of a
sale or exchange of such obligations by the Louisiana Trust or as a result of a
sale or exchange of a Unit by a Unitholder) is includible in the federal
adjusted gross income of a resident individual, such gain will be included in
the calculation of the Unitholder's Louisiana taxable income; and
(4) Gain or loss on the Unit or as to underlying bonds for Louisiana
income tax purposes would be determined by taking into account the basis
adjustments for federal income tax purposes described in this Prospectus.
As no opinion is expressed regarding the Louisiana tax consequences of
Unitholders other than individuals who are Louisiana residents, tax counsel
should be consulted by other prospective Unitholders. The Internal Revenue Code
of 1986, as amended (the "1986 Code"), contains provisions relating to investing
in tax-exempt obligations (including, for example, corporate minimum tax
provisions which treat certain tax-exempt interest and corporate book income
which may include tax-exempt interest, as tax preference items, provisions
affecting the deductibility of interest expense by financial institutions) which
could have a corresponding effect on the Louisiana tax liability of the
Unitholders.
In rendering the opinions expressed above, counsel has relied upon the
opinion of Counsel to the Sponsor that the Louisiana Trust is not an association
taxable as corporation for Federal income tax purposes, that each Unitholder of
the Louisiana Trust will be treated as the owner of a pro rata portion of such
Louisiana Trust under the 1986 Code and that the income of the Louisiana Trust
will be treated as income of the Unitholders under the 1986 Code.
Tax counsel should be consulted as to the other Louisiana tax
consequences not specifically considered herein, and as to the Louisiana Tax
Status of taxpayers other than Louisiana resident individuals who are
Unitholders in the Louisiana Trust. In addition, no opinion is being rendered as
to Louisiana tax consequences resulting from any proposed or future federal or
state tax legislation.
Maine Risk Factors. The financial condition of the State of Maine is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Maine's economy consists of services,
trade, government and manufacturing.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Maine currently maintains a "AA", "Aa2" and "AA+" bond rating
from Standard & Poor's, Moody's and Fitch IBCA, Inc. (formerly Fitch Investors
Service, L.P.), respectively, on its general obligation indebtedness.
Further information concerning Maine risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Maine Trust, special
counsel to the Fund for Maine tax matters rendered an opinion under then
existing Maine income tax law applicable to taxpayers whose income is subject to
Maine income taxation substantially to the effect that:
The assets of the Maine Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Maine (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Maine Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Maine Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for Federal income tax purposes, (iii) interest on the Maine Bonds, if
received directly by a Unitholder, would be exempt from the Maine income tax
applicable to individuals, trusts and estates and corporations ("Maine Income
Tax"), and (iv) interest on the Bonds will not be taken into account by
individuals and corporations in computing an additional tax ("Maine Minimum
Tax") imposed under the Maine Income Tax or in the case of corporations, a
surcharge ("Maine Corporate Income Tax Surcharge") enacted in 1991 and scheduled
to apply to tax years beginning in 1991 and 1992. The opinion set forth below
does not address the taxation of persons other than full time residents of
Maine.
In the opinion of Chapman and Cutler LLP, Special Counsel to the Fund
for Maine tax matters, under existing law as of the date of this prospectus and
based upon the assumptions set forth above:
(1) the Maine Trust is not an association taxable as a corporation,
thus each Unitholder of the Trust will be essentially treated as the owner of a
pro rata portion of the Maine Trust and the income of such portion of the Maine
Trust will be treated as the income of the Unitholder for Maine Income Tax
purposes;
(2) Interest on the Bonds which is exempt from the Maine Income Tax
when received by the Maine Trust, and which would be exempt from the Maine
Income Tax and the Maine Minimum Tax if received directly by a Unitholder, will
retain its status as exempt from the Maine Income Tax and the Maine Minimum Tax
when received by the Maine Trust and distributed to the Unitholder;
(3) to the extent that interest derived from the Maine Trust by a
Unitholder with respect to the Possession Bonds is excludable from gross income
for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
the Maine Income Tax;
(4) each Unitholder of the Maine Trust will recognize gain or loss for
Maine Income Tax purposes if the Trustee disposes of a bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Maine Trust to the extent that such a transaction results in a recognized
gain or loss to such Unitholder for Federal income tax purposes; and
(5) the Maine Income Tax does not permit a deduction of interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units in
the Maine Trust, the interest on which is exempt from the Tax.
Prospective purchasers subject to the Maine Franchise Tax should be
advised that for purposes of the Maine Franchise Tax, interest on the Bonds
received by the Trust and distributed to a Unitholder subject to such tax will
be added to the Unitholder's Federal taxable income and therefore will be
taxable. Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Maine law. Ownership of the Units may
result in collateral Maine tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
consequences.
Maryland Risk Factors. The financial condition of the State of Maryland
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Maryland currently maintains a "AAA" and "Aaa" bond rating
from Standard & Poor's and Moody's, respectively, on its general obligation
indebtedness.
Further information concerning Maryland risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. In the opinion of special counsel to the Trust for Maryland
tax matters, in summary under existing Maryland income tax law applicable to
taxpayers whose income is subject to Maryland income taxation:
In the opinion of special counsel to the Trust for Maryland tax
matters, in summary under existing Maryland income tax law applicable to
taxpayers whose income is subject to Maryland income taxation:
(1) For Maryland State and local income tax purposes, the Maryland
Quality Trust will not be recognized as an association taxable as a corporation,
but rather as a fiduciary whose income will not be subject to Maryland state and
local income taxation.
(2) To the extent that interest and accrued original issue discount
derived from the Maryland Quality Trust by a Unitholder with respect to the
bonds in the Trust is excludable from Federal gross income, such interest will
not be subject to Maryland State or local income taxes. Interest paid to a
"financial institution" will be subject to the Maryland Franchise Tax.
(3) In the case of taxpayers who are individuals, Maryland presently
imposes an income tax on items of tax preference with reference to such items as
defined in the Internal Revenue Code, as amended from time to time, for purposes
of calculating the federal alternative minimum tax. Interest paid on certain
private activity bonds constitutes a tax preference item for the purpose of
calculating the federal alternative minimum tax. Accordingly, if the Maryland
Quality Trust holds such bonds, 50% of the interest on such bonds in excess of a
threshold amount is taxable in Maryland.
(4) Capital gain, including gain realized by a Unitholder from the
redemption, sale or other disposition of a Unit, will be included in the taxable
base of Unitholders for Maryland state and local income taxation purposes.
However, Maryland defines the taxable net income of individuals as federal
adjusted gross income with certain modifications. Likewise, the Maryland taxable
net income of corporations is federal taxable income with certain modifications.
There is available to Maryland income taxpayers a modification which allows
those taxpayers to subtract from the Maryland taxable base the gain included in
federal adjusted gross income or federal taxable income, as the case may be,
which is realized from the disposition of obligations issued by the State of
Maryland or its political subdivisions by the Maryland Quality Trust.
Consequently, by making that modification, a Unitholder who is entitled to make
the subtraction modification will not be subject to Maryland state or local
income tax with respect to gain realized upon the disposition of obligations
issued by the State of Maryland and its political subdivisions by the Maryland
Quality Trust. Profit realized by a "financial institution" from the sale or
exchange of bonds will be subject to the Maryland Franchise Tax.
These opinions relate only to the treatment of the Maryland Quality
Trust and the Units under the Maryland state and local income tax laws and
Maryland franchise tax laws. Unitholders should consult tax counsel as to other
Maryland tax consequences not specifically considered in these opinions. For
example, no opinion is expressed as to the treatment of the Units under the
Maryland inheritance and estate tax laws.
Massachusetts Risk Factors. The financial condition of the Commonwealth
of Massachusetts is affected by various national, economic, social and
environmental policies and conditions. Additionally, limitations imposed by
statute and voter initiative upon the Commonwealth and its local governments
concerning taxes, bond indebtedness and other matters may constrain the
revenue-generating capacity of the Commonwealth and its local governments and,
therefore, the ability of the issuers of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors.
The Commonwealth is a party to numerous lawsuits in which an adverse
final decision could materially affect the Commonwealth's governmental
operations and consequently, its ability to pay debt service on its obligations.
The Commonwealth of Massachusetts currently maintains a "AA-" and "Aa2"
bond rating from Standard and Poor's and Moody's, respectively, on its general
obligation indebtedness (confirmed on September 24, 2003).
Further information concerning Massachusetts risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Massachusetts Trust,
Special Counsel to each Massachusetts Trust for Massachusetts tax matters
rendered an opinion under then existing Massachusetts income tax law applicable
to taxpayers whose income is subject to Massachusetts income taxation
substantially to the effect that:
In the opinion of special counsel to the Fund, under existing
Massachusetts law:
(1) For Massachusetts income tax purposes, the Trust will be treated as
a corporate trust under Section 8 of Chapter 62 of the Massachusetts General
Laws and not as a grantor trust under Section 10(e) of Chapter 62 of the
Massachusetts General Laws.
(2) The Trust will not be held to be engaging in business in
Massachusetts within the meaning of said Section 8 and will not, therefore, be
subject to Massachusetts income tax.
(3) Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of the Massachusetts General Laws will not be required
to include their respective shares of the earnings of or distributions from the
Trust in their Massachusetts gross income to the extent that such earnings or
distributions represent tax-exempt interest for federal income tax purposes
received by the Trust on obligations issued by Massachusetts, its counties,
municipalities, authorities, political subdivisions or instrumentalities or by
United States territories or possessions ("Bonds").
(4) Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of the Massachusetts General Laws will not be required
to include their respective shares of the earnings of or distributions from the
Trust in their Massachusetts gross income to the extent that such earnings or
distributions are derived from proceeds of insurance obtained by the Trust or by
the Sponsor or by the issuer or underwriter of an Bond held by the Trust that
represent maturing interest on defaulted Bonds held by the Trust, if, and to the
same extent that, such earnings or distributions would have been excludable from
their gross income if derived from interest paid by the issuer of the defaulted
Bond.
(5) The Trust's capital gains and/or capital losses realized upon
disposition of Bonds held by it will be included pro rata as capital gains
and/or losses in the gross income of Massachusetts Unitholders who are subject
to Massachusetts income taxation under Chapter 62 of the Massachusetts General
Laws, except where capital gain is specifically exempted from income taxation
under acts authorizing issuance of said Bonds.
(6) Gains or losses realized on sales or redemptions of Units by
Massachusetts Unitholders who are subject to Massachusetts income taxation under
Chapter 62 of the Massachusetts General Laws will be includible in their
Massachusetts gross income. In determining such gain or loss Massachusetts
Unitholders will, to the same extent required for Federal tax purposes, be
required to adjust the tax basis for their Units for accrued interest received,
if any, on Bonds delivered to the Trustee after the Massachusetts Unitholders
pay for their Units, and for amortization of premiums, if any, on the Bonds held
by the Trust.
(7) The Units of the Trust are not subject to any property tax levied
by Massachusetts or any political subdivision thereof, nor to any income tax
levied by any such political subdivision. They are includible in the gross
estate of a deceased Massachusetts Unitholder who is a resident of Massachusetts
for purposes of the Massachusetts Estate Tax.
Michigan Risk Factors. The financial condition of the State of Michigan
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds of the state were rated "Aa1" by
Moody's, "AA+" by Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.), and
"AA+" by Standard & Poor's as of May, 2003.
Further information concerning Michigan risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. In the opinion of special counsel to the Trust for Michigan
tax matters, in summary under existing Michigan law, the Michigan IM-IT Trust
and the owners of Units will be treated for purposes of the Michigan income tax
laws and the Single Business Tax in substantially the same manner as they are
for purposes of the Federal income tax laws, as currently enacted. Accordingly,
we have relied upon the opinion of Messrs. Chapman and Cutler LLP as to the
applicability of Federal income tax under the Internal Revenue Code of 1986 to
the Michigan IM-IT Trust and the Unitholders.
In the opinion of special counsel to the Trust for Michigan tax
matters, in summary under existing Michigan law, the Michigan IM-IT Trust and
the owners of Units will be treated for purposes of the Michigan income tax laws
and the Single Business Tax in substantially the same manner as they are for
purposes of the Federal income tax laws, as currently enacted. Accordingly, we
have relied upon the opinion of Messrs. Chapman and Cutler LLP as to the
applicability of Federal income tax under the Internal Revenue Code of 1986 to
the Michigan IM-IT Trust and the Unitholders.
Under the income tax laws of the State of Michigan, the Michigan IM-IT
Trust is not an association taxable as a corporation; the income of the Michigan
IM-IT Trust will be treated as the income of the Unitholders and be deemed to
have been received by them when received by the Michigan IM-IT Trust. Interest
on the underlying bonds which is exempt from tax under these laws when received
by Michigan IM-IT Trust will retain its status as tax exempt interest to the
Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will
be considered to have received his pro rata share of bond interest when it is
received by the Michigan IM-IT Trust, and each Unitholder will have a taxable
event when the Michigan IM-IT Trust disposes of a bond (whether by sale,
exchange, redemption or payment at maturity) or when the Unitholder redeems or
sells his Certificate to the extent the transaction constitutes a taxable event
for Federal income tax purposes. The tax cost of each unit to a Unitholder will
be established and allocated for purposes of these Michigan tax laws in the same
manner as such cost is established and allocated for Federal income tax
purposes.
The Michigan Intangibles Tax was totally repealed effective January 1,
1998.
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the Intangible
Tax with respect to those intangibles of persons subject to the Single Business
Tax the income from which would be considered in computing the Single Business
Tax. Persons are subject to the Single Business Tax only if they are engaged in
"business activity", as defined in the Act. Under the Single Business Tax, both
interest received by the Michigan IM-IT Trust on the underlying bonds and any
amount distributed from the Michigan IM-IT Trust to a Unitholder, if not
included in determining taxable income for Federal income tax purposes, is also
not included in the adjusted tax base upon which the Single Business Tax is
computed, of either the Michigan IM-IT Trust or the Unitholders. If the Michigan
IM-IT Trust or the Unitholders have a taxable event for Federal income tax
purposes when the Michigan IM-IT Trust disposes of a bond (whether by sale,
exchange, redemption or payment at maturity) or the Unitholder redeems or sells
his Certificate, an amount equal to any gain realized from such taxable event
which was included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual realized in
connection with such event but excluded in computing that individual's Federal
taxable income) will be included in the tax base against which, after
allocation, apportionment and other adjustments, the Single Business Tax is
computed. The tax base will be reduced by an amount equal to any capital loss
realized from such a taxable event, whether or not the capital loss was deducted
in computing Federal taxable income in the year the loss occurred. Unitholders
should consult their tax advisor as to their status under Michigan law. The
Single Business Tax is being phased-out, with total repeal after December 31,
2009.
Any proceeds paid under an insurance policy issued to the Trustee of
the Trust, or paid under individual policies obtained by issuers of bonds,
which, when received by the Unitholders, represent maturing interest on
defaulted obligations held by the Trustee, will be excludable from the Michigan
income tax laws and the Single Business Tax if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. While treatment under the Michigan Intangibles Tax is not premised
upon the characterization of such proceeds under the Internal Revenue Code, the
Michigan Department of Treasury should adopt the same approach as under the
Michigan income tax laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminated the capital gain deduction for
tax years beginning after December 31, 1986, the federal adjusted gross income,
the computation base for the Michigan Income Tax, of a Unitholder will be
increased accordingly to the extent such capital gains are realized when the
Michigan IM-IT Trust disposes of a bond or when the Unitholder redeems or sells
a Unit, to the extent such transaction constitutes a taxable event for Federal
income tax purposes.
Minnesota Risk Factors. The financial condition of the State of
Minnesota is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Minnesota currently maintains a "AAA" bond rating from
Standard & Poor's and Aa1 from Moody's on its general obligation indebtedness.
Further information concerning Minnesota risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Minnesota Trust,
Special Counsel to each Minnesota Trust for Minnesota tax matters rendered an
opinion under then existing Minnesota income tax law applicable to taxpayers
whose income is subject to Minnesota income taxation substantially to the effect
that:
We understand that the Minnesota Trust will only have income consisting
of (i) interest from bonds issued by the State of Minnesota and its political
and governmental subdivisions, municipalities and governmental agencies and
instrumentalities (the "Minnesota Bonds") and bonds issued by possessions of the
United States, including bonds issued by Puerto Rico authorities (the
"Possession Bonds" and, collectively with the Minnesota Bonds, the "Bonds")
which would be exempt from federal and Minnesota income taxation when paid
directly to an individual, trust or estate, (ii) gain on the disposition of such
Bonds, and (iii) proceeds paid under certain insurance policies issued to the
Trustee or to the issuers of the Bonds which represent maturing interest or
principal payments on defaulted Bonds held by the Trustee.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
federal income tax purposes and (iii) the interest thereon is exempt from the
income tax imposed by Minnesota that is applicable to individuals, trusts and
estates (the "Minnesota Income Tax"). It should be noted that interest on the
Minnesota Bonds is subject to tax in the case of corporations subject to the
Minnesota Corporate Franchise Tax or the Corporate Alternative Minimum Tax and
is a factor in the computation of the Minimum Fee applicable to financial
institutions. The opinion set forth below does not address the taxation of
persons other than full time residents of Minnesota. We have assumed that at the
respective times of issuance of the Bonds, opinions relating to the validity
thereof and to the exemption of interest thereon from Federal income tax were
rendered by bond counsel to the respective issuing authorities. In addition, we
have assumed that with respect to the Minnesota Bonds, bond counsel to the
issuing authorities rendered opinions that the interest on the Minnesota Bonds
is exempt from the Minnesota Income Tax and, with respect to the Possession
Bonds, bond counsel to the issuing authorities rendered opinions that the
Possession Bonds and the interest thereon is exempt from all state and local
income taxation. Neither the Sponsor nor its counsel has made any review for the
Minnesota Trust of the proceedings relating to the issuance of the Bonds or of
the bases for the opinions rendered in connection therewith.
Although Minnesota state law provides that interest on Minnesota Bonds
is exempt from Minnesota state income taxation, the Minnesota state legislature
has enacted a statement of intent that interest on the Minnesota Bonds should be
subject to Minnesota state income taxation if it is judicially determined that
the exemption discriminates against interstate commerce, effective for the
calendar year in which such a decision becomes final. It cannot be predicted
whether a court would render such a decision or whether, as a result thereof,
interest on Minnesota Bonds and therefore distributions by the Minnesota Trust
would become subject to Minnesota state income taxation.
In the opinion of Chapman and Cutler LLP, Counsel to the Sponsor, under
existing Minnesota income tax law as of the date of this prospectus and based
upon the assumptions above:
(1) The Minnesota Trust is not an association taxable as a corporation;
(2) Income on the Bonds which is excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax when received by the Minnesota
Trust and which would be excludable from Minnesota taxable income for purposes
of the Minnesota Income Tax if received directly by a Unitholder will be
excludable from Minnesota taxable income for purposes of the Minnesota Income
Tax when received by the Minnesota Trust and distributed to such Unitholder;
(3) To the extent that interest on certain Bonds (except with respect
to Possession Bonds, as to which no opinion is expressed), if any, is includible
in the computation of "alternative minimum taxable income" for federal income
tax purposes, such interest will also be includible in the computation of
"alternative minimum taxable income" for purposes of the Minnesota Alternative
Minimum Tax imposed on individuals, estates and trusts;
(4) Each Unitholder of the Minnesota Trust will recognize gain or loss
for Minnesota Income Tax purposes if the Trustee disposes of a Bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Minnesota Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax purposes;
(5) Tax basis reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Unitholders realizing taxable
gain for Minnesota Income Tax purposes when their Units are sold or redeemed for
an amount equal to or less than their original cost;
(6) Proceeds, if any, paid under individual insurance policies obtained
by issuers of Bonds or the Trustee which represent maturing interest on
defaulted obligations held by the Trustee will be excludible from Minnesota net
income if, and to the same extent as, such interest would have been so
excludible from Minnesota net income if paid in the normal course by the issuer
of the defaulted obligation provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable, customary and
consistent with the reasonable expectation that the issuer of the bonds, rather
than the insurer, will pay debt service on the bonds; and
(7) To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds would be excludible from gross
income for federal income tax purposes and would be exempt from state and local
taxation pursuant to federal law if the Unitholder directly owned the Possession
Bonds, such interest will not be subject to the Minnesota Income Tax when
distributed by the Minnesota Trust and received by the Unitholders. As noted
above, we have expressed no opinion as to the treatment of interest on the
Possession Bonds for purposes of the Minnesota Corporate Franchise Tax or the
Alternative Minimum Tax or whether it is a factor in the computation of the
Minimum Fee applicable to financial institutions. Although a federal statute
currently provides that bonds issued by the Government of Puerto Rico, or by its
authority, are exempt from all state and local taxation, the Supreme Court of
Minnesota has held that interest earned on bonds issued by the Government of
Puerto Rico may be included in taxable net income for purposes of computing the
Minnesota bank excise tax. The State of Minnesota could apply the same reasoning
in determining whether interest on the Possession Bonds is subject to the taxes
listed above on which we express no opinion.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinions to the
exemption from State income taxes of interest on the Bonds if received directly
by a Unitholder. Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Minnesota law. Ownership of the Units may
result in collateral Minnesota tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences.
Missouri Risk Factors. The financial condition of the State of Missouri
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the state and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds to the State are rated "AAA" by
Standard and Poor's and "Aaa" by Moody's. Further information concerning
Missouri risk factors may be obtained upon request to the Sponsor as described
in "Additional Information".
Tax Status. At the time of the closing for each Missouri Trust, Special
Counsel to each Missouri Trust for Missouri tax matters rendered an opinion
under then existing Missouri income tax law applicable to taxpayers whose income
is subject to Missouri income taxation substantially to the effect that:
The assets of the Missouri IM-IT Trust will consist of debt obligations
issued by or on behalf of the State of Missouri (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Missouri
Bonds") or by the Commonwealth of Puerto Rico or an authority thereof (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Missouri IM-IT Trust. However, although
no opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for Federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income tax
applicable to individuals and corporations ("Missouri State Income Tax"). It is
assumed that, at the respective times of issuance of the Bonds, opinions that
the Bonds were validly issued and that interest on the Bonds is excluded from
gross income for Federal income tax purposes were rendered by bond counsel to
the respective issuing authorities. In addition, with respect to the Missouri
Bonds, bond counsel to the issuing authorities rendered opinions that the
interest on the Missouri Bonds is exempt from the Missouri State Income Tax and,
with respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions that the Possession Bonds and the interest thereon is exempt
from all state and local income taxation. Neither the Sponsor nor its counsel
has made any review for the Missouri IM-IT Trust of the proceedings relating to
the issuance of the Bonds or the bases for the opinions rendered in connection
therewith. The opinion set forth below does not address the taxation of persons
other than full time residents of Missouri.
In the opinion of Chapman and Cutler LLP, counsel to the Sponsor, in
summary under existing law:
(1) The Missouri IM-IT Trust is not an association taxable as a
corporation for Missouri income tax purposes, and each Unitholder of the
Missouri IM-IT Trust will be treated as the owner of a pro rata portion of the
Missouri IM-IT Trust and the income of such portion of the Missouri IM-IT Trust
will be treated as the income of the Unitholder for Missouri State Income Tax
purposes.
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Missouri State Income Tax if received directly by
a Unitholder will be exempt from the Missouri State Income Tax when received by
the Missouri IM-IT Trust and distributed to such Unitholder; however, no opinion
is expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri IM-IT Trust and
distributed to Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
(3) Each Unitholder of the Missouri IM-IT Trust will recognize gain or
loss for Missouri State Income Tax purposes if the Trustee disposes of a Bond
(whether by redemption, sale, payment at maturity or otherwise) or if the
Unitholder redeems or sells Units of the Missouri IM-IT Trust to the extent that
such a transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes. Due to the amortization of bond premium and other
basis adjustments required by the Internal Revenue Code, a Unitholder under some
circumstances, may realize taxable gain when his or her Units are sold or
redeemed for an amount less than or equal to their original cost.
(4) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income for
Federal income tax purposes will be excludable from the Missouri State Income
Tax to the same extent as such interest would have been so excludible if paid by
the issuer of such Bonds held by the Missouri IM-IT Trust; however, no opinion
is expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri IM-IT Trust and
distributed to Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
(5) The Missouri State Income Tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Trust, the interest on which is exempt from such Tax.
(6) The Missouri IM-IT Trust will not be subject to the Kansas City,
Missouri Earnings and Profits Tax and each Unitholder's share of income of the
Bonds held by the Missouri IM-IT Trust will not generally be subject to the
Kansas City, Missouri Earnings and Profits Tax or the City of St. Louis Earnings
Tax (except that no opinion is expressed in the case of certain Unitholders,
including corporations, otherwise subject to the St. Louis City Earnings Tax).
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Missouri law. Ownership of the Units may
result in collateral Missouri tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
Nebraska Risk Factors. The financial condition of the State of Nebraska
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Nebraska risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Nebraska Trust, Special
Counsel to each Nebraska Trust for Nebraska tax matters rendered an opinion
under then existing Nebraska income tax law applicable to taxpayers whose income
is subject to Nebraska income taxation substantially to the effect that:
The assets of the Nebraska Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Nebraska (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Nebraska Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Nebraska Trust. With respect to certain
Nebraska Bonds which may be held by the Nebraska Trust, the opinions of bond
counsel to the issuing authorities for such Bonds have indicated that the
interest on such Bonds is included in computing the Nebraska Alternative Minimum
Tax imposed by Section 77-2715 (2) of the Revised Nebraska Statutes (the
"Nebraska Minimum Taxes") (the "Nebraska AMT Bonds"). However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for Federal income tax purposes, (iii) none of the Bonds (other than the
Nebraska AMT Bonds, if any) are "specified private activity bonds" the interest
on which is included as an item of tax preference in the computation of the
Alternative Minimum Tax for federal income tax purposes, (iv) interest on the
Nebraska Bonds (other than the Nebraska AMT Bonds, if any), if received directly
by a Unitholder, would be exempt from both the Nebraska income tax, imposed by
Section 77-2714 et seq. of the Revised Nebraska Statutes (other than the
Nebraska Minimum Tax) (the "Nebraska State Income Tax") and the Nebraska Minimum
Tax imposed by Section 77-2715 (2) of the Revised Nebraska Statutes (the
"Nebraska Minimum Tax"), and (v) interest on the Nebraska AMT Bonds, if any, if
received directly by a Unitholder, would be exempt from the Nebraska State
Income Tax. The opinion set forth below does not address the taxation of persons
other than full time residents of Nebraska.
In the opinion of Chapman and Cutler LLP, Counsel to the Sponsor, under
existing law as of the date of this prospectus and based upon the assumptions
set forth above:
(1) The Nebraska Trust is not an association taxable as a corporation,
each Unitholder of the Nebraska Trust will be treated as the owner of a pro rata
portion of the Nebraska Trust, and the income of such portion of the Nebraska
Trust will therefore be treated as the income of the Unitholder for both
Nebraska State Income Tax and Nebraska Minimum Tax purposes;
(2) Interest on the Bonds which is exempt from both the Nebraska State
Income Tax and the Nebraska Minimum Tax when received by the Nebraska Trust, and
which would be exempt from both the Nebraska State Income Tax and the Nebraska
Minimum Tax if received directly by a Unitholder, will retain its status as
exempt from such taxes when received by the Nebraska Trust and distributed to a
Unitholder;
(3) Interest on the Nebraska AMT Bonds, if any, which is exempt from
the Nebraska State Income Tax but is included in the computation of the Nebraska
Minimum Tax when received by the Nebraska Trust, and which would be exempt from
the Nebraska State Income Tax but would be included in the computation of the
Nebraska Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Nebraska State Income Tax but included in the
computation of the Nebraska Minimum Tax when received by the Nebraska Trust and
distributed to a Unitholder;
(4) To the extent that interest derived from the Nebraska Trust by a
Unitholder with respect to the Possession Bonds is excludable from gross income
for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
either the Nebraska State Income Tax or the Nebraska Minimum Tax;
(5) Each Unitholder of the Nebraska Trust will recognize gain or loss
for both Nebraska State Income Tax and Nebraska Minimum Tax purposes if the
Trustee disposes of a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Nebraska Trust to the extent that such
a transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes;
(6) The Nebraska State Income Tax does not permit a deduction for
interest paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Nebraska Trust, the interest on which is exempt from such
Tax; and
(7) In the case of a Unitholder subject to the State financial
institutions franchise tax, the income derived by such Unitholder from his pro
rata portion of the Bonds held by the Nebraska Trust may affect the
determination of such Unitholder's maximum franchise tax.
We have not examined any of the Bonds to be deposited and held in the
Nebraska Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinion as to the
exemption from either the Nebraska State Income Tax or the Nebraska Minimum Tax
of interest on the Nebraska Bonds if received directly by a Unitholder.
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Nebraska law. Ownership of the Units may
result in collateral Nebraska tax consequences to certain taxpayers. Prospective
investors should consult their own tax advisors as to the applicability of any
such collateral consequences.
New Jersey Risk Factors. The financial condition of the State of New
Jersey is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds to the State are rated "AA+" by
Standard and Poor's and "Aa2" by Moody's. Further information concerning New
Jersey risk factors may be obtained upon request to the Sponsor as described in
"Additional Information".
Tax Status. In the opinion of special counsel to the Trust for New Jersey
tax matters, in summary under existing law:
(1) The New Jersey IM-IT Trust will be recognized as a trust and not an
association taxable as a corporation. The New Jersey IM-IT Trust will not be
subject to the New Jersey Corporation Business Tax or the New Jersey Corporation
Income Tax.
(2) With respect to the non-corporate Unitholders who are residents of New
Jersey, the income of the New Jersey IM-IT Trust which is allocable to each such
Unitholder will be treated as the income of such Unitholder under the New Jersey
Gross Income Tax. Interest on the underlying bonds which would be exempt from
New Jersey Gross Income Tax if directly received by such Unitholder will retain
its status as tax-exempt interest when received by the New Jersey IM-IT Trust
and distributed to such Unitholder. Any proceeds paid under the insurance policy
issued to the Trustee of the New Jersey IM-IT Trust with respect to the bonds or
under individual policies obtained by issuers of bonds which represent maturing
interest on defaulted obligations held by the Trustee will be exempt from New
Jersey Gross Income Tax if, and to the same extent as, such interest would have
been so exempt if paid by the issuer of the defaulted obligations.
(3) A non-corporate Unitholder will not be subject to the New Jersey
Gross Income Tax on any gain realized either when the New Jersey IM-IT Trust
disposes of a bond (whether by sale, exchange, redemption, or payment at
maturity), when the Unitholder redeems or sells his Units or upon payment of any
proceeds under the insurance policy issued to the Trustee of the New Jersey
IM-IT Trust with respect to the bonds or under individual policies obtained by
issuers of bonds which represent maturing principal on defaulted obligations
held by the Trustee. Any loss realized on such disposition may not be utilized
to offset gains realized by such Unitholder on the disposition of assets the
gain on which is subject to the New Jersey Gross Income Tax.
(4) Units of the New Jersey IM-IT Trust may be taxable on the death of
a Unitholder under the New Jersey Transfer Inheritance Tax Law or the New Jersey
Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax, interest from the
bonds in the New Jersey IM-IT Trust which is allocable to such corporation will
be includible in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax, less any interest
expense incurred to carry such investment to the extent such interest expense
has not been deducted in computing Federal taxable income. Net gains derived by
such corporation on the disposition of the bonds by the New Jersey IM-IT Trust
or on the disposition of its Units will be included in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax. Any proceeds paid under the insurance policy issued to the Trustee
of the New Jersey IM-IT Trust with respect to the bonds or under individual
policies obtained by issuers of bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee will be included
in its entire net income for purposes of the New Jersey Corporation Business Tax
or New Jersey Corporation Income Tax if, and to the same extent as, such
interest or proceeds would have been so included if paid by the issuer of the
defaulted obligations.
New Mexico Risk Factors. The financial condition of the State of New
Mexico is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economy is composed of
energy resources, services, construction and trade. These industries tend to be
highly cyclical. Tourism is also one of the State's important industries.
Because many international travelers visit New Mexico, an increase in the value
of the U.S. dollar adversely affects this industry. Moreover, New Mexico could
be impacted by problems in the agricultural sector, including crop failures,
severe weather conditions or other agricultural-related problems.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa1 and AA+ from Moody's and
Standard & Poor's, respectively, on its general obligation indebtedness
(confirmed on September, 2004).
Further information concerning New Mexico risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each New Mexico Trust,
Special Counsel to the Fund for New Mexico tax matters rendered an opinion under
then existing New Mexico income tax law applicable to taxpayers whose income is
subject to New Mexico income taxation substantially to the effect that:
The assets of the New Mexico Trust will consist of interest-bearing
obligations issued by or on behalf of the State of New Mexico ("New Mexico") or
counties, municipalities, authorities or political subdivisions thereof (the
"New Mexico Bonds"), and by the Commonwealth of Puerto Rico, Guam, or the Virgin
Islands (collectively the "Possession Bonds") (collectively the New Mexico Bonds
and the Possession Bonds shall be referred to herein as the "Bonds") the
interest on which is expected to qualify as exempt from New Mexico income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the New Mexico Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unitholder, would be exempt from the New Mexico income
taxes applicable to individuals and corporations (collectively, the "New Mexico
State Income Tax"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the New Mexico Bonds, bond counsel to
the issuing authorities rendered opinions as to the exemption of interest from
the New Mexico State Income Tax and, with respect to the Possession Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption from
all state and local income taxation. Neither the Sponsor nor its counsel has
made any review for the New Mexico Trust of the proceedings relating to the
issuance of the Bonds or of the bases for the opinions rendered in connection
therewith. The opinion set forth below does not address the taxation of persons
other than full time residents of New Mexico.
In the opinion of Chapman and Cutler LLP, Special Counsel to the Fund
for New Mexico tax matters, under existing law as of the date of this Prospectus
and based upon the assumptions set forth above:
(1) The New Mexico Trust will not be subject to tax under the New
Mexico State Income Tax.
(2) Interest on the Bonds which is exempt from the New Mexico State
Income Tax when received by the New Mexico Trust, and which would be exempt from
the New Mexico State Income Tax if received directly by a Unitholder, will
retain its status as exempt from such tax when received by the New Mexico Trust
and distributed to such Unitholder provided that the New Mexico Trust complies
with the reporting requirements contained in the New Mexico State Income Tax
regulations.
(3) To the extent that interest income derived from the New Mexico
Trust by a Unitholder with respect to Possession Bonds is excludable from gross
income for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48
U.S.C. Section 1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to New Mexico State Income Tax.
(4) Each Unitholder will recognize gain or loss for New Mexico Income
Tax purposes if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Unitholder redeems or sells Units of the New Mexico Trust
to the extent that such a transaction results in a recognized gain or loss to
such Unitholder for Federal income tax purposes.
(5) The New Mexico State Income Tax does not permit a deduction of
interest paid on indebtedness or other expenses incurred (or continued) in
connection with the purchase or carrying of Units in the New Mexico Trust to the
extent that interest income related to the ownership of Units is exempt from the
New Mexico State Income Tax.
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provisions of New Mexico law. We have assumed that at
the respective times of issuance of the Bonds, opinions relating to the validity
thereof and to the exemption of interest thereon from Federal income tax were
rendered by bond counsel to the respective issuing authorities. Investors should
consult their tax advisors regarding collateral tax consequences under New
Mexico law relating to the ownership of the Units, including, but not limited
to, the inclusion of income attributable to ownership of the Units in "modified
gross income" for purposes of determining eligibility for and the amount of the
low income comprehensive tax rebate, the child day care credit, and the elderly
taxpayers' property tax rebate and the applicability of other New Mexico taxes,
such as the New Mexico estate tax.
New York Risk Factors. The financial condition of the State of New York
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The economy of the State continues to
be influenced by the financial health of the City of New York, which, due to the
terrorist attacks on the World Trade Center on September 11, 2001, has been
weakened. The burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, has contributed to the decisions
of some businesses and individuals to relocate outside, or not locate within,
the State.
The State is party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds of the State are rated "AA" by
Standard and Poor's and "A2" by Moody's. Further information concerning New York
risk factors may be obtained upon request to the Sponsor as described in
"Additional Information".
Tax Status. In the opinion of special counsel to the Trust for New York
tax matters, in summary under existing New York law, the New York IM-IT Trust is
not an association taxable as a corporation and the income of the New York IM-IT
Trust will be treated as the income of the Unitholders under the income tax laws
of the State and City of New York. Individuals who reside in New York State or
City will not be subject to State and City tax on interest income which is
exempt from Federal income tax under section 103 of the Internal Revenue Code of
1986 and derived from obligations of New York State or a political subdivision
thereof or of the Government of Puerto Rico or a political subdivision thereof
or of the Government of Guam or its authorities, although they will be subject
to New York State and City tax with respect to any gains realized when such
obligations are sold, redeemed or paid at maturity or when any such Units are
sold or redeemed.
North Carolina Risk Factors. The financial condition of the State of
North Carolina is affected by various national, economic, social and
environmental policies and conditions. Additionally, Constitutional and
statutory limitations imposed on the State and its local governments concerning
taxes, bond indebtedness and other matters may constrain the revenue-generating
capacity of the State and its local governments and, therefore, the ability of
the issuers of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture. The State has
a relatively high wage labor market which has resulted in the State's business
sector becoming more vulnerable to competitive pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of North Carolina currently maintains a "AAA" bond rating
from Standard & Poor's on its general obligation indebtedness.
Further information concerning North Carolina risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
Tax Status. The portfolio of the North Carolina Quality Trust consists
of bonds issued by the State of North Carolina or municipalities, authorities or
political subdivisions thereof (the "North Carolina Bonds") or by territories or
possessions of the United States. We have assumed for the purposes of this
opinion that the issuers of bonds other than North Carolina Bonds will be
limited to the Commonwealth of Puerto Rico, the United States Virgin Islands or
Guam, or their respective public authorities (collectively, the "Possession
Bonds") (the North Carolina Bonds and the Possession Bonds are sometimes
referred to herein as the "Bonds").
In the opinion of special counsel to the Fund for North Carolina tax
matters, in summary under existing North Carolina law, upon the establishing of
the North Carolina Quality Trust and the Units thereunder:
(1) The North Carolina Quality Trust is not an "association" taxable as
a corporation under North Carolina law with the result that income of the North
Carolina Quality Trust will be deemed to be income of the Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina income tax
when received by the North Carolina Quality Trust will retain its tax-exempt
status when received by the Unitholders.
(3) Unitholders will realize a taxable event when the North Carolina
Quality Trust disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or when a Unitholder redeems or sells his Units (or any of
them), and taxable gains for Federal income tax purposes may result in gain
taxable as ordinary income for North Carolina income tax purposes. However, when
a Bond has been issued under an act of the North Carolina General Assembly that
provides that all income from such Bond, including any profit made from the sale
thereof, shall be free from all taxation by the State of North Carolina, any
such profit received by the North Carolina Quality Trust will retain its
tax-exempt status in the hands of the Unitholders.
(4) Unitholders must amortize their proportionate shares of any premium
on a Bond. Amortization for each taxable year is accomplished by lowering the
Unitholder's basis (as adjusted) in his Units with no deduction against gross
income for the year.
The opinion of special counsel is based, in part, on the opinion of Chapman
and Cutler LLP regarding Federal tax status.
Ohio Risk Factors. The financial condition of the State of Ohio is affected
by various national, economic, social and environmental policies and conditions.
Additionally, Constitutional and statutory limitations imposed on the State and
its local governments concerning taxes, bond indebtedness and other matters may
constrain the revenue-generating capacity of the State and its local governments
and, therefore, the ability of the issuers of the Bonds to satisfy their
obligations. The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its fiscal
year or fiscal biennium in a deficit position.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The Ohio economy continues to rely in
part on durable goods manufacturing, largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. Yet, the Ohio
economy has become more diversified with expansion into the service and other
non-manufacturing sectors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning Ohio risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
In the opinion of Squire, Sanders & Dempsey L.L.P., special counsel to
the Trust for Ohio tax matters, assuming the Ohio IM-IT continues to qualify as
a grantor trust under Section 676(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and that at all times at least fifty percent (50%) of the
total assets of the Ohio IM-IT will consist of interest-bearing Obligations of
the State of Ohio or its political subdivisions or similar obligations of other
states or their political subdivisions under existing law:
(1) The Ohio IM-IT Trust is not taxable as a corporation or otherwise
for purposes of the Ohio personal income tax, school district or municipal
income taxes in Ohio, the Ohio corporation franchise tax, or the Ohio dealers in
intangibles tax.
(2) Distributions with respect to Units of the Ohio IM-IT Trust
("Distributions") will be treated as the income of the Unitholders for purposes
of the Ohio personal income tax, and school district and municipal income taxes
in Ohio and the Ohio corporation franchise tax in proportion to the respective
interest therein of each Unitholder.
(3) Distributions properly attributable to interest on obligations
issued by or on behalf of the State of Ohio, political subdivisions thereof, or
agencies or instrumentalities thereof ("Ohio Obligations") held by the Trust are
exempt from the Ohio personal income tax, school district and municipal income
taxes in Ohio, and are excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to Unitholders.
(4) Distributions properly attributable to interest on obligations
issued by the governments of Puerto Rico, the Virgin Islands or Guam
("Territorial Obligations") held by the Ohio IM-IT Trust the interest on which
is exempt from state income taxes under the laws of the United States are exempt
from the Ohio personal income tax, and municipal and school district income
taxes in Ohio and, provided such interest is excluded from gross income for
federal income tax purposes, are excluded from the net income base of the Ohio
corporation franchise tax when distributed or deemed distributed to Unitholders.
(5) Distributions properly attributable to proceeds of insurance paid
to the Ohio IM-IT Trust that represent maturing or matured interest on defaulted
obligations held by the Ohio IM-IT Trust and that are excluded from gross income
for federal income tax purposes will be exempt from Ohio personal income tax,
and school district and municipal income taxes in Ohio and the net income base
of the Ohio corporation franchise tax.
(6) Distributions of profit made on the sale, exchange or other
disposition by the Ohio IM-IT Trust of Ohio Obligations, including distributions
of "capital gain dividends" as defined in Section 852(b)(3)(C) of the Code,
properly attributable to the sale, exchange or other disposition of Ohio
Obligations are exempt from Ohio personal income tax, and school district and
municipal income taxes in Ohio, and are excluded from the net income base of the
Ohio corporation franchise tax.
Oklahoma Risk Factors. The financial condition of the State of Oklahoma
is affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Oklahoma has broadened its economic
base to rely less on petroleum and agriculture and has expanded in
manufacturing. These industries tend to be highly cyclical and there is no
assurance that Oklahoma's current expansionary phase will continue.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa3, AA and AA from Moody's and
Standard & Poor's, respectively, on its general obligation indebtedness.
Further information concerning Oklahoma risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Oklahoma Trust, Special
Counsel to the Fund for Oklahoma tax matters rendered an opinion under then
existing Oklahoma income tax law applicable to taxpayers whose income is subject
to Oklahoma income taxation substantially to the effect that:
The assets of the Oklahoma Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oklahoma (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Oklahoma Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds"). At
the respective times of issuance of the Oklahoma Bonds, certain, but not
necessarily all, of the issues of the Oklahoma Bonds may have been accompanied
by an opinion of bond counsel to the respective issuing authorities that
interest on such Oklahoma Bonds (the "Oklahoma Tax-Exempt Bonds") are exempt
from the income tax imposed by the State of Oklahoma that is applicable to
individuals and corporations (the "Oklahoma State Income Tax"). The Oklahoma
Trust may include Oklahoma Bonds the interest on which is subject to the
Oklahoma State Income Tax (the "Oklahoma Taxable Bonds"). See "Portfolio" which
indicates by footnote which Oklahoma Bonds are Oklahoma Tax-Exempt Bonds (all
other Oklahoma Bonds included in the portfolio are Oklahoma Taxable Bonds).
Neither the Sponsor nor its counsel has independently examined the
Bonds to be deposited in and held in the Oklahoma Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for federal income tax purposes and (iii) interest on the Oklahoma
Tax-Exempt Bonds and the Possession Bonds, if received directly by a Unitholder,
would be exempt from the Oklahoma State Income Tax. At the respective times of
issuance of the Bonds, opinions relating to the validity thereof and to the
exemption of interest thereon from federal income tax were rendered by bond
counsel to the respective issuing authorities. In addition, with respect to the
Oklahoma Tax-Exempt Bonds, bond counsel to the issuing authorities rendered
opinions as to the exemption of interest from the Oklahoma State Income Tax and,
with respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions as to the exemption from all state and local income taxation.
Neither the Sponsor nor its counsel has made any review for the Oklahoma Trust
of the proceedings relating to the issuance of the Bonds or of the bases for the
opinions rendered in connection therewith. The opinion set forth below does not
address the taxation of persons other than full time residents of Oklahoma.
In the opinion of Special Counsel to the Fund for Oklahoma tax matters,
under existing laws as of the date of this Prospectus and based upon the
assumptions set forth above:
(1) For Oklahoma State Income Tax purposes, the Oklahoma Trust is not
an association taxable as a corporation, each Unitholder of the Trust will be
treated as the owner of a pro rata portion of the Oklahoma Trust and the income
of such portion of the Oklahoma Trust will be treated as the income of the
Unitholder.
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Oklahoma State Income Tax if received directly by
a Unitholder will be exempt from the Oklahoma State Income Tax when received by
the Trust and distributed to such Unitholder. A Unitholder's pro rata portion of
any interest paid and original issue discount, if any, on the Bonds which would
be subject to the Oklahoma State Income Tax if received directly by a
Unitholder, including, for example interest paid and original issue discount, if
any, on the Oklahoma Taxable Bonds, will be taxable to such Unitholder for
Oklahoma State Income Tax purposes when received by the Oklahoma Trust.
(3) To the extent that interest paid and original issue discount, if
any, derived from the Oklahoma Trust by a Unitholder with respect to Possession
Bonds is excludable from gross income for Federal income tax purposes pursuant
to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a, and 48 U.S.C. Section 1403,
such interest paid and original issue discount, if any, will not be subject to
the Oklahoma State Income Tax.
(4) Each Unitholder of the Oklahoma Trust will recognize gain or loss
for Oklahoma State Income Tax purposes if the Trustee disposes of a Bond
(whether by redemption, sale, payment at maturity or otherwise) or if the
Unitholder redeems or sells Units of the Oklahoma Trust to the extent that such
a transaction results in a recognized gain or loss to such Unitholder for
federal income tax purposes. Due to the amortization of bond premium and other
basis adjustments required by the Internal Revenue Code, a Unitholder, under
some circumstances, may realize taxable gain when his or her Units are sold or
redeemed for an amount equal to their original cost.
(5) Although no opinion is expressed herein, we have been informally
advised by the Oklahoma Tax Commission that any insurance proceeds paid under
policies which represent maturing interest on defaulted obligations which are
excludable from gross income for federal income tax purposes should be
excludable from the Oklahoma State Income Tax to the same extent as such
interest would have been if paid by the issuer of such Bonds held by the
Oklahoma Trust provided that, at the time such policies are purchased, the
amounts paid for such policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the obligations, rather than the
insurer, will pay debt service on the obligations.
(6) The Oklahoma State Income Tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Oklahoma Trust, the interest on which is exempt from such tax
if such interest is not deductible for federal income tax purposes. Special
rules apply in the case of certain banks and financial institutions.
Title 68 Section 1201 of the Oklahoma Statutes Annotated imposes a
franchise tax on "corporations" and certain other organizations organized under
the laws of or qualified to do or doing business in, the State of Oklahoma.
Recent Oklahoma administrative guidance has indicated that a federal grantor
trust (a fixed investment trust) is characterized as a business trust and thus a
corporation for estate tax purposes. Accordingly, the Oklahoma Tax Commission
may hold that all fixed unit investment trusts are corporations subject to the
Oklahoma franchise tax. Although Chapman and Cutler LLP expresses no opinion
with respect to taxation of the Oklahoma Trust for Oklahoma franchise tax
purposes, there is a reasonable basis to conclude that the Oklahoma Trust is not
subject to the Oklahoma franchise tax because the Trust would not be considered
as "doing business" within the State. The Oklahoma franchise tax is equal to
$1.25 per $1,000 of the capital used, invested or employed in the State of
Oklahoma not to exceed $20,000 per year.
Under recently enacted Oklahoma legislation, a pass-through entity must
withhold income tax at a rate of five percent of the Oklahoma share of income of
the entity distributed to each nonresident member. A "pass-through entity" is
defined to include a trust that is not taxed as a corporation for federal income
tax purposes and a "member" is defined to include a beneficiary of a trust.
Special counsel has expressed no opinion as to the applicability of this
provision to amounts distributed by the Oklahoma Trust.
The scope of this opinion is expressly limited to the matters set forth
herein, and we express no other opinions of law with respect to the state or
local taxation of the Oklahoma Trust, the purchase, ownership or disposition of
Units or the Unitholders under Oklahoma law. We have assumed that at the
respective times of issuance of the Bonds, opinions relating to the validity
thereof and to the exemption of interest thereon from federal income tax were
rendered by bond counsel to the respective issuing authorities. In addition, we
have assumed that, with respect to the Oklahoma Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest from the
Oklahoma Income Tax and, with respect to the Possession Bonds, bond counsel to
the issuing authorities rendered opinions as to the exemption from all state and
local income taxation of the Possession Bonds and the interest thereon. Neither
the Sponsor nor its counsel has made any review for the Oklahoma Trust of the
proceedings relating to the issuance of the Bonds or of the bases for the
opinions rendered in connection therewith.
Oregon Risk Factors. The financial condition of the State of Oregon is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa3 from Moody's and AA from Standard
& Poor's, on its general obligation indebtedness. Further information concerning
Oregon risk factors may be obtained upon request to the Sponsor as described in
"Additional Information".
Tax Status. At the time of the closing for each Oregon Trust, Special
Counsel to each Oregon Trust for Oregon tax matters rendered an opinion under
then existing Oregon income tax law applicable to taxpayers whose income is
subject to Oregon income taxation substantially to the effect that:
The assets of the Oregon Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oregon (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Oregon Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to be
deposited in and held in the Oregon Trust. Although no opinion is expressed
herein regarding such matters, it is assumed that: (i) the Bonds were validly
issued; (ii) the interest thereon is excludable from gross income for federal
income tax purposes; and (iii) interest on the Bonds, if received directly by an
Oregon Unitholder, would be exempt from the Oregon income tax applicable to
individuals (the "Oregon Personal Income Tax").
In the opinion of counsel to the Sponsor, under existing Oregon law and
based on the assumptions set forth above: The Oregon Trust is not an association
taxable as a corporation and based upon an administrative rule of the Oregon
State Department of Revenue, each Oregon Unitholder of the Oregon Trust will be
essentially treated as the owner of a pro rata portion of the Oregon Trust and
the income of such portion of the Oregon Trust will be treated as the income of
the Oregon Unitholder for Oregon Personal Income Tax purposes;
Interest on the Bonds which is exempt from the Oregon Personal Income
Tax when received by the Oregon Trust, and which would be exempt from the Oregon
Personal Income Tax if received directly by an Oregon Unitholder, will retain
its status as exempt from such tax when received by the Oregon Trust and
distributed to an Oregon Unitholder;
To the extent that interest derived from the Oregon Trust by an Oregon
Unitholder with respect to the Possession Bonds is excludable from gross income
for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
the Oregon Personal Income Tax;
Each Oregon Unitholder of the Oregon Trust will recognize gain or loss
for Oregon Personal Income Tax purposes if the Trustee disposes of a bond
(whether by redemption, sale, payment at maturity or otherwise) or if the Oregon
Unitholder redeems or sells Units of the Oregon Trust to the extent that such a
transaction results in a recognized gain or loss to such Oregon Unitholder for
federal income tax purposes; and
The Oregon Personal Income Tax does not permit a deduction of interest
paid or incurred on indebtedness incurred or continued to purchase or carry
Units in the Oregon Trust, the interest on which is exempt from such Tax.
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Oregon Law. Ownership of the Units may
result in collateral Oregon tax consequences to certain tax payers.
Counsel to the Sponsor has not examined any of the Bonds to be
deposited and held in the Oregon Trust or the proceedings for the issuance
thereof or the opinions of bond counsel with respect thereto and therefore it
expresses no opinion as to the exemption from the Oregon Personal Income Tax of
interest on the Bonds if received directly by an Oregon Unitholder. In addition,
prospective purchasers subject to the Oregon corporate income tax should be
advised that for purposes of the Oregon Corporate Income (Excise) Tax, interest
on the Bonds received by the Oregon Trust and distributed to an Oregon
Unitholder subject to such tax will be added to the corporate Oregon
Unitholder's Federal taxable income and therefore will be taxable. No opinion is
expressed regarding the Oregon taxation of foreign or domestic insurance
companies. We have assumed that at the respective times of issuance of the
Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, we have assumed that, with respect
to the Oregon Bonds, bond counsel to the issuing authorities rendered opinions
as to the exemption of interest from the Oregon Income Tax and, with respect to
the Possession Bonds, bond counsel to the issuing authorities rendered opinions
as to the exemption from all state and local income taxation of the Possession
Bonds and the interest thereon. Neither the Sponsor nor its counsel has made any
review for the Oregon Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith.
Pennsylvania Risk Factors. The financial condition of the Commonwealth
of Pennsylvania is affected by various national, economic, social and
environmental policies and conditions. Additionally, Constitutional and
statutory limitations imposed on the State and its local governments concerning
taxes, bond indebtedness and other matters may constrain the revenue-generating
capacity of the Commonwealth and its local governments and, therefore, the
ability of the issuers of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. Historically, the economy of the
Commonwealth has been dependent on heavy industry and manufacturing. Growth in
the Commonwealth economy has more recently been in the service sector, including
trade, health services and educational institutions. Growth in these sectors may
be affected by federal funding and state legislation.
The Commonwealth is a party to numerous lawsuits in which an adverse
final decision could materially affect the Commonwealth's governmental
operations and consequently its ability to pay debt service on its obligations.
All outstanding general obligation bonds of the Commonwealth are rated AA
by Standard and Poor's and Aa2 by Moody's. Further information concerning
Pennsylvania risk factors may be obtained upon request to the Sponsor as
described in "Additional Information".
Tax Status. We have examined certain laws of the State of Pennsylvania
(the "State") to determine their applicability to the Pennsylvania IM-IT Trust
and to the holders of Units in the Pennsylvania IM-IT Trust who are residents of
the State of Pennsylvania (the "Unitholders"). The assets of the Pennsylvania
IM-IT Trust will consist of interest-bearing obligations issued by or on behalf
of the State, any public authority, commission, board or other agency created by
the State or a political subdivision of the State, or political subdivisions
thereof (the "Pennsylvania Bonds") or by the Commonwealth of Puerto Rico (the
"Puerto Rico Bonds", and, collectively with the Pennsylvania Bonds, the
"Bonds"). Distributions of income with respect to the Bonds received by the
Pennsylvania IM-IT Trust will be made monthly.
Although we express no opinion with respect thereto, in rendering the
opinion expressed herein, we have assumed that: (i) the Bonds were validly
issued by the State or its municipalities, or by the Commonwealth of Puerto
Rico, as the case may be, (ii) the interest thereon is excludable from gross
income for federal income tax purposes, (iii) the interest thereon is exempt
from Pennsylvania State and local taxes and (iv) with respect to the Puerto Rico
Bonds, the Puerto Rico Bonds and the interest thereon are exempt from all state
and local taxation. This opinion does not address the taxation of persons other
than full-time residents of Pennsylvania.
In the opinion of Chapman and Cutler LLP, special counsel for the
Pennsylvania IM-IT Trust for Pennsylvania tax matters, under existing
Pennsylvania law as of the date of this Prospectus and based upon the
assumptions set forth above:
(1) The Pennsylvania IM-IT Trust will have no tax liability for
purposes of the personal income tax (the "Personal Income Tax"), the corporate
income tax (the "Corporate Income Tax") and the capital stock-franchise tax (the
"Franchise Tax"), all of which are imposed under the Pennsylvania Tax Reform
Code of 1971, or the Philadelphia School District Investment Net Income Tax (the
"Philadelphia School Tax") imposed under Section 19-1804 of the Philadelphia
Code of Ordinances.
(2) Interest on the Bonds, net of Pennsylvania IM-IT Trust expenses,
which is exempt from the Personal Income Tax and the Corporate Income Tax when
received by the Pennsylvania IM-IT Trust and which would be exempt from such tax
if received directly by a Unitholder, will retain its status as exempt from such
taxes when received by the Pennsylvania IM-IT Trust and distributed to such
Unitholder. Interest on the Pennsylvania Bonds which is exempt from the
Philadelphia School Tax when received by the Pennsylvania IM-IT Trust and which
would be exempt from such tax if received directly by a Unitholder, will retain
its status as exempt from such tax when received by the Pennsylvania IM-IT Trust
and distributed to such Unitholder. We express no opinion with respect to the
treatment of distributions from the Pennsylvania IM-IT Trust attributable to
interest on the Puerto Rico bonds under the Philadelphia School Tax.
(3) Distributions from the Pennsylvania IM-IT Trust attributable to
capital gains recognized by the Pennsylvania IM-IT Trust upon its disposition of
a Pennsylvania Bond issued on or after February 1, 1994 or a Puerto Rico Bond,
will be taxable for purposes of the Personal Income Tax and the Corporate Income
Tax. No opinion is expressed with respect to the taxation of distributions from
the Pennsylvania IM-IT Trust attributable to capital gains recognized by the
Pennsylvania IM-IT Trust upon its disposition of a Pennsylvania Bond issued
before February 1, 1994.
(4) Distributions from the Pennsylvania IM-IT Trust attributable to
capital gains recognized by the Pennsylvania IM-IT Trust upon its disposition of
a Bond will be exempt from the Philadelphia School Tax if the Bond was held by
the Pennsylvania IM-IT Trust for a period of more than six months and the
Unitholder held his Unit for more than six months before the disposition of the
Bond. If, however, the Bond was held by the Pennsylvania IM-IT Trust or the Unit
was held by the Unitholder for a period of less than six months, then
distributions from the Pennsylvania IM-IT Trust attributable to capital gains
recognized by the Pennsylvania IM-IT Trust upon its disposition of a
Pennsylvania Bond issued on or after February 1, 1994 or a Puerto Rico Bond,
will be taxable for purposes of the Philadelphia School Tax; no opinion is
expressed with respect to the taxation of any such gains attributable to
Pennsylvania Bonds issued before February 1, 1994.
(5) Insurance proceeds paid under policies which represent maturing
interest on defaulted obligations will be exempt from the Corporate Income Tax
to the same extent as such amounts are excluded from gross income for federal
income tax purposes. No opinion is expressed with respect to whether such
insurance proceeds are exempt from the Personal Income Tax or the Philadelphia
School Tax.
(6) Each Unitholder will recognize gain for purposes of the Corporate
Income Tax if the Unitholder redeems or sells Units of the Pennsylvania IM-IT
Trust to the extent that such a transaction results in a recognized gain to such
Unitholder for federal income tax purposes and such gain is attributable to
Pennsylvania Bonds issued on or after February 1, 1994 or to Puerto Rico Bonds.
No opinion is expressed with respect to the taxation of gains realized by a
Unitholder on the sale or redemption of a Unit to the extent such gain is
attributable to Pennsylvania Bonds issued prior to February 1, 1994.
(7) A Unitholder's gain on the sale or redemption of a Unit will be
subject to the Personal Income Tax, except that no opinion is expressed with
respect to the taxation of any such gain to the extent it is attributable to
Pennsylvania Bonds issued prior to February 1, 1994.
(8) A Unitholder's gain upon a redemption or sale of Units will be
exempt from the Philadelphia School Tax if the Unitholder held his Unit for more
than six months and the gain is attributable to Bonds held by the Pennsylvania
IM-IT Trust for a period of more than six months. If, however, the Unit was held
by the Unitholder for less than six months or the gain is attributable to Bonds
held by the Pennsylvania IM-IT Trust for a period of less than six months, then
the gains will be subject to the Philadelphia School Tax; except that no opinion
is expressed with respect to the taxation of any such gains attributable to
Pennsylvania Bonds issued before February 1, 1994.
Unitholders should be aware that, generally, interest on indebtedness
incurred or continued to purchase or carry Units is not deductible for purposes
of the Personal Income Tax, the Corporate Income Tax or the Philadelphia School
Tax.
We have not examined any of the Bonds to be deposited and held in the
Pennsylvania IM-IT Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto, and therefore express no opinion
as to the exemption from federal, state or local taxation of interest on the
Bonds if interest thereon had been received directly by a Unitholder.
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Pennsylvania law. Ownership of the Units
may result in collateral Pennsylvania tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences.
South Carolina Risk Factors. The state of South Carolina is affected by
various national, economic, social and environmental policies and conditions.
Additionally, Constitutional and statutory limitations imposed on the State and
its local governments concerning taxes, bond indebtedness and other matters may
constrain the revenue-generating capacity of the State and its local governments
and, therefore, the ability of the issuers of the Bonds to satisfy their
obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting primarily of manufacturing, but expanding into the trade
and service industries, supplemented by rural areas with selective commercial
agriculture. The State has a relatively high wage labor market which has
resulted in the State's business sector becoming more vulnerable to competitive
pressures.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of South Carolina currently maintains a "triple A" bond
rating from Standard & Poor's and Moody's on its general obligation
indebtedness.
Further information concerning South Carolina risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each South Carolina Trust,
Special Counsel for each South Carolina Trust for South Carolina tax matters
rendered an opinion under then existing South Carolina income tax law applicable
to taxpayers whose income is subject to South Carolina income taxation
substantially to the effect that:
In the opinion of special counsel to the Fund for South Carolina tax
matters, under existing South Carolina law: (1) By the provision of paragraph
(j) of Section 3 of Article 10 of the South Carolina Constitution (revised 1977)
intangible personal property is specifically exempted from any and all ad
valorem taxation.
(2) Pursuant to the provisions of Section 12-7-430(b), as interpreted
by South Carolina Revenue Ruling #91-15, interest from obligations issued by the
State of South Carolina or any of its political subdivisions, as well as
interest derived from bonds issued by the Government of Puerto Rico, which is
exempt from federal income taxes is exempt from income taxes and that the
exemption so granted extends to all recipients of interest paid thereon through
the Trust. (This opinion does not extend to so-called 63-20 obligations.)
(3) The income of the Trust would be treated as income to each
Unitholder of the Trust in the proportion that the number of Units of the Trust
held by the Unitholder bears to the total number of Units of the Trust
outstanding. For this reason, interest derived by the Trust that would not be
includible in income for South Carolina income tax purposes when paid directly
to a South Carolina Unitholder will be exempt from South Carolina income
taxation when received by the Trust and attributed to such South Carolina
Unitholder.
(4) Each Unitholder will recognize gain or loss for South Carolina
state income tax purposes if the Trustee disposes of a Bond (whether by sale,
payment on maturity, retirement or otherwise) or if the Unitholder redeems or
sells his Unit.
(5) The Trust would be regarded, under South Carolina law, as a common
trust fund and therefore not subject to taxation under any income tax law of
South Carolina.
The above described opinion has been concurred in by an informal ruling
of the South Carolina Tax Commission pursuant to Section 12-3-170 of the South
Carolina Code.
Tennessee Risk Factors. The financial condition of the State of
Tennessee is affected by various national, economic, social and environmental
policies and conditions. Additionally, Constitutional and statutory limitations
imposed on the State and its local governments concerning taxes, bond
indebtedness and other matters may constrain the revenue-generating capacity of
the State and its local governments and, therefore, the ability of the issuers
of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The State's economic base is
diversified, consisting of manufacturing, construction and service industries,
supplemented by a diverse agricultural sector. These sectors tend to be more
cyclical than other sectors.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State of Tennessee currently maintains a "AA" and "Aa2" bond rating
from Standard & Poor's and Moody's, respectively, on its general obligation
indebtedness (confirmed on September 24, 2003).
Further information concerning Tennessee risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Tennessee Trust,
Special Counsel to the Fund for Tennessee tax matters rendered an opinion under
then existing Tennessee income tax law applicable to taxpayers whose income is
subject to Tennessee income taxation substantially to the effect that:
The assets of the Tennessee Trust will consist of bonds issued by the
State of Tennessee (the "State") or any county or any municipality or political
subdivision thereof, including any agency, board, authority or commission, the
interest on which is exempt from the Hall Income Tax imposed by the State of
Tennessee ("Tennessee Bonds") or by the Commonwealth of Puerto Rico (the "Puerto
Rico Bonds") (collectively, the "Bonds").
Under Tennessee law, a unit investment trust taxable as a grantor trust
for federal income tax purposes is entitled to special Tennessee State tax
treatment (as more fully described below) with respect to its proportionate
share of interest income received or accrued with respect to the Tennessee
Bonds. Tennessee law also provides an exemption for distributions made by a unit
investment trust or mutual fund that are attributable to "bonds or securities of
the United States government or any agency or instrumentality thereof" ("U.S.
Government, Agency or Instrumentality Bonds"). If it were determined that the
Tennessee Trust held assets other than Tennessee Bonds or U.S. Government,
Agency or Instrumentality Bonds, a proportionate share of distributions from the
Tennessee Trust would be taxable to Unitholders for Tennessee Income Tax
purposes.
Further, this provision appears only to provide an exemption for
distributions that relate to interest income, distributions by the Trust that
relate to capital gains realized from the sale or redemption of Tennessee Bonds
or U.S. Government, Agency or Instrumentality Bonds are likely to be treated as
taxable dividends for purposes of the Hall Income Tax. However, capital gains
realized directly by a Unitholder when the Unitholder sells or redeems his Unit
will not be subject to the Hall Income Tax. The opinion set forth below assumes
that the interest on the Tennessee Bonds, if received directly by a Unitholder,
would be exempt from the Hall Income Tax under Tennessee State law. This opinion
does not address the taxation of persons other than full-time residents of the
State of Tennessee.
Because this provision only provides an exemption for distributions
attributable to interest on Tennessee Bonds or U.S. Government, Agency or
Instrumentality Bonds, it must be determined whether bonds issued by the
Government of Puerto Rico qualify as U.S. Government, Agency or Instrumentality
Bonds. For Hall Income Tax purposes, there is currently no published
administrative interpretation or opinion of the Attorney General of Tennessee
dealing with the status of distributions made by unit investment trusts such as
the Tennessee Trust that are attributable to interest paid on bonds issued by
the Government of Puerto Rico. However, in a letter dated August 14, 1992 (the
"Commissioner's Letter"), the Commissioner of the State of Tennessee Department
of Revenue advised that Puerto Rico would be an "instrumentality" of the U.S.
Government and treated bonds issued by the Government of Puerto Rico as U.S.
Government, Agency or Instrumentality Bonds. Based on this conclusion, the
Commissioner advised that distributions from a mutual fund attributable to
investments in Puerto Rico Bonds are exempt from the Hall Income Tax. Both the
Sponsor and Chapman and Cutler LLP, for purposes of its opinion (as set forth
below), have assumed, based on the Commissioner's Letter, that bonds issued by
the Government of Puerto Rico are U.S. Government, Agency or Instrumentality
Bonds. However, it should be noted that the position of the Commissioner is not
binding, and is subject to change, even on a retroactive basis.
The Sponsor cannot predict whether new legislation will be enacted into
law affecting the tax status of Tennessee Trusts. The occurrence of such an
event could cause distributions of interest income from the Trust to be subject
to the Hall Income Tax. Investors should consult their own tax advisors in this
regard. It is assumed for purposes of the discussion and opinion below that the
Bonds constitute debt for federal income tax purposes.
In the opinion of Chapman and Cutler LLP, Counsel to the Sponsor, under
existing Tennessee State law as of the date of this prospectus:
For purposes of the Hall Income Tax, the Tennessee Excise Tax imposed
by Section 67-4-2005 (the "State Corporate Income Tax"), and the Tennessee
Franchise Tax imposed by Section 67-4-2105, the Tennessee Trust will not be
subject to such taxes.
For Hall Income Tax purposes, a proportionate share of such
distributions from the Tennessee Trust to Unitholders, to the extent
attributable to interest on the Tennessee Bonds (based on the relative
proportion of interest received or accrued attributable to Tennessee Bonds) will
be exempt from the Hall Income Tax when distributed to such Unitholders. Based
on the Commissioner's Letter, distributions from the Tennessee Trust to
Unitholders, to the extent attributable to interest on the Puerto Rico Bonds
(based on the relative proportion of interest received or accrued attributable
to the Puerto Rico Bonds) will be exempt from the Hall Income Tax when
distributed to such Unitholders. A proportionate share of distributions from the
Tennessee Trust attributable to assets other than the Bonds would not, under
current law, be exempt from the Hall Income Tax when distributed to Unitholders.
For State Corporate Income Tax Purposes, Tennessee law does not provide
an exemption for interest on Tennessee Bonds and requires that all interest
excludable from federal gross income must be included in calculating "net
earnings" subject to the State Corporate Income Tax. No opinion is expressed
regarding whether such tax would be imposed on the earnings or distributions of
the Tennessee Trust (including interest on the Bonds or gain realized upon the
disposition of the Bonds by the Tennessee Trust) attributable to Unitholders
subject to the State Corporate Income Tax. However, based upon prior written
advice from the Tennessee Department of Revenue, earnings and distributions from
the Tennessee Trust (including interest on the Tennessee Bonds or gain realized
upon the disposition of the Tennessee Bonds by the Tennessee Trust) attributable
to the Unitholders should be exempt from the State Corporate Income Tax. The
position of the Tennessee Department of Revenue is not binding, and is subject
to change, even on a retroactive basis.
Each Unitholder will realize taxable gain or loss for State Corporate
Income Tax purposes when the Unitholder redeems or sells his Units, at a price
that differs from original cost as adjusted for accretion or any discount or
amortization of any premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Unitholder's settlement
date and the date such Bonds are delivered to the Tennessee Trust, if later. Tax
basis reduction requirements relating to amortization of bond premium may, under
some circumstances, result in Unitholders realizing taxable gain when the Units
are sold or redeemed for an amount equal to or less than their original cost.
For purposes of the Tennessee Property Tax, the Tennessee Trust will be
exempt from taxation with respect to the Bonds it holds. As for the taxation of
the Units held by the Unitholders, although intangible personal property is not
presently subject to Tennessee taxation, no opinion is expressed with regard to
potential property taxation of the Unitholders with respect to the Units because
the determination of whether property is exempt from such tax is made on a
county by county basis.
No opinion is expressed herein regarding whether insurance proceeds
paid in lieu of interest on the Bonds held by the Tennessee Trust (including the
Tennessee Bonds) are exempt from the Hall Income Tax. Distributions of such
proceeds to Unitholders may be subject to the Hall Income Tax.
The Bonds and the Units held by the Unitholder will not be subject to
Tennessee sales and use taxes.
Neither the Sponsor or Chapman and Cutler LLP have examined any of the
Bonds to be deposited and held in the Tennessee Trust or the proceedings for the
issuance thereof or the opinions of bond counsel with respect thereto, and
therefore express no opinion as to the exemption from State income taxes of
interest on the Bonds if received directly by a Unitholder. It is assumed that
at the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exemption of interest thereon from federal income
tax were rendered by bond counsel to the respective issuing authorities. In
addition, it is assumed that, with respect to the Tennessee Bonds, bond counsel
to the issuing authorities rendered opinions as to the exemption of interest
from the Income taxes imposed and, with respect to the Puerto Rico Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption from
all state and local income taxation of the Puerto Rico Bonds and the interest
thereon. Neither the Sponsor nor its counsel has made any review for the
Tennessee Trust of the proceedings relating to the issuance of the Bonds or the
bases for the opinions rendered in connection therewith.
Chapman and Cutler LLP has expressed no opinion with respect to
taxation under any other provision of Tennessee law. Ownership of the Units may
result in collateral Tennessee tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences.
Texas Risk Factors. The financial condition of the State of Texas is
affected by various national, economic, social and environmental policies and
conditions. Additionally, Constitutional and statutory limitations imposed on
the State and its local governments concerning taxes, bond indebtedness and
other matters may constrain the revenue-generating capacity of the State and its
local governments and, therefore, the ability of the issuers of the Bonds to
satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. The Texas labor force is concentrated
in oil and gas extraction, pipelines and petroleum production. These industries
tend to be highly cyclical. Texas's largest industries in terms of earnings have
traditionally been services, government and trade. There is no assurance that
these industries will continue to grow.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
The State maintains a bond rating of Aa1 and AA from Moody's and
Standard & Poor's, respectively, on its general obligation indebtedness.
Further information concerning Texas risk factors may be obtained upon
request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Texas Trust, Special
Counsel to the Fund for Texas tax matters rendered an opinion under then
existing Texas income taw law applicable to taxpayers whose income is subject to
Texas income taxation substantially to the effect that:
(1) Neither the State nor any political subdivision of the State
currently imposes an income tax on individuals. Therefore, no portion of any
distribution received by an individual Unitholder of the Trust in respect of his
Units, including a distribution of the proceeds of insurance in respect of such
Units, is subject to income taxation by the State or any political subdivision
of the State;
(2) Except in the case of certain transportation businesses, savings
and loan associations and insurance companies, no Unit of the Trust is taxable
under any property tax levied in the State;
(3) The "inheritance tax" of the State, imposed upon certain transfers
of property of a deceased resident individual Unitholder, may be measured in
part upon the value of Units of the Trust included in the estate of such
Unitholder; and
(4) With respect to any Unitholder which is subject to the State
corporate franchise tax, Units in the Trust held by such Unitholder, and
distributions received therein, will be taken into account in computing the
"taxable capital" of the Unitholder allocated to the State, one of the bases by
which such franchise tax is currently measured (the other being a corporation's
"net capital earned surplus," which is, generally, its net corporate income plus
officers and directors income).
The opinion set forth in clause (2), above, is limited to the extent that
Units of the Trust may be subject to property taxes levied in the State if held
on the relevant date: (i) by a transportation business described in V.T.C.A.,
Tax Code, Subchapter A, Chapter 24; (ii) by a savings and loan association
formed under the laws of the State (but only to the extent described in section
11.09 of the Texas Savings and Loan Act, Vernon's Ann. Civ. St. art. 852a); or
(iii), by an insurance company incorporated under the laws of the State (but
only to the extent described in V.A.T.S., Insurance Code, Art. 4.01). Each
Unitholder described in the preceding sentence should consult its own tax
advisor with respect to such matters.
Corporations subject to the State franchise tax should be aware that in
its first called 1991 session, the Texas Legislature adopted, and the Governor
has signed into law, certain substantial amendments to the State corporate
franchise tax, the effect of which may be to subject to taxation all or a
portion of any gains realized by such a corporate Unitholder upon the sale,
exchange or other disposition of a Unit. The amendments are applicable to
taxable periods commencing January 1991, and to each taxable period thereafter.
Because no authoritative judicial, legislative or administrative interpretation
of these amendments has been issued, and there remain many unresolved questions
regarding its potential effect on corporate franchise taxpayers, each
corporation which is subject to the State franchise tax and which is considering
the purchase of Units should consult its tax advisor regarding the effect of
these amendments.
Virginia Risk Factors. The financial condition of the Commonwealth of
Virginia is affected by various national, economic, social and environmental
policies and conditions. Constitutional and statutory limitations concerning
taxes, bond indebtedness and other matters may constrain the revenue-generating
capacity of the Commonwealth and its local governments and, therefore, the
ability of the issuers of the Bonds to satisfy their obligations.
The economic vitality of the Commonwealth and its various regions and,
therefore, the ability of the Commonwealth and its local governments to satisfy
the Bonds, are affected by numerous factors.
The Commonwealth is a party to numerous lawsuits in which an adverse
final decision could materially affect the Commonwealth's governmental
operations and consequently, its ability to pay debt service on its obligations.
The Commonwealth of Virginia currently maintains a "triple A" bond
rating from Standard & Poor's, Moody's and Fitch IBCA, Inc. (formerly Fitch
Investors Service, L.P.).
Further information concerning Virginia risk factors may be obtained
upon request to the Sponsor as described in "Additional Information".
Tax Status. At the time of the closing for each Virginia Trust, Special
Counsel to each Virginia Trust for Virginia tax matters rendered an opinion
under then existing Virginia income tax law applicable to taxpayers whose income
is subject to Virginia income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations
issued by or on behalf of the Commonwealth of Virginia or counties,
municipalities, authorities or political subdivisions thereof (the "Virginia
Bonds") and certain bonds issued by Puerto Rico authorities (the "Possession
Bonds," and collectively with the Virginia Bonds, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) opinions
relating to the validity thereof and to the exemption of interest thereon from
Federal income tax were rendered by bond counsel to the respective issuing
authorities, (ii) the interest thereon is excludible from gross income for
federal income tax purposes and (iii) the interest thereon is exempt from income
tax imposed by Virginia that is applicable to individuals and corporations (the
"Virginia Income Tax") and, with respect to the Possession Bonds, bond counsel
to the issuing authorities rendered opinions as to the exemption from all state
and local taxation. The opinion set forth below does not address the taxation of
persons other than full time residents of Virginia.
In the opinion of Chapman and Cutler LLP, special counsel to the Trust
for Virginia tax matters, under existing law as of the date of this prospectus
and based upon the assumptions set forth above:
(1)The Virginia Quality Trust is not an association taxable as a
corporation for purposes of the Virginia Income Tax and each
Unitholder of the Trust will be treated as the owner of a pro rata
portion of each of the assets held by the Trust and the income of
such portion of the Virginia Quality Trust will be treated as income
of the Unitholder for purposes of the Virginia Income Tax.
(2)Interest on the Virginia Bonds which is exempt from Virginia Income
Tax when received by the Virginia Quality Trust, and which would be
exempt from Virginia Income Tax if received directly by a
Unitholder, will retain its status as exempt from such tax when
received by the Trust and distributed to such Unitholder.
(3)Interest on the Possession Bonds which is excludible from gross
income for federal income tax purposes and is exempt from state and
local taxation pursuant to federal law when received by the Trust
will be exempt from Virginia income taxation and therefore will not
be includible in the income of the Unitholder for Virginia income
tax purposes when distributed by the Trust and received by the
Unitholders.
(4)The Virginia legislature has enacted a law, effective July 1, 1997,
that would exempt from the Virginia Income Tax income derived on the
sale or exchange of obligations of the Commonwealth of Virginia or
any political subdivision or instrumentality of the Commonwealth of
Virginia. However, Virginia law does not address whether this
exclusion would apply to gains recognized through entities such as
the Virginia Quality Trust. Accordingly, we express no opinion as to
the treatment for Virginia Income Tax purposes of any gain or loss
recognized by a Unitholder for federal income tax purposes.
(5)The Virginia Income Tax does not permit a deduction of interest
paid on indebtedness incurred or continued to purchase or carry
Units in the Virginia Quality Trust to the extent that interest
income related to the ownership of Units is exempt from the Virginia
Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax,
the income derived by such a Unitholder from his pro rata portion of the Bonds
held by the Virginia Quality Trust may affect the determination of such
Unitholder's Bank Franchise Tax. Prospective investors subject to the Virginia
Bank Franchise Tax should consult their tax advisors. Chapman and Cutler LLP has
expressed no opinion with respect to taxation under any other provisions of
Virginia law. Ownership of the Units may result in collateral Virginia tax
consequences to certain taxpayers. Prospective investors should consult their
tax advisors to the applicability of any such collateral consequences.
West Virginia Risk Factors. The financial condition of the State of
West Virginia is affected by various national, economic, social and
environmental policies and conditions. Additionally, Constitutional and
statutory limitations imposed on the State and its local governments concerning
taxes, bond indebtedness and other matters may constrain the revenue-generating
capacity of the State and its local governments and, therefore, the ability of
the issuers of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and,
therefore, the ability of the State and its local governments to satisfy the
Bonds, are affected by numerous factors. West Virginia's primary employment is
in the services, trade and government. These sectors tend to be cyclical and can
cause problems for the economy. West Virginia has historically had a higher
unemployment rate than the U.S. which also affects the economy.
The State is a party to numerous lawsuits in which an adverse final
decision could materially affect the State's governmental operations and
consequently its ability to pay debt service on its obligations.
Further information concerning West Virginia risk factors may be
obtained upon request to the Sponsor as described in "Additional Information".
Tax Status. The assets of the West Virginia Trust will consist of
interest-bearing obligations issued by or on behalf of the State of West
Virginia ("West Virginia") or counties, municipalities, authorities or political
subdivisions thereof the interest on which is expected to qualify as exempt from
West Virginia income taxes (the "West Virginia Bonds") or by the Commonwealth of
Puerto Rico, Guam or the United States Virgin Islands (the "Possession Bonds")
(collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the West Virginia Trust. However, although
no opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unitholder would be exempt from the West Virginia
personal income tax applicable to individuals (the "West Virginia Personal
Income Tax"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the West Virginia Bonds, bond counsel
to the issuing authorities rendered opinions as to the exemption of interest
from the West Virginia Personal Income Tax and, with respect to the Possession
Bonds, bond counsel to the issuing authorities rendered opinions as to the
exemption from all state and local income taxation. Neither the Sponsor nor its
counsel has made any review for the West Virginia Trust of the proceedings
relating to the issuance of the Bonds or of the bases for the opinions rendered
in connection therewith. The opinion set forth below does not address the
taxation of persons other than full-time residents of West Virginia.
At the time of closing for each West Virginia Trust, Special Counsel to
the Fund for West Virginia tax matters rendered an opinion, based upon the
assumptions set forth above, under then existing West Virginia law substantially
to the effect that:
(1) The West Virginia Trust will not be subject to tax under the West
Virginia Corporation Net Income Tax, the West Virginia Business Franchise Tax,
or the West Virginia Personal Income Tax.
(2) Interest on the Bonds which is exempt from the West Virginia
Personal Income Tax when received by the West Virginia Trust, and which would be
exempt from the West Virginia Personal Income Tax if received directly by a
Unitholder, will retain its status as exempt from such tax when received by the
West Virginia Trust and distributed to such Unitholder.
(3) For Unitholders subject to the West Virginia Corporation Net Income
Tax, income of the West Virginia Trust received by them (except interest income
with respect to Possession Bonds, as to which no opinion is expressed) is not
exempt from the West Virginia Corporation Net Income Tax. However, such
Unitholders may be entitled to a credit against the tax imposed under the West
Virginia Corporation Net Income Tax Law based on their ownership of Units in the
West Virginia Trust. Unitholders should consult their own advisors regarding the
applicability and computation of any such credit.
(4) Each Unitholder will recognize gain or loss for West Virginia
Personal Income Tax purposes if the Trustee disposes of a bond (whether by
redemption, sale, payment at maturity or otherwise) or if the Unitholder redeems
or sells Units of the West Virginia Trust to the extent that such a transaction
results in a recognized gain or loss to such Unitholder for federal income tax
purposes.
(5) Insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income for
federal income tax purposes should be excludable from the West Virginia Personal
Income Tax to the same extent as such interest would have been if paid by the
issuer of such Bonds held by the West Virginia Trust.
(6) The West Virginia Personal Income Tax does not permit a deduction
of interest paid on indebtedness incurred or continued to purchase or carry
Units in the West Virginia Trust to the extent that interest income related to
the ownership of Units is exempt from the West Virginia Personal Income Tax.
We have not examined any of the Bonds to be deposited and held in the
West Virginia Trust or the proceedings for the issuance thereof or the opinions
of bond counsel with respect thereto, and therefore express no opinion as to the
exemption from federal or state income taxation of interest on the Bonds if
interest thereon had been received directly by a Unitholder. We have assumed
that at the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exemption of interest thereon from Federal income
tax were rendered by bond counsel to the respective issuing authorities. In
addition, we have assumed that, with respect to the West Virginia Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest from the West Virginia Income Tax and, with respect to the Possession
Bonds, bond counsel to the issuing authorities rendered opinions as to the
exemption from all state and local income taxation of the Possession Bonds and
the interest thereon. Neither the Sponsor nor its counsel has made any review
for the West Virginia Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of West Virginia law. Ownership of the Units
may result in collateral West Virginia tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences.
EXPENSES
--------------------------------------------------------------------------------
General. The Trustee will periodically deduct from the Interest Account
and, to the extent funds are not sufficient therein, from the Principal Account,
amounts necessary to pay the expenses of the Trusts. The Trustee also may
withdraw from these Accounts such amounts, if any, as it deems necessary to
establish a reserve for any governmental charges payable out of the Trusts.
Amounts so withdrawn shall not be considered a part of a Trust's assets until
such time as the Trustee shall return all or any part of such amounts to the
appropriate Accounts. All costs and expenses incurred in creating and
establishing the Trusts, including the cost of the initial preparation, printing
and execution of the Trust Agreement and the certificates, legal and accounting
expenses, advertising and selling expenses, expenses of the Trustee, initial
evaluation fees and other out-of-pocket expenses have been borne by the Sponsor
at no cost to the Trusts.
Sponsor, Supervisor, Evaluator and Trustee. The Sponsor and the Supervisor,
which is an affiliate of the Sponsor, will receive the annual fees indicated
under "Summary of Essential Financial Information" in Prospectus Part I for
providing bookkeeping and administrative services and for providing portfolio
supervisory services for the Trusts. These fees may exceed the actual costs of
providing these services for a Trust but the total amount received for providing
these services to all Van Kampen unit investment trusts will not exceed the
total cost of providing the services in any calendar year. The Evaluator will
receive the annual evaluation fee indicated under "Summary of Essential
Financial Information" in Prospectus Part I for evaluating each Trust's
portfolio. For its services the Trustee will receive the fee indicated under
"Summary of Essential Financial Information" in Prospectus Part I (which may be
reduced as described therein). Part of the Trustee's compensation for its
services is expected to result from the use of the funds being held in the
Principal and Interest Accounts for future distributions, payment of expenses
and redemptions since these Accounts are non-interest bearing to Unitholders.
These fees are based on the outstanding principal amount of bonds and Units on
the Date of Deposit for the first year and as of the close of business on
January 1 for each year thereafter.
Insurance. Premiums for any portfolio insurance are obligations of each
Insured Trust and are payable monthly by the Trustee on behalf of the Trust. As
bonds covered by a portfolio insurance policy in an Insured Trust are redeemed
by their respective issuers or are sold by the Trustee, the amount of the
premium will be reduced in respect of those bonds. If the Trustee exercises the
right to obtain permanent insurance, the premiums payable for such permanent
insurance will be paid solely from the proceeds of the sale of the related
bonds.
Miscellaneous Expenses. The following additional charges are or may be
incurred by the Trusts: (a) fees of the Trustee for extraordinary services, (b)
expenses of the Trustee (including legal and auditing expenses) and of counsel
designated by the Sponsor, (c) various governmental charges, (d) expenses and
costs of any action taken by the Trustee to protect the Trusts and the rights
and interests of Unitholders, (e) indemnification of the Trustee for any loss,
liability or expenses incurred by it in the administration of the Trusts without
negligence, bad faith or willful misconduct on its part, (f) any special
custodial fees payable in connection with the sale of any of the bonds in a
Trust, (g) expenditures incurred in contacting Unitholders upon termination of
the Trusts and (h) costs incurred to reimburse the Trustee for advancing funds
to the Trusts to meet scheduled distributions (which costs may be adjusted
periodically in response to fluctuations in short-term interest rates). Each
Trust will pay the costs associated with updating its registration statement
each year. The fees and expenses set forth herein are payable out of the Trusts.
When such fees and expenses are paid by or owing to the Trustee, they are
secured by a lien on the portfolio of the applicable Trust. If the balances in
the Interest and Principal Accounts are insufficient to provide for amounts
payable by a Trust, the Trustee has the power to sell bonds to pay such amounts.
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
This prospectus does not contain all the information set forth in the
registration statement filed by your Trust with the SEC. The Information
Supplement, which has been filed with the SEC and is incorporated herein by
reference, includes more detailed information concerning the bonds in your
Trust, investment risks and general information about the Trust. Information
about your Trust (including the Information Supplement) can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. You may obtain
information about the Public Reference Room by calling 1-202-942-8090. Reports
and other information about your Trust are available on the EDGAR Database on
the SEC's Internet site at http://www.sec.gov. Copies of this information may be
obtained, after paying a duplication fee, by electronic request at the following
e-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference
Section, Washington, D.C. 20549-0102.
OTHER MATTERS
--------------------------------------------------------------------------------
Legal Matters. The legality of the Units offered hereby and certain
matters relating to Federal tax law have been passed upon by Chapman and Cutler
LLP, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor. Winston & Strawn LLP has acted as counsel to the Trustee and special
counsel to the Fund for New York tax matters.
Independent Registered Public Accounting Firm. The statement of
condition and the related portfolio included in Prospectus Part I have been
audited by Grant Thornton LLP, independent registered public accounting firm, as
set forth in their report in Prospectus Part I, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
o Contents of Prospectus Part II
The Trusts........................................2
Estimated Current and Long-Term Returns...........5
Public Offering...................................5
Rights of Unitholders.............................8
Insurance on the Bonds in the Insured Trusts......9
Fund Administration..............................10
Federal Tax Status...............................12
State Trust Risk Factors and Tax Status..........14
Expenses.........................................41
Additional Information...........................42
Other Matters....................................42
o Daily Prices
(1) Call our 24-Hour Pricing Line
(800) 953-6785
(1) Visit our Unit Trusts Internet Pricing Page
http://www.vankampen.com
o Account Questions
(1) Contact the Trustee
(800) 221-7668
o Learning More About Unit Trusts
(1) Contact Van Kampen
(630) 684-6000
(1) Visit our Unit Trusts Internet Product Page
http://www.vankampen.com
o Additional Information
You may obtain an Information Supplement that provides more details about
your trust and its policies.
(1) Visit the SEC Internet Site
http://www.sec.gov
(1) Contact the Trustee
(800) 221-7668
SECPRO0904
Van Kampen
Investments
Prospectus Part II
September 2004
Insured Municipals Income Trust
Investors' Quality Tax-Exempt Trust
Van Kampen Focus Portfolios,
Municipal Series
Van Kampen Unit Trusts,
Municipal Series
Van Kampen Funds Inc.
Van Kampen
Investments
Information Supplement
Insured Municipals Income Trust
Investors' Quality Tax-Exempt Trust
Van Kampen Focus Portfolios, Municipal Series
Van Kampen Unit Trusts, Municipal Series
--------------------------------------------------------------------------------
This Information Supplement provides additional information concerning the
risks and operations of the Trusts which is not described in the prospectus for
the Trusts. This Information Supplement should be read in conjunction with the
Trust's prospectus. This Information Supplement is not a prospectus (but is
incorporated into the prospectus by reference), does not include all of the
information that an investor should consider before investing in a Trust and may
not be used to offer or sell Units without the prospectus. Copies of the
prospectus can be obtained by contacting the Sponsor's unit investment trust
division at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois
60181-5555 or by contacting your broker. This Information Supplement is dated as
of the date of Prospectus Part I and all capitalized terms have been defined in
the prospectus.
Table of Contents
Page
Municipal Bond Risk Factors 2
Insurance on the Bonds in the Insured Trusts 6
Portfolio Administration 13
Sponsor Information 14
Trustee Information 14
Termination of the Trust Agreement 15
Description of Ratings 16
Arizona Risk Factors 17
Arkansas Risk Factors 19
California Risk Factors 22
Colorado Risk Factors 23
Connecticut Risk Factors 27
Florida Risk Factors 32
Georgia Risk Factors 33
Kansas Risk Factors 35
Kentucky Risk Factors 38
Louisiana Risk Factors 42
Maine Risk Factors 45
Maryland Risk Factors 47
Massachusetts Risk Factors 49
Michigan Risk Factors 50
Minnesota Risk Factors 52
Missouri Risk Factors 55
Nebraska Risk Factors 57
New Jersey Risk Factors 58
New Mexico Risk Factors 60
New York Risk Factors 61
North Carolina Risk Factors 65
Ohio Risk Factors 67
Oklahoma Risk Factors 77
Oregon Risk Factors 78
Pennsylvania Risk Factors 80
Puerto Rico Risk Factors 83
South Carolina Risk Factors 91
Tennessee Risk Factors 92
Texas Risk Factors 94
Virginia Risk Factors 97
West Virginia Risk Factors 101
Municipal Bond Risk Factors
The Trusts include certain types of bonds described below. Accordingly, an
investment in a Trust should be made with an understanding of the
characteristics of and risks associated with such bonds. The types of bonds
included in each Trust are described under "Portfolio" in the related Prospectus
Part I. Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any of the bonds.
Certain of the bonds may be general obligations of a governmental entity that
are backed by the taxing power of such entity. All other bonds in the Trusts are
revenue bonds payable from the income of a specific project or authority and are
not supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds, on the other hand, are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source. There are, of course, variations in the security of the
different bonds in a Trust, both within a particular classification and between
classifications, depending on numerous factors.
Certain of the bonds may be obligations which derive their payments from
mortgage loans. Certain of such housing bonds may be FHA insured or may be
single family mortgage revenue bonds issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on residences
located within the issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these bonds are
subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such bonds will probably
be redeemed prior to their scheduled maturities or even prior to their ordinary
call dates. Extraordinary mandatory redemption without premium could also result
from the failure of the originating financial institutions to make mortgage
loans in sufficient amounts within a specified time period. Additionally,
unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage
revenue bonds. These bonds were issued under Section 103A of the Internal
Revenue Code, which Section contains certain requirements relating to the use of
the proceeds of such bonds in order for the interest on such bonds to retain its
tax-exempt status. In each case the issuer of the bonds has covenanted to comply
with applicable requirements and bond counsel to such issuer has issued an
opinion that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have considered
various ways to redeem bonds they have issued prior to the stated first
redemption dates for such bonds. In connection with the housing bonds held by a
Trust, the Sponsor at the Date of Deposit is not aware that any of the
respective issuers of such bonds are actively considering the redemption of such
bonds prior to their respective stated initial call dates.
Certain of the bonds may be health care revenue bonds. Ratings of bonds
issued for health care facilities are often based on feasibility studies that
contain projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service may be affected by
future events and conditions including, among other things, demand for services
and the ability of the facility to provide the services required, physicians'
confidence in the facility, management capabilities, competition with other
health care facilities, efforts by insurers and governmental agencies to limit
rates, legislation establishing state rate-setting agencies, expenses, the cost
and possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, government regulation and
the termination or restriction of governmental financial assistance, including
that associated with Medicare, Medicaid and other similar third party payor
programs.
Certain of the bonds may be obligations of public utility issuers, including
those selling wholesale and retail electric power and gas. General problems of
such issuers would include the difficulty in financing large construction
programs in an inflationary period, the limitations on operations and increased
costs and delays attributable to environmental considerations, the difficulty of
the capital market in absorbing utility debt, the difficulty in obtaining fuel
at reasonable prices and the effect of energy conservation. In addition,
Federal, state and municipal governmental authorities may from time to time
review existing, and impose additional, regulations governing the licensing,
construction and operation of nuclear power plants, which may adversely affect
the ability of the issuers of certain of the bonds to make payments of principal
and/or interest on such bonds.
Certain of the bonds may be obligations of issuers whose revenues are derived
from the sale of water and/or sewerage services. Such bonds are generally
payable from user fees. The problems of such issuers include the ability to
obtain timely and adequate rate increases, population decline resulting in
decreased user fees, the difficulty of financing large construction programs,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the increasing difficulty of obtaining or
discovering new supplies of fresh water, the effect of conservation programs and
the impact of "no-growth" zoning ordinances.
Certain of the bonds may be industrial revenue bonds ("IRBs"). IRBs have
generally been issued under bond resolutions pursuant to which the revenues and
receipts payable under the arrangements with the operator of a particular
project have been assigned and pledged to purchasers. In some cases, a mortgage
on the underlying project may have been granted as security for the IRBs.
Regardless of the structure, payment of IRBs is solely dependent upon the
creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors may be affected by many factors
which may have an adverse impact on the credit quality of the particular company
or industry. These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition and financial
deterioration resulting from a corporate restructuring pursuant to a leveraged
buy-out, takeover or otherwise. Such a restructuring may result in the operator
of a project becoming highly leveraged which may impact on such operator's
creditworthiness which in turn would have an adverse impact on the rating and/or
market value of such bonds. Further, the possibility of such a restructuring may
have an adverse impact on the market for and consequently the value of such
bonds, even though no actual takeover or other action is ever contemplated or
effected.
Certain of the bonds may be obligations that are secured by lease payments of
a governmental entity (hereinafter called "lease obligations"). Lease
obligations are often in the form of certificates of participation. Although the
lease obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to appropriate for and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. A governmental entity that enters into such
a lease agreement cannot obligate future governments to appropriate for and make
lease payments but covenants to take such action as is necessary to include any
lease payments due in its budgets and to make the appropriations therefor. A
governmental entity's failure to appropriate for and to make payments under its
lease obligation could result in insufficient funds available for payment of the
obligations secured thereby. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult.
Certain of the bonds may be obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from ad valorem taxes or for higher education systems, from
tuition, dormitory revenues, grants and endowments. General problems relating to
school bonds include litigation contesting the state constitutionality of
financing public education in part from ad valorem taxes, thereby creating a
disparity in educational funds available to schools in wealthy areas and schools
in poor areas. Litigation or legislation on this issue may affect the sources of
funds available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college" age individuals,
possible inability to raise tuitions and fees sufficiently to cover increased
operating costs, the uncertainty of continued receipt of Federal grants and
state funding, and government legislation or regulations which may adversely
affect the revenues or costs of such issuers.
Certain of the bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation of
facilities such as airports, bridges, turnpikes, port authorities, convention
centers and arenas. The major portion of an airport's gross operating income is
generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for leases, occupancy of certain
terminal space and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under the use
agreements. From time to time the air transport industry has experienced
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints, acts of
terrorism and other factors, and several airlines have experienced severe
financial difficulties. Similarly, payment on bonds related to other facilities
is dependent on revenues from the projects, such as user fees from ports, tolls
on turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the bonds may be obligations which are payable from and secured by
revenues derived from the operation of resource recovery facilities. Resource
recovery facilities are designed to process solid waste, generate steam and
convert steam to electricity. Resource recovery bonds may be subject to
extraordinary optional redemption at par upon the occurrence of certain
circumstances, including but not limited to: destruction or condemnation of a
project; contracts relating to a project becoming void, unenforceable or
impossible to perform; changes in the economic availability of raw materials,
operating supplies or facilities necessary for the operation of a project or
technological or other unavoidable changes adversely affecting the operation of
a project; and administrative or judicial actions which render contracts
relating to the projects void, unenforceable or impossible to perform or impose
unreasonable burdens or excessive liabilities. The Sponsor cannot predict the
causes or likelihood of the redemption of resource recovery bonds in a Trust
prior to the stated maturity of the bonds.
Certain of the bonds may have been acquired at a market discount from par
value at maturity. The coupon interest rates on discount bonds at the time they
were purchased and deposited in a Trust were lower than the current market
interest rates for newly issued bonds of comparable rating and type. If such
interest rates for newly issued comparable bonds increase, the market discount
of previously issued bonds will become greater, and if such interest rates for
newly issued comparable bonds decline, the market discount of previously issued
bonds will be reduced, other things being equal. Investors should also note that
the value of bonds purchased at a market discount will increase in value faster
than bonds purchased at a market premium if interest rates decrease. Conversely,
if interest rates increase, the value of bonds purchased at a market discount
will decrease faster than bonds purchased at a market premium. In addition, if
interest rates rise, the prepayment risk of higher yielding, premium Securities
and the prepayment benefit for lower yielding, discount bonds will be reduced. A
bond purchased at a market discount and held to maturity will have a larger
portion of its total return in the form of taxable income and capital gain and
less in the form of tax-exempt interest income than a comparable bond newly
issued at current market rates. See "Federal Tax Status" in Prospectus Part II.
Market discount attributable to interest changes does not indicate a lack of
market confidence in the issue.
Certain of the bonds may be "zero coupon" bonds. Zero coupon bonds are
purchased at a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not receive any
periodic interest payments. The effect of owning deep discount bonds which do
not make current interest payments (such as the zero coupon bonds) is that a
fixed yield is earned not only on the original investment but also, in effect,
on all discount earned during the life of such obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest the income on such obligation at a rate as high as the implicit yield
on the discount obligation, but at the same time eliminates the holder's ability
to reinvest at higher rates in the future. For this reason, zero coupon bonds
are subject to substantially greater price fluctuations during periods of
changing market interest rates than are securities of comparable quality which
pay interest.
Certain of the bonds may have been purchased on a "when, as and if issued" or
"delayed delivery" basis. The delivery of any such bonds may be delayed or may
not occur. Interest on these bonds begins accruing to the benefit of Unitholders
on their respective dates of delivery. To the extent any bonds are actually
delivered to the Fund after their respective expected dates of delivery,
Unitholders who purchase their Units prior to the date such bonds are actually
delivered to the Trustee would be required to adjust their tax basis in their
Units for a portion of the interest accruing on such bonds during the interval
between their purchase of Units and the actual delivery of such bonds. As a
result of any such adjustment, the Estimated Current Returns during the first
year would be slightly lower than those stated in the prospectus which would be
the returns after the first year, assuming the portfolio of a Trust and
estimated annual expenses other than that of the Trustee (which may be reduced
in the first year only) do not vary from that set forth in Prospectus Part I.
Unitholders will be "at risk" with respect to all bonds in the portfolios
including "when, as and if issued" and "delayed delivery" bonds (i.e., may
derive either gain or loss from fluctuations in the evaluation of such bonds)
from the date they commit for Units.
Certain of the bonds may be subject to redemption prior to their stated
maturity date pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or otherwise. A
sinking fund is a reserve fund accumulated over a period of time for retirement
of debt. A callable debt obligation is one which is subject to redemption or
refunding prior to maturity at the option of the issuer. A refunding is a method
by which a debt obligation is redeemed, at or before maturity, by the proceeds
of a new debt obligation. In general, call provisions are more likely to be
exercised when the offering side valuation is at a premium over par than when it
is at a discount from par. The exercise of redemption or call provisions will
(except to the extent the proceeds of the called bonds are used to pay for Unit
redemptions) result in the distribution of principal and may result in a
reduction in the amount of subsequent interest distributions; it may also affect
the current return on Units of the Trust involved. Each Trust portfolio contains
a listing of the sinking fund and call provisions, if any, with respect to each
of the debt obligations. Extraordinary optional redemptions and mandatory
redemptions result from the happening of certain events. Generally, events that
may permit the extraordinary optional redemption of bonds or may require the
mandatory redemption of bonds include, among others: a final determination that
the interest on the bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the bonds were
used; an exercise by a local, state or Federal governmental unit of its power of
eminent domain to take all or substantially all of the project for which the
proceeds of the bonds were used; changes in the economic availability of raw
materials, operating supplies or facilities or technological or other changes
which render the operation of the project for which the proceeds of the bonds
were used uneconomic; changes in law or an administrative or judicial decree
which renders the performance of the agreement under which the proceeds of the
bonds were made available to finance the project impossible or which creates
unreasonable burdens or which imposes excessive liabilities, such as taxes, not
imposed on the date the bonds are issued on the issuer of the bonds or the user
of the proceeds of the bonds; an administrative or judicial decree which
requires the cessation of a substantial part of the operations of the project
financed with the proceeds of the bonds; an overestimate of the costs of the
project to be financed with the proceeds of the bonds resulting in excess
proceeds of the bonds which may be applied to redeem bonds; or an underestimate
of a source of funds securing the bonds resulting in excess funds which may be
applied to redeem bonds. The issuer of certain bonds in a Trust may have sold or
reserved the right to sell, upon the satisfaction of certain conditions, to
third parties all or any portion of its rights to call bonds in accordance with
the stated redemption provisions of such bonds. In such a case the issuer no
longer has the right to call the bonds for redemption unless it reacquires the
rights from such third party. A third party pursuant to these rights may
exercise the redemption provisions with respect to a bond at a time when the
issuer of the bond might not have called a bond for redemption had it not sold
such rights. The Sponsor is unable to predict all of the circumstances which may
result in such redemption of an issue of bonds. See also the discussion of
single family mortgage and multi-family revenue bonds above for more information
on the call provisions of such bonds.
To the best knowledge of the Sponsor, there is no litigation pending as of
the Date of Deposit in respect of any bonds which might reasonably be expected
to have a material adverse effect upon the Fund or any of the Trusts. At any
time after the Date of Deposit, litigation may be initiated on a variety of
grounds with respect to bonds in a Trust. Such litigation, as, for example,
suits challenging the issuance of pollution control revenue bonds under
environmental protection statutes, may affect the validity of such bonds or the
tax-free nature of the interest thereon. While the outcome of litigation of such
nature can never be entirely predicted, each Trust has received or will receive
opinions of bond counsel to the issuing authorities of each bond on the date of
issuance to the effect that such bonds have been validly issued and that the
interest thereon is exempt from Federal income tax. In addition, other factors
may arise from time to time which potentially may impair the ability of issuers
to meet obligations undertaken with respect to the bonds.
Insurance on the Bonds in the Insured Trusts
Insurance has been obtained by each Insured Trust, by the issuer of bonds in
an Insured Trust, by a prior owner of such bonds, or by the Sponsor prior to the
deposit of such bonds in a Trust guaranteeing prompt payment of interest and
principal, when due, in respect of the bonds in such Trust. See "The
Trusts--Objectives and Bond Selection" in Prospectus Part II. An insurance
policy obtained by an Insured Trust, if any, is non-cancelable and will continue
in force so long as such Trust is in existence, the respective Portfolio Insurer
is still in business and the bonds described in such policy continue to be held
by such Trust (see "Portfolio" for the respective Insured Trust in Prospectus
Part I). Any portfolio insurance premium for an Insured Trust, which is an
obligation of such Trust, is paid by such Trust on a monthly basis. Non-payment
of premiums on a policy obtained by an Insured Trust will not result in the
cancellation of insurance but will force the insurer to take action against the
Trustee to recover premium payments due it. The Trustee in turn will be entitled
to recover such payments from such Trust. Premium rates for each issue of bonds
protected by a policy obtained by an Insured Trust, if any, are fixed for the
life of the Trust. The premium for any Preinsured Bond insurance has been paid
by such issuer, by a prior owner of such bonds or the Sponsor and any such
policy or policies are non-cancelable and will continue in force so long as the
bonds so insured are outstanding and the respective Preinsured Bond Insurer
remains in business. If the provider of an original issuance insurance policy is
unable to meet its obligations under such policy or if the rating assigned to
the claims-paying ability of any such insurer deteriorates, the Portfolio
Insurers have no obligation to insure any issue adversely affected by either of
the above described events.
The aforementioned portfolio insurance obtained by an Insured Trust, if any,
guarantees the timely payment of principal and interest on the bonds when they
fall due. For the purposes of insurance obtained by an Insured Trust, "when due"
generally means the stated payment or maturity date for the payment of principal
and interest. However, in the event (a) an issuer of a bond defaults in the
payment of principal or interest on such bond, (b) such issuer enters into a
bankruptcy proceeding or (c) the maturity of such bond is accelerated, the
affected Portfolio Insurer has the option, in its sole discretion, after
receiving notice of the earliest to occur of such a default, bankruptcy
proceeding or acceleration to pay the outstanding principal amount of such bond
plus accrued interest to the date of such payment and thereby retire the bond
from the affected Trust prior to such bond's stated maturity date. The insurance
does not guarantee the market value of the bonds or the value of the Units.
Insurance obtained by an Insured Trust, if any, is only effective as to bonds
owned by and held in such Trust. In the event of a sale of any such bond by the
Trustee, such insurance terminates as to such bond on the date of sale.
Pursuant to an irrevocable commitment of the Portfolio Insurers, the Trustee,
upon the sale of a bond covered under a portfolio insurance policy obtained by
an Insured Trust, has the right to obtain permanent insurance with respect to
such bond (i.e., insurance to maturity of the bond regardless of the identity of
the holder thereof) (the "Permanent Insurance") upon the payment of a single
predetermined insurance premium and any expenses related thereto from the
proceeds of the sale of such bond. Accordingly, any bond in an Insured Trust is
eligible to be sold on an insured basis. It is expected that the Trustee would
exercise the right to obtain Permanent Insurance only if upon such exercise the
affected Trust would receive net proceeds (sale of bond proceeds less the
insurance premium and related expenses attributable to the Permanent Insurance)
from such sale in excess of the sale proceeds if such bonds were sold on an
uninsured basis. The insurance premium with respect to each bond eligible for
Permanent Insurance would be determined based upon the insurability of each bond
as of the Date of Deposit and would not be increased or decreased for any change
in the creditworthiness of each bond.
The Sponsor believes that the Permanent Insurance option provides an
advantage to an Insured Trust in that each bond insured by a Trust insurance
policy may be sold out of the affected Trust with the benefits of the insurance
attaching thereto. Thus, the value of the insurance, if any, at the time of
sale, can be realized in the market value of the bond so sold (which is not the
case in connection with any value attributable to an Insured Trust's portfolio
insurance). See "Public Offering--Offering Price" in Prospectus Part II. Because
any such insurance value may be realized in the market value of the bond upon
the sale thereof upon exercise of the Permanent Insurance option, the Sponsor
anticipates that (a) in the event an Insured Trust were to be comprised of a
substantial percentage of bonds in default or significant risk of default, it is
much less likely that such Trust would need at some point in time to seek a
suspension of redemptions of Units than if such Trust were to have no such
option (see "Rights of Unitholders--Redemption of Units" in Prospectus Part II)
and (b) at the time of termination of an Insured Trust, if such Trust were
holding defaulted bonds or bonds in significant risk of default such Trust would
not need to hold such bonds until their respective maturities in order to
realize the benefits of such Trust's portfolio insurance (see "Fund
Administration--Termination of Trust Agreement" in Prospectus Part II).
Except as indicated below, insurance obtained by an Insured Trust has no
effect on the price or redemption value of Units. It is the present intention of
the Evaluator to attribute a value for such insurance (including the right to
obtain Permanent Insurance) for the purpose of computing the price or redemption
value of Units if the bonds covered by such insurance are in default in payment
of principal or interest or in significant risk of such default. The value of
the insurance will be the difference between (i) the market value of a bond
which is in default in payment of principal or interest or in significant risk
of such default assuming the exercise of the right to obtain Permanent Insurance
(less the insurance premium and related expenses attributable to the purchase of
Permanent Insurance) and (ii) the market value of such bonds not covered by
Permanent Insurance. See "Public Offering--Offering Price" in Prospectus Part
II. It is also the present intention of the Trustee not to sell such bonds to
effect redemptions or for any other reason but rather to retain them in the
portfolio because value attributable to the insurance cannot be realized upon
sale. See "Public Offering--Offering Price" in Prospectus Part II for a more
complete description of an Insured Trust's method of valuing defaulted bonds and
bonds which have a significant risk of default. Insurance obtained by the issuer
of a bond is effective so long as such bond is outstanding. Therefore, any such
insurance may be considered to represent an element of market value in regard to
the bonds thus insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
The portfolio insurance policy or policies obtained by an Insured Trust, if
any, with respect to the bonds in such Trust were issued by one or more of the
Portfolio Insurers. Any other Preinsured Bond insurance policy (or commitment
therefor) was issued by one of the Preinsured Bond Insurers. See "The
Trusts--Objectives and Bond Selection" in Prospectus Part II.
Ambac Assurance Corporation ("Ambac Assurance"). Effective July 14, 1997,
AMBAC Indemnity Corporation changed its name to Ambac Assurance Corporation. The
Insurance Policy of Ambac Assurance obtained by an Insured Trust is
noncancelable and will continue in force for so long as the bonds described in
the Insurance Policy are held by an Insured Trust. A monthly premium is paid by
an Insured Trust for the Insurance Policy obtained by it. The Trustee will pay,
when due, successively, the full amount of each installment of the insurance
premium. Pursuant to a binding agreement with Ambac Assurance, in the event of a
sale of a bond covered by the Ambac Assurance Insurance Policy, the Trustee has
the right to obtain permanent insurance for such bond upon payment of a single
predetermined premium from the proceeds of the sale of such bond.
Under the terms of the Insurance Policy, Ambac Assurance agrees to pay to the
Trustee that portion of the principal of and interest on the bonds insured by
Ambac Assurance which shall become due for payment but shall be unpaid by reason
of nonpayment by the issuer of the bonds. The term "due for payment" means, when
referring to the principal of a bond so insured, its stated maturity date or the
date on which it shall have been called for mandatory sinking fund redemption
and does not refer to any earlier date on which payment is due by reason of call
for redemption (other than by mandatory sinking fund redemption), acceleration
or other advancement of maturity and means, when referring to interest on a
bond, the stated date for payment of interest.
Ambac Assurance will make payment to the Trustee not later than thirty days
after notice from the Trustee is received by Ambac Assurance that a nonpayment
of principal or of interest on a bond has occurred, but not earlier that the
date on which the bonds are due for payment. Ambac Assurance will disburse to
the Trustee the face amount of principal and interest which is then due for
payment but is unpaid by reason of nonpayment by the issuer in exchange for
delivery of bonds, not less in face amount than the amount of the payment in
bearer form, free and clear of all liens and encumbrances and uncancelled. In
cases where bonds are issuable only in a form whereby principal is payable to
registered holders or their assigns, Ambac Assurance shall pay principal only
upon presentation and surrender of the unpaid bonds uncancelled and free of any
adverse claim, together with an instrument of assignment in satisfactory form,
so as to permit ownership of such bonds to be registered in the name of Ambac
Assurance or its nominee. In cases where bonds are issuable only in a form
whereby interest is payable to registered holders or their assigns, Ambac
Assurance shall pay interest only upon presentation of proof that the claimant
is the person entitled to the payment of interest of the bonds and delivery of
an instrument of assignment, in satisfactory form, transferring to Ambac
Assurance all right under such bonds to receive the interest of which the
insurance payment was made.
Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled
stock insurance corporation regulated by the Office of the Commissioner of
Insurance of the State of Wisconsin and licensed to do business in 50 states,
the District of Columbia, the Territory of Guam and the Commonwealth of Puerto
Rico, with admitted assets of approximately $5,802,000,000 (unaudited) and
statutory capital of approximately $3,564,000,000 (unaudited) as of September
30, 2002. Statutory capital consists of Ambac Assurance's policyholder's surplus
and statutory contingency reserve. Standard & Poor's Ratings Services, a
Division of The McGraw-Hill Companies, Moody's Investors Service and Fitch IBCA,
Inc. have each assigned a triple-A financial strength rating to Ambac Assurance.
The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the
"Company"), is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 233 Broadway,
New York, New York 10279 and 175 West Jackson Blvd., Suite 900, Chicago,
Illinois 60604. Copies of such material can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D. C.
20549 at prescribed rates. In addition, the aforementioned material may be
inspected at the offices of the New York Stock Exchange, Inc. (the "NYSE") at 20
Broad Street, New York, New York 10005. The Company's Common Stock is listed on
the NYSE.
Copies of Ambac Assurance's financial statements prepared in accordance with
statutory accounting standards are available from Ambac Assurance. The address
of Ambac Assurance's administrative offices and its telephone number are One
State Street Plaza, 19th Floor, New York, New York, 10004 and (212) 668-0340.
The information relating to Ambac Assurance contained above has been
furnished by Ambac Assurance. No representation is made herein as to the
accuracy or adequacy of such information, or as to the existence of any adverse
changes in such information, subsequent to the date hereof.
MBIA Insurance Corporation. MBIA Insurance Corporation ("MBIA Corporation" or
"MBIA") is the principal operating subsidiary of MBIA Inc., a New York Stock
Exchange listed company. MBIA, Inc. is not obligated to pay the debts of or
claims against MBIA Corporation. MBIA Corporation is domiciled in the State of
New York and licensed to do business in and subject to regulation under the laws
of all fifty states, the District of Columbia, the Commonwealth of Puerto Rico,
the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the
United States and the Territory of Guam. MBIA has two European branches, one in
the Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rate and forms. State laws also
regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the insurer, changes in control and
transactions among affiliates. Additionally, the Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
As of December 31, 2001, MBIA had admitted assets of $8.5 billion (audited),
total liabilities of $5.6 billion (audited), and total capital and surplus of
$2.9 billion (audited), determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities. Copies of
MBIA's financial statements prepared in accordance with statutory accounting
practices are available from MBIA. As of September 30, 2002, MBIA had admitted
assets of $9.0 billion (unaudited, total liabilities of $5.9 billion
(unaudited)), and total capital and surplus of $3.0 billion (unaudited),
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities. The address of MBIA is 113 King
Street, Armonk, New York 10504. The telephone number of MBIA is (914) 273-4545.
Effective February 17, 1998 MBIA acquired all of the outstanding stock of
Capital Markets Assurance Corporation ("CMAC"), a New York domiciled financial
guarantee insurance company, through a merger with its parent, CapMAC Holdings,
Inc. Pursuant to a reinsurance agreement, CMAC has ceded all of its net insured
risks (including any amounts due but unpaid from third party reinsurers), as
well as its unearned premiums and contingency reserves, to MBIA. MBIA is not
obligated to pay the debts of or claims against CMAC.
Effective December 31, 1989, MBIA Inc. acquired Bond Investors Group, Inc. On
January 5, 1990, MBIA acquired all of the outstanding stock of Bond Investors
Group, Inc., the parent of Bond Investors Guaranty Insurance Company (BIG), now
known as MBIA Insurance Corp. of Illinois. Through a reinsurance agreement, BIG
has ceded all of its net insured risks, as well as its unearned premium and
contingency reserves, to MBIA and MBIA has reinsured BIG's net outstanding
exposure.
Moody's Investors Service rates all bond issues insured by MBIA "Aaa."
Standard & Poor's rates all new issues insured by MBIA "AAA." Fitch IBCA, Inc.
rates the financial strength of MBIA "AAA".
In the event MBIA were to become insolvent, any claims arising under a policy
of financial guaranty insurance are excluded from coverage by the California
Insurance Guaranty Association, established pursuant to Article 14.4 (commencing
with Section 1063) of Chapter 1 of Part 2 of Division 1 of the California
Insurance Code.
Financial Guaranty Insurance Company. Financial Guaranty Insurance Company
("Financial Guaranty" or "FGIC") is a wholly-owned subsidiary of FGIC
Corporation (the "Corporation"), a Delaware holding company. The Corporation is
a subsidiary of General Electric Capital Corporation ("GE Capital"). Neither the
Corporation nor GE Capital is obligated to pay the debts of or the claims
against Financial Guaranty. Financial Guaranty is a monoline financial guaranty
insurer domiciled in the State of New York and subject to regulation by the
State of New York Insurance Department. As of September 30, 2002, the total
capital and surplus of Financial Guaranty was $1.1 billion. Financial Guaranty
prepares financial statements on the basis of both statutory accounting
principles, and generally accepted accounting principles. Copies of such
financial statements may be obtained by writing to Financial Guaranty at 125
Park Avenue, New York, New York 10017, Attention: Communications Department,
telephone number: (212) 312-3000 or to the New York State Insurance Department
at 25 Beaver Street, New York, New York 10004-2319, Attention: Financial
Condition Property/Casualty Bureau, telephone number: (212) 480-5187.
Financial Security Assurance Inc. Financial Security Assurance Inc.
("Financial Security") is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in the financial guaranty insurance business in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. Financial guaranty insurance provides a
guaranty of scheduled payments of an issuer's securities, thereby enhancing the
credit rating of those securities, in consideration for payment of a premium to
the insurer. Financial Security and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed securities
are generally supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities consist largely
of general obligation bonds, special revenue bonds and other special obligations
of state and local governments. Financial Security insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy Financial Security's underwriting criteria.
Financial Security, a New York domiciled insurance company, is a wholly-owned
subsidiary of Financial Security Assurance Holdings Ltd. ("Holdings"). Holdings
is an indirect subsidiary of Dexia S.A., a publicly held Belgian corporation.
Dexia S.A., through its bank subsidiaries, is primarily engaged in the business
of public finance in France, Belgium and other European countries. No
shareholder of Holdings or Financial Security is liable for the obligations of
Financial Security. As of September 30, 2002, the total policyholders' surplus
and contingency reserves was approximately $1,728,433,000 and its total unearned
premium reserve was approximately $972,390,000 in accordance with statutory
accounting principles. As of September 30, 2002, total shareholders' equity was,
approximately $1,928,564,000 and its total net unearned premium reserve was
approximately $814,684,000 in accordance with generally accepted accounting
principles, Copies of Financial Security's financial statements may be obtained
by writing to Financial Security at 350 Park Avenue, New York, 10022, Attention
Communications Department. Financial Security's telephone number is (212)
826-0100.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by Financial Security or its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security reinsures
a portion of its liabilities under certain various quota share treaties and on a
transaction-by-transaction basis. This reinsurance is used by Financial Security
as a risk management device and to comply with certain statutory and rating
agency requirements; it does not alter on limit the obligations of Financial
Security under any financial guaranty insurance policy.
Financial Security's insurance financial strength is rated "Aaa" by Moody's
Investors Service, Inc. and "AAA" by Fitch. Financial Security's insurer
financial strength is rated "AAA" by Standard & Poor's Ratings Services and
Standard &Poor's (Australia) Pty. Ltd. Financial Security's claims-paying
ability is rated "AAA" by Rating and Investment Information, Inc. These ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, or sell or hold securities and are subject to revision
or withdrawal at any time by those rating agencies.
Capital Guaranty Insurance Company. On December 20, 1995, Capital Guaranty
Corporation ("CGC") merged with a subsidiary of Financial Security Assurance
Holdings Ltd. and Capital Guaranty Insurance Company, CGC's principal operating
subsidiary, changed its name to Financial Security Assurance of Maryland Inc.
("FSA Maryland") and became a wholly-owned subsidiary of Financial Security
Assurance Inc. On September 30, 1997, Financial Security Assurance Inc. assumed
all of the liabilities of FSA Maryland and sold the FSA Maryland "shell company"
to American Capital Access, a wholly-owned subsidiary of American Capital Access
Holdings, Incorporated.
XL Capital Assurance Inc. ("XLCA") is a monoline financial guaranty insurance
company incorporated under the laws of the State of New York. XLCA is currently
licensed to do insurance business in, and is subject to the insurance regulation
and supervision by, the State of New York, forty-six other states, the District
of Columbia, Puerto Rico and Singapore. XLCA has license applications pending,
or intends to file an application, in each of those states in which it is not
currently licensed.
XLCA is an indirect wholly owned subsidiary of XL Capital Ltd, a Cayman
Islands corporation ("XL Capital Ltd"). Through its subsidiaries, XL Capital Ltd
is a leading provider of insurance and reinsurance coverages and financial
products to industrial, commercial and professional service firms, insurance
companies and other enterprises on a worldwide basis. The common stock of XL
Capital Ltd is publicly traded in the United States and listed on the New York
Stock Exchange (NYSE: XL). XL Capital Ltd is not obligated to pay the debts of
or claims against XLCA.
XLCA was formerly known as The London Assurance of America Inc. ("London"),
which was incorporated on July 25, 1991 under the laws of the State of New York.
On February 22, 2001, XL Reinsurance America Inc. ("XL Re") acquired 100% of the
stock of London. XL Re merged its former financial guaranty subsidiary, known as
XL Capital Assurance Inc. (formed September 13, 1999) with and into London, with
London as the surviving entity. London immediately changed its name to XL
Capital Assurance Inc. All previous business of London was 100% reinsured to
Royal Indemnity Company, the previous owner at the time of acquisition.
XLCA has entered into a facultative quota share reinsurance agreement with XL
Financial Assurance Ltd ("XLFA"), an insurance company organized under the laws
of Bermuda, and an affiliate of XLCA. Pursuant to this reinsurance agreement,
XLCA expects to cede up to 90% of its business to XLFA. XLCA may also cede
reinsurance to third parties on a transaction-specific basis, which cessions may
be any or a combination of quota share, first loss or excess of loss. Such
reinsurance is used by XLCA as a risk management device and to comply with
statutory and rating agency requirements and does not alter or limit XLCA's
obligations under any financial guaranty insurance policy. With respect to any
transaction insured by XLCA, the percentage of risk ceded to XLFA may be less
than 90% depending on certain factors including, without limitation, whether
XLCA has obtained third party reinsurance covering the risk. As a result, there
can be no assurance as to the percentage reinsured by XLFA of any given
financial guaranty insurance policy issued by XLCA.
As of December 31, 2001, XLFA had total assets, liabilities, redeemable
preferred shares and shareholders' equity of US$543,538,559 (audited),
US$244,403,576 (audited), US$39,000,000 (audited) and US$260,134,983 (audited)
respectively, determined in accordance with generally accepted accounting
principles in the United States. XLFA's insurance financial strength is rated
"Aaa" by Moody's and "AAA" by Standard & Poor's and Fitch, Inc. ("Fitch"). In
addition, XLFA has obtained a financial enhancement rating of "AAA" from
Standard & Poor's.
The obligations of XLFA to XLCA under the reinsurance agreement described
above are unconditionally guaranteed by XL Insurance (Bermuda) Ltd ("XLI"), a
Bermuda company and one of the world's leading excess commercial insurers. XLI
is a wholly owned indirect subsidiary of XL Capital Ltd. In addition to having
an "A+" rating from A.M. Best, XLI's insurance financial strength is rated "Aa2"
by Moody's and "AA" by Standard & Poor's and Fitch.
Notwithstanding the capital support provided to XLCA described in this
section, the holders of bonds insured by XLCA will have direct recourse against
XLCA only, and neither XLFA nor XLI will be directly liable to the holders of
such bonds.
XLCA's insurance financial strength is rated "Aaa" by Moody's and "AAA" by
Standard & Poor's and Fitch. In addition, XLCA has obtained a financial
enhancement ruling of "AAA" from Standard & Poor's. These ratings reflect
Moody's, Standard & Poor's and Fitch's current assessment of XLCA's
creditworthiness and claims-paying ability as well as the reinsurance
arrangement with XLFA described above.
The above ratings are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by Moody's, Standard & Poor's
or Fitch.
As of June 30, 2002, XLCA had total statutory assets of approximately
$205,800,000, total liabilities of approximately $73,500,000 and total capital
and surplus of approximately $132,300,000. As of June 30, 2002, XL Capital Ltd.
had consolidated assets of approximately $31.2 billion and consolidated
shareholders' equity of approximately $5.4 billion.
For further information concerning XLCA and XLFA, see the financial
statements of XLCA and XLFA, and the notes thereto. The financial statements of
XLCA and XLFA are included as exhibits to the periodic reports filed with the
Securities and Exchange Commission (the "Commission") by XL Capital Ltd and may
be reviewed at the EDGAR website maintained by the Commission. Copies of the
statutory quarterly and annual statements filed with the State of New York,
Insurance Department by XLCA are available upon request to the State of New York
Insurance Department.
XLCA is regulated by the Superintendent of Insurance of the State of New
York. In addition, XLCA is subject to regulation by the insurance laws and
regulations of the other jurisdictions in which it is licensed. As a financial
guaranty insurance company licensed in the State of New York, XLCA is Subject to
Article 69 of the New York Insurance Law, which, among other things, limits the
business of each insurer to financial guaranty insurance and related lines,
prescribes minimum standards of solvency, including minimum capital
requirements, establishes contingency, loss and unearned premium reserve
requirements, requires the maintenance of minimum surplus to policyholders and
limits the aggregate amount of insurance which may be written and the maximum
size of any single risk exposure which may be assumed. XLCA is also required to
file detailed annual financial statements with the New York Insurance Department
and similar supervisory agencies in each of the other jurisdictions in which it
is licensed.
The extent of state insurance regulation and supervision varies by
jurisdiction, but New York and most other jurisdictions have laws and
regulations prescribing permitted investments and governing the payment of
dividends, transactions with affiliates, mergers, consolidations, acquisitions
or sales of assets and incurrence of liabilities for borrowings.
In order to be in an Insured Trust, bonds must be insured by one of the
Preinsured Bond Insurers or be eligible for the insurance being obtained by such
Trust. In determining eligibility for insurance, the Preinsured Bond Insurers
and the Portfolio Insurers have applied their own standards which correspond
generally to the standards they normally use in establishing the insurability of
new issues of municipal bonds and which are not necessarily the criteria used in
the selection of bonds by the Sponsor. To the extent the standards of the
Preinsured Bond Insurers and the Portfolio Insurers are more restrictive than
those of the Sponsor, the previously stated Trust investment criteria have been
limited with respect to the bonds. This decision is made prior to the Date of
Deposit, as debt obligations not eligible for insurance are not deposited in an
Insured Trust. Thus, all of the bonds in the portfolios of the Insured Trusts in
the Fund are insured either by the respective Trust or by the issuer of the
bonds, by a prior owner of such bonds or by the Sponsor prior to the deposit of
such bonds in a Trust.
An objective of portfolio insurance obtained by an Insured Trust is to obtain
a higher yield on the portfolio of such Trust than would be available if all the
bonds in such portfolio had Standard & Poor's "AAA" rating and yet at the same
time to have the protection of insurance of prompt payment of interest and
principal, when due, on the bonds. There is, of course, no certainty that this
result will be achieved. Preinsured Bonds in an Insured Trust (all of which are
rated "AAA" by Standard & Poor's) may or may not have a higher yield than
uninsured bonds rated "AAA" by Standard & Poor's. In selecting such bonds for an
Insured Trust, the Sponsor has applied the criteria hereinbefore described.
In the event of nonpayment of interest or principal, when due, in respect of
a bond, AMBAC Indemnity shall make such payment not later than 30 days and
Financial Guaranty shall make such payment within one business day after the
respective insurer has been notified that such nonpayment has occurred or is
threatened (but not earlier than the date such payment is due). The insurer, as
regards any payment it may make, will succeed to the rights of the Trustee in
respect thereof. All policies issued by the Portfolio Insurers and the
Preinsured Bond Insurers are substantially identical insofar as obligations to
an Insured Trust are concerned.
The Internal Revenue Service has issued a letter ruling which holds in effect
that insurance proceeds representing maturing interest on defaulted municipal
obligations paid to holders of insured bonds, under policy provisions
substantially identical to the policies described herein, will be excludable
from Federal gross income under Section 103(a)(1) of the Internal Revenue Code
to the same extent as if such payments were made by the issuer of the municipal
obligations. Holders of Units in an Insured Trust should discuss with their tax
advisers the degree of reliance which they may place on this letter ruling.
However, Chapman and Cutler LLP, counsel for the Sponsor, has given an opinion
to the effect such payment of proceeds would be excludable from Federal gross
income to the extent described under "Federal Tax Status" in Prospectus Part II.
Each Portfolio Insurer is subject to regulation by the department of
insurance in the state in which it is qualified to do business. Such regulation,
however, is no guarantee that each Portfolio Insurer will be able to perform on
its contract of insurance in the event a claim should be made thereunder at some
time in the future. At the date hereof, it is reported that no claims have been
submitted or are expected to be submitted to any of the Portfolio Insurers which
would materially impair the ability of any such company to meet its commitment
pursuant to any contract of bond or portfolio insurance.
The information relating to each Portfolio Insurer has been furnished by such
companies. The financial information with respect to each Portfolio Insurer
appears in reports filed with state insurance regulatory authorities and is
subject to audit and review by such authorities. No representation is made
herein as to the accuracy or adequacy of such information or as to the absence
of material adverse changes in such information subsequent to the dates thereof.
Portfolio Administration
The Trustee is empowered to sell, for the purpose of redeeming Units tendered
by any Unitholder, and for the payment of expenses for which funds may not be
available, such of the bonds designated by the Supervisor as the Trustee in its
sole discretion may deem necessary. The Supervisor, in designating such bonds,
will consider a variety of factors including (a) interest rates, (b) market
value and (c) marketability. The Sponsor may direct the Trustee to dispose of
bonds upon default in payment of principal or interest, institution of certain
legal proceedings, default under other documents adversely affecting debt
service, default in payment of principal or interest or other obligations of the
same issuer, decline in projected income pledged for debt service on revenue
bonds or decline in price or the occurrence of other market or credit factors,
including advance refunding (i.e., the issuance of refunding securities and the
deposit of the proceeds thereof in trust or escrow to retire the refunded
securities on their respective redemption dates), so that in the opinion of the
Supervisor the retention of such bonds would be detrimental to the interest of
the Unitholders. In connection with the Insured Trusts to the extent that bonds
are sold which are current in payment of principal and interest in order to meet
redemption requests and defaulted bonds are retained in the portfolio in order
to preserve the related insurance protection applicable to said bonds, the
overall quality of the bonds remaining in such Trust's portfolio will tend to
diminish. Except as described in this section and in certain other unusual
circumstances for which it is determined by the Trustee to be in the best
interests of the Unitholders or if there is no alternative, the Trustee is not
empowered to sell bonds from an Insured Trust which are in default in payment of
principal or interest or in significant risk of such default and for which value
has been attributed for the insurance obtained by such Insured Trust. Because of
restrictions on the Trustee under certain circumstances, the Sponsor may seek a
full or partial suspension of the right of Unitholders to redeem their Units in
an Insured Trust. See "Rights of Unitholders--Redemption of Units" in Prospectus
Part II. The Sponsor is empowered, but not obligated, to direct the Trustee to
dispose of bonds in the event of an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by
an issuer of any of the bonds to issue new obligations in exchange or
substitution for any bond pursuant to a refunding or refinancing plan, except
that the Sponsor may instruct the Trustee to accept or reject such an offer or
to take any other action with respect thereto as the Sponsor may deem proper if
(1) the issuer is in default with respect to such bond or (2) in the written
opinion of the Sponsor the issuer will probably default with respect to such
bond in the reasonably foreseeable future. Any obligation so received in
exchange or substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as bonds originally
deposited thereunder. Within five days after the deposit of obligations in
exchange or substitution for underlying bonds, the Trustee is required to give
notice thereof to each Unitholder of the Trust thereby affected, identifying the
bonds eliminated and the bonds substituted therefor. Except as stated herein and
under "Fund Administration--Replacement Bonds" in Prospectus Part II regarding
the substitution of Replacement Bonds for Failed Bonds, the acquisition by a
Trust of any securities other than the bonds initially deposited is not
permitted.
If any default in the payment of principal or interest on any bonds occurs
and no provision for payment is made therefor within 30 days, the Trustee is
required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such bonds within 30 days after notification by the
Trustee to the Sponsor of such default, the Trustee may in its discretion sell
the defaulted bond and not be liable for any depreciation or loss thereby
incurred.
Sponsor Information
Van Kampen Funds Inc. is the Sponsor of the Trusts. Van Kampen Funds Inc.
is a wholly owned subsidiary of Van Kampen Investments Inc. ("Van Kampen
Investments"). Van Kampen Investments is a diversified asset management company
that administers more than three million retail investor accounts, has extensive
capabilities for managing institutional portfolios and has more than $89 billion
under management or supervision as of June 30, 2004. Van Kampen Investments has
more than 50 open-end funds, more than 30 closed-end funds and more than 2,700
unit investment trusts that are distributed by authorized dealers nationwide.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley,
a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses: securities, asset management
and credit services. Morgan Stanley is a full service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services. The Sponsor's principal
office is located at 1221 Avenue of the Americas, New York, New York 10020. As
of November 30, 2003, the total stockholders' equity of Van Kampen Funds Inc.
was $175,086,426 (unaudited). (This paragraph relates only to the Sponsor and
not to the Trust or to any other Series thereof. The information is included
herein only for the purpose of informing investors as to the financial
responsibility of the Sponsor and its ability to carry out its contractual
obligations. More detailed financial information will be made available by the
Sponsor upon request.)
Van Kampen Funds Inc. and your Trust have adopted a code of ethics
requiring Van Kampen's employees who have access to information on Trust
transactions to report personal securities transactions. The purpose of the code
is to avoid potential conflicts of interest and to prevent fraud, deception or
misconduct with respect to your Trust.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or shall become bankrupt or its affairs
are taken over by public authorities, then the Trustee may (i) appoint a
successor Sponsor at rates of compensation deemed by the Trustee to be
reasonable and not exceeding amounts prescribed by the Securities and Exchange
Commission, (ii) terminate the Trust Agreement and liquidate the Trusts as
provided therein or (iii) continue to act as Trustee without terminating the
Trust Agreement.
Trustee Information
The Trustee is The Bank of New York, a trust company organized under the laws
of New York. The Bank of New York has its principal unit investment trust
division offices at 2 Hanson Place, 12th Floor, Brooklyn, New York 11217,
telephone (800) 221-7668. The Bank of New York is subject to supervision and
examination by the Superintendent of Banks of the State of New York and the
Board of Governors of the Federal Reserve System, and its deposits are insured
by the Federal Deposit Insurance Corporation to the extent permitted by law.
The duties of the Trustee are primarily ministerial in nature. It did not
participate in the selection of bonds for the portfolios of any of the Trusts.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Trusts. Such
records shall include the name and address of, and the certificates issued by
the Trusts to, every Unitholder of the Trusts. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may from
time to time be required under any applicable state or Federal statute, rule or
regulation. The Trustee is required to keep a certified copy or duplicate
original of the Trust Agreement on file in its office available for inspection
at all reasonable times during the usual business hours by any Unitholder,
together with a current list of the bonds held in the Trusts.
Under the Trust Agreement, the Trustee or any successor trustee may resign
and be discharged of the trusts created by the Trust Agreement by executing an
instrument in writing and filing the same with the Sponsor. The Trustee or
successor trustee must mail a copy of the notice of resignation to all
Unitholders then of record, not less than 60 days before the date specified in
such notice when such resignation is to take effect. The Sponsor upon receiving
notice of such resignation is obligated to appoint a successor trustee promptly.
If, upon such resignation, no successor trustee has been appointed and has
accepted the appointment within 30 days after notification, the retiring Trustee
may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may remove the Trustee and appoint a successor trustee as
provided in the Trust Agreement at any time with or without cause. Notice of
such removal and appointment shall be mailed to each Unitholder by the Sponsor.
Upon execution of a written acceptance of such appointment by such successor
trustee, all the rights, powers, duties and obligations of the original trustee
shall vest in the successor. The resignation or removal of a Trustee becomes
effective only when the successor trustee accepts its appointment as such or
when a court of competent jurisdiction appoints a successor trustee. Any
corporation into which a Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a banking corporation organized under the laws of the United States or
any state and having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
Termination of the Trust Agreement
A Trust may be terminated at any time by consent of Unitholders of 51% of the
Units of such Trust then outstanding or by the Trustee when the value of such
Trust, as shown by any semi-annual evaluation, is less than 20% of the original
principal amount of bonds. A Trust will be liquidated by the Trustee in the
event that a sufficient number of Units not yet sold are tendered for redemption
by the Underwriters, including the Sponsor, so that the net worth of such Trust
would be reduced to less than 40% of the initial principal amount of such Trust.
If a Trust is liquidated because of the redemption of unsold Units by the
Underwriters, the Sponsor will refund to each purchaser of Units the entire
sales charge paid by such purchaser. The Trust Agreement provides that each
Trust shall terminate upon the redemption, sale or other disposition of the last
bond held in such Trust, but in no event shall it continue beyond the end of the
year preceding the fiftieth anniversary of the Trust Agreement in the case of an
IM-IT, Investment Grade Municipal, IM-IT Discount, a U.S. Territorial IM-IT, a
Long-Term State or a National Quality Trust, or beyond the end of the year
preceding the twentieth anniversary of the Trust Agreement in the case of
Strategic Municipal, IM-IT Limited Maturity, IM-IT Intermediate, State
Intermediate Laddered Maturity and IM-IT Short Intermediate Trusts. In the event
of termination of any Trust, written notice thereof will be sent by the Trustee
to each Unitholder of such Trust at his address appearing on the registration
books of the Fund maintained by the Trustee. Within a reasonable time thereafter
the Trustee shall liquidate any bond then held in such Trust and shall deduct
from the funds of such Trust any accrued costs, expenses or indemnities provided
by the Trust Agreement, including estimated compensation of the Trustee and
costs of liquidation and any amounts required as a reserve to provide for
payment of any applicable taxes or other government charges. The sale of bonds
in the Trust upon termination may result in a lower amount than might otherwise
be realized if such sale were not required at such time. For this reason, among
others, the amount realized by a Unitholder upon termination may be less than
the principal amount or par amount of bonds represented by the Units held by
such Unitholder. The Trustee shall then distribute to each Unitholder his share
of the balance of the Interest and Principal Accounts. With such distribution
the Unitholder shall be furnished a final distribution statement of the amount
distributable. At such time as the Trustee in its sole discretion shall
determine that any amounts held in reserve are no longer necessary, it shall
make distribution thereof to Unitholders in the same manner.
Notwithstanding the foregoing, in connection with final distributions to
Unitholders of an Insured Trust, it should be noted that because the portfolio
insurance obtained by an Insured Trust is applicable only while bonds so insured
are held by such Trust, the price to be received by such Trust upon the
disposition of any such bond which is in default, by reason of nonpayment of
principal or interest, will not reflect any value based on such insurance.
Therefore, in connection with any liquidation, it shall not be necessary for the
Trustee to, and the Trustee does not currently intend to, dispose of any bond or
bonds if retention of such bond or bonds, until due, shall be deemed to be in
the best interest of Unitholders, including, but not limited to, situations in
which a bond or bonds so insured have deteriorated market prices resulting from
a significant risk of default. Since the Preinsured Bonds will reflect the value
of the related insurance, it is the present intention of the Sponsor not to
direct the Trustee to hold any of such Preinsured Bonds after the date of
termination. All proceeds received, less applicable expenses, from insurance on
defaulted bonds not disposed of at the date of termination will ultimately be
distributed to Unitholders of record as of such date of termination as soon as
practicable after the date such defaulted bond or bonds become due and
applicable insurance proceeds have been received by the Trustee.
Description of Ratings
Standard & Poor's, A Division of the McGraw-Hill Companies. A Standard &
Poor's municipal bond rating is a current assessment of the creditworthiness of
an obligor with respect to a specific debt bond. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price. The ratings are based on
current information furnished to Standard & Poor's by the issuer and obtained by
Standard & Poor's from other sources it considers reliable. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation.
II. Nature of and provisions of the obligation.
III. Protection afforded by, and relative position of, the bond in the
event of bankruptcy, reorganization or other arrangements under the
laws of bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's. The obligor's
capacity to meet its financial commitment on the obligation is extremely strong.
AA--An obligation rated "AA" differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A--An obligation rated "A" is somewhat more susceptible to adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB--An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: A provisional rating ("p") assumes the successful
completion of the project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgement with respect to such
likelihood and risk.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's rating symbols and their meanings follows:
Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
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 payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's(R) 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.
Arizona Risk Factors
Economic Condition and Outlook. Arizona's economy has continued to add jobs
in calendar year 2003. In fact, throughout most of the year Arizona was ranked
in the top ten fastest job-growing states in the nation. More than 82,000 jobs
will be added to the Arizona economy during calendar years 2003 and 2004.
Although jobs grew at a slower than expected rate during the second quarter,
momentum picked up during the remainder of 2003 and is expected to continue into
2004. Most of this stems from improving consumer optimism and business
confidence and the expected gradual recovery extending through other geographic
regions.
Arizona's goods-producing industries are expected to grow by 800 jobs over
calendar years 2003 and 2004. This group of industries shows a surprising
endurance in job creation in the case of construction, while manufacturing shows
a loss of industry share in its return to 1993-94 levels.
These two most cyclical industries have shown sharply different experiences
since 2001. Construction is an industry serving mostly "home-grown" demand.
Population growth in Arizona, among the fastest in the Mountain states region,
helps to supply the demand for job growth, while the continued low interest
rates add to the affordability and attraction of housing and other related
products. Manufacturing, on the other hand, is an industry largely serving
demand external to our state. With demand levels sharply curtailed in recent
years from other regions, manufacturing firms have struggled to adjust by
shedding plant, equipment, and jobs, a process generally referred to as
consolidation. Increasingly, however, manufacturing and mining firms have also
opted to close, relocate, or prioritize their expansion efforts abroad.
During the calendar years 2003 and 2004, construction is forecast to add more
than 11,000 jobs. Continued strong demand for housing has developers building
new homes, homeowners expanding and remodeling, and cities and counties
grappling with a great deal of infrastructure development such as improvements
of roads and highways.
Additionally, continued attraction to rural regions from retirees and locals
is forecast to incite economic planning and development groups to work hard in
an effort to stay ahead of demand pressures.
Meanwhile, projected gains for construction are largely offset by the
anticipated losses of nearly 10,000 jobs in manufacturing and a decrease of
roughly 700 jobs in mining.
Computer and electronic manufacturing firms experienced the largest blow in
the most recent downturn, and these related sectors are projected to show a
prolonged struggle toward recovery. Service-providing industries are forecast to
add more than 81,000 jobs during 2003-04.
This group of varied and diverse providers has been growing faster than the
goodsproducing industries, due to large sectors of the economy catering to
Arizona's fast growing population and industries serving tourists. Health and
education sectors are projected to show growth of more than 26,000 jobs. Annual
growth rates are expected to average roughly 5.5 percent during 2003-04.
Notably, increases in health services jobs are forecast to outpace most all
others during the next few years.
Professional and business services sectors are forecast to show increasing
demand for labor over the next two years, growing by 1.7 percent in 2003 to more
than 4 percent in 2004. This industry is forecast to add 18,600 jobs, accounting
for more than 22 percent of the increase on jobs during the 2003-04 period.
Projected to be one of the fastest growing sectors of this super sector, the
employment services sector is already leading this group as it serves the growth
in many other industries.
The combined trade, transportation, warehousing, and public utilities group
is forecast to add almost 15,000 jobs during 2003-04. This represents nearly 18
percent of all jobs added during this two-year period. Trade is projected to be
the fastest growing of this group, but loses in wholesale trade are expected to
drag down improving retail sectors benefiting from rising and sustained levels
of consumer optimism. Wholesale trade showed losses in 2003 but is expected to
contribute to growth in 2004.
The information services sector is forecast to experience a difficult period
toward recovery. Publishing and other information services are forecast to pare
more than 3,000 jobs during 2003-04. This industry has been one of the hardest
hit in the serviceproducing industries following the post 2000 economic
downturn.
Arizona's leisure and hospitality industry is forecast to add 7,600 jobs
during 2003 and 2004, averaging roughly 1.5 percent over the two-year period.
More than 9 percent of the total increase of jobs will come from this mostly
tourism and entertainment group of sectors.
Financial services forecasts showed a slight loss of jobs in 2003 with modest
gains forecast for 2004. Real estate is projected to be the source of continued
growth, whereas the securities and commodities related sectors, along with the
insurance sectors are forecast to experience some slight consolidations to cut
costs and match lower demand. Other services, a mix of service providing
industries not elsewhere categorized, is forecast to add nearly 5,000 jobs.
Growth rates of 2.3 percent and 3.3 percent are forecast for 2003 and 2004,
respectively.
Providing services to Arizona's growing population, government is forecast to
add almost 11,000 jobs during the two-year period. Annual growth rates are
expected to be modest and average less than 1.5 percent during the two-year
period. Local education is projected to generate most of the jobs in government.
Growth in federal government jobs stems from the demand for greater security and
other services across the state. Fiscal pressures are expected to restrain job
growth in state and local government to levels sharply lower than historical
trend.
General Fund. The General Fund ended the June 30, 2003, fiscal year with $343
million in unreserved fund balance and a $203.4 million reserved fund balance
for a total fund balance of $546.4 million. This compares to the previous year
total fund balance of $748.3 billion. Included in the $203.4 million reserved
fund balance is $13.7 million for the Budget Stabilization Fund. The Budget
Stabilization Fund is a form of "Rainy Day Fund" established by the Legislature
in 1991.
Cash Management. The responsibility for cash management of the State is
shared by the Office of the Treasurer ("Treasurer") and the General Accounting
Office of the Department of Administration, Financial Services Division (GAO).
The Treasurer is responsible for the depository, custodial and investment
functions of cash. The GAO is responsible for drawing down monies available for
State functions and the expenditure or disbursement of those monies. The State
requires that Treasurer's deposits and investments with financial institutions
be entirely covered by Federal depository insurance or alternatively
collateralized with surety equal to 102% of the deposit or investment. Component
units may have collateralization policies that differ from those of the
Treasurer. The Legislature has passed statutes authorizing State investments.
The Treasurer deposits receipts in accordance with applicable statutes and
invests excess cash of the General Fund and various other funds. All interest,
not otherwise apportioned by law, is deposited in the General Fund. Investment
earnings for the General Fund totaled $21.6 million for the fiscal year ended
June 30, 2003.
Budgetary Controls. Budgetary control is maintained through legislative
appropriation and the executive branch allotment process. The Governor is
required to submit an annual budget to the Legislature. The budget is legally
required to be adopted through passage of appropriation bills by the Legislature
and approval by the Governor. The appropriated funds are controlled by the
executive branch through an allotment process. This process allocates the
appropriation into quarterly allotments by legal appropriation level. The State
also maintains an encumbrance accounting system to further enhance budgetary
control. Encumbered amounts generally lapse as of the end of the fiscal year,
with the exception of capital outlay items. Capital outlay appropriations and
their encumbrances continue from year to year. The State's budgetary policies
are explained in detail in the Required Supplementary Information (RSI).
The State is responsible for establishing and maintaining an internal control
structure designed to ensure that the assets of the State are protected from
loss, theft or misuse and to ensure that adequate accounting data are compiled
to allow for the preparation of financial statements in conformity with U.S.
generally accepted accounting principles. Internal accounting controls are
designed to provide reasonable, but not absolute, assurance that these
objectives are met. The concept of reasonable assurance recognizes that: (1) the
cost of a control should not exceed the benefits likely to be derived and (2)
the valuation of costs and benefits requires estimates and judgments by
management. In the opinion of management, the State's internal controls are
adequate to provide reasonable assurance that these objectives are met.
Risk Management. The State purchases property and liability coverage whenever
available on reasonable terms. The State is insured by a property insurer for
claims in excess of $3.5 million, but less than $345 million, and liability
claims in excess of $2 million for the Universities and $7 million for all other
state agencies, but less than $107 million. The State also maintains first
dollar aircraft coverage up to $200 million. Other purchased coverages include
fidelity, foreign liability, medical malpractice (limited to the University of
Arizona's medical professional staff), and employment practices. The State's
self-insurance fund provides property and liability coverage for claims less
than or in excess of this coverage, or whenever coverage, such as workers'
compensation and medical malpractice for non-University of Arizona professional
staff, is unavailable on reasonable terms.
The State pays self-insurance losses, defense costs, premiums and
administrative costs from an appropriated fund which all of the State's agencies
participate in. Total costs (excluding the cost of administering the program)
have risen from approximately $15.3 million in fiscal year 1988 to approximately
$78.1 million in fiscal year 2003. Yearly appropriations have also increased
from approximately $27.7 million in fiscal year 1988 to approximately $96.2
million in fiscal year 2003 to meet rising losses and claims-related expenses.
Although there are no assurances, historically the Legislature has appropriated
sufficient funds to cover all costs.
Each Arizona Trust is susceptible to political, economic or regulatory
factors affecting issuers of Arizona municipal obligations (the "Arizona
Municipal Obligations"). These include the possible adverse effects of certain
Arizona constitutional amendments, legislative measures, voter initiatives and
other matters The information provided is only a brief summary of the complex
factors affecting the financial situation in Arizona and is derived from sources
that are generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any of
the preceding information. It is based in part on information obtained from
various State and local agencies in Arizona or contained in Official Statements
for various Arizona Municipal Obligations.
Arkansas Risk Factors
Economic Outlook. During the past two decades, Arkansas' economic base has
shifted from agriculture to light manufacturing. Agriculture has traditionally
been a significant component of Arkansas' economy, but total income from this
sector continues to decrease. Over 40% of the land in Arkansas is devoted to
agriculture, and the state is a leading producer of rice, commercial broiler and
cotton, generating over $5.5 billion in overall farm income each year.
The state is now moving toward a heavier manufacturing base involving more
sophisticated processes and products such as electrical machinery,
transportation equipment, fabricated metals and electronics. In fact, Arkansas
now has a higher percentage of workers involved in manufacturing than the
national average. The diversification of economic interests has lessened the
state's cyclical sensitivity to impact by any single sector. The State's work
force and other factors continue to attract investment in manufacturing, as well
as other factors to the State.
The Arkansas unemployment rate for November 2003 was 5.9 percent, down
one-half of a percent from November 2002. Year-on-year employment rose 1.0
percent from November 2002 to November 2003. Roughly 1,297,600 Arkansans held
employment in November 2002, compared with 1,310,200 in November 2003.
After increasing by a revised seasonally adjusted annual rate (SAAR) of 2.9
percent in December 2003, the Arkansas Index of Leading Economic Indicators,
which predicts economic conditions within the state six to nine months hence,
increased by a preliminary estimate of 2.8 percent (SAAR) in January 2004 . The
index has stayed even or increased for ten consecutive months. The index's
positive contributors were, from largest to smallest contribution, a 7.6 percent
(SAAR) increase in the national index of leading economic indicators, a 1.0
percent increase in seasonally adjusted construction employment and a 10.6
percent drop in seasonally adjusted initial claims for unemployment. The index's
negative contributors were a decline of 0.5 percent in average weekly
manufacturing hours (AWMH) and a 3.2 percent decline in the number of new
incorporations. The state's leading index stands at a preliminary estimate of
105.2 in January 2004, up from its revised level of 104.9 in December 2003.
Overall, the data imply the state will experience mild economic growth in the
final quarter of 2004.
Based on calculations as of the fourth quarter of 2003, annualized personal
income in Arkansas reached a total of $66,205. This represents an increase of
3.9% over the previous year.
Revenues and Expenditures. Deficit spending has been prohibited by statute in
Arkansas since 1945. The Revenue Stabilization Act controls spending by state
agencies and prohibits deficit spending. This Act requires that, before any
state spending can take place, the General Assembly must make an appropriation
and funds must be available in the fund from which the appropriation has been
made. The state is prohibited from borrowing money to put into any state fund
from which appropriations can be paid.
Act 750 of 1973, as amended, established the State's Revenue Stabilization
Law. This law and related legislation govern the administration and distribution
of State revenues. Pursuant to the Stabilization Law, all general and special
revenues are deposited into the General Revenue Allotment Account and the
Special Revenue Allotment Account according to the type of revenue being
deposited. From the General Revenues Fund, 3% of all general revenues are first
distributed to the Constitutional Officers Fund and the Central Services Fund to
provide support for the States' elected officials and their staffs and the
Department of Finance and Administration.
The balance is then distributed to separate funds proportionately as
established by the Stabilization Law. From the Special Revenue Fund, 3% of all
special revenues collected by DFA and 1.5% of all special revenues collected by
other agencies are first distributed to provide support for the State's elected
officials, their staffs, and DFA. The balance is then distributed to the funds
for which the special revenues were collected.
Special revenues, which are primarily user taxes, are generally earmarked
for the program or agency providing the related services. General revenues are
transformed into funds established and maintained by the Treasurer for major
programs and agencies of the state in accordance with fund priorities
established by the General Assembly.
According to the Stabilization Law, the General Assembly establishes three
levels of priority for general revenue spending, levels "A", "B", and "C".
Successive levels of appropriations are funded only in the event sufficient
revenues have been generated to fully fund any prior level. Accordingly,
appropriations made to programs and agencies are only maximum authorizations to
spend. Actual expenditures are limited to the lesser of (1) moneys flowing a
program or agencies' fund maintained by the Treasurer or (2) the maximum
appropriation by the General Assembly. Because state revenues are not collected
throughout the year in a pattern consistent with program and agency
expenditures, a budget revolving fund, which receives interest earnings for
State fund investments, has been established and is utilized to assure proper
cash flow during any period.
As of September 2002, total general revenues were $367,609,000, a 2.3% change
over the previous year.
Debt Management. The Constitution of the State of Arkansas does not limit the
amount of general obligation bonds which may be issued by the State; however, no
such bonds may be issued unless approved by the voters of the State at a general
election or special election held for that purpose.
Although the State of Arkansas defaulted on some of its general obligation
debt during the depression in the late 1930s, it has not failed to pay the
principal and interest on any of its general obligations when due since that
time.
Act 496 of 1981, as amended, the Arkansas Water Resources Development Act of
1981 ("Act 496"), authorizes the issuance of State Water Resources Development
General Obligation Bonds by the State of Arkansas, acting by and through the
Arkansas Soil and Water Conservation Commission. The issuance of bonds pursuant
to Act 496 was approved by the electors of the state at the general election on
November 2, 1982. The total principal amount of bonds issued during any fiscal
biennium may not exceed $15,000,000, and the total principal of all bonds issued
under Act 496 may not exceed $100,000,000. All bonds to be issued under Act 496
shall be direct general obligations of the state, the principal and interest of
which are payable from the general revenues of the state.
Act 686 of 1987, the Arkansas Waste Disposal and Pollution Abatement
Facilities Financing Act of 1987 ("Act 686"), authorizes the issuance of
Arkansas Waste Disposal and Pollution Abatement Facilities General Obligation
Bonds by the State of Arkansas, acting by and through the Arkansas Soil and
Water Conservation Commission. The issuance of bonds pursuant to Act 686 was
approved by the electors of the state at the general election on November 8,
1988. The total principal amount of bonds issued during any fiscal biennium may
not exceed $50,000,000, and the total principal of all bonds issued under Act
686 may not exceed $250,000,000. All bonds to be issued under Act 686 shall be
direct general obligations of the state, the principal and interest of which are
payable from the general revenues of the state.
Act 683 of 1989, the Arkansas College Savings Bond Act of 1989 ("Act 683"),
authorizes the issuance of Arkansas College Savings General Obligation Bonds by
the State of Arkansas, acting by and through the Arkansas Development Finance
Authority. The issuance of bonds pursuant to Act 683 was approved by the
electors of the state at the general election on November 6, 1990. The total
principal amount of bonds issued during any fiscal biennium may not exceed
$100,000,000, and the total principal of all bonds issued under Act 683 may not
exceed $300,000,000. All bonds to be issued under Act 683 shall be direct
general obligations of the state, the principal and interest of which are
payable from the general revenues of the state.
Counties and municipalities may issue general obligation bonds (pledging an
ad valorem tax), special obligation bonds (pledging other specific tax revenues)
and revenue bonds (pledging only specific revenues from sources other than tax
revenues). School districts may issue general obligation bonds (pledging ad
valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but, as
in all cases of revenue bonds, neither the full faith and credit nor the taxing
power of the State of Arkansas or any municipality or county thereof is pledged
to the repayment of those bonds. Revenue bonds can be issued only for public
purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
The total outstanding general obligation bonded indebtedness, including
special obligation and other debt instruments, of the governmental fund types of
the State as of June 30, 2001, was approximately $558 million.
Bond Ratings. State of Arkansas general obligation bonds hold the following
ratings: AA by Standard & Poor's Ratings Services; and Aa2 by Moody's Investors
Service, Inc.
There can be no assurance that such ratings will be maintained in the future.
It should be noted that the creditworthiness of obligations issued by local
Arkansas issuers may be unrelated to the creditworthiness of obligations issued
by the State of Arkansas, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of default.
Each Arkansas Trust is susceptible to political, economic or regulatory
factors affecting issuers of Arkansas municipal obligations (the "Arkansas
Municipal Obligations"). These include the possible adverse effects of certain
Arkansas constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Arkansas and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Arkansas or
contained in Official Statements for various Arkansas Municipal Obligations.
California Risk Factors
Economic Outlook. The State of California's (the "State" or "California")
fiscal problems that started in the 2001-02 fiscal year have continued. Although
tax revenues have improved since their plummet in 2002, total net assets for
governmental activities have declined from a positive $10.5 billion as of July
1, 2001, to a negative $24.5 billion as of June 30, 2003. While these amounts
exclude the state highway infrastructure assets built before July 1, 2001, this
shows that the State's net assets of governmental activities have declined an
average of $17.5 billion each year for the past two years.
In 1991, California's bond rating was the highest rating that could be
awarded. Now, however, the bond rating companies of Moody's Investors Services,
Fitch Ratings, and Standard and Poor's are concerned about California's ability
to pay its debt obligations, and they have lowered their ratings on the State's
general obligation bonds to the lowest rating in California's history and the
worst of all the states. During this financial downturn, the State Controller's
Office has taken actions to ensure that the State has sufficient cash, through
external borrowing, to address its legal obligations. California currently has
$14.0 billion in short-term loans outstanding that must be redeemed in June
2004. Proposition 57, the Economic Recovery Bond Act, along with its companion
Proposition 58, the California Balanced Budget Act, was placed on the March 2004
ballot by the Legislature and the Governor and approved by California's voters.
Proposition 57 allows the sale of up to $15.0 billion in general obligation
bonds that will be used to replace the State's short-term loans and retire the
accumulated budgetary deficit. The sale of these bonds provides a short-term
respite for the State's budget deficit and cash situation. However, these bonds
do not address the ongoing structural deficit, where expenditures required by
current law exceed state revenues. Also, the bonds will not improve the State's
net assets, because this transaction will largely exchange a short-term
obligation for a long-term one.
Employment growth is expected to accelerate in 2004--although, by historic
standards, the growth will not be exceptional. In the first two quarters of
2004, employment growth will probably be under 1.0%, rising to about 2.0% by the
end of the calendar year. Rising sales of electronic and computer equipment in
the last two quarters of 2003 should give a boost to the hard-hit technology
industries of the Silicon Valley. This will help offset the slowing employment
of state and local governments in California. International trade, while still
depressed, has begun to grow and will stimulate the California economy in 2004.
Transportation and warehousing, along with retail sales, health, hospitality,
and professional services, should see employment growth as the economy picks up
in 2004. Housing sales and prices are expected to moderate in 2004, but the
sector should remain healthy. Personal income growth is expected to exceed 5.0%
by the second quarter of 2004--providing a welcomed growth in tax receipts for
the State.
Budget Outlook. The Legislature and the Governor enacted the 2003-04 Budget
Act on August 2, 2003. The General Fund revenues and expenditures for the
2003-04 fiscal year were projected to be $74.8 billion and $71.1 billion,
respectively. The 2003-04 budget continued to depend heavily on debt financing
that was authorized for the 2002-03 fiscal year but had not been accomplished by
June 30, 2003. A total of $14.6 billion in General Fund support was projected to
be from bond sales, of which $12.6 billion has been challenged in the courts.
Because of the legal challenges, the Legislature and the Governor enacted
legislation in December 2003 that authorized up to $15.0 billion in general
obligation bonds to be placed on the March 2004 ballot for approval by
California's voters. These bonds, if approved, will replace the $12.6 billion of
bonds that are being challenged in the courts.
The 2004-05 Governor's Budget, issued on January 9, 2004, estimates that the
General Fund, without the solutions detailed in the budget, will end the 2003-04
fiscal year with a deficit of $12.3 billion and the 2004-05 fiscal year with a
deficit of $26.3 billion. The Governor's Budget provides for the elimination of
these deficits by proposing, through the 2004-05 fiscal year, $16.2 billion in
spending reductions, fund shifts, cost avoidance, bonds, debt service savings,
transfers/other revenues, loans/borrowings, and pension reform. The Legislative
Analyst's Office, California's nonpartisan fiscal and policy advisor, comments
positively on the realistic revenue estimates and caseload assumptions but says
that the plan does not fully address the State's ongoing budget problem. The
Legislative Analyst's Office believes that a shortfall of approximately $6.0
billion will occur in the 2005-06 fiscal year, barring any further budgetary
actions to reduce the structural deficit.
General Obligation Bond Credit Rating. On July 24, 2003, Standard and Poor's
lowered its rating on California's general obligation debt to BBB from A, citing
the lack of progress in adopting a fiscal 2004 budget, the gubernatorial recall
election, and diminished prospects for structural budget reform in light of the
recall. On December 9, 2003, Moody's Investors Service lowered its rating on
California's general obligation bonds to Baa1 from A3. Moody's downgrade cited
recent action to cut the amount of vehicle license fees paid by motorists, as
well as the continuing inability to reach political consensus on budget
solutions. On December 18, 2003, Fitch Ratings lowered its rating on
California's general obligation bonds to BBB from A. Fitch attributed the
downgrade to California's widening budget gap, the State's intention to increase
the amount of deficit funding, and the magnitude of measures necessary to
restore budgetary balance.
Debt Management Plan. In 2002, the State Treasurer implemented a Strategic
Debt Management Plan. A principal goal of this plan was to better match the
timeframe for repaying debt for infrastructure projects to the useful life of
the assets being funded. The plan also reduces debt service in fiscal years
2001-02 through 2003-04 by approximately $2.0 billion and is intended to
increase the State's long-term debt capacity to finance California's
infrastructure needs. These goals are to be achieved by: (1) shifting from level
principal payments to level debt service payments for new bond issues; (2)
restructuring existing debt to achieve significant one-time debt service
reductions and to expedite the transition to level debt service payments; and
(3) implementing recent legislation that authorizes the State to issue
variable-rate debt for a portion of its general obligation bond portfolio.
Each California Trust is susceptible to political, economic or regulatory
factors affecting issuers of California municipal obligations (the "California
Municipal Obligations"). These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters. The information provided is only a brief summary of the
complex factors affecting the financial situation in California and is derived
from sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the following information. It is based in part on
information obtained from various State and local agencies in California or
contained in Official Statements for various California Municipal Obligations.
Colorado Risk Factors
General. Colorado became the thirty-eighth state of the United States of
America when it was admitted to the union in 1876. Its borders encompass 104,247
square miles of the high plains and the Rocky Mountains with elevations ranging
from 3,350 to 14,431 feet above sea level. The state's major economic sectors
include agriculture, manufacturing, technology, tourism, energy production, and
mining. Considerable economic activity is generated in support of these sectors
by government, wholesale and retail trade, transportation, communications,
public utilities, finance, insurance, real estate, and other services. Given the
state's semiarid climate, water resource development, allocation, and
conservation are ongoing issues for state management.
The state maintains a separation of powers utilizing three branches of
government - executive, legislative, and judicial. The executive branch
comprises four major elected officials - Governor, State Treasurer, Attorney
General, and Secretary of State. Most departments of the state report directly
to the Governor; however, the Departments of Treasury, Law, and State report to
their respective elected officials, and the Department of Education reports to
the elected State Board of Education. The elected officials serve four-year
terms with the number of terms limited in duration.
The legislature is bicameral and comprises thirty-five senators and
sixty-five representatives who are also term limited. It is a citizen
legislature whose general session lasts 120 days beginning in January of each
year. Special sessions may be called by the Governor at his discretion and are
limited to the topics identified by the Governor. The legislature's otherwise
plenary power is checked by the requirement for the Governor's signature of its
legislation and by specific limitations placed in the State Constitution by
voters. The most significant of these limitations is the restriction related to
issuing debt, raising taxes, and changing existing spending limits. From a
fiscal perspective, the Joint Budget Committee of the legislature, because of
its preparation of the annual budget and supplemental appropriations bills,
holds the most important power vested in the legislature. The committee is
bipartisan with members drawn from each of the houses of the legislature. The
Governor's Office of State Planning and Budgeting develops an executive branch
budget proposal, but there is no requirement for the Joint Budget Committee to
adopt that proposal.
The Judicial Branch is responsible for resolving disputes within the state,
including those between the executive and legislative branches of government,
and for supervising offenders on probation. The branch includes the Supreme
Court, Court of Appeals, and district and county courts, served by 256 justices
and judges in 22 judicial districts across the state (excluding 17 Denver county
court judges). Municipal courts are not part of the state system. There are also
seven water courts, one in each of the major river basins. The Judicial Branch
budget is appropriated by the legislature, and it is funded primarily from
general-purpose revenues of the General Fund.
Economic Outlook. The Governor's Office of State Planning and Budgeting
(OSPB) anticipates that the Colorado economy is still awaiting a jump-start from
increasing national economic activity. In the mean time, many recent Colorado
economic signals are encouraging and the evidence continues to indicate that the
worst has passed. Although year-to-date employment levels are still below their
year-earlier levels, jobs are generally increasing month to month and individual
sectors are showing marked improvement.
Meanwhile, the unemployment rate has stabilized at about 5.7 percent.
Furthermore, first quarter 2003 personal income rose nearly one percentage point
faster than inflation, meaning that Colorado consumers have more money to spend.
Finally, demand for office space is improving and tourism activity in Colorado
is expanding. In the long term, the recent declines in the Colorado economy
improve the state's competitive advantage by lowering the costs of living and
doing business in the state. Colorado's central location and well-developed
infrastructure combined with a highly educated work force and Internet-savvy
population create an amenable business climate in the state.
Nonfarm employment declined 0.6 percent, 13,400 jobs, year-to-date through
July 2003 compared with the same period in 2002. However, since the beginning of
January 2003, the state has gained several thousand jobs. Furthermore, the
financial activities, education and health services, leisure and hospitality,
and national and local government sectors each posted gains compared with the
previous year. Meanwhile, although the number of business and professional
services jobs still shows a year-over-year decline, the number of business and
professional services jobs in Colorado has increased each month since January
2003. Furthermore, in July 2003, business and professional service employment
exceeded that of July 2002. Employment in the information sector, which includes
telecommunications, has stabilized since fourth quarter 2002, whereas a
substantial number of information jobs were shed every month in the first three
quarters of 2002.
Revenues and Expenditures. The State Constitution requires that expenditures
for any fiscal year not exceed revenues for such fiscal year. By statute, the
amount of General Fund revenues available for appropriation is based upon
revenue estimates which, together with other available resources, must exceed
annual appropriations by the amount of the unappropriated reserve (the
"Unappropriated Reserve"). For fiscal years 1994 and thereafter, the
Unappropriated Reserve requirement is set at 4 percent. In addition to the
Unappropriated Reserve, a constitutional amendment approved by Colorado voters
in 1992 requires the State and local government to reserve a certain percentage
of its fiscal year spending (excluding bonded debt service) for emergency use
(the "Emergency Reserve"). The minimum Emergency Reserve is set at 3 percent for
1995 and later years. For fiscal year 1992 and thereafter, General Fund
appropriations are also limited by statute to an amount equal to the cost of
performing certain required reappraisals of taxable property plus an amount
equal to the lesser of (i) 5 percent of Colorado personal income or (ii) 106
percent of the total General Fund appropriations for the previous fiscal year.
This restriction does not apply to any General Fund appropriations which are
required as a result of a new federal law, a final state or federal court order
or moneys derived from the increase in the rate or amount of any tax or fee
approved by a majority of the registered electors of the State voting at any
general election. In addition, the statutory limit on the level of General Fund
appropriations may be exceeded for a given fiscal year upon the declaration of a
State fiscal emergency by the State General Assembly.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general, became effective December 31, 1992, and
restricts the ability of the State and local governments to increase revenues
and impose taxes. The Amendment applies to the State and all local governments,
including home rule entities ("Districts"). Enterprises, defined as
government-owned businesses authorized to issue revenue bonds and receiving
under 10 percent of annual revenue in grants from all Colorado state and local
governments combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also limits
increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield no
more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to the
Amendment, local government spending is to be limited by the same formula as the
limitation for property tax revenues. The basis for spending and revenue limits
for each fiscal year is the prior fiscal year's spending and property taxes
collected in the prior calendar year. Debt service changes, reductions and
voter-approved revenue changes are excluded from the calculation bases. The
Amendment also prohibits new or increased real property transfer tax rates, new
state real property taxes and local district income taxes. There is also a
statutory restriction on the amount of annual increases in taxes that the
various taxing jurisdictions in Colorado can levy without electoral approval.
This restriction does not apply to taxes levied to pay general obligation debt.
Litigation concerning several issues relating to the Amendment was filed in
the Colorado courts. The litigation dealt with three principal issues: (i)
whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease purchase agreement subject to annual appropriations is an obligation which
requires voter approval prior to execution of the agreement; and (iii) what
constitutes an "enterprise" which is excluded from the provisions of the
Amendment. In September 1994, the Colorado Supreme Court held that Districts can
increase mill levies to pay debt service on general obligation bonds issued
after the effective date of the Amendment; in June, 1995, the Colorado Supreme
Court validated mill levy increases to pay general obligation bonds issued prior
to the Amendment. In late 1994, the Colorado Court of Appeals held that
multi-year lease-purchase agreements subject to annual appropriation do not
require voter approval. Finally, in May, 1995, the Colorado Supreme Court ruled
that entities with the power to levy taxes may not themselves be "enterprises"
for purposes of the Amendment; however, the Court did not address the issue of
how valid enterprises may be created. Litigation in the "enterprise" arena may
be filed in the future to clarify these issues.
The Taxpayer's Bill of Rights ("TABOR"), Article X, Section 20 of the
Colorado State Constitution, limits the state's revenue growth to the sum of
inflation plus population growth in the previous calendar year.
After logging TABOR revenue surpluses for five years, the TABOR surplus
vanished in FY 2001-02 and remains absent through FY 2004-05. Indeed, FY 2002-03
TABOR revenues were lower than the TABOR limit by $619.7 million. The OSPB does
not expect the TABOR surplus to reappear until FY 2005-06 and even then, the
surplus is small in that year. The TABOR surplus disappeared for three reasons.
First, the national economic expansion ended in March 2001, after an
unprecedented 10 years of growth. The Colorado economy was negatively affected
by the national recession and the events of September 11, 2001. As a result,
revenues decreased in FY 2001-02 and FY 2002-03. Although a tentative recovery
in the national economy is underway, strong growth will not be evident until
2004. Second, two measures passed by voters in the November 2000 election
lowered the TABOR surplus each year by at least $250 million. Amendment 23,
which provides increased public school funding, and Referendum A, which is also
known as the Senior Homestead Exemption and provides property tax relief for
senior citizens, both exempt revenues from the TABOR restriction. Third,
legislation enacted through House Bill 02-1310 and Senate Bill 02-179 enables
the state to recoup revenues lost because the TABOR limits used during the 1990s
relied on population estimates that were too low. The percentage change
associated with this lost revenue is called the growth dividend and is equal to
six percent. The state will gradually be using this growth dividend in FY
2003-04, FY 2004-05, and FY 2005-06. The full six percent growth dividend is
applied to the TABOR limit by FY 2005-06. The growth dividend acts to eliminate
the TABOR surplus in FY 2003-04 and FY 2004-05 and reduce the TABOR surplus in
FY 2005-06. This adjustment allows the state to keep $1.0 billion in additional
revenues during those three years and enables state government to keep an
additional $2.7 billion through the forecast horizon. By FY 2005-06, the TABOR
surplus reappears, totaling $29.5 million. In subsequent years, the OSPB expects
the TABOR surplus to be between $180 million and $510 million.
Although TABOR is not the cause of the state's present financial situation,
legislative action previously taken to implement TABOR exacerbated the revenue
shortfalls in FY 2001-02 and FY 2002-03. This previous action -- House Bill
98-1414 -- was reversed during the 2003 legislative session. During the 2003
legislative session, a very important change was made in how the state treats
its TABOR surplus. In 1998, the General Assembly passed House Bill 98-1414,
which permitted the state to spend TABOR surplus revenues in the year in which
they were received instead of setting the money aside to be refunded to
taxpayers the following year. Effectively, this delayed recognizing the state's
TABOR refund obligation by one year and allowed the state to spend money that it
was obligated to return to taxpayers. For example, in FY 2000-01 the state had a
$927.2 million TABOR surplus that it was required to refund in FY 2001-02.
Rather than reserve this obligation in FY 2000-01 when the surplus revenues came
into the state, the 1998 legislation allowed the state to defer this obligation
until the refund was due in FY 2001-02. Thus, the state was in a situation where
it spent the $927.2 million surplus revenue in FY 2000-01 but needed to refund
$927.2 million in FY 2001-02 at a time when revenues were significantly lower
than the previous year. The delayed recognition of the TABOR obligation
significantly worsened the FY 2001-02 revenue shortfall. In order to avoid a
replay of this situation in future years, two bills (Senate Bill 03-222 and
House Bill 03-1238) were passed in the 2003 session to reverse the 1998
legislation. In future years, the state must set aside surplus revenues in the
year in which they come to the state and recognize the obligation in that year.
This prevents the state from spending money that it knows it must refund in the
next year. In sum, it puts the state in a much better financial situation to
deal with future revenue shortfalls, should they occur.
In FY 2002-03, the state's General Fund ended the year with a $223.1 million
reserve. This reserve exceeded the statutory reserve by $91.8 million. Based on
the September 2003 OSPB revenue projections, FY 2003-04 revenues will exceed the
statutory four percent reserve requirement by $8.2 million. The September 2003
OSPB forecast presented in Table 3 indicates that the FY 2003-04 budget is
balanced. When the reserve falls below two percent of appropriations, the
Governor must implement a plan to restore the reserve to two percent. The
September 2003 OSPB revenue forecast indicates that the FY 2003-04 reserve is
well above the two percent target ($114.9 million). Furthermore, the Governor
set aside $131.7 million of the federal grant money coming to the state through
the 2003 federal tax act in a separate account to be used to address revenue
shortfalls, should they occur, and thereby avoid further expenditure reductions.
General Fund revenues are expected to increase 4.3 percent in FY 2003-04
compared with FY 2002-03. The projected increase in General Fund revenues
results primarily from rising income tax revenues and estate taxes. Declines in
excise taxes will partially offset these General Fund revenue increases.
Debt Management. Under its constitution, the State of Colorado is not
permitted to issue general obligation bonds secured by the full faith and credit
of the State. However, certain agencies and instrumentalities of the State are
authorized to issue bonds secured by revenues from specific projects and
activities. The State enters into certain lease transactions which are subject
to annual renewal at the option of the State. In addition, the State is
authorized to issue short-term revenue anticipation notes. Local governmental
units in the State are also authorized to incur indebtedness. The major source
of financing for such local government indebtedness is an ad valorem property
tax. In addition, in order to finance public projects, local governments in the
State can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment bonds payable
from special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the option
of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the creation
of any multiple fiscal year debt or other financial obligation whatsoever,
except for refundings at a lower rate or obligations of an enterprise.
Each Colorado Trust is susceptible to political, economic or regulatory
factors affecting issuers of Colorado municipal obligations (the "Colorado
Municipal Obligations"). These include the possible adverse effects of certain
Colorado constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Colorado and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Colorado or
contained in Official Statements for various Colorado Municipal Obligations.
Connecticut Risk Factors
Economic Condition and Outlook. After almost eight years of solid economic
growth, Connecticut began to experience payroll job losses in Fiscal Year 2001.
In Fiscal Years 2001, 2002 and 2003 the state's payroll job losses totaled
13,700, 10,300 and 19,100 respectively. Payroll employment for Connecticut was
recorded at 1,653,000 jobs at the end of Fiscal Year 2003. The Fiscal Year 2003
job loss represented a 1.1 percent decline in employment as compared to a 0.4
percent job decline nationally during the same period. The first four months of
Fiscal Year 2004 have been more promising with preliminary figures showing
modest job growth.
Over the past ten years, Connecticut has experienced a shift in the
industrial make-up of its workers with manufacturing jobs being replaced by
service sector jobs. This is a trend that began several decades ago. In 1993,
17.7 percent of Connecticut workers were employed in manufacturing. By 2003,
this number stood at 12.5 percent. Conversely, service sector employment rose
from 36.7 percent to 40.7 percent of the workforce during this period. The
diversification of Connecticut's workforce has helped to mitigate the economic
consequences of declines in specific industries such as defense. Despite these
shifts, manufacturing continues to play an important role in Connecticut's
economic life contributing approximately 16 percent of Gross State Product.
Transportation equipment production (primarily aircraft engines and submarines)
is the dominant manufacturing industry in Connecticut. The state also has a
vibrant export sector with export growth of 11.3 percent in 2000 and 7 percent
in 2001. Exports contribute just over 5 percent to Gross State product.
Connecticut's unemployment rate was 4.9 percent at the end of Fiscal Year
2003 compared to a national rate of 6.4 percent. After a slight rise at the
beginning of Fiscal Year 2004, the state's unemployment rate dropped back to 4.9
percent in October 2003.
One reason for the state's relatively low unemployment rate is stagnation in
its labor force growth. Between Fiscal Years 1993 and 2003, Connecticut's labor
force actually declined slightly. Nationally during this period the labor force
was growing at an annual average rate of 1.4 percent. Reversing the trend of a
declining state labor force will prove important to Connecticut's long-term
economic growth potential. A slight acceleration in the state's population
growth has been observed since 1996. A continuation of this trend should also
contribute to labor force growth.
Connecticut continues to be a national leader in income measurements.
Connecticut's 2002 per capita income of $42,829 was 38.9 percent above the
national average. Connecticut's median household income of $53,347 was 26.3
percent above the national average. Although Connecticut continues to hold its
position as a high-income state, its comparative advantage over the rest of the
country has declined through the first half of 2003. Through the first two
quarters of 2003, Connecticut ranked 42nd in the country in personal income
growth. It is projected that as Connecticut emerges from recession and job
losses, its comparative income advantage will reemerge.
Connecticut's housing market remained strong throughout the recent recession.
Historically low interest rates contributed to the strong real estate activity.
Home sales advanced at double-digit growth rates and home prices in the greater
Hartford-New Haven area increased by 14 percent through the first three quarters
of 2003 as compared to the same period a year earlier.
Preliminary estimates point toward a growing national economy as 2003 ends.
This bodes well for Connecticut's economic future. In the third quarter of 2003,
preliminary estimates show Gross Domestic Product growth of 8.2 percent.
MAJOR GOVERNMENT INITIATIVES
Technology Initiative
In July 2003, the state implemented the first phase of a new fully
integrated, Internet based financial management and human resources system
called Core-CT. The system provides a single point of entry for all state
financial, human resources and payroll data. Core-CT contains central and agency
accounting, purchasing, accounts payable, assets, inventory, payroll, time and
attendance, worker's compensation, personnel and other business systems. The
human resources/ payroll component of Core-CT came on-line in October 2003.
The implementation of Core-CT is the product of several years of work to
improve the state's financial reporting and management information systems. This
work is continuing with the development of additional system modules. Core-CT
will ultimately allow the state to gather more detailed financial and personnel
data than had been available in the past, and to better analyze the
effectiveness and efficiency of governmental programs. Over the next decade it
is anticipated that Core-CT will help the state to improve its delivery of
services to the people of Connecticut and to reduce program costs through
efficiencies.
From an information technology perspective, Core-CT has allowed the state to
standardize and modernize its computer technology bringing uniformity to the
computers, programming languages, and data base packages utilized by state
government. Core-CT utilizes PeopleSoft ERP software.
Tax Policy Initiatives
By the beginning of Fiscal Year 2003, it was clear that the state was facing
its second straight year of a significant General Fund deficit. Estimates during
the first half of the fiscal year indicated that the deficit was in excess of
half a billion dollars and growing. In February 2003, a deficit mitigation plan
was enacted (Public Act 03-2). This plan raised General Fund revenue by an
estimated $439.8 million in Fiscal Year 2003 as detailed below.
o The personal income tax rate on the upper income bracket was raised
from 4.5 percent to 5 percent for an estimated revenue gain of $207.4
million.
o The sales and use tax base was expanded to include items such as media
services, advertising, health clubs and magazines, adding $10.4
million in revenue.
o The cigarette tax rate increased 40 cents to $1.51 per pack, which was
estimated to raise $27.5 million in additional revenue.
o A surcharge of 20 percent was imposed on the corporation tax with a
projected revenue gain of $32.4 million. Various other one-time
revenue enhancements were implemented to add an additional $70 million
to General Fund revenue in Fiscal Year 2003.
Downsizing the State's Workforce
In response to growing Fiscal Year 2003 General Fund deficit estimates, the
Governor and legislature took action to reduce state spending. A major part of
the spending reduction plan included downsizing the state's workforce.
Beginning in December 2002, the Governor laid off 1,886 General Fund
employees for estimated savings in Fiscal Year 2003 of $9.2 million. These
layoffs were in lieu of other state employee union concessions that were
rejected by the Governor.
To achieve additional personnel savings, the legislature included an early
retirement incentive program in its February deficit mitigation act. The program
was intended to create $36.9 million in Fiscal Year 2003 savings. Over 4,500
employees took advantage of the program.
The deficit mitigation plan contained an additional $129.4 million in
programmatic savings. Approximately half of this savings target was realized.
BUDGETARY AND OTHER CONTROL SYSTEMS
In November 1992, electors approved an amendment to the State Constitution
providing that the amount of general budget expenditures authorized for any
fiscal year shall not exceed the estimated amount of revenue for such fiscal
year. This amendment also provided a framework for placing a cap on budgeted
appropriations. Annual budgeted appropriations are capped at a percentage
increase that is based on either the five-year average annual growth in the
state's personal income or inflation, whichever is higher. Debt service
payments, certain statutory grants to distressed municipalities, and
appropriations required by federal mandate or court order are excluded from the
limits of the cap. The spending cap can be lifted if the Governor declares the
existence of extraordinary circumstances and the General Assembly by a
three-fifths vote approves appropriations in excess of the cap.
Budget control is maintained at the individual appropriation account level by
agency as established in authorized appropriation bills. The allotment process
exercises control over obligations or commitments. The Governor, through his
budget office, allots funds for both budgeted and non-budgeted accounts and
funds. The Governor is permitted to modify appropriations through the allotment
process under certain circumstances and within percentage limitations specified
by the General Assembly.
Elected officials, agency commissioners, directors of public benefit
corporations and agency managers are responsible for establishing internal
control structures. Good internal control systems ensure that: resource use is
consistent with laws, regulations and polices; resources are safeguarded against
waste, loss and misuse; and reliable data are obtained, maintained and fairly
disclosed in reports. The Office of the State Comptroller has worked to improve
the overall internal control environment in state government. This work has
included improvements to the central state accounting system that advance
internal control efforts.
CASH MANAGEMENT
The State Treasurer continually monitors cash flow to maximize the
utilization of cash resources. During the year, temporary balances are invested
in the state's short-term investment fund. This fund is a money market
investment pool with investments consisting of certificates of deposit, bankers'
acceptances, commercial paper, repurchase agreements, federal agency securities,
and other investments with various ranges of maturities. The investment income
and average yield rate for Fiscal Year 2003 for this fund was approximately $60
million and 1.64 percent respectively.
Bank balances at June 30, 2003 were $177.1 million of which about 67 percent
was insured or protected by collateral.
DEBT MANAGEMENT
The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of November 1, 2002, the State had authorized direct
general obligation bond indebtedness totaling $16,468,814,000, of which
$15,102,913,000 had been approved for issuance by the State Bond Commission and
$13,430,976,000 had been issued. As of November 1, 2002, net State direct
general obligation bond indebtedness outstanding was $8,973,711,000. In
addition, the State has limited or contingent liability on a significant amount
of other bonds. Such bonds have been issued by the following quasi-public
agencies: the Connecticut Housing Finance Authority, the Connecticut Development
Authority, the Connecticut Higher Education Supplemental Loan Authority, the
Connecticut Resources Recovery Authority and the Connecticut Health and
Educational Facilities Authority. Such bonds have also been issued by the City
of Waterbury and the Southeastern Connecticut Water Authority. As of November 1,
2002, the amount of bonds outstanding on which the State has limited or
contingent liability totaled $4,066,600,000.
The State is obligated to various cities and towns under grant programs to
fund certain school construction costs. As of June 30, 2002, the State's
outstanding obligation was $1,124,000,000, and the Commissioner of Education
estimated that future additional grant obligations might total $2,800,000,000.
General obligation bonds issued by municipalities are payable primarily from
ad valorem taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of these
is the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991.
The State opposed the petition. The United States Bankruptcy Court for the
District of Connecticut held that Bridgeport 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. State legislation
enacted in 1993 prohibits municipal bankruptcy filings without the prior written
consent of the Governor.
In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities finance projects by issuing
bonds that are not considered to be debts of the municipality. Such bonds may be
repaid only from revenues of the financed project, the revenues from which may
be insufficient to service the related debt obligations.
The State's general obligation bonds are rated Aa3 by Moody's and AA by both
Standard & Poor's and Fitch. As of August 22, 2002, Moody's and Standard &
Poor's had each revised its credit outlook on such bonds from "stable" to
"negative."
Regional economic difficulties, reductions in revenues, and increases in
expenses could lead to further fiscal problems for the State, its political
subdivisions, and its or their authorities and agencies. Such problems could
result in declines, possibly severe, in the value of their outstanding
obligations, increases in their future borrowing costs, and impairment of their
ability to pay debt service on their obligations.
LITIGATION
The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the State's Attorney General has opined that an adverse decision in
any of the following cases might have a significant impact on the State's
financial position: (i) an action involving claims by property owners in one of
the poorest towns in a regional school district asserting that the statutory
formula for cost allocation among towns in such a district denies the plaintiffs
equal protection because it requires all towns in the district to pay the same
per-pupil charge, seeking to enjoin use of the statutorily mandated system and
to require that a formula more favorable to the plaintiffs be devised; (ii)
litigation involving claims by Indian tribes and alleged Indian tribes to
portions of the State's land area; (iii) an action by certain students and
municipalities claiming that the State's formula for financing public education
violates the State's constitution and seeking a declaratory judgment and
injunctive relief; (iv) an action seeking to represent a class of certain
Medicaid recipients, claiming that the Commissioner of the Department of Social
Services fails to provide them adequate access to dental services and to
adequately compensate providers of such services, and seeking declaratory and
injunctive relief plus attorneys' fees and costs; (v) actions by several
hospitals claiming partial refunds of taxes imposed on hospital gross earnings
to the extent such taxes related to tangible personal property transferred in
the provision of services to patients; (vi) an action against the State and its
Attorney General by importers and distributors of cigarettes previously sold by
their manufacturers seeking damages and injunctive relief relating to business
losses alleged to result from the 1998 Master Settlement Agreement entered into
by most states in litigation against the major domestic tobacco companies and
challenging certain related so-called Non Participating Manufacturer statutes;
(vii) an action seeking to represent a class of juveniles, claiming that the
policy of strip searching all juveniles arriving at State detention centers is
unconstitutional, and seeking damages, declaratory and injunctive relief,
attorneys' fees, and costs; (viii) an action seeking to represent a class of
adults, challenging the policy or practice of strip searching all adult inmates
arriving at correctional centers, whether or not there is a reasonable suspicion
of the presence of weapons or contraband, and seeking damages, declaratory and
injunctive relief, attorneys' fees, and costs; (ix) a class action alleging that
the Department of Mental Retardation violates federal laws by maintaining a
waiting list for Medicaid services of Medicaid-eligible persons and by placing
persons in quasi-institutional settings without allowing them to choose more
integrated community settings, and seeking mandatory injunctive relief,
attorneys' fees, and costs; (x) two sales and use tax refund cases involving
claims of exemption for purchases by aircraft manufacturers of certain property
used by them in conducting certain research and development activities; (xi) a
purported class action on behalf of approximately 30,000 people, claiming that
the Commissioner of the Department of Social Services has violated federal law
by implementing a State statute reducing eligibility for Medicaid benefits to
individuals with incomes of up to 100% of the federal poverty level, from
incomes up to 150% of the federal poverty level, and seeking a continuation of
benefits for a longer period of time than the State statute provides; and (xii)
a purported class-action on behalf of laid-off State employees, alleging that
they were laid off in violation of their constitutional rights and claiming back
wages, damages, attorneys fees, and costs.
As a result of litigation on behalf of black and Hispanic school children in
the City of Hartford seeking "integrated education" within the Greater Hartford
metropolitan area, on July 9, 1996, the State Supreme Court directed the
legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. On December 28, 2000, the plaintiffs
filed a motion seeking to have the Superior Court monitor the State's compliance
with the 1996 Supreme Court decision. A hearing was held in April 2002, and the
case was settled early in 2003. Under the settlement agreement, the State will
be required to open two new magnet schools in the Hartford area in each of the
next four years and to substantially increase the voluntary inter-district
busing program in that area. The anticipated cost of compliance over the
four-year period is $45,000,000.
Each Connecticut Trust is susceptible to political, economic or regulatory
factors affecting issuers of Connecticut municipal obligations (the "Connecticut
Municipal Obligations"). These include the possible adverse effects of certain
Connecticut constitutional amendments, legislative measures, voter initiatives
and other matters that are described. The information provided is only a brief
summary of the complex factors affecting the financial situation in Connecticut
and is derived from sources that are generally available to investors and are
believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the preceding information. It is based in
part on information obtained from various State and local agencies in
Connecticut or contained in Official Statements for various Connecticut
Municipal Obligations.
Florida Risk Factors
Economic Outlook. Although the state's economy will grow at a pace slower
than originally anticipated in the near term, the outlook is still positive.
With strong economic foundations and sound economic policies, Florida is
rebounding faster than most other states and is expected to enjoy a healthy,
vibrant and prosperous economy. Governor Jeb Bush continues his commitment to
Florida's economic well-being by providing nearly $6 billion for diversifying
the state's economy, improving the state's strategic transportation system, and
assisting the state's communities in the Fiscal Year 2003-04 Recommended Budget.
The State's population is also expected to grow to 17,260,899 by the midpoint
(January 1, 2004) of fiscal year ending June 30, 2004. Population growth
provides stimulus to the State's economic expansion. Florida's economy has
continued to show its strength and resilience. Despite the devastation
experienced during the September 11 attacks coupled with the recession, the
State's economy is expected to recover. Although the possibility of a war
looming in the horizon has dampened the economy from growing at a faster pace,
the economic fundamentals remain strong. Such strength should provide impetus
for the State's economy to achieve more sustained growth.
Revenues and Expenditures. Governmental funds include general, special
revenue, capital projects and debt service funds. Revenues are recognized when
they are both measurable and available to finance current expenditures.
Florida's General Revenue budget for FY 2003-2004 will grow by 3 percent, or
$633 million, for a total of nearly $22 billion. Florida is projected to end the
current year, FY 2002-03, with a $140 million surplus in the General Revenue
fund and $960 million in its "rainy day fund." This contrasts sharply with most
other states, some of whom are experiencing budget deficits as high as 20
percent. Across the nation, the collective state budget shortfall is expected to
be $45 billion this year. In his speech, Governor Bush noted that fiscal
discipline, including spending restraint, vetoing so-called "turkeys," reducing
bureaucracy and other government efficiencies, a doubling of the states reserves
in the past four years as well as tax cuts were all instrumental in Florida's
relative success
Debt Management. Florida's Constitution and statutes require that Florida not
run a deficit in its budget as a whole, or in any separate fund within its
budget. Rather, its budget and funds must be kept in balance from currently
available revenues each fiscal year. If the Governor or Comptroller believes a
deficit will occur in any fund, by statute, he must certify his opinion to the
Administrative Commission, which then is authorized to reduce all Florida agency
budgets and releases by a sufficient amount to prevent a deficit in any fund.
Additionally, the Florida Constitution prohibits Florida from borrowing by
issuing bonds to fund its operations.
Section 11 of Article VII of the State Constitution authorizes the State to
issue general obligation bonds and revenues bonds to finance or refinance the
cost of state fixed capital outlay projects authorized by law. General
obligation bonds are secured by the full faith and credit of the State and
payable from the proceeds of various taxes. Revenue bonds are payable from funds
that receive legally restricted revenues. The Division of Bond Finance of the
State Board of Administration has the responsibility to issue all state bonds.
Florida's outstanding general obligation bonds at June 30, 2002, totaled
approximately $9.9 billion and were issued to finance capital outlay for
educational projects of local school districts, community colleges and state
universities, environmental protection and highway construction.
Bond Ratings. Florida maintains a high bond rating from Moody's Investors
Services (Aa2), Standard and Poor's Corporation (AA+) and Fitch, Inc. (AA) on
all State general obligation bonds (as of November 20, 2003). There can be no
assurance that such ratings will be maintained in the future. It should be noted
that the creditworthiness of obligations issued by local Florida issuers may be
unrelated to the creditworthiness of obligations issued by the State of Florida,
and that there is no obligation on the part of the State to make payment on such
local obligations in the event of default.
Litigation. Currently under litigation are several issues relating to state
actions or state taxes that put at risk a portion of General Revenue Fund
monies. There is no assurance that any of such matters, individually or in the
aggregate, will not have a material adverse affect on the state's financial
position.
Florida's 1997 tobacco settlement is expected to total approximately $13
billion over the initial 25-year period. As of June 30, 2002, the state has
received approximately $3.3 billion from the settlement. The settlement
anticipates that the state will use the funds for children's health care
coverage and other health-related services and for mandated improvements in
state enforcement efforts regarding the reduction of sales of tobacco products
to minors.
Each Florida Trust is susceptible to political, economic or regulatory
factors affecting issuers of Florida municipal obligations (the "Florida
Municipal Obligations"). These include the possible adverse effects of certain
Florida constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Florida and is derived from sources
that are generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any of
the preceding information. It is based in part on information obtained from
various State and local agencies in Florida or contained in Official Statements
for various Florida Municipal Obligations.
Georgia Risk Factors
Each Georgia Trust is susceptible to political, economic or regulatory
factors affecting issuers of Georgia municipal obligations (the "Georgia
Municipal Obligations"). These include the possible adverse effects of certain
Georgia constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided herein is only a brief summary of the
complex factors affecting the financial situation in Georgia and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the following information. It is based in part on
information obtained from various State and local agencies in Georgia.
Economic Condition and Outlook. Measured by output, the U.S. recession began
in the first quarter of 2001 and was over by the last quarter. Although down by
a cumulative one percent in the first three quarters, gross domestic product
(adjusted for inflation) increased by almost 3 percent in the fourth quarter.
For the year ending June 30, 2002, U.S. output climbed by 2.2 percent and
reached a level 1.6 percent higher than its pre-recession peak in the fourth
quarter of 2000. In Georgia's economy, there was also easing and recovery.
Personal income (adjusted for inflation) fell below its year-ago level in the
third quarter of 2001. However, in the fourth quarter, it rose again. By the
middle of 2002, Georgia's personal income had increased to a level 2.2 percent
above that of a year earlier and, like U.S. gross domestic product, stood 1.6
percent above its pre-recession high. Despite revivals in growth in output and
income, revenues flowing to the Georgia state government (the "State") in the
fiscal year (FY) ending in June of 2002 showed no resurgence. Instead,
collections by the State, about 90 percent from sales and income taxes, fell
below year-ago levels in each of the twelve months of the fiscal year. At the
end of FY 2002, consequently, net revenues were below those of FY 2001 by $684
million or 4.7 percent. Ostensibly, this decline was the first since a 3.4
percent drop in FY 1953. When price-adjusted, however, net revenues prove to
have slipped below prior-year levels in eight of the recessions which occurred
in the forty-nine intervening years. Nonetheless, the 6 percent decrease in the
State's "real" revenues in FY 2002 was the largest decline since a 10 percent
fall in FY 1975. Because the drop in revenues in FY 2002 occurred while
tax-related activity in both the national and the state economies was
strengthening, the malady currently emerging among states, "structural
imbalance," perhaps had infected Georgia as well.
For the year ending in June of 2002, Georgia's net earnings (adjusted for
inflation) went up by 1.2 percent. While less than the corresponding gain in
U.S. output of 2.2 percent, the choice of proxy is not of account. Rather, the
principal reason for deviation is the exaggerated reduction of labor usage in
Georgia as compared with the U.S. economy. Non-agricultural employment in
Georgia slipped by 2.2 percent from middle 2001 to middle 2002 whereas that in
the United States eased by only 1.0 percent in the same period. More telling,
non-agricultural employment in Georgia in June of 2002 was 3.3 percent below its
level at the boom's end in 2000. For the U.S., the decrease was just 0.1
percent. Importantly, the decline in Georgia was also the more pervasive. Except
for government, employment in each of the state's major industries in June of
2002 had fallen below its level in June of 2001. The percentage decreases varied
from 1.1 percent in manufacturing to 6.7 percent in transportation and public
utilities. Unlike the gain in its U.S. counterpart, employment in services
shrank as well. In the Metro-Atlanta area, which accounts for about 55 percent
of the state's employment, the shrinkages were as much as 150 percent of those
seen across the state. Whereas Georgia had been a national leader among the
states in employment gains during the expansion of 1995-2000, it had by the
middle of 2002 dropped precipitously to fiftieth or forty-ninth place in terms
of growth in employments in retail and wholesale trade, services, transportation
and public utilities, and in non-agricultural industries as a group.
In total, the output gain in Georgia from June of 2001 to June of 2002 was
lower than that for the United States in the same period. The deviation was a
reflection of a more marked and pervasive decline in employment in Georgia and,
it appears, of a slightly lower rate of gain in productivity in the state. The
characteristics of the state's markets which could account for these divergences
has not been investigated.
Although the State reaches into the private economy of Georgia with a host of
taxes and fees, roughly 90 percent of its net revenues are generated by taxes on
sales and on income. Therefore, it is not surprising that net revenues would be
aligned with gross state product and, even more closely, with personal income.
Of course, the State's tax base is much narrower than either of these economic
aggregates. Sales taxes are applicable, in the main, to durables and
non-durables purchased by individuals and businesses; income taxes apply to the
net incomes of households and businesses after exclusion of shielded amounts.
Over the past thirty years, the relationship between net revenue and personal
income has changed little. In fact, the ratio of revenues to income, an
indicator of "tax stability", has varied between 6.4 percent (FY 1974) and 5.7
percent (FY 1992). In FY 2002, the ratio returned to the 5.7 percent lower bound
of FY 1992. Significantly, revenues in FY 1992 had climbed by 1.4 percent, but,
in FY 2002, they fell by 4.7 percent.
Since the state's personal income climbed by 3.5 percent in FY 2002, the
potential for spending out of current income also increased. Yet, sales taxes
fell by 9.1 percent. Mostly to blame were slumping business purchases. In
particular, spending on structures and on equipment and software fell in each
quarter of the year. By the end of FY 2002, spending on structures had fallen by
18.7 percent and spending on equipment and software by 8.8 percent.
Within personal income, net earnings rose by 2.5 percent in FY 2002 and wage
and salaries advanced by 2.2 percent. Though current taxable incomes then
increased, individual income taxes decreased by 3.0 percent. Of account, were
sharp reductions in capital gains (not a part of personal income), higher
refunds on weakened incomes in tax-year 2001, and lowered advance payments to
cover expected tax liabilities in tax-year 2002.
Debt Administration. The Georgia State Financing and Investment Commission,
an agency of the State, is empowered by law to receive the proceeds from the
issuance of State of Georgia general obligation and guaranteed revenue debt from
the State, to provide the means for the proper application of the proceeds of
such debt, and to establish the procedure for protecting the holders of such
debt. Under the Constitution of the State of Georgia, the highest aggregate
annual debt service for all outstanding general obligation and guaranteed
revenue debt may not exceed 10 percent of the previous fiscal year's revenue
collections. As of September 30, 2003, the total debt service for general
obligation state debt for the State of Georgia totaled $8,393,468,661.25. The
total debt service for guaranteed revenue state debt, as of September 30, 2003,
was $663,451,106.25.
Bond Ratings. State of Georgia general obligation bonds are currently rated
as follows: Standard & Poor's, AAA (upgraded from AA+ on July 29, 1997); and
Moody's, Aaa (confirmed on October 14, 2003). There can be no assurance that
such ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local Georgia issuers may be unrelated
to the creditworthiness of obligations issued by the State of Georgia, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Cash Management. The State's investment policy is to maximize the protection
of State funds on deposit while accruing an advantageous yield of interest by
investing the funds in excess of those required for current operating expenses.
Cash is managed in pooled funds to maximize interest earnings. Types of
investments are dictated by legislation and are reviewed quarterly.
Risk Management. The State assumes substantially all risks associated with
the following: Claims of covered employees for medical insurance and group life
insurance benefits; Claims with respect to death or permanent disability of any
law enforcement officer, fireman, or prison guard in the line of duty (limited
to a five year disbursement totaling $75,000 or an immediate lump sum settlement
of $65,221 per occurrence); Claims of covered employees for workers'
compensation benefits; Claims of State employees for unemployment compensation
benefits; Liability claims against employees of the University System of
Georgia; and Liability claims in connection with abatement and removal of
asbestos and other hazardous materials.
The State also purchases commercial insurance coverage and self-insures to
cover risks associated with the following: State owned real and personal
property; Liability claims actionable under the law which parties may file
against the State, its agencies, officials, employees or appointees; Liability
claims against State authorities arising from their operations; and Honesty and
faithful performance bonds on employees.
Various risk control techniques are utilized to minimize accident-related
losses. These techniques include safety inspections, assistance in establishing
safety programs, training and certification of employees as American Automobile
Association instructors, and maintenance of an extensive safety library.
Kansas Risk Factors
Economic Factors and Next Year's Budgets and Rates. According to the Kansas
Department of Human Resources Kansas Labor Market Information News Release for
July 2003, employment in the State of Kansas for June 2003 was at its highest
level since July 1999. Compared to June 2002, employment was up 59,675. Modest
gains were shown in most industries. The unemployment rate was 5.1 percent for
June 2003, compared to 5.3 percent for last June and the seasonally adjusted
national rate for June 2003 of 6.4 percent.
The Kansas Department of Commerce and Housing reported in November 2003 that
Kansas's per capita personal income for 2002 was $29,141 and ranked 26th of all
the states. The national per capita personal income was $30,941 in 2002. The
cost of doing business in Kansas is 94.1 when compared to the national average
of 100.0.
The Wichita State University Center for Economic Development and Business
Research reported in the March 2003 Kansas's Economic Outlook that job creation
is expected to be slow during 2003. With layoffs continuing in the manufacturing
sector and employers reluctant to resume hiring in the wake of a sluggish
national recovery, the competition for the few available manufacturing jobs will
be fierce. The telecommunication and airline industries are expected to continue
to struggle in 2003. Most of the State's job gains are expected in the services
and construction sectors. The majority of the job gains are expected in the
Kansas City metro area. The Center for Economic Development and Business
Research expected total wage and salary employment in 2003 to increase modestly
adding 10,800 jobs or 0.8 percent.
The latest consensus revenue estimates as of November 3, 2003 revised the
estimates for fiscal year 2004 and provided the first estimates for fiscal year
2005. For fiscal year 2004, the estimate was increased by $11.9 million above
the previous estimate (made in April and subsequently adjusted for legislation
enacted after that point and for the implementation of the property tax
accelerator provisions by the Governor in August).
The revised SGF estimate of $4.484 billion represents a 5.6 percent increase
from the final fiscal year 2003 receipts. The fiscal year 2004 estimate includes
one-time moneys (tax amnesty, property and motor vehicle taxes, the deferral of
$50 million in tax refunds, and revenues from the Federal government) that for
the most part are not expected to continue. The initial estimate for fiscal year
2005 is $4.469 billion, which is $14.3 million below the newly revised fiscal
year 2004 estimate. This is largely due to the removal of many of the one-time
moneys from the receipts base.
Financial Highlights. The assets of the State exceeded its liabilities at
fiscal year ending June 30, 2003 by $10.7 billion. Of this amount, $1.2 billion
was reported as unrestricted net assets, which represents the amount available
to be used to meet ongoing obligations to citizens and creditors. Total net
assets decreased by $13.6 million (.1% decrease) in fiscal year 2003. Net assets
of governmental activities decreased by $25 million (.3% decrease), and net
assets of the business-type activities increased $11.8 million (.7% increase).
Fund Highlights. For fiscal year 2003, the governmental funds reported a
combined ending fund balance of $674 million, a decrease of $623 million in
comparison with the prior year. Of the total amount, $793 million represents the
fund balance of the Transportation Fund. There is ($631) million in the
"unreserved fund balances" with substantially all being in the Transportation
Fund and Transportation-Capital Project Fund. This unreserved ($631) million is
roughly 8.1% of the total governmental fund expenditures for the year. The
designated balances of $1,305 million include the reserve for inventory of $22
million and the reserve for encumbrances of $1,053 million.
Differences existed between the original budget and the final budget. Revenue
estimates were lowered by approximately $354 million and expenditure estimates
were also lowered by approximately $311 million. The original estimates provided
for an excess of revenues over expenditures of $129 million. The final budget
provided for an excess of $86 million of revenues over expenditures. In reality,
fiscal year 2003 was closed with an excess of revenues over expenditures of $108
million.
Revenues and Expenditures. During 1990, the Kansas legislature enacted
legislation-establishing minimum ending balances for the State General Fund to
ensure financial solvency for the state. The act established targeted year-end
State General Fund balances as a percentage of state expenditures for the
forthcoming fiscal year. This act was phased in over several years and currently
requires an ending balance of at least 7.5% of expenditures and demand
transfers.
Estimates for the State General Fund are developed using a consensus revenue
estimate approach. Pursuant to K.S.A. 75-6701, on or before each December 4 or
each April 4, the Director of the Budget and the Director of the Legislative
Research Department shall prepare a joint estimate of revenue to the State
General Fund for the current and the ensuing fiscal year. If legislation is
passed affecting State General Fund revenue, the two directors prepare a joint
estimate of such revenue. If the two directors are unable to agree on the joint
estimates, the Legislature must use the estimate of the Director of Legislative
Research and the Governor must use the estimate of the Director of the Budget.
(To date, the two directors have successfully reached agreement on these revenue
estimates.)
The focus of the State's governmental funds is to provide information on
near-term inflows, outflows, and balances of expendable resources. Such
information is useful in assessing the financing requirements. In particular,
unreserved fund balance may serve as a useful measure of a government's net
resources available for spending at the end of the fiscal year. As of the end of
the current fiscal year, governmental funds reported a combined ending fund
balance of $674 million, a decrease of $623 million in comparison with the prior
year. Part of this fund balance is reserved to indicate that it is not available
for new spending because it has already been committed to liquidate contracts
and purchase orders of the prior fiscal year in the amount of $1,053 million or
for inventory in the amount of $22 million.
The General Fund is the chief operating fund of the State. At the end of the
current fiscal year, unreserved fund balance of the General Fund was a negative
$54 million, while the total fund balance reached a negative $35 million. This
deficit fund balance was a result of year-end payables and commitments exceeding
available resources. As a measure of liquidity of the General Fund, it may be
useful to compare both unreserved fund balance and total fund balance to total
fund expenditures. Unreserved fund balance represents 1.3 percent of total
general fund expenditures, while total fund balance represents 0.8 percent of
that same amount. The fund balance of the General Fund decreased by $113 million
during the current fiscal year. This is a 144.9 percent decrease from the prior
year.
State investment in capital assets for its governmental and business-type
activities as of June 30, 2003, amounts to $10.8 billion. This investment in
capital assets includes land, buildings, improvements, equipment, infrastructure
and construction in progress. Infrastructure assets are items that are normally
immovable and of value only to the State, such as roads, bridges, streets and
sidewalks, drainage systems, lighting systems, and similar items.
The Kansas Department of Transportation used the modified approach for
valuing their infrastructure. The roadways' conditions are assessed using a
pavement management system. The bridges' conditions are assessed using the
Pontis Bridge Management System. The conditions for the roadways and the bridges
exceeded the Department's policy for minimum condition levels. The total
increase in the investment in capital assets for its governmental and
business-type activities for the current fiscal year was about 3% in terms of
net book value. The majority of capital asset expenditures were used to
construct or reconstruct roads and bridges. Depreciation charges for the year
totaled $130 million. Additional information on the capital assets can be found
in Note III of the notes to the financial statements of this report.
Debt Management. The State of Kansas finances a portion of its capital
expenditures with various debt instruments. Revenue bonds and loans from the
Pooled Money Investment Board finance most debt-financed capital improvements
for buildings, while "master lease" and "third-party" financing pays for most
capital equipment. The State of Kansas does not have the statutory authority to
issue general obligation bonds. The Legislature has authorized the issuance of
specific purpose revenue bonds and other forms of long-term obligations. The
State's total long-term debt obligation showed a net increase of $271 million
(9.4%) during the current year. This increase was primarily due to the increase
of $144 million in revenue bonds, $135 million in STAR bonds, and $31 million in
capital leases and was offset by the decreases of $37 million in claims and
judgments and $3 million in loan reserve payable.
The State of Kansas does not have the statutory authority to issue general
obligation bonds. The Legislature has authorized the issuance of specific
purpose revenue bonds and other forms of long-term obligations. KDFA is a public
body politic and corporate, constituting an independent instrumentality of the
State of Kansas. It was created to enhance the ability of the State to finance
capital improvements and improve access to long-term financing for State
agencies, political subdivisions, public and private organizations, and
businesses.
The total long-term bond debt obligations increased by $176 million during
the current fiscal year. The key factor in this increase was the issuance of
$144 million of Water Pollution Control Revenue Bonds Series 2002 and 2003.
Additional information on long-term debt obligations can be found in Note III of
the notes to the financial statements of this report.
Litigation. The State is a defendant in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Known
claims, asserted and unasserted, have been evaluated for the likelihood of an
unfavorable outcome. After review, it is the State's opinion, according to the
State's financial report, that its ultimate liability in these cases, if any, is
not expected to have a material adverse effect on the State's financial
position.
Ratings. As of September 2004, State of Kansas's general obligation bonds are
rated as AA+ by Standard & Poor's Ratings Services and Aaa by Moody's Investors
Service, Inc. There can be no assurance that such ratings will be maintained in
the future. It should be noted that the creditworthiness of obligations issued
by local Kansas issuers may be unrelated to the creditworthiness of obligations
issued by the state of Kansas, and that there is no obligation on the part of
the State to make payment on such local obligations in the event of default.
Each Kansas Trust is susceptible to political, economic or regulatory factors
affecting issuers of Kansas municipal obligations (the "Kansas Municipal
Obligations"). These include the possible adverse effects of certain Kansas
constitutional amendments, legislative measures, voter initiatives and other
matters that are described. The information provided is only a brief summary of
the complex factors affecting the financial situation in Kansas and is derived
from sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Kansas or
contained in Official Statements for various Kansas Municipal Obligations.
Kentucky Risk Factors
Economic Condition and Outlook. Both the Kentucky and U.S. economies grew
rapidly through most of the decade of the 1990s. With the apparent advent of the
"new economy" -- a phrase used to describe the economic prosperity derived from
the Internet and biotechnology-- many businesses and economists thought that the
era of business cycles was over. This optimism was shattered by the recession of
2001 as real Gross Domestic Product (GDP) went from a growth rate of 4.4% in
fiscal year 2000 to 1.8% in 2001 and a tepid 0.8% in 2002.
Fiscal year 2003 can best be described as a period of slow recovery from the
sharp downturn of the previous two years. Real GDP grew by 2.7% and industrial
output turned mildly positive from a decline of 4.3% in 2002 to 0.2% in 2003.
However, much of the increase in output was from rapid gains in productivity and
a slightly increased workweek. Employment continued to decline during 2003.
Nonagricultural employment in Kentucky dipped by 0.5%. Manufacturing continues
to be a key sector in Kentucky. It accounts for around 15% of all employment and
provides much of the high-end wages. Employment in manufacturing declined by
3.4%. Key areas like mining, trade, and transportation also experienced job
losses.
The only areas that showed gains were in the service-related industries,
especially in educational and health services. The outlook for fiscal year 2004
is much more promising. Not only is U.S. real GDP expected to increase by a
robust 3.5%, but employment in Kentucky is forecasted to go up by 0.5%. The job
loss in manufacturing, however, is expected to continue as many of the jobs lost
during the last three years have located elsewhere and are unlikely to return to
Kentucky. The areas that are expected to see growth are business services,
educational and health services, as well as trade, transportation, and
utilities.
Major Initiatives. In March of fiscal year 2003, the General Assembly enacted
the Commonwealth's 2002-2004 biennial budget when meeting in Regular Session.
Prior to that time, both the Executive and Judicial Branches of government had
operated under Spending Plans promulgated at the beginning of the fiscal year as
Executive Orders by the Governor and the Chief Justice, respectively. This was
unprecedented in Kentucky's history.
The Spending Plans represented a continuation of current levels of activity
exclusive of new bond issues and debt-financed construction activity. The March
2003 enactment of Appropriations Bills for the Executive and Judicial Branches
covered both fiscal years of the biennium, in large part incorporating actions
undertaken under the Spending Plans previously, and approved a significant
capital finance program financed with bonds for schools and local water and
sewer projects. Moreover, the General Assembly also passed Senate Bill 48
formally appropriating the funds required for expenditures previously approved
by the Secretary of the Finance and Administration Cabinet for which the Office
of the State Treasurer had "written a check." This measure essentially ratified
the actions undertaken in the Executive and Judicial Branch Spending Plans
preceding the effective dates of House Bill 269 and House Bill 294, the
Executive and Judicial Appropriations Acts, respectively.
The budget enacted by the 2003 Session of the General Assembly effected
further reductions in spending authority for most state agencies in both fiscal
year 2003 and fiscal year 2004 - with important exceptions, the most significant
of which was for elementary and secondary education. This action was taken in
recognition of a continued deterioration in state revenue collections as
compared with the estimates upon which the Spending Plans had been predicated.
Nonetheless, nearing the close of fiscal year 2003, it became clear that even
these reduced levels of General Fund revenues would not materialize. And, in
fact, the General Fund actual receipts were some $75 million short of the
revenue estimate as it had been most recently revised during the 2003 Session.
This shortfall was more than offset by a combination of factors including the
enactment of federal fiscal relief legislation by the U.S. Congress that
provided Kentucky with $69 million for ongoing General Fund-supported activity
(exclusive of Medicaid), as well as administrative cost savings measures that
resulted in lapses of unspent General Funds sufficient to close the year with a
modest surplus. This surplus of $24 million was credited to the Budget Reserve
Trust Fund, which had been appropriated to receive $5 million in fiscal year
2003 by the General Assembly.
In addition to the small surplus, the state General Fund ended the fiscal
year with an undesignated fund balance of $138 million - the amount that had
been intended in the enacted budget. This ending balance was then appropriated
by the legislature for expenditure in the 2004 fiscal year. The administrative
savings initiatives had first been set out in an Executive Order in December
2002 by the Governor. These measures entailed reductions in the state workforce
largely by attrition and hiring freezes, specified reductions in travel,
containment of energy costs, reductions in contracts for services, restrictions
on equipment purchases, and other fiscal austerity measures. These
administrative savings measures were subsequently incorporated in the
Appropriations Bill enacted by the General Assembly and were, in a number of
cases, expanded upon.
The state Road Fund ended the fiscal year almost exactly as had been budgeted
and estimated in the Spending Plan and the 2003 legislative session. A modest
surplus of $23 million attributable largely to lapsed expenditure authority
accruing from the administrative savings measures was made available to the Road
Fund Surplus Plan. The enacted budget also renewed authorization for the state
construction program to continue a policy of "pre-financing" road construction
projects. This was intended to "spend down" a multi-year accumulated Road Fund
balance in order to hasten completion of projects included in the enacted
Six-Year Road Fund program. However, the General Assembly constrained that
spending authority by including a budgetary limitation that a targeted $100
million Road Fund balance had to be maintained until such time as a Spending
Plan to manage cash flows had been submitted to and approved by the Secretary of
the Finance and Administration Cabinet. That review had not yet been finalized
by the close of the fiscal year.
Fund Highlights. As of the close of the fiscal year 2003, the Commonwealth's
governmental funds reported combined ending fund balances of $2.16 billion, a
decrease of $196 million in comparison with the prior year. Of this total amount
$690 million was reserved, and the balance of $1.47 billion was unreserved. The
unreserved undesignated fund balance of the General Fund was $184 million at
June 30, 2003. Enterprise funds reported net assets of $(61) million, of which
$713 million was restricted or invested in capital assets, and the balance of
$(774) million was unrestricted.
Debt Administration. The authority of the Commonwealth to incur debt is
described in Article X, Section 25, of the Kentucky Constitution. In 1987, the
Commonwealth created the Executive Bond Oversight Commission and the Legislative
Bond Oversight Commission. The commissions meet jointly to review all proposed
debt issuance. Both commissions must approve each financing plan before
obligations are issued. The legislation that created the bond oversight
commissions also created the position of Commonwealth Bond Advisor, who advises
the commissions and must approve the pricing and fees associated with any debt
issuance.
The Commonwealth of Kentucky's bonded debt decreased by $240 million to
$3,165,223, a 7% decrease during the current fiscal year. No general obligation
bonds were authorized or outstanding at June 30, 2003. The key factor in this
decrease was the payment of principal on bonds outstanding and no new bonds were
issued during fiscal year 2003.
The amount of debt service for general bonded debt, the ratio of this amount
to total expenditures for general governmental functions, and the amount of debt
per capita are useful indicators to citizens, investors, and management
regarding the Commonwealth's debt position. The data for 2003 is: Debt service
(thousands) - $460,256; Ratio to Total General Governmental Expenditures -
3.10%; Per Capita General Bonded Debt - $759. No general obligation bonds were
authorized or outstanding at June 30, 2003.
Cash Management. The Commonwealth's investments are governed by KRS 42.500 et
seq. and KAR Title 200 Chapter 14. The State Investment Commission, comprised of
the Governor, the Treasurer, Secretary of the Finance and Administration Cabinet
and gubernatorial appointees of the Kentucky Banker's Association, is charged
with the oversight of the Commonwealth's investment activities. The Commission
is required to meet at least quarterly, and delegates day-to-day investment
management to the Office of Financial Management.
At June 30, 2003, the Commonwealth's operating portfolio was approximately
$2.73 billion in cash and securities. The composition of investments was as
follows: U.S. treasury securities (19%); securities issued by agencies,
corporations and instrumentalities of the United States Government, including
mortgage backed securities and collateralized mortgage obligations (42%);
repurchase agreements collateralized by the aforementioned (13%); municipal
securities (5%); and corporate and asset backed securities, including money
market securities (21%). The portfolio had a current yield of 1.71% and an
effective duration of 1.55 years. Investment income for Fiscal Year 2003 was
$149 million versus $221 million the previous fiscal year.
The Commonwealth's investments are categorized into four investment pools:
Short-term, Intermediate-term, Long-term and Bond Proceeds Pools. The purpose of
these pools is to provide economies of scale that enhance yield, ease
administration and increase accountability and control. The Short-term Pool
consists primarily of General Fund cash balances and provides liquidity to the
remaining pools. The Intermediate-term Pool represents Agency Fund investments,
state held component unit funds and fiduciary fund accounts held for the benefit
of others by the Commonwealth. The Long-term Pool invests funds deemed
appropriate for the pool where liquidity is not a serious concern. The Bond
Proceeds Pool is where bond proceeds for capital construction projects are
deposited until expended for their intended purpose.
The Commonwealth engages in selective derivative transactions. These
transactions are entered into only with an abundance of caution and for specific
hedge applications to minimize yield volatility in the portfolio. The State
Investment Commission expressly prohibits the use of margin or other leveraging
techniques. The Commonwealth executes a variety of transactions which may be
considered derivative transactions, which include: the securities lending
program, over-the-counter treasury options, interest rate swaps, mortgage backed
securities, collateralized mortgage obligations and asset backed securities.
The Commonwealth has used over-the-counter treasury options since the
mid-1980s to hedge and add value to the portfolio of treasury securities. These
transactions involve the purchase and sale of put and call options on a covered
basis, holding either cash or securities sufficient to meet the obligation
should it be exercised. The State Investment Commission limits the total option
commitment to no more than twenty percent of the total portfolio of treasury and
agency securities. Historically, actual commitments have been less than ten
percent of the portfolio. The Commonwealth has had a securities lending program
since the mid-1980s. The Commonwealth is able to enter into either a principal
relationship or an agent relationship. In a principal relationship the
Commonwealth reverses its treasury and agency securities in exchange for 102% of
eligible collateral, marked to market daily. Eligible Collateral is defined as
securities authorized for purchase pursuant to KRS 42.500. In an agent program
the agent lends the Commonwealth's treasuries and agencies, takes the cash
received from the loan and invests it in securities authorized for purchase
pursuant to KRS 42.500. The income generated by these transactions is split
between the agent and the Commonwealth. At the present time the Commonwealth has
entered into an agent agreement that has a guarantee of 10 basis points of the
average market value of securities in the program.
On June 20, 2003, the State Investment Commission adopted Resolution 03-03,
which amended the Commonwealth's investment policy concerning asset-based
interest rate swaps. The change modifies the exposure limits from a $200 million
notional amount to a net market value approach, the absolute value of which
cannot exceed $50 million for all counter-parties. The Commonwealth engages in
asset-based interest rate swaps to better manage its duration and to stabilize
the volatility of interest income. As of June 30, 2003, the Commonwealth had no
asset-based swap transactions outstanding.
House Bill 5 of the First Extraordinary Session of 1997 was enacted on May
30, 1997. The Bill amended KRS 42.500 to authorize the purchase of additional
investment securities with excess funds available for investment. The new
classes of investment securities include: United States dollar denominated
corporate securities, issued by foreign and domestic issuers, including
sovereign and supranatural governments, rated in one of the three highest
categories by a nationally recognized rating agency, and asset backed securities
rated in the highest category by a nationally recognized rating agency.
KAR Title 200 Chapter 14 provides, among other things that: corporate
securities, inclusive of Commercial Paper, Banker's Acceptances and Certificates
of Deposit are limited to twenty-five million per issuer and a stated final
maturity of five years or less. Money market securities rated A1-P1 or higher
are limited to 20% of any investment pool and when combined with corporate and
asset backed securities (ABS) must not exceed 25% of any investment pool. United
States Agency Mortgage Backed Securities (MBS) and Collateralized Mortgage
Obligations (CMO) are also limited to a maximum of 25% of any investment
portfolio. ABS, MBS and CMO must have a weighted-average-life of four years or
less at time of purchase.
Risk Management. The Division of Risk Management (DRM) provides oversight and
coordinates risk management and insurance responsibilities among various state
agencies in accordance with KRS 42.0245. For the year ended June 30, 2003, the
Division assisted in achieving a cash savings of $478,000 by obtaining lower
bids from improved insurance bid specifications and by seeking broader markets.
Risk exposures in the amount of $10,000,000 were eliminated for state agencies'
properties that were either uninsured or underinsured. The Finance and
Administration Cabinet insures property, computers, vehicles, telephones,
fidelity bonds, and workers' compensation with a total insurance value $506
million annually for a premium of $285,000. New risk management initiatives
included developing a loss control program for the Administrative Office of the
Courts (AOC). Recommendations for a bonding program for the Court's Master
Commissioners will be fully implemented in fiscal year 2004.
Currently, the Commonwealth's two major self-insurance programs include the
State Fire and Tornado Insurance Fund for property and casualty coverage; and
the State Self-Insurance Fund for Workers' Compensation benefits. The Finance
and Administration Cabinet, in accordance with KRS 45A.022, purchases insurance
policies to transfer to insurance companies other financial and catastrophic
risks for various state agencies. One such coverage is the vehicle liability
insurance policy, which insures 8,793 vehicles for an annual premium of
$3,114,648.50. As of June 30, 1999, the Commonwealth terminated the self-insured
Kentucky Kare program and offered coverage for health benefits through
competitive bidding with the private health insurance markets. The Commonwealth
expended $628 million for health insurance for the calendar year 2002, covering
a group of 225,622 lives.
The State Fire and Tornado Insurance Fund, created in 1936, insures publicly
owned buildings and personal property, including computers, against loss from
fire, windstorms, hail, explosions, floods and earthquakes. All state agencies
are required to secure insurance from the Fund against these perils. Earthquake
and flood coverage for all state facilities are available as additional insured
perils in the Fund. The Fund, in accordance with KRS 56.070, is comprised of an
appropriation level of $5 million combined with premiums charged to state
agencies and universities. By statute, the Fund must have a reserve of $5
million at the close of each fiscal year.
Current Annual premiums of $6,795,205 insure $8,448,316,374 in property
assets for 6,900 facilities throughout the state. Included in this amount is
$825,683,605 in property assets for computers, telephones, fine arts, and other
insured assets. All losses are reinsured to limit fund liability to $500,000 for
any one loss to each subject risk. The premium for reinsurance is $4,460,450, a
16.2% increase from the previous fiscal year. For the year ended June 30, 2003,
the Fund paid 313 claims in the amount of $2,515,479.
The State Self-Insured Workers Compensation Trust Fund, established in 1979,
provides workers' compensation coverage for state employees. At June 30, 2003,
the State program had assets of $7.2 million and an unreserved accumulated
deficit of $87.8 million. Premium income for the fiscal year totaled $21.4
million. The unreserved accumulated deficit increased $9.4 million or 8.9% from
the previous fiscal year. The Fund carries reinsurance coverage for large
individual or incident claims of $5 million with limits of $10 million. The
amount of claims paid for the fiscal year was $18.7 million, which is $6.3
million less than fiscal year 2002. The Transportation Cabinet has a separate
self-insured workers' compensation fund for its employees. As of June 30, 2003,
the Fund has a claim liability of $22.7 million. Total claim payments for the
year were $3.6 million. The fund carries reinsurance coverage for claims
exceeding $1 million with limits of $10 million.
Bond Rating. As of September 2004, State of Kentucky general obligation bonds
have been given the following ratings: Standard & Poor's Ratings Services, AA-;
Moody's Investors Service, Inc., Aa2. There can be no assurance that such
ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local Kentucky issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Kentucky, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
Each Kentucky Trust is susceptible to political, economic or regulatory
factors affecting issuers of Kentucky municipal obligations (the "Kentucky
Municipal Obligations"). These include the possible adverse effects of certain
Kentucky constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Kentucky and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Kentucky or
contained in Official Statements for various Kentucky Municipal Obligations.
Louisiana Risk Factors
Economic Outlook. Located on the Gulf of Mexico and bounded by Arkansas,
Texas and Mississippi, Louisiana occupies a land area of 43,411 square miles and
serves a population of 4,483,000. The Executive, Judicial and Legislative
Branches govern the State as provided by the State Constitution of 1974.
The State provides a variety of services to citizens including education,
health care, public safety, road and highway development and maintenance, and
recreation. These services are financed primarily through taxes, fees, mineral
royalties and federal revenues, which are accounted for by various funds
(general fund, special revenue funds, capital project funds, etc.).
Major industries in Louisiana include agriculture, fishing, and processing of
mineral resources. The State leads the nation in the production of salt and
sulfur and ranks high in the production of crude petroleum, natural gas, and
natural gas liquids. The State rapidly industrialized in the 1960's and 70's and
has giant oil refineries, petrochemical plants, foundries, and lumber and paper
mills. Four of the ten busiest U.S. ports are located in Louisiana along the
lower Mississippi River (New Orleans, South Louisiana, Baton Rouge, and
Plaquemines).
The State financial reporting entity includes 51 active component units,
which are reported discretely in the financial statements. These component units
include colleges and universities, boards and commissions, ports, levee
districts, and other special purpose authorities.
Louisiana will be returning to the growth mode during 2004-05 after three
years of decline in which the State lost 1.2% of its workforce. The chemical
industry will continue to slide because of high natural gas prices, but the
transportation equipment manufacturing industry should offset this loss
somewhat. Large military contracts will boost the shipbuilding industry and
General Motors will open a new automotive plant. With several large construction
projects planned, the construction industry will recover those jobs lost with
the industrial construction decline associated with the chemical industry
losses.
As the State economy picks up, the retail trade, professional services, and
transportation industry should return to a better growth status. Health care
will continue to be a major source of new jobs. Louisiana improved from 45th to
41st in the ranks of per capita income among the 50 states due to a much milder
hit from the national recession than most other states. Personal income growth
should also rise accordingly in 2004.
Major Initiatives. Three bond rating agencies, Fitch, Standard & Poor's, and
Moody's, have raised Louisiana's bond rating based on its improved financial
profile. Fitch and Standard & Poor's raised the rating from an A to an A+ and
Moody's went from a bond rating of A2 to A1. Contributing factors in the bond
rating upgrade are due to the number of changes in the financial stability of
the State, which has stabilized the credit outlook with a continued conservative
approach to managing the budget and debt, as well as a strong cash position.
These bond rating increases were instrumental in helping Louisiana borrow money
at a record low interest rate for the sale of $290.8 million in general
obligation bonds for approved capital outlay projects.
Other noteworthy economic developments are the new industrial additions and
expansions coming to the State that will result in new high quality jobs. Some
of these are: Sasol North America, Inc., a chemicals manufacturer and marketer;
Plastipak Packaging, Inc., a plastic bottling facility supplying Procter &
Gamble; Conrad Aluminum, LLC, an aluminum fabrication facility; and four high
tech companies that specialize in geospatial areas that provide satellite and
aerial imaging. These new industries are reflective of the positive changes that
are being made to economic development and incentive programs that have been put
into place as part of the long-term economic development master plan, Louisiana:
Vision 2020.
Fund Highlights. Supplemental appropriations are usually passed before the
end of the fiscal year based on revisions to estimated revenues by the Revenue
Estimating Conference and the needs of various departments and programs. Final
budgeted revenues were approximately $654 million greater than originally
budgeted and final budgeted expenditures were approximately $1.3 billion greater
than originally budgeted. Transfers in from other funds make up the difference
between revenues and expenditures. Final budgeted expenditures in excess of
original budgeted expenditures include $201 million for the Department of the
Military, mainly for damage caused by Hurricane Lili and Tropical Storm Isidore;
$262 million for the Medicaid Program, due mainly to an increased number of
Medicaid patients; $250 million to the Department of Social Services; $67
million for coastal restoration and management; $108 million for the Job
Training and Placement Program; 103 million for higher education; and more than
$200 million for various other projects or services.
Final budgeted revenues in excess of original budgeted revenues is due to
$161 million in Federal aid received from the Federal Emergency Management
Agency (FEMA) for the damages caused by the Hurricane Lili and Tropical Storm
Isidore; $30 million as a result of an increase in the Federal matching rate for
certain medical assistance expenditures under the Medicaid Program; the receipt
of approximately $76 million in Federal aid as a result of the Job and Growth
Tax Relief Reconciliation Act of 2003; and more than $385 million in other
revenues.
Actual revenues were $431 million less than the final budgeted revenue and
actual expenditures were $1.3 billion less than final budgeted expenditures. The
difference between the final budgeted amounts and actual results can be
attributed to an over estimation of final budgeted revenues and transfers.
Consequently, there were less expenditures due to the lack of funds.
Revenue and Expenditures. The Louisiana Revenue Estimating Conference (the
"Conference") was established by Act No. 814 of the 1987 Regular Session of the
Legislature and given constitutional status in 1990 (Article VII, Section 10 of
the State Constitution). The Conference was established to provide an official
forecast of anticipated state revenues upon which the executive budget shall be
based, to provide for a more stable and accurate method of financial planning
and budgeting and to facilitate the adoption of a balanced budget as is required
by Article VII, Section 10(E) of the State Constitution.
In developing the official forecast, the Conference can only consider
revenues that are projected to accrue to the state as a result of laws and rules
enacted and in effect during the forecast period. The Conference is prohibited
from including revenues which would be raised by proposed legislation or rules.
During the 1990 Regular Session of the Louisiana Legislature, a constitutional
amendment was approved (Act No. 1096), granting constitutional status to the
existence of the Revenue Estimating Conference without altering its structure,
powers, duties or responsibilities which are currently provided by statute.
The General Fund is the chief operating fund of the State. The overall
performance of the General Fund declined $45 million due to expenditures
outpacing revenues as shown by comparing the restated net change in fund balance
in fiscal year 2002 to that of fiscal year 2003; however, the
unreserved/undesignated fund balance improved from a deficit of $34 million to
zero. Also, $18 million was designated in fiscal year 2003 due to an increase in
the unrealized gain in the investment portfolio of the State. This improvement,
in spite of the overall decline in the performance of the General Fund, was due
to the large reduction in the Reserve for Specific Purposes, which were $328
million in fiscal year 2002 and $231 million in fiscal year 2003 (a decline of
$97 million).
General Fund revenues and expenditures increased during the fiscal year by
$526 million and $701 million, respectively. The increases in expenditures can
be largely attributed to $363 million in additional education related
expenditures and $334 million in additional general government expenditures.
Some of the larger expenditures for education included higher education; the
Minimum Foundation Program, whose purpose is to provide a minimum foundation of
education to all public elementary and secondary school students in Louisiana;
and the Temporary Assistance for Needy Families (TANF) Program, which provides
extraordinary flexibility for funding a wide variety of employment and training
activities, supportive services, and benefits that will enable clients to get a
job, keep a job, and improve their economic circumstances. The increase in
general government expenditures is also partially due to the increased spending
in the TANF Program. The majority of the increase in General Fund revenues can
be attributed to an increase in Federal funding.
Revenues for the Bond Security and Redemption Fund decreased by $1.5 billion
(14%) in fiscal year 2003, which can mainly be attributed to larger than normal
revenues in fiscal year 2002 due to the sale of 60% of the tobacco settlement
during that year. The Louisiana Education Quality Trust Fund reported interest
earnings of $17.1 million (a 4% increase) and market gains of $13.3 million. The
fund balance for the Medicaid Trust for the Elderly increased to $907 million (a
17% increase) due mainly to a reduction in expenditures as a result of the
reduction in the amount paid for the Nursing Home Intergovernmental Transfer
Program and the increase in the Federal matching rate on certain expenditures.
Cash Management. The State Treasurer is responsible for managing all cash and
investments, with the exception of certain component units included in the
reporting entity that have independent powers to manage and invest their funds.
During fiscal year 2003, cash management and investment transactions managed by
the State Treasurer included checking accounts, certificates of deposit, U.S.
government and agency obligations, commercial paper, repurchase agreements, and
security lending agreements. Legal requirements for the investment of funds
maintained by the State Treasurer are discussed in Note 2 to the financial
statements.
For fiscal year 2003, the Treasury earned $107,514,714 on its fixed-income
investments for the General Fund. The investments earned a cash rate of return
of 4.00% during fiscal year 2003, which is a 12.7% decrease from the 4.58% rate
that earned $126,312,075 in the previous year. By comparison, the thirty-day
Treasury bill averaged 1.28% and the two-year Treasury note averaged 5.64%
during the same period.
The fixed income and equity investments of the Louisiana Education Quality
Trust Fund earned a total rate of return of 12.1% for the 2003 fiscal year,
which is a 764% increase from the 1.4% rate of return reported for the 2002
fiscal year.
Debt Management. The Louisiana Constitution of 1974 provides that the state
shall have no power, directly or indirectly, through any state board, agency,
commission or otherwise to incur debt or issue bonds except by law enacted by
two-thirds of the elected members of each house of the legislature. The State
authorizes, issues, and sells debt obligations. General obligation bonds issued
by the State are backed by the full faith and credit of the State. The State
also issues revenue obligations, which are secured by a pledge of revenues or
property derived from the operations of a program funded by the issuance of the
obligations.
Louisiana Revised Statutes (LRS) 39:1365(25) limits the legislative
authorization of general obligation bonds and other general obligations secured
by the full faith and credit of the state by prohibiting total authorized bonds
from exceeding an amount equal to two times the average annual revenues of the
Bond Security and Redemption Fund for the last three fiscal years prior to such
authorization. The bond authorization limitation is $20,458,126,000. The total
general obligation bonds authorized are $2,010,977,000 at June 30, 2003, or
9.83% of the bond authorization limit.
LRS 39:1402(D) limits issuance by the Louisiana State Bond Commission of
general obligation bonds or other general obligations secured by the full faith
and credit of the State. The highest annual debt service requirement for the
current or any subsequent fiscal years for general obligation debt, including
the debt service on any bonds or other obligations that are proposed to be sold
by the Louisiana State Bond Commission, may not exceed 10% of the average annual
revenues of the Bond Security and Redemption Fund for the last three fiscal
years completed prior to the issuance being proposed. The general obligation
debt issuance limitation is $1,022,906,000.
At June 30, 2003, the highest current or future annual general obligation
debt service requirement is $268,395,000, which represents 26.24% of the debt
issuance limitation. LRS 39:1367, enacted pursuant to a constitutional
amendment, provides that the State Bond Commission establish annually a limit on
the net State tax-supported debt issued subject to certain percentages
established in the statutes and based on General Fund and dedicated funds
revenues forecast by the Revenue Estimating Conference. The maximum amount of
net State tax-supported debt allowed by statute for fiscal year 2002-2003 is
6.50% of estimated General Fund and dedicated funds revenues established by the
Revenue Estimating Conference. During the fiscal year 2002-2003, the total net
State tax-supported debt paid was $479,908,872 or 6.13% of the estimated General
Fund and dedicated funds revenues established by the Revenue Estimating
Conference.
During fiscal year, 2003, $291 million in new general obligation debt and
$333 million in revenue bonds were issued, which increased the bonded debt by
$236 million. The additional general obligation bonds were issued for various
construction projects at several state parks, construction and renovations at
several universities, and various local projects. The bulk of the newly issued
revenue bonds, $275 million, can be attributed to the TIMED project, a new
program to widen highways, build bridges and provide transportation
improvements.
Risk Management. The primary government, through the Office of Risk
Management, retains risk for property, casualty, and worker's compensation
insurance, as well as coverage for all State property, with virtually no upper
limits. Auto liability, comprehensive, and collision coverage is provided for
the State fleet and other coverage, such as bonds, crime, aviation, and marine
insurance, is provided as needed.
Bond Rating: As of September 2004, State of Louisiana general obligation
bonds have been given the following ratings: Standard & Poor's Ratings Services,
A+; Moody's Investors Service, Inc., A1; and Fitch IBCA, Inc., A+. There can be
no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local Louisiana issuers
may be unrelated to the creditworthiness of obligations issued by the State of
Louisiana, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
Each Louisiana Trust is susceptible to political, economic or regulatory
factors affecting issuers of Louisiana municipal obligations (the "Louisiana
Municipal Obligations"). These include the possible adverse effects of certain
Louisiana constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Louisiana and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Louisiana or
contained in Official Statements for various Louisiana Municipal Obligations.
Maine Risk Factors
Certain Considerations. Generally. Maine's economy is based in large part on
its natural resources--fishing, farming, forestry and tourism. The nature of
these industries has meant that a significant portion of the state's employment
opportunities are seasonal and overall earnings lag behind national averages.
One of Maine's greatest impediments to faster economic growth is slow population
gain.
The Maine economy appears to have stabilized. Following the past few years of
robust economic growth, the State's employment actually declined 0.3% in 2002
and 0.2% in 2003. Meanwhile, as layoff announcements became more frequent, the
State's jobless rate started to tick upward from its 2002 rate of 4.5% to 5.1%
in 2003, but was still 0.9% below the national average of 6%. Income growth
slowed 4.4% in 2002 to an estimated 4.1% for 2003. However, economists are
projecting a positive gain of 0.8% in employment during 2004.
Even in a period of weakness, Maine's economic growth has, for the most part,
outpaced that of both the nation and the region. National employment growth over
the period was a negative 0.9% in 2002. With the nation experiencing deeper job
cuts than Maine, unemployment spiked to 6%, a full 1.5 percentage points above
the Pine Tree State. And for the first time in over a decade, Maine's income
gains outpaced the nation's in 2001 and hit the national average in 2002.
The primary reason for Maine's relative "vibrancy" appears to be that the
economy is far less invested in the technology sector which has been ravaged
through the stock market adjustment, taking its toll on technology dependent
regions like New England and on the nation as a whole. In Maine, during 2003,
taxable retail sales and construction contracts continued to improve.
Construction contracts increased by 12.4% and taxable retail sales increased
4.6% over 2002.
Businesses invested $146.3 million in Maine during 2003. Northern Maine saw
the addition of 166 new jobs added to the economy in diverse industries that
include manufacturing, computer services, and financial services. Central and
Western Maine added 126 new jobs in various sectors and saw the investment of
$112.5 million by International Paper at their Jay facility. Southern Maine
continued to grow economically as the Gulf of Maine Research Institute invested
$9.0 million and created 55 new jobs at the Portland Marine Research Center.
Columbia Air Services retained 15 jobs and invested $500,000 in their Trenton
facility to provide aviation support services.
Maine's employment is expected to grow once more in 2004 at a rate of 0.8%.
Most job gains will be in the non-manufacturing sector, led by retail trade,
health and other services. Manufacturing employment is projected to continue its
descent through the period, though the pace of decline will abate from -7% in
2003 to -3.2% in 2005. Further erosion in manufacturing employment will also
constrain income gains through the period. It appears that Maine was in a period
of stabilization in 2003 and the trend will continue through part of 2004 until
the US economy can develop enough traction to pull States out of their malaise.
Overall, Maine's growth should resume in 2004 at a slow but steady gait.
Major Initiatives. During 2003, the Governor proposed landmark legislation to
create a health plan that will extend comprehensive health insurance to small
employers, self-employed and the uninsured. Legislation was enacted in FY 2004
as a part of the plan establishing Dirigo Health. Dirigo Health is an
independent State agency designed to implement the Governor's vision of health
care reform in Maine.
Revenues and Expenditures. The State pools cash for a variety of State
agencies and public sector entities. Interest earned on pooled cash is allocated
to the various funds, generally based on their average equity balances. In
accordance with statute, the Treasurer of State may deposit State funds in any
of the banking institutions organized under the laws of this State, and any
national bank or federal savings and loan association located in the State. All
State money in any depository of State Government shall be to the credit of the
State but the Treasurer of State shall not withdraw any of the funds except upon
the authority of the State Controller.
The Treasurer of State may invest funds that exceed current obligations, with
the concurrence of the State Controller or the Commissioner of Administrative
and Financial Services, and the consent of the Governor. The list of approved
pool investments includes: U.S. Treasury Bills, Notes, Bonds and Agency
Securities, certain secured repurchase agreements, prime commercial paper,
tax-exempt obligations, banker's acceptances, and certain secured shares of an
investment company registered under the federal Investment Company Act of 1940.
Deposits with financial institutions are classified by collateral risk into
three categories. Category 1 is the amount of State deposits that are fully
insured or collateralized with securities held by the State or its agent in the
States name. Category 2 is the amount of deposits that are collateralized with
securities held by the pledging financial institution's trust department or
agent in the State's name. Category 3 is the amount of deposits that are neither
collateralized nor insured.
Debt Management. The Constitution of the State of Maine provides that the
Legislature shall not create any debt which exceeds $2,000,000 except to
suppress insurrection, to repel invasion or for purposes of war except when
two-thirds of the Legislature and a majority of the voters authorize the
issuance of debt. The Constitution also provides that tax anticipation loans
must be repaid during the fiscal year of issuance. Constitutional amendments
have been adopted which also allow the Legislature to authorize the issuance of
bonds to insure payments on revenue bonds of up to $4,800,000 for local public
school building projects; in the amount of up to $4,000,000 to guarantee student
loans; to insure payments on up to $1,000,000 of mortgage loans for Indian
housing; to insure payments on up to $4,000,000 of mortgage loans or small
business loans to war veterans; and to insure payments on up to $90,000,000 of
mortgage loans for industrial, manufacturing, fishing, agricultural, and
recreational enterprises. This last authorization has been limited statutorily
to a maximum of $87,500,000 available for issue through the Finance Authority of
Maine.
Risk Management. In general, the State is "self-insured" for health and
dental insurance, worker's compensation, tort liability, vehicle liability,
marine and aircraft, property losses, and retiree health insurance for State
employees and teachers. The Risk Management Division's activities include
analysis of and control over insurance coverage and risk exposure. Risk
Management funds the cost of providing claims servicing and claims payment by
charging premiums to agencies based on a review of past losses and estimated
losses for the current period.
As of September 2004, State of Maine's general obligation bonds are rated as
AA by Standard & Poor's Ratings Services, AA+ by Fitch IBCA, Inc. and Aa2 by
Moody's Investors Service, Inc. There can be no assurance that such ratings will
be maintained in the future. It should be noted that the creditworthiness of
obligations issued by local Maine issuers may be unrelated to the
creditworthiness of obligations issued by the state of Maine, and that there is
no obligation on the part of the State to make payment on such local obligations
in the event of default.
Each Maine Trust is susceptible to political, economic or regulatory factors
affecting issuers of Maine municipal obligations (the "Maine Municipal
Obligations"). These include the possible adverse effects of certain Maine
constitutional amendments, legislative measures, voter initiatives and other
matters. The information provided is only a brief summary of the complex factors
affecting the financial situation in Maine and is derived from sources that are
generally available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from various
State and local agencies in Maine or contained in Official Statements for
various Maine Municipal Obligations.
Maryland Risk Factors
Maryland's Economy. Maryland is doing a good job overall at promoting
economic development, despite a high number of business closings and poor
diversity in industry. For the third quarter of 2003, Maryland firms reported
both gains in revenue and employment growth. The percentage of firms reporting
revenue growth increased from 43% in the second quarter to 47% in the third
quarter of 2003. The percentage of firms reporting increases in employment
during the third quarter of 2003 increased from 31% to 35%. These sustained
increases are significant in that both revenue and employment gains are
indicators that Maryland firms have continued to experience positive growth
prior to and during the national economic recovery. Firms reporting increases in
revenues have occurred over the entire year. The gains in employment growth have
been continuing upward over the past four quarters. Employment gains have been
increasing at a continually faster pace since the fourth quarter of 2002. With
the latest data showing the State's unemployment rate nearly two percentage
points below the national average, only 25% of responding firms in 2003 stated
that labor market conditions in Maryland have hindered their ability to do
business. This indicates that firms are able to increase their revenues and
increase their employment despite a tight labor market.
In the third quarter of 2003, businesses continued to indicate a very
favorable attitude towards the business climate in Maryland. The percentage of
firms viewing the State as being business friendly decreased slightly and the
percentage of firms viewing the State as unfriendly to business also decreased
slightly. The percentage of businesses that rated the State as either being
pro-business or business friendly decreased from 59% in the second quarter to
57% in the third quarter of 2003. The percentage of businesses holding a
negative view of the State's business climate (rating Maryland as either
anti-business or business unfriendly) decreased from 13% in the second quarter
to 11% in the second quarter of 2003.
However, the businesses in Maryland have pessimistic indications for the
coming year. Maryland businesses have reported diminished expectations for
revenue and employment growth for 2004. The percentage of firms expecting
revenue growth in the coming year decreased from 76% to 63% in the third
quarter, while the percentage of firms expecting employment growth in 2004
decreased from 60% to 52% in the third quarter of 2003. While the percentage of
firms with expectations for great increases in employment and revenues in 2004
held nearly steady from the second to third quarters of 2003, the decline in the
percentage of firms expecting slight increases in revenues and employment drove
the overall number of firms expecting increases to decline.
Revenues and Expenditures. The State's combined net assets (government and
business-type activities) totaled $15.7 billion at the end of 2002, compared to
$16.1 billion at the end of the previous year. Specifically, the State's net
assets decreased by $407.5 million during the current fiscal year. This decrease
represents the degree to which ongoing revenues, mainly income taxes, have not
kept pace with ongoing expenses. The largest portion of the State's net assets,
78%, reflects investment in capital assets such as land, buildings, equipment,
and infrastructure, less any related debt to acquire those assets that is still
outstanding. The State uses these capital assets to provide services to
citizens. Consequentially, these assets are not available for future spending.
Although the State's investment in capital assets is reported net of related
debt, it should be noted that the resources needed to repay this debt must be
provided from other sources, since the capital assets themselves cannot be used
to liquidate these liabilities.
The total primary government revenues for fiscal year 2002 were
$19,761,400,000, while the expenditures totaled $20,194,500,000. Governmental
activities in fiscal year 2002 resulted in a decrease to the State's net assets
of $445.3 million. This decrease occurred primarily because tax revenues
declined, due to a gradual downturn in the economy and the phase-in of an income
tax reduction. In addition expenditures increased during the year, although cost
containment measures kept the fund balance positive.
As of the end of fiscal year 2002, the State's governmental funds reported a
combined fund balance of $2.3 billion, a decrease of $1.1 billion from the prior
year. The combined fund balance includes $269.3 million in unreserved fund
balance, of which $265.5 million is in the general fund.
The general fund is the chief operating fund of the State. At the end of
fiscal year 2002, the unreserved, designated fund balance of the general fund
was $265.5 million, while total fund balance reached $1.6 billion. As a measure
of the general fund's liquidity, it may be useful to compare both unreserved
fund balance and total fund balance to total fund expenditures. Unreserved fund
balance represents 1.8% and total fund balance represents 10.9% of general fund
expenditures. The fund balance of the Stategeneral fund decreased by $839.8
million during fiscal year 2002. Although federal revenues, charges for services
and other licenses and fees increased over the previous year's revenues,
overall, general fund revenue decreased by $335.8 million or 2.3%. This was due
primarily to the final year of the phased in income tax reduction, a 50% decline
in capital gains tax revenue and a decline in interest earnings. In addition, by
the end of the year, overall general fund expenditures increased by $1.1 billion
or 8.1%, after taking into effect certain revenue transfers of prior years that
were recorded as expenditures in the current fiscal year. Expenditures increased
primarily due to increased spending for primary and secondary education, higher
education, foster care and child welfare programs, medical assistance, inmate
services, housing assistance projects, and land preservation programs.
Debt Management. Maryland's general obligation bonds have been rated Aaa by
Moody's Investors Service and AAA by Standard and Poor's and Fitch Investors,
Inc., for a number of years. There can be no assurance that such ratings will be
maintained in the future. It should be noted that the creditworthiness of
obligations issued by local Maryland issuers may be unrelated to the
creditworthiness of obligations issued by the State of Maryland, and that there
is no obligation on the part of the State to make payment on such local
obligations in the event of default.
The State is empowered by law to authorize, issue and sell general obligation
bonds, which are backed by the full faith and credit of the State. The State
also issues revenue dedicated bonded debt for the Department of Transportation
and various business-type activities whose payment for principal and interest
comes solely out of revenues received from the respective activities. This debt
is not backed by the State's full faith and credit. At June 30,2002, the State
had total bonded debt of $7.7 billion. Of this amount $3.6 billion was debt
backed by the full faith and credit of the State. The remaining $4.1 billion was
revenue bonds secured solely by the specified revenue sources. The total debt
increase for the State in the current fiscal year was 7.1% (3.8% related to
general obligation bonds and 11.4% related to revenue bonds).
During fiscal year 2002, the State issued general obligation debt totaling
$528 million at a premium of $41.2 million, including $109.9 million to
refinance existing debt to take advantage of favorable interest rates. The
refinancing is expected to decrease future debt service payments by $10.2
million. State statutes limit the amount of Consolidated Transportation Bonds
that may be outstanding as of June 30 to the amount established in the budget
and not to exceed $1.2 billion. The aggregate principal amount of those bonds
that was allowed to be outstanding as of June 30,2002, was $799.0 million. This
amount is in excess of the actual bonds outstanding ($718 million).
Each Maryland Trust is susceptible to political, economic or regulatory
factors affecting issuers of Maryland municipal obligations (the "Maryland
Municipal Obligations"). These include the possible adverse effects of certain
Maryland constitutional amendments, legislative measures, voter initiatives and
other matters that are described. The information provided is only a brief
summary of the complex factors affecting the financial situation in Maryland and
is derived from sources that are generally available to investors and are
believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the following information. It is based in
part on information obtained from various Maryland and local agencies in
Maryland or contained in Official Statements for various Maryland Municipal
Obligations.
Massachusetts Risk Factors
Economic Outlook. Massachusetts and the rest of the nation have in the
midst of a profound economic downturn. Even though the Commonwealth of
Massachusetts is home to many world-renowned institutions of medicine and higher
education, both public and private, keeping the economy relatively stable and
full of ingenuity, no sector is immune from this current recession. The
Commonwealth, with an international reputation for medical, cultural,
historical, and educational institutions, remains the economic and educational
hub of New England. The Commonwealth's economy remains diversified but its
strongest component is its knowledge-based technology and service industries.
Massachusetts' infrastructure provides strong support for this
knowledge-based economy. There are over 120 colleges and universities located in
Massachusetts, and the 2000 US Census has estimated that 35% of the residents
over age 25 have earned bachelor's degrees, compared to an estimate of 25.1% for
the United States as a whole. The capital, Boston, has over 20 hospitals and
three medical schools.
As of September 2003, the seasonally adjusted unemployment rate for the
Commonwealth was 5.3%. This is below the national average rate of 6.1%.
Revenues and Expenditures. As of the close of fiscal year 2002, the
Commonwealth's governmental funds reported a combined ending fund balance of
nearly $2.5 billion. Of the $2.5 billion: 226 million, net deficit, represents
the "unreserved and undesignated fund balances" largely due to a $1.1 billion
deficit in the local aid fund and a nearly $540 million deficit in the highway
capital projects fund due to the timing of bond sales. The unreserved general
fund balance of over $1.4 billion offsets these deficits. Governmental reserves
total nearly $2.7 billion. They include $86 million for continuing
appropriations, $881 million for stabilization, $1 billion reserve in bond
proceeds reserved for capital projects, largely connected with the Central
Artery / Tunnel (CA/T) project and $351 million reserved for retirement of
indebtedness. During the year, the reserve for stabilization saw a dramatic
decline due to measures passed to balance the budget. Other reserves that were
used in this fashion are depicted at the left. The unreserved and undesignated
deficit balance of nearly $226 million is roughly 0.7% of the $30 billion of
governmental fund expenditures for 2002. To meet the fiscal challenges of fiscal
2002 and beyond, the Commonwealth took a series of measures to remain in fiscal
balance. The Commonwealth transferred over $1 billion out of stabilization
during fiscal 2002 including $442 million transitioned from fiscal 2001. An
additional $550 million will be transferred from stabilization in fiscal 2003.
Debt Management. The Commonwealth funds its capital appropriations by
authorizing the issuance of long-term bonds. The Commonwealth issues short-term
and long-term debt that is primarily of a general obligation nature. Debt that
is general obligation in nature is backed by the full faith and credit of the
Commonwealth and paid from governmental funds. The Commonwealth's outstanding
governmental debt increased by nearly $956 million, net of refunding issues, in
fiscal 2002, largely for bonds issued related to the Central Artery / Tunnel
project. In summary, nearly $2.9 billion in general, special obligation and
refunding debt was issued.
Bond Ratings. As of November 2003, the general obligation bonds of the
Commonwealth of Massachusetts were rated AA- by Standard & Poor's Ratings
Services , Aa2 by the Moody's Investors Service, Inc.'s and AA- by Fitch IBCA,
Inc.'s (formerly Fitch Investors Service, L.P.). There can be no assurance that
such ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local Massachusetts issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Massachusetts, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
Each Massachusetts Trust is susceptible to political, economic or
regulatory factors affecting issuers of Massachusetts municipal obligations (the
"Massachusetts Municipal Obligations"). These include the possible adverse
effects of certain Massachusetts constitutional amendments, legislative
measures, voter initiatives and other matters. The information provided is only
a brief summary of the complex factors affecting the financial situation in
Massachusetts and is derived from sources that are generally available to
investors and are believed to be accurate. No independent verification has been
made of the accuracy or completeness of any of the preceding information. It is
based in part on information obtained from various State and local agencies in
Massachusetts or contained in Official Statements for various Massachusetts
Municipal Obligations.
Michigan Risk Factors
Investors should be aware that the economy of the State of Michigan has, in
the past, proven to be cyclical, due primarily to the fact that the leading
sector of the State's economy is the manufacturing of durable goods. While the
State's efforts to diversify its economy have proven successful, as reflected by
the fact that the share of employment in the State in the durable goods sector
has fallen from 33.1 percent in 1960 to 17.9 percent in 1990 and to 14.9 percent
in 2000, durable goods manufacturing still represents a sizable portion of the
State's economy.
In September of 2000, Standard & Poor's raised its rating on the State's
general obligation bonds to "AAA" but in December of 2003 downgraded that rating
to "AA+". In October of 2000, Moody's Investors Service, Inc. raised the State's
general obligation bond rating to "Aaa" but in November of 2003 reduced that
rating to Aa1. In April, 1998, Fitch IBCA, Inc., raised its rating on the
State's general obligation bonds to AA+.
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe. In addition, as described in the State's
comprehensive annual financial report on file with the Nationally Recognized
Municipal Securities Information Repositories, the State is party to a number of
lawsuits and legal actions, some of which, if determined adversely to the State,
could have a materially adverse impact on the State's finances.
Consistent with the down-turn in the national economy, the State has been
experiencing an economic slow-down, which has resulted in reductions in
anticipated State revenues. On November 6, 2001, the State Legislature completed
required approvals of an executive order presented by the Governor which reduced
2001-2002 appropriated State expenditures by approximately $540 million. The
State Legislature also appropriated transfers from the Budget Stabilization Fund
to avoid a deficit as of September 30, 2001 and September 30, 2002. These
transfers reduced the balance in the Budget Stabalization Fund to approximately
$145 million at September 30, 2002, and it is expected that the fund will reach
a zero balance by September 30, 2003.
In December of 2002, the Governor proposed and the legislature approved cuts
of $462.9 million on the 2002-03 fiscal year general fund budget, including cuts
of approximately 2.0% in the public university appropriations and 3.5% in state
revenue sharing to local municipalities. The impact of the reduction on local
units of government will vary depending on, among other factors, the percentage
of their own budgets which comes from revenue sharing.
On January 14, 2003, the State's revenue estimation conference predicted
additional 2002-03 fiscal year shortfalls of approximately $143 million in the
general fund and approximately $134 million in the school aid fund. In response,
the Governor proposed and the legislature approved executive order cuts in state
payments to local school districts of $134 million and cuts in general fund
expenditures of $158.3 million, including an additional 1.5% cut in funding for
the State's public universities.
In the summer of 2003, the Governor and the legislature approved the budget
for the 2003-04 fiscal year. The budget addressed a projected shortfall of
approximately $1.9 billion through a combination of expenditure cuts and revenue
increases. Appropriations to higher education and revenue sharing payments to
local units of government were each cut. Basic school aid was restored to its
original budgeted 2002-03 level, but categorical grants to schools were also
reduced. In October of 2003, the State's revenue estimating conference projected
an additional shortfall of $900 million in the 2003-04 revenues. In December of
2003 the Governor and the state legislature acted to close this gap with a
combination of expenditure cuts and revenue increases. Included in the cuts were
appropriations to higher education and basic school aid. Included in the revenue
enhancements was a 6 month delay in the reduction from 4.0% to 3.9% in the
State's income tax rate, originally scheduled for January 1, 2004.
On February 12, 2004, the Governor released her proposals for the 2004-05
budget, including measures to close a projected funding gap in the general fund
of approximately $1.3 billion. The Governor's proposals include $494 million in
spending cuts, $391 million in revenue increases and $386 in expenditure
re-directions and other fund shifts. Included in the expenditure cut proposals
is $184 million from revenue sharing to Michigan's counties, to be made up by a
shift in the collection date of counties' property taxes from the winter to the
summer. The legislature is currently considering the Governor's proposals.
On May 18, 2004, the State's representatives of the State's Treasury
Department and legislative fiscal agencies predicted an additional shortfall in
the current fiscal year's revenues and based on that prediction, the State
Treasurer is predicting a current year budgetary imbalance of approximately $250
million. In addition, current estimates of the State Treasurer are that the
2004-05 fiscal year revenues will be short of projected expenditures. The
Governor and the State Legislature are currently working to address the 2003-04
and 2004-05 projected budgetary imbalances through revenue increases,
expenditure cuts, or both.
In November of 1997, the State Legislature adopted legislation to provide for
the funding of claims of local school districts, some of whom had alleged in a
lawsuit, Durant v. State of Michigan, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution. Under
this legislation, the State paid to school districts which were plaintiffs in
the suit approximately $212 million from the Budget Stabilization Fund on April
15, 1998, and will be required to pay to other school districts an estimated
amount of $632 million over time. Those payments, which commenced in fiscal year
1998-99, are being paid from the Budget Stabilization Fund and the General Fund,
half in annual payments over 10 years and half in annual payments over 15 years.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the prior calendar
year. In the event that the State's total revenues exceed the limit by 1 percent
or more, the Michigan Constitution of 1963 requires that the excess be refunded
to taxpayers. In order to comply with this requirement, the State refunded
approximately $113 million through income tax credits for the 1995 calendar
year.
On March 15, 1994, Michigan voters approved a school finance reform amendment
to the State's Constitution which, among other things, increased the State sales
tax rate from 4% to 6% and placed a cap on property assessment increases for all
property taxes. Concurrent legislation cut the State's income tax rate from 4.6%
to 4.4%, reduced some property taxes and altered local school funding sources to
a combination of property taxes and state revenues. The legislation also
contained other provisions that alter (and, in some cases, may reduce) the
revenues of local units of government, and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional amendment
and related legislation under various economic conditions which may occur in the
future cannot yet be accurately predicted, investors should be alert to the
potential effect of such measures upon the operations and revenues of Michigan
local units of government.
In addition, the State Legislature in 1995 adopted a package of state tax
cuts, including the 1998 repeal of the intangibles tax, an increase in exemption
amounts for personal income tax, and reductions in single business tax.
Legislation was enacted that will reduce the personal income tax rate from 4.4
percent to 3.9 percent over a period of years. Beginning in Year 2000, the rate
will be 4.2%; 2001, 4.2%; 2002, 4.1%; 2003, 4.0%; beyond, 3.9%. The reduction to
3.9% has been deferred to July 1, 2004. The single business tax will be totally
repealed by 2010.
Although all or most of the Bonds in the Michigan IM-IT Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of bonds
issued by the State Building Authority, the dependency of the State Building
Authority on the receipt of rental payments from the State to meet debt service
requirements upon such bonds. In the 1991 fiscal year, the State deferred
certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level otherwise
provided under formulas in each of those years.
The Michigan IM-IT Trust may contain general obligation bonds of local units
of government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978, or
issued after December 22, 1978 with the approval of the electors of the local
unit, are payable from property taxes levied without limitation as to rate or
amount. With respect to bonds issued after December 22, 1978, and which were not
approved by the electors of the local unit, the tax levy of the local unit for
debt service purposes is subject to constitutional, statutory and charter tax
rate limitations. In addition, several major industrial corporations have
instituted challenges of their ad valorem property tax assessments in a number
of local municipal units in the State. If successful, such challenges could have
an adverse impact on the ad valorem tax bases of such units which could
adversely affect their ability to raise funds for operation and debt service
requirements.
Minnesota Risk Factors
Economic Outlook. Minnesota's economy struggled during fiscal year 2003 as
both the U.S. economy and the state economy failed to perform as well as is
typical following a recession. The statewide unemployment rate held relatively
constant, averaging just 4.35 percent over the fiscal year, well below the U.S.
average of 5.9 percent. But, by the end of the fiscal year, Minnesota payroll
employment had fallen by 19,500 jobs, or 0.7 percent. Nationally, payroll
employment declined by 0.4 percent. As in the rest of the nation, Minnesota's
manufacturing employment was particularly weak, falling by 13,700 jobs (3.8
percent) during the fiscal year. During the same period, U.S. manufacturing
employment was even weaker, dropping by 4.2 percent.
Minnesota personal income grew 3.4 percent during fiscal year 2003, 0.4
percentage points faster than the national average. Strong growth in farm
income, due to above average yields and the higher prices brought on by
drought-reduced yields elsewhere, is only part of the explanation. Non-farm
personal income also grew more rapidly than the national average. In calendar
2002, personal income per capita in Minnesota was $34,071, up 3.1 percent from
calendar 2001 levels, and 110 percent of the U.S. average. Minnesota now ranks
seventh among states in per capita personal income.
The economy in fiscal year 2004 is expected to be stronger than it has been
in recent years. Nationally, job growth is expected to resume, and forecasts of
real Gross Domestic Product growth rates of 4 percent or more are common.
Minnesota's economy is expected to strengthen as well, but projected growth
rates for the state are slightly below the U.S. average. The statewide labor
market is improving, with preliminary October payroll employment estimates
showing that, on a seasonally adjusted basis, more than 13,000 jobs have been
added since June. That turnaround in employment appears to have occurred sooner
in Minnesota than nationally. Even though U.S. manufacturing employment
continues to decline, manufacturing employment in Minnesota is up, with more
than 2,700 jobs added since the start of fiscal year 2004. Minnesota personal
income is now forecasted to grow by 3.9 percent during fiscal year 2004,
slightly less than the projected national growth rate of 4.1 percent. Total
wages and salaries in Minnesota are projected to increase by 3.7 percent.
Nationwide wages and salaries are expected to grow by 3.3 percent.
Revenues and Expenditures. Minnesota operates on a two-year budget cycle (a
biennium). The governor's biennial budget is presented to the legislature in
January of odd numbered years for the upcoming biennium. State statutes and its
constitution require a balanced budget.
Several significant events occurred prior to and during fiscal year 2003. To
meet the constitutional requirements of a balanced budget for the General Fund,
Minnesota legislators spent the majority of the 2002 and 2003 legislative
sessions addressing shortfalls projected for fiscal year 2003 as well as the
2004-2005 biennial budget. As previously stated, the state's Constitution and
Statutes require that the state have a balanced budget for each two-year budget
period. When the original budget for fiscal year 2003 was enacted, a positive
General Fund balance of $235 million on a budgetary basis was projected. The
state economy, reflecting the national recession in early 2001, did not show the
recovery expected and revenue shortfalls resulted.
Minnesota budgets and manages its financial affairs on a budgetary basis,
which primarily uses a cash basis of accounting. Revenues are recorded when
received and expenditures are recorded when the payments are made with the
exception that, at year-end, encumbered amounts are included in the expenditures
of the year appropriated for budgetary reporting. Generally Accepted Accounting
Principals (GAAP) requires that the modified accrual basis of accounting be used
to prepare governmental fund statements. The modified accrual basis of
accounting recognizes revenues when they become both measurable and available to
finance operations of the fiscal year or liquidate liabilities existing at
fiscal year end. Expenditures are recognized when a liability occurs.
Because of the budget shortfalls and the need to use state reserves, the
result has been an overall reduction in the General Fund's fund balance. On a
budgetary basis, the state's General Fund ended fiscal year 2003 with an
undesignated balance of $196 million. On a GAAP basis, however, the accruals of
revenue and expenditures required by the modified accrual basis of accounting
resulted in a decrease of $1.203 billion from the budgetary General Fund
balance, which resulted in a reported unreserved year-end fund balance deficit
of $1.007 billion.
Accrued liabilities for two major state programs, entitlement aid programs
for school districts, and human services medical assistance, which are paid on a
reimbursement basis, have historically exceeded accrued revenue. However, large
General Fund designated reserves and undesignated balances have, in the past,
exceeded this net accrued liability, and the state has reported positive GAAP
General Fund balances. It is anticipated that the General Fund will continue to
report a GAAP deficit for the next biennium.
However, the legislature acted to replenish General Fund reserves over the
next two years. A total of $522 million was designated by appropriation in
fiscal year 2004-05. This will add to the $104 million reserve balance at
year-end to bring the reserve to $631 million by fiscal year 2005. Finally,
statutory provisions require that any forecast balances first be allocated to
restore the cash flow reserve to $350 million, then to increase the budget
reserve to a total of $653 million.
Legislation/Litigation. On May 8, 1998, Minnesota settled its lawsuit with
the tobacco industry, resulting in a new revenue stream for the state. A small
portion of the settlement ($202 million) was dedicated by the courts for
specific purposes and will not be a part of the state's general revenues. A
larger portion of the settlement (the one-time payments) was dedicated by the
Governor and the legislature to be placed into endowments for specific purposes.
The balance (the annual payments) will be deposited into the state's General
Fund.
The 2002 legislature expanded the uses of one-time tobacco settlement funds
to allow for short-term borrowing by the state effective July 2003. The
legislature created the endowments in response to the 1998 settlement and
dedicated the proceeds to medical education and tobacco prevention. Up to five
percent of the endowment's value is appropriated each year for health programs.
After the recent law changes, appropriations may still be issued for medical
education and tobacco prevention, but the state may use endowment balances if
necessary to meet short-term cash flow needs.
At any given time there may be numerous civil actions pending against the
state of Minnesota which could, if determined adversely to the State, affect the
State's expenditures and, in some cases, its revenues.
Debt Management. The state debt management policy has four guidelines. The
first requires that the ratio of the budgeted biennial debt service expenditures
for general obligation bonded debt, paid by transfers from the General Fund, not
exceed 3.0% of the total projected biennial General Fund non-dedicated revenues,
net of refunds, on a budgetary basis. The ratio of transfers to net
non-dedicated revenues for the biennium ending June 30, 2003 is 2.3%. The second
and third guidelines state that the general obligation bonded debt should not
exceed 2.5% of the total personal income for the state, and also that the total
debt of state agencies and the University of Minnesota should not exceed 3.5% of
total personal income. These ratios were 1.7% and 3.0%, respectively based on
outstanding debt at June 30, 2003 and estimated personal income for the year
ended on that date. The fourth guideline states that the total amount of state
general obligation debt, moral obligation debt, state bond guarantees, equipment
capital leases and real estate leases should not exceed 5.0% of the total
personal income for the state. That ratio was 3.0% at June 30, 2003.
The total amount of State general obligation bonds outstanding on November 1,
2002, was approximately $30 billion. The total amount of general obligation
bonds authorized but unissued as of November 1, 2002, was approximately $1.1
billion.
Fitch IBCA, Inc. rates State of Minnesota general obligation bonds as AAA. In
June 2003, Moody's Investor Services changed Minnesota's general obligation bond
rating from Aaa to Aa1. In August 1997, Standard & Poor's raised the state's
general obligation bond rating from AA+ to AAA.
There can be no assurance that such ratings will be maintained in the future.
It should be noted that the creditworthiness of obligations issued by local
Minnesota issuers may be unrelated to the creditworthiness of obligations issued
by the State of Minnesota, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of default.
Each Minnesota Trust is susceptible to political, economic or regulatory
factors affecting issuers of Minnesota municipal obligations (the "Minnesota
Municipal Obligations"). These include the possible adverse effects of certain
Minnesota constitutional amendments, legislative measures, voter initiatives and
other matters that are described. The information provided is only a brief
summary of the complex factors affecting the financial situation in Minnesota
and is derived from sources that are generally available to investors and are
believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the following information. It is based in
part on information obtained from various State and local agencies in Minnesota
or contained in Official Statements for various Minnesota Municipal Obligations.
Missouri Risk Factors
Each Missouri Trust is susceptible to political, economic or regulatory
factors affecting issuers of Missouri municipal obligations (the "Missouri
Municipal Obligations"). These include the possible adverse effects of certain
Missouri constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Missouri and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Missouri or
contained in Official Statements for various Missouri Municipal Obligations.
Economic Outlook. The State provides a range of services in the areas of
agriculture, education, health and social services, transportation systems,
public safety, law enforcement, judicial systems, economic development,
conservation and natural resources, labor relations, and general administration.
The State operates on a legally adopted budget in order to ensure compliance
with legal provisions embodied in the annual appropriated budget passed by the
General Assembly and approved by the Governor prior to the beginning of the
fiscal year. If appropriations are not sufficient for a fiscal year,
supplemental amounts are requested during the next legislative session by the
same process that original appropriations are requested. Budgetary control is
maintained at the departmental level. Expenditures cannot exceed the
appropriation amounts at the individual appropriation level. Also, the Governor
has the authority to reduce the allotments of appropriations in any fund if it
appears that the revenue estimate will not be met. Unexpended appropriations
lapse at the end of each appropriation year, unless reappropriated to the
following appropriation year.
According to the Missouri Department of Economic Development, Missouri's
unemployment rate has generally been below the U.S. rate, sometimes by a half
point or more. The state's rate peaked from May 2003 to August 2003 at 5.8
percent and began to edge down after August. The rate dropped to an unusually
low 4.7 percent in January of 2004 and has moved irregularly since. Sometimes,
unemployment can rise even when employment is growing strongly. One explanation
for this phenomenon is the "encouraged worker effect." Workers who left the
labor force when conditions were not promising begin to look for work again when
the employment situation begins to brighten. Those entrants to the labor force
who do not immediately find work are counted as unemployed.
The rate of 5.2 percent in June 2004 is six-tenths of a point lower than it
was a year earlier and in fact lower than in any month in 2002 or 2003. About
19,000 fewer Missourians are unemployed now than in June 2003. The national rate
moved upward to a peak of 6.3 percent in June 2003. It has since receded to 5.6
percent.
Major Initiatives. Balancing Missouri's budget in fiscal year 2003 was
achieved through sound financial management. A conservative consensus revenue
estimate was agreed to by the Governor and General Assembly. However, the
estimate was revised in December 2002 and May 2003 as the continued effect of
the recession, the terrorist attacks, the war in Iraq, and the falling stock
market on the State's revenue collections became clearer.
Personal income trends indicate that Missouri can expect moderate growth
during fiscal year 2004. In future years, Missouri will continue to focus on
controlling the growth of mandatory programs through various cost-effective
alternatives. Major funding priorities include education, health care,
correctional facilities, and economic development.
Revenues and Expenditures. The slumping economy, federal tax cuts that sap
state revenue, and rapidly increasing health care costs have required decisive
action each year to balance the budget. While the federal government is allowed
to run a deficit, Missouri state government must balance its budget each year.
Missouri's constitutional revenue and spending limit ("Article X") provides
that over time the growth in state revenues and spending cannot exceed the
growth in Missouri Personal Income. The Missouri Constitution requires that the
revenue and spending limit formula use the personal income figure supplied by
the United States Department of Commerce Bureau of Economic Analysis (BEA). The
personal income statistics are designed to measure current economic activity.
Changes have been made in the methodology for computing the personal income
statistics in recent years with significant effect on the state's revenue limit.
In 1998 the BEA implemented a change that significantly lowered the revenue and
spending limit beginning in Fiscal Year 1999. Personal income is the sum of all
wages and salaries, proprietors and rental income, interest and dividend income,
and transfer payments (such as social security and welfare). Personal income has
never included capital gains made on direct investment in the stock market. In
1998, the BEA concluded that they were including capital gains made by mutual
funds that invest in the stock market. The personal income statistics published
by the BEA now deduct the value of mutual funds' capital gains from personal
income - about a $2 billion reduction in Missouri Personal Income.
Strong economic growth resulted in revenues above the total state revenue
limit in fiscal years 1995 through 1999. The State has refunded to Missouri
income taxpayers the entire $978.7 million in excess revenue for those years.
All Article X refunds were initially paid from the General Revenue Fund and
various other funds reimbursed their share of the refund liability through
operating transfers to the General Revenue Fund as appropriated by the General
Assembly. The total amount reimbursed from other funds is $168.1 million.
However, in the fiscal years 2000-2003, the State was well below the revenue
limit. Currently, revenue is under the limit by more than $1 billion.
The Missouri Merchants and Manufacturer's Association filed a lawsuit to
obtain a judicial determination of certain issues relative to this calculation.
The lawsuit (Missouri Merchants and Manufacturer's Association et al v. State of
Missouri Case No. 99-CV-323530) was remanded with instructions to the Circuit
Court of Cole County after an appeal to the Missouri Supreme Court. In fiscal
year 2003, $6 million of Article X refunds relating to prior years revenue
receipts were paid based on the Cole County Circuit Court decision regarding the
treatment of refundable tax credits in the total state revenue calculation.
The Missouri Merchants and Manufacturer's Association filed an additional
lawsuit to obtain a judicial determination of certain issues relative to this
calculation. The lawsuit (Missouri Merchants and Manufacturer's Association et
al v. State of Missouri, Case No. 00-CV-325457) was dismissed on April 22, 2002.
Tobacco Settlement. In November 1998 the National Association of Attorney
Generals announced a national settlement agreement with five major tobacco
companies. Attorney General Jay Nixon accepted the proposed agreement on behalf
of the State of Missouri. The agreement is the largest settlement ever achieved
by the State of Missouri. Over the next 25 years, the state will receive
approximately $4.5 billion before the settlement's adjustments for inflation and
discounts.
In May 2001, Missouri received its first payment of the tobacco settlement
proceeds. It is estimated that the state will receive about $160 million during
Fiscal Year 2004. The Governor has recommended using a portion of the tobacco
settlement proceeds to pay for core health care programs while retaining a
portion for the most critical investments that will improve the lives of
Missourians in the futures.
In 2002, the Governor recommended that the General Assembly pass legislation
that would allow the state to sell a portion of the tobacco settlement proceeds
in a process called "securitization." The General Assembly passed SB 1191 (2002)
to give the state this option for up to 30 percent of the tobacco settlement
proceeds. Tobacco securitizations have been completed by other states and are
somewhat similar to revenue bond borrowing.
Debt Management. Missouri voters have approved constitutional amendments
providing for the issuance of general obligation bonds used for a number of
purposes. The amount of general obligation debt that can be issued by the state
is limited to the amount approved by popular vote plus $1 million.
The State's general obligation debt limit at June 30, 2003, was
$1,776,000,000 of which $336,505,760 was unissued. The general obligation debt
position of the State at June 30, 2003, was as follows: General obligation
bonded debt (net of amount available in governmental funds) - $860,730,000; Debt
per capita for general obligation debt - $151.06.
During fiscal year 2003, $52,155,000 of the bonds were retired and
$45,000,000 of new bonds were issued. At year-end, the total general obligation
debt outstanding was $900,745,000 and the interest rate range was 3.0-7.0%.
Risk Management. The State attempts to minimize credit and market risks while
maintaining a competitive yield on its investments. Approximately 82% of
investments held by the State and subject to risk categorization at June 30,
2003, are classified in the lowest risk category as defined by the Governmental
Accounting Standards Board. All deposits invested by the State Treasurer are
either insured by federal depository insurance or collateralized.
Ratings. As of September 2004, State of Missouri general obligation bond
issues are rated as follows: Standard & Poor's Rating Services - AAA; Moody's
Investors Service, Inc. - Aaa; and Fitch IBCA, Inc. - AAA. There can be no
assurance that such ratings will be maintained in the future. It should be noted
that the creditworthiness of obligations issued by local Missouri issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Missouri, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
Nebraska Risk Factors
Economic Outlook. The State of Nebraska, located at the heart of the Great
Plains, has a population of about 1.7 million people. Along with positive
population growth, the state has enjoyed regular economic growth during the past
few years. Historically, the state's economy is less cyclical than the national
economy; that is, it typically does not grow as quickly as the national economy
during periods of expansion but also does not contract as much during periods of
recession. With more than 44 million of the state's 49 million acres used for
farming and ranching, agriculture is a leading component of the Nebraska
economy. Thus, any changes in agriculture and in the agricultural economy may
have significant consequences for the overall Nebraska economy.
According to the Bureau of Business Research of the University of Nebraska,
the State has weathered the national recession well. They report that while the
State did not slide into the depths of a recession, neither will it experience a
spectacular rise in the next few years. As of March 2004, Nebraska's
unemployment rate was 3.9% compared to the national rate of 6.0%. The Bureau did
indicate, however, that even with federal farm payments, it is likely that
Nebraska's agriculture sector will restrain future economic growth rates.
The Bureau of Business Research at the University of Nebraska-Lincoln
forecasted slowing economic advances by the Nebraska economy for calendar years
2002 and 2003. The Bureau, in its latest report of July 2003, indicated that
employment, personal income and retail sales all continued to show positive
growth, but at slower than normal growth rates. The slowdown is the result of a
slowing national economy. Non-farm personal income continues to grow, but at
modest rates. In 2003 Nebraska's per capita income increased to $30,758.
Revenues and Expenditures. The General Fund operations of the State of
Nebraska are almost entirely dependent upon the income and sales taxes the State
receives each year. Such taxes represent over 90 percent of all General Fund
revenues. Thus, it necessarily follows that funds available for expenditures are
heavily dependent upon those taxes. As the national economy wavered in
2001-2002, especially with the loss of jobs, declining investment income and
market losses due to the devastating stock market, and lack of consumer
confidence, revenue from income taxes and sales taxes also declined.
At the end of fiscal year 2002-03, the State's General Fund had an ending
balance of $55,970,978.
As a result of the declining revenues, the Legislature met twice in special
sessions in calendar 2002 to reduce the operating budgets of state agencies to
help keep such budgets in line with the declining revenues. Over the Governor's
veto, the Legislature also increased the sales tax base and temporarily
increased the sales tax rate and the cigarette tax rate to boost revenues. In
finalizing that biennium budget, the Legislature is required by the State
Constitution to find solutions to balance such budget, notwithstanding the
current economic conditions.
In 1983, Nebraska created the Cash Reserve Fund ("CRF") to provide a source
of funds for temporary transfers to the State General Fund when balances were
not sufficient to process expenditures transactions. The original balance in the
Fund was accumulated through the imposition of an increase in the sales tax. The
movement of monies between the CRF and the General Fund for cash management
purposes has been governed by a variety of legislation over the life of the
Fund. Also, there have been several instances in which money was moved to and
from the Cash Reserve Fund to accomplish policy initiatives that were not
related to cash management.
The most recent legislative change to the operation of the CRF occurred in
1996 and provides for an annual, rather than quarterly, comparison of the actual
General Fund receipts to the certified projection of the Economic Forecasting
Advisory Board. If actual receipts are greater than the certified projection, a
transfer in the amount of the difference is made from the General Fund to the
CRF. The CRF was at $170 million at the end of 2001. Due to transfers to the
General Fund to make up for lagging revenues, this balance was reduced to $110
million at the end of 2002 and $59 million at the end of 2003.
Debt Management. Article XIII of the State Constitution prohibits the State
from incurring debt in excess of one hundred thousand dollars. However, there is
a provision in the constitution that permits the issuance of revenue bonds for:
(1) construction of highways; and (2) construction of water conservation and
management structures. The State can enter into capital lease and other
financing contracts provided that the contracts include cancellation of clauses
if the Legislature does not appropriate funds to continue the lease or financing
agreement.
Each Nebraska Trust is susceptible to political, economic or regulatory
factors affecting issuers of Nebraska municipal obligations (the "Nebraska
Municipal Obligations"). These include the possible adverse effects of certain
Nebraska constitutional amendments, legislative measures, voter initiatives and
other matters that are described. The information provided is only a brief
summary of the complex factors affecting the financial situation in Nebraska and
is derived from sources that are generally available to investors and are
believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the following information. It is based in
part on information obtained from various State and local agencies in Nebraska
or contained in Official Statements for various Nebraska Municipal Obligations.
New Jersey Risk Factors
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,134 persons per square mile, it is the most
densely populated of all the states. The State's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
During calendar year 2001, New Jersey experienced an economic slowdown
similar to the rest of the nation. Although average annual employment grew for
the ninth consecutive year, it marked the slowest pace since recovery began in
1993 and was well below the 2.5% growth in 2000. The average annual rate of
growth in employment fell to 0.7% in 2001 adding under 30,000 jobs. Employment
gains were primarily spread across the service producing industries. Most of the
job losses were concentrated in manufacturing, a sector that has been declining
for more than a decade. The slower employment growth in 2001 was compounded by
the tragic events of September 11, 2001.
With the weakening in the labor market conditions, New Jersey's personal
income growth moderated to a 4.5% rate in 2001, substantially below the record
pace of 8.2% in 2000. Low inflation, approximately 3%, continues to benefit New
Jersey consumers and businesses. Low interest rates have supported spending on
housing and other consumer durable goods in the State. In 2001, home building
decreased from the 12-year high level of 2000.
New Jersey's unemployment rate rose to 4.2% in 2001 but remained below the
national rate. The unemployment rate climbed in early 2002, peaking at 5.6% in
March 2002. Joblessness, however, has started to level off, declining to 5.4% in
May 2002. Although current growth in the job market is still weak, New Jersey's
employment level continues to remain above the 4 million mark.
Economic forecasts as of June 2002 for the national and State economies
project a weaker economic performance in 2002 than was anticipated at the
beginning of the fiscal year. However, a moderate underlying recovery is
expected to continue during 2002, leading to accelerated economic performance in
2003.
New Jersey's economy is expected to follow the national trend in 2002 and in
2003. Employment growth is projected to remain flat in 2002, but grow moderately
in 2003. Personal income growth in New Jersey is expected to dip in 2002 and
then pick up in 2003. Housing starts are expected to ease in the next two years.
To a large extent, the future direction of economic recovery nationally and in
New Jersey hinges on assumptions of no further terrorist attacks, supportive
monetary and fiscal stimulus, low energy prices, a stable dollar, minimal
disruptions from corporate collapses similar to Enron and WorldCom, and no
further turmoil in the financial markets.
The State operates on a fiscal year beginning July 1 and ending June 30. The
State closed recent fiscal years with surpluses in the general fund (the fund
into which all State revenues not otherwise restricted by statute are deposited
and from which the appropriations are made) of $228 million in 1998, $276
million in 1999 and $188 million in 2000. It is estimated that Fiscal Year 2001
ended with a surplus of $389 million and that Fiscal Year 2002 ended with a
surplus of $100 million. The Fiscal Year 2002 estimate includes $1,075 million
from tobacco securitization.
In Fiscal Year 1992 the State initiated a program under which it issued tax
and revenue anticipation notes to aid in providing effective cash flow
management to fund balances which occur in the collection and disbursement of
the General Fund and Property Tax Relief Fund revenues. The State intends to
issue notes in the amount of $1.9 billion which will be payable on June 12,
2003. Such tax and revenue anticipation notes do not constitute a general
obligation of the State or a debt or liability within the meaning of the State
constitution. Such notes constitute special obligations of the State payable
solely from moneys on deposit in the General Fund and the Property Tax Relief
Fund and legally available for such payment.
The State finances certain capital projects through the sale of the general
obligation bonds of the State. These bonds are backed by the full faith and
credit of the State. Certain state tax revenues and certain other fees are
pledged to meet the principal payments, interest payments, redemption premium
payments, if any, required to fully pay the bonds. As of June 30, 2002, the
State's outstanding general obligation bonded indebtedness totaled $3.2 billion.
The recommended appropriation for the debt service obligation on outstanding
projected indebtedness is $470.7 million for Fiscal Year 2003.
At any given time, there are various numbers of claims and cases pending
against the State, State Agencies and employees, seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Claims Act. The State does not formally estimate its reserve representing
a potential exposure for these claims and cases. The State is unable to estimate
its exposure for these claims and cases.
The State routinely receives notices of claims seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contracts and
other claims against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
The State is a party in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Adverse
judgments in these and other matters could have the potential for either a
significant loss of revenue or a significant unanticipated expenditure by the
State.
Since 1994 the State's general obligation bonds were rated Aa1 by Moody's and
AA+ by S&P. New Jersey's strong economic growth during the past eight years and
its growing reserves supported its strong credit rating. The State's combined
debt burden is above average but is mitigated by New Jersey's high wealth
levels. However, on March 4, 2002 Moody's downgraded New Jersey's general
obligation rating to Aa2 from Aa1 and on June 4, 2002, S&P downgraded New
Jersey's general obligation rating to AA from AA+. The rating change reflects
the dramatic negative effect of the depressed stock market and weakened
financial services industry on the State's revenues and overall financial plan.
The severity of the revenue loss, in combination with the current level of State
spending and future spending pressures in the areas of healthcare, education,
transportation, pensions, and debt service, will likely strain the State's
finances for at least the next two years. In addition, reserves available to
cushion the State against additional unanticipated economic or revenue
underperformance over this period will be modest.
There can be no assurance that these ratings will continue or that particular
bond issues may not be adversely affected by changes in the State or local
economic or political conditions. It should be noted that the creditworthiness
of obligations issued by local New Jersey issuers may be unrelated to the
creditworthiness of obligations issued by the State of New Jersey, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
New Mexico Risk Factors
New Mexico is the nation's fifth-largest state in area (121,356 square
miles), with an estimated population in 2003 of 1,874,614. Albuquerque is the
state's largest city and economic center. Most of the state's leading employers
are concentrated in Albuquerque, where 40% of the state's population resides.
Albuquerque area employers include the University of New Mexico, Albuquerque
Public Schools, Kirtland Air Force Base, and Sandia National Laboratories. Intel
Corp. is the largest manufacturer and private employer in the state, with a
semiconductor plant in Rio Rancho just outside Albuquerque.
New Mexico's unemployment rate dropped to 5.3 percent in July 2004, down a
tenth of a percent from June's rate, according to the New Mexico Department of
Labor, a big drop from a year ago when the unemployment rate was 6.7 percent.
Since then, the state has added 16,000 jobs, for a growth rate of 2.1 percent.
Only two of 13 industry groups -- manufacturing and the information industry --
lost jobs over the past year. Educational and health services has been the
fastest growing industry, adding 4,600 new jobs over the past year. Per capita
personal income for 2003 was $25,541, ranking New Mexico 45th of the 50 states.
Revenues and Expenditures. The State derives the bulk of its recurring
General Fund revenues from five major sources: general and selective sales
taxes, income taxes, the emergency school tax on oil and gas production, rents
and royalties from State and federal land, and interest earnings from its two
Permanent Funds. Effective July 1, 1981, the Legislature abolished all property
taxes for State operating purposes. For fiscal year 2003, as of May, total
General Fund revenue was $3,479,100,000. And as of January 2003, outstanding
general obligation debt totaled $293.5 million.
Debt Management. Sections 7 and 8 of Article IX of the Constitution of the
New Mexico limits the power of State officials to incur general obligation
indebtedness extending beyond the fiscal year in three ways. First, the state
may borrow money not exceeding the sum of two hundred thousand dollars
($200,000) in the aggregate to meet casual deficits or failure in revenue, or
for necessary expenses. Second, other debt may be contracted by or on behalf of
the State only when authorized by law for some specified work or object. Such a
law takes effect only after being submitted to the qualified electors of the
State and having received a majority of all votes cast thereon at a general
election. No debt may be created if the total indebtedness of the State,
exclusive of the debts of the territory and several counties thereof assumed by
the State, would thereby be made to exceed 1% of the assessed valuation of all
property subject to taxation in the State, as shown by the last preceding
general assessment. Lastly, the State may also contract debts to suppress
insurrection and to provide for the public defense.
General obligation bonds of the State are issued and the proceeds thereof
appropriated to various purposes pursuant to an act of the Legislature of the
State. The State Constitution requires that any law which authorizes general
obligation debt of the State shall provide for an annual tax levy sufficient to
pay the interest and to provide a sinking fund to pay the principal of the
debts. General obligation bonds are general obligations of the State for the
payment of which the full faith and credit of the State are pledged. The general
obligation bonds are payable from "ad valorem" taxes levied without limit as to
rate or amount on all property in the State subject to taxation for State
purposes. The total debt service on general obligation bonds was $293.5 million
as of February of 2003.
As of September 2004, Moody's Investors Service, Inc. and Standard & Poor's
Ratings Services have assigned the bond ratings of "Aa1" and "AA+,"
respectively, to State of New Mexico general obligation bonds. There can be no
assurance that such ratings will be maintained in the future. It should be noted
that the creditworthiness of obligations issued by local New Mexico issuers may
be unrelated to the creditworthiness of obligations issued by the State of New
Mexico, and that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
Each New Mexico Trust is susceptible to political, economic or regulatory
factors affecting issuers of New Mexico municipal obligations (the "New Mexico
Municipal Obligations"). These include the possible adverse effects of certain
New Mexico constitutional amendments, legislative measures, voter initiatives
and other matters. The information provided is only a brief summary of the
complex factors affecting the financial situation in New Mexico and is derived
from sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in New Mexico or
contained in Official Statements for various New Mexico Municipal Obligations.
New York Risk Factors
Economic Condition and Outlook. The events of September 11, 2001 had a
significant impact on the economies of New York State and the nation. An
economic slowdown was already developing, and in early 2001 the Federal
Reserve's Open Market Committee had begun a series of dramatic rate reductions
in an effort to prevent the slowdown from turning into a serious recession. The
annualized rate of growth in the Gross Domestic Product (GDP), a measure of the
nation's output of goods and services, averaged 1.1% in the fourth quarter of
2000, but then declined by 0.6% in the first quarter of 2001 and by 1.6% in the
second quarter. Business investments were declining and inventories were being
reduced, and the pace of consumer spending had slowed somewhat.
The attacks on the World Trade Center and the Pentagon generated significant
shocks throughout the economy. The New York financial markets were closed for
several days, and the travel and tourism industries were particularly hard hit
by the shutdown of the air transportation network. The Federal Reserve moved
aggressively to maintain the soundness of the financial system, ultimately
reducing interest rates to a 40-year low. GDP declined at a 0.3% annualized rate
in the third quarter of 2001. The National Bureau of Economic Research declared
that a recession had officially begun in March 2001. Although job losses mounted
and major parts of the national economy were negatively impacted, the record-low
interest rates quickly had a beneficial effect on the economy. The housing
market, after a short pause, was energized as buyers flooded the market and
outstanding mortgages were refinanced. Under these conditions, home values
continued to rise. Auto sales were brisk, aided by zero percent-financing
incentives. GDP growth, which had resumed with a 2.7% annualized gain in the
fourth quarter of 2001, surged at a 5.0% annualized rate in the first quarter of
2002, helped by stronger consumer spending and a slowing of business inventory
reductions. Since then, GDP growth has been modest, with gains held down by
concerns over corporate accounting scandals and uncertainties over the war with
Iraq. Although the GDP is growing, the national economy is not yet generating
jobs.
As the site of one of the terrorist attacks, the impact on New York State's
economy was greater than in other parts of the nation. New York had lagged
behind the recovery from the early 1990s recession, and it was only in recent
years that the State's economic performance had improved. The rate of job growth
had slowly built through the late 1990s, reaching 2.7% in 1999, an increase
which ranked 14th among the 50 states. As the economy began to slow in 2000, the
State's rate of job growth slipped to 2.1%, and its ranking slid to 23rd. For
the first three quarters of 2001 compared to the same period in 2000, New York's
job growth was 0.5%, the same rate as the nation, and ranked 28th among the
states. However, after the attacks, employment in New York declined by 1.4% in
the fourth quarter of 2001, while national employment declined by 0.8%, and New
York's ranking fell to 40th. However, the recession, the terrorist attacks and
the ongoing financial market declines took a heavy toll on the State in 2002,
pushing the State's relative employment performance down to 48th in the nation,
as average annual employment levels declined by 1.8%. Although the rate of job
loss has declined in the first five months of 2003, falling by 0.7%, New York's
performance relative to other states has risen to a rank of 44th.
Unemployment rates have also risen as the economy slowed. The recession and
the World Trade Center attack had a greater impact upon the State's job market
than the national job market. The number of jobs in New York State declined 3%
over the past two years while the nation lost jobs at a 1.7% rate. The
industries in the State that were hit the hardest were manufacturing,
information, financial activities, and professional and business services. After
New York State's unemployment rate steadily declined, reaching its lowest level
in early 2001, the rate rebounded as the long boom of 1990s came to an end. As
of May 2003, the State's unemployment rate stood at 6.1%, tied with the national
rate. New York City's rate has been consistently higher than the national and
State rates since the late 1980s. The City's unemployment rate reached 8.1% in
May 2003. Despite the recent increases in the national, State and local
unemployment rates, levels are still lower than at their peaks during the prior
recession in 1992.
The slowdown in the economy also affected income growth. Total State personal
income has increased 37.2% since 1995, compared to a 44.1% increase nationwide.
New York State ranked 42nd out of the 50 states in growth in personal income
during this period. The State's per person personal income in 2002 ($36,043)
continues to be higher than that of the U.S. ($30,941). The State's per person
personal income increased by 0.5% in 2001, while per person personal income in
the nation grew by 1.7%. The State ranked fifth highest in per person personal
income in 2002, behind Connecticut, New Jersey, Massachusetts and Maryland.
After having ranked fourth highest from 1993 through 2001, New York slipped
behind Maryland in the latest rankings.
The sharp slowdown in growth in personal income in New York State resulted in
part from the State's economic dependency on the financial industry. Salaries
are highest on Wall Street, which paid an average salary of $237,006 in 2001. In
the rest of the financial sector, the average salary was $75,615, while
non-financial industries paid an average of $39,726. The Wall Street sector
represented only 2.5% of the total jobs in the State in 2001, but accounted for
12.8% of the total compensation paid. The gap between Wall Street's salaries and
those of the non-financial industries has also been growing significantly. Wall
Street has been particularly hard hit during the last few years, suffering the
effects of the national economic slowdown, the impacts of corporate scandals and
war worries. With the financial markets in decline, securities industry profits
have fallen over the last two years, from a record high of $21 billion in 2000
to $7 billion in 2002. Bonuses paid to Wall Street workers fell by 35% in 2001
and another 41% in 2002.
There has also been a change in the geographic distribution of economic
activity in the State. During the economic expansion of the 1990s and into 2000,
almost 72% of the job growth in New York State during the expansion was in New
York City and the downstate suburbs. Per person personal income is much higher
in the downstate counties than in the rest of the State, primarily reflecting
the higher wages and salaries paid by jobs in the downstate region. In 2001, per
person personal income averaged $38,643 in New York City, $41,559 on Long
Island, and $52,540 in the Lower Hudson Valley. For the rest of the State, per
person personal income ranged from $21,957 in the North Country to $30,465 in
the Capital District. On a county basis, the highest per person personal income
was in New York County (Manhattan) ($92,984) while the lowest was in Lewis
County ($18,927). Likewise, New York City accounted for 70% of the State's
population increase in the 1990s. When combined with the gains in the suburbs
surrounding the City, the downstate region was responsible for more than 90% of
the State's growth. This strong growth reflected the strength of the area's
economy in those years. Population across much of the upstate region has
declined in response to the area's poor economic performance during the last
decade. While the City's economy had been slowing before the World Trade Center
attack, in its aftermath business activity slowed in lower Manhattan and many of
the City's major industries--finance, air transportation, business services,
trade, and tourism--were adversely affected. Most of the recent job losses in
the State have been concentrated in New York City, although there have also been
significant declines in the major upstate metropolitan areas of Binghamton,
Buffalo, Elmira and Rochester.
In the short run, the State's economy will go through a difficult period as
the recovery slowly takes hold and spreads. New York City will reassert itself
as a major center of commerce, and will benefit from reconstruction spending.
Although the current recession will be followed by a new expansion, the strength
of that expansion in New York State will be dependent on many factors. As the
major engine of recent economic growth, the downstate economy is particularly
dependent on the health of the financial industry, investments in transportation
infrastructure, the ability of the education system to produce a skilled
workforce, the availability of affordable housing, the cost and availability of
energy, and the continued attractiveness of the region for both domestic
migrants and international immigrants. Upstate, many regions continue to
transition from manufacturing to service-based economies, and to face their own
issues in education, housing, energy, and population. Finally, the fiscal
stresses currently faced by many localities will have an impact on how policies
that address important issues are resolved.
General Government Results. An operating deficit of $4.2 billion is reported
in the General Fund for fiscal year 2002-03. As a result, the General Fund now
has an accumulated deficit of $3.3 billion. The State completed its fiscal year
ended March 31, 2003 with a combined Governmental Funds operating deficit of
$4.304 billion as compared to a combined Governmental Funds operating deficit in
the preceding fiscal year of $4.45 billion. The Governmental Funds 2002-03
operating deficit of $4.304 billion included operating deficits in the General
Fund of $4.221 billion, the Federal Special Revenue Funds of $2.0 million and
Other Governmental Funds of $81 million.
The State's financial position as shown in its Governmental Funds Balance
Sheet as of March 31, 2003 includes overall fund balances of $2.960 billion
represented by liabilities of $21.038 billion and by assets available to
liquidate such liabilities of $23.998 billion.
Debt Administration. There are a number of methods by which the State may
incur debt. The State has obtained long-term financing in the form of
voter-approved General Obligation debt (voter approved debt) and other
obligations for which voter approval is not needed and has not otherwise been
sought (non-voter approved debt). Non-voter approved long-term financing at
March 31, 2003 includes debt obligations the State pays pursuant to contractual
obligations it entered into with the issuer. Such obligations include certain
bonds issued through state public authorities, certificates of participation,
and capital leases obtained through vendors. The State administers its long-term
financing needs as a single portfolio of state-supported debt that includes
general obligation bonds and other obligations of both its governmental
activities and business-type activities. Most of the debt reported under
business-type activities, all of which was issued for capital assets used in
those activities, is supported by payments from resources generated by the
State's Governmental Activities--thus it is not expected to be repaid from
resources generated by business-type activities. The State finance law allows
for the bonded portion of this single combined debt portfolio--which includes
debt reported in both governmental and business-type activities combined--to
include variable rate securities equal to 15% of total bonds outstanding and
interest rate exchange agreements (Swaps) equal to 15% of total bonds
outstanding. At March 31, 2003 the State had $5.7 billion in State-supported
variable rate bonds outstanding of which $1.5 billion are convertible to fixed
or variable rates and $2.2 billion were subject to Swap agreements resulting in
effective fixed rates, subject to certain risks. At March 31, 2003 variable rate
bonds, net of those subject to fixed rate Swaps, were equal to 8.9% of the
State-supported bonded debt portfolio. Total Swap agreements of $2.2 billion
equaled 5.7% of the total portfolio of bonded State-supported debt. At March 31,
2003 the State had $3.996 billion in general obligations\ bonds outstanding at
year end. At March 31, 2003 the State had $39.3 billion in bonds, notes and
other financing agreements outstanding compared with $37.0 billion last year, an
increase of $2.3 billion.
The State Constitution, with exceptions for emergencies, limits the amount of
general obligation bonds that can be issued to that amount approved by the
voters for a single work or purpose in a general election. Currently, the State
has $1.2 billion in authorized but unissued bond capacity that can be used to
issue bonds for specifically approved purposes. The State may issue short-term
debt without voter approval in anticipation of the receipt of tax and revenues
or proceeds from duly authorized but not issued general obligation bonds.
The State Finance Law, through the Debt Reform Act of 2000 (the Act), also
imposes phased-in caps on new debt issued and related debt service costs. The
Act also limits the use of debt to capital works and purposes, and establishes a
maximum length of term for repayment of 30 years. The Act applies to all
State-supported debt but does not require that the capital works or projects be
limited to State-owned projects. Debt issued prior to the Act and State-related
debt including the Tobacco Revenue Bonds issued subsequent to the date of the
financial statements to finance a portion of last year's budgetary deficit are
not subject to the Act.
During 2002 the State enacted legislation providing for the issuance of State
Personal Income Tax Revenue Bonds (PIT) to be issued by several State Public
Benefit Corporations. The legislation provides that 25% of personal income tax
receipts, excluding refunds owed to taxpayers, be deposited to the Other
Governmental Funds for the purpose of making debt service payments on these
bonds with excess amounts returned to the General Fund. The first PIT bonds were
issued in May 2002 and approximately $2.4 billion were issued through March 31,
2003.
The construction of certain State office buildings, campus facilities, and
other public facilities has been financed through bonds and notes issued by
public benefit corporations or local governments pursuant to lease/purchase
agreements with the State. These lease/purchase contracts are capital leases for
which the State's rental payments over the duration of the agreements constitute
long-term liabilities. The amount included in obligations under lease/purchase
and other financing arrangements consists of total future principal payments and
equals the outstanding balance of the related bonds and notes. Reporting
relative to capitalized interest is also not included for leased capital assets.
In prior years, the State refunded certain of its Obligations Under
Lease/Purchase and Other Financing Arrangements. At March 31, 2003,
approximately $3.2 billion of such obligations were outstanding. The assets and
liabilities related to these obligations are not reported in the accompanying
basic financial statements.
Bond Ratings. The State's general obligation bonds are rated AA (with a
negative outlook) by Standard and Poor's Corporation, A2 by Moody's Investors
Services and AA- by Fitch (confirmed on April 5, 2004). There can be no
assurance that such ratings will be maintained in the future. It should be noted
that the creditworthiness of obligations issued by local New York issuers may be
unrelated to the creditworthiness of obligations issued by the State of New
York, and that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
Risk Management. The State does not insure its buildings or their contents
against theft, fire or other risks and does not insure its automobiles against
the possibility of bodily injury and property damage. However, the State does
have fidelity insurance on State employees. Workers' compensation coverage is
provided on a self-insurance basis.
Litigation. The State is a defendant in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings, and other alleged violations of State and Federal laws.
Included in the State's outstanding litigation are a number of cases
challenging the legality or the adequacy of a variety of significant social
welfare programs primarily involving the State's Medicaid and mental health
programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care that could
require substantial increased financing of the litigated programs in the future.
Subsequent to year end, the Court of Appeals directed the State of New York
to put in place reforms to school financing and governance designed to redress
the funding mechanism for school aid. Because the court did not specify the
manner in which to implement these reforms, no provision for potential exposure
is made in the accompanying basic financial statements.
Actions commenced by several Indian nations which include the St. Regis
Mohawk Indian Nation, the Oneida Indian Nation and the Cayuga Indian Nation
claim that significant amounts of land were unconstitutionally taken from the
Indians in violation of various treaties and agreements during the eighteenth
and nineteenth centuries. The claimants seek recovery of thousands of acres of
land as well as compensatory and punitive damages.
In addition, the State is party to other claims and litigation that its legal
counsel has advised are not probable of adverse court decisions. Although the
amounts of potential losses, if any, are not presently determinable, it is the
State's opinion that its ultimate liability in these cases is not expected to
have a material adverse effect on the State's financial position.
With respect to pending and threatened litigation, the State has reported, in
the governmental activities, liabilities of $958 million for awarded and
anticipated unfavorable judgments.
North Carolina Risk Factors
Generally. One of the primary characteristics of the 2001 recession was the
impact on the manufacturing sector. This is important to North Carolina because
18% of nonagricultural employment is in manufacturing in our state versus 12%
nationally. A more important measure might be the share of gross state product
tied to manufacturing: around 23% in North Carolina versus 17% for the United
States.
The decline in manufacturing jobs did not begin with the 2001 recession. Data
compiled by the Employment Security Commission show that manufacturing
experienced a fairly rapid recovery from the 1990-91 recession, with job growth
of 2.6% in 1993. In fact, the "boom and bust" nature of manufacturing is one
reason why the state's economy grew 33% faster than the national experience
following the 1981-82 recession and 45% faster following the Gulf War downturn.
In fact, North Carolina was the fifth fastest growing state during the 1992-94
period.
Manufacturing employment began a steady decline in mid-1995 as the national
economy experienced a mild slowdown following the Federal rate hikes in 1994.
The rate of decline began to accelerate in February 2001 and peaked at an 8.5%
year-over-year rate in late 2001. Particularly hard hit were the textile and
apparel sectors, dropping over 15% annually by the spring of 2001.
There are some signs that the state's economy has begun to improve. For one
thing, the unemployment rate has dropped from 6.9% in April to 6.0% in October
and we have seen improvement in the unemployment claims numbers. State sales tax
receipts during the quarter ending September 30 were up 1.7% over the same
quarter last year and increased 2.3% during the second calendar quarter. This
compares to -2.0% for the first quarter and -3.5% for the final quarter of 2001.
Unit sales of cars and light trucks rose 2.9% in May and June this year.
Finally, real estate conveyance tax collections, levied on a "percent of value"
basis, continue to benefit from favorable mortgage rates.
Even with the recent improvements, the State is budgeting on the basis of a
continued sluggish recovery. This would be very different from the explosive
growth after the last two recessions. One reason is the continued weakness of
tech stock prices. As the state has diversified away from the traditional
manufacturing industries (textiles, apparel, furniture, and tobacco) to
electronics and other technology-oriented companies, we have become more
vulnerable to problems in the new sectors.
A classic example is the experience of the Catawba Valley region (Hickory).
During the late-1990s, this area had an unemployment rate as low as 1.5% due to
the explosive growth of fiber optic manufacturing. Now, the unemployment rate in
this county is 9.4%, one of the highest rates in the state. We are concerned
that it may take some time for the nation's telecommunications companies to work
down excess inventory.
In addition, it is not clear how areas affected by the displacement of
workers in traditional industries will recover. The prevailing view of many
local officials is that not only are the jobs lost in recent years the textile,
apparel, and furniture sectors gone forever but the shift away from U.S.
production is spreading to other types of manufacturing operations.
Revenues and Expenditures. The North Carolina State Constitution requires
that the total expenditures of the state for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and a portion
of the surplus remaining in the State Treasury at the beginning of the period.
State law requires 25% of surplus funds from the previous fiscal period to be
placed in the Savings Reserve Account; an amount of the funds equal to 3% of the
value of state-owned facilities to be placed in the Reserve for Repairs and
Renovations; and 6.5% of the surplus funds to be placed in the Clean Water
Management Trust Funds. The remainder of the surplus may be used for
expenditures during the following fiscal period.
With the adoption of the General Fund budget for fiscal year ended June 30,
2003, North Carolina will have experienced its third straight year in which
spending needs exceededrecurring revenues. This problem has been increased by
the economic downturn experienced nationally and in North Carolina. The increase
in spending needs is attributed to enrollment growth in the public schools and
higher education institutions along with continued increased costs in the health
and human services areas such as Medicaid and children services. The result is
that North Carolina has spent more money than it has realized in the General
Fund during the last four consecutive years.
In order to meet the constitutional requirement of a balanced budget for the
General Fund, the Governor has exercised his constitutional powers through the
enactment of Executive Orders to control spending and to identify resources to
meet spending requirements. Among these resources are the Highway Trust Fund,
the Tobacco Trust Fund, agency special funds, and reductions to employer
contributions to some of the State retirement systems. State agencies and
institutions have been operating under Executive Orders since February 2001. The
current Executive Order allows spending at an average of 96.5% of the authorized
General Fund budget for fiscal year 2003.
Because of the budget shortfalls, the need to use State reserves, and the
inability to replenish reserves, the result has been an overall reduction in the
net worth of the General Fund (GAAP basis) component of the State budget. In the
last three years, the unreserved balance has gradually declined to its current
level of negative $575 million for the fiscal year ended June 30, 2002. The
Savings Reserve Account balance was used to balance the budget in fiscal year
2001, and the General Assembly authorized new funds to replenish that reserve in
fiscal year 2002. But the Savings Reserve Account balance again was required to
manage the budget shortfall for fiscal year 2002. As of June 30, 2002, the
Savings Reserve had a zero balance.
For fiscal year 2003 through December 11, $215.6 million has been set aside
in the Governor's Executive Order Reserve and is available to manage any
potential budget shortfall that may occur. It is important to note, however,
that some of these funds will be needed for the continued recovery of eastern
North Carolina from the aftermath of Hurricane Floyd. This Reserve coupled with
spending restrictions and zero economic revenue growth are the tools the
Governor is using to manage the 2003 budget.
Debt Management. The State's general obligation debt payable increased during
fiscal year 2002 to $3.478 billion, an increase of $439 million (or by 14.5%),
which represents the net difference between new issuances, and payments,
recognition of accretion, and the amortization of premiums on outstanding debt.
During the year the State issued general obligation bonds in the amount of $605
million. The amount of authorized but unissued bonds at June 30, 2002, totaled
$3.765 billion as follows: Higher Education $2.55 billion; Highway Construction
$700 million; Clean Water $380 million; and Natural Gas $135 million. interest
payment date which began on December 1, 2001. The proceeds of these issuances
were used to provide funds to refund in advance of their maturity the following
issues:
North Carolina general obligation bonds are rated AAA by Standard & Poor's
and Fitch, and AA1 by Moody's. There can be no assurance that such ratings will
be maintained in the future. It should be noted that the creditworthiness of
obligations issued by local North Carolina issuers may be unrelated to the
creditworthiness of obligations issued by the State of North Carolina, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Litigation. The State is involved in numerous claims and legal proceedings,
many of which normally recur in governmental operations and may have a material
adverse effect on the financial position of the State.
Each North Carolina Trust is susceptible to political, economic or regulatory
factors affecting issuers of North Carolina municipal obligations (the "North
Carolina Municipal Obligations"). These include the possible adverse effects of
certain North Carolina constitutional amendments, legislative measures, voter
initiatives and other matters that are described. The information provided is
only a brief summary of the complex factors affecting the financial situation in
North Carolina and is derived from sources that are generally available to
investors and are believed to be accurate. No independent verification has been
made of the accuracy or completeness of any of the following information. It is
based in part on information obtained from various State and local agencies in
North Carolina or contained in Official Statements for various North Carolina
Municipal Obligations.
Ohio Risk Factors
As described above, the Ohio Trust will invest most of its net assets in
securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of the
State, or agencies or instrumentalities of the State or its political
subdivisions ("Ohio Obligations"). The Ohio Trust is therefore susceptible to
general or particular economic, political or regulatory factors that may affect
issuers of Ohio Obligations. The following information constitutes only a brief
summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of the
following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection
with investment in particular Ohio Obligations or in those obligations of
particular Ohio issuers. It is possible that the investment may be in particular
Ohio Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary, and
is not intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
Much of this information is as of December 22, 2003, particularly debt
figures and other statistics. Ohio is the seventh most populous state. The
Census count for 2000 was 11,353,140, up from 10,847,100 in 1990. While
diversifying more into the service and other non-manufacturing areas, the
Ohio economy continues to rely in part on durable
goods manufacturing largely concentrated in motor vehicles and machinery,
including electrical machinery. As a result, general economic activity, as in
many other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming and a
significant portion of total employment in agribusiness.
In earlier years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, then
through 1998 the annual State rates were below the national rates (4.3% vs. 4.5%
in 1998), but were again slightly higher in 1999 (4.3% vs. 4.2%) and 2000 (4.0%
vs. 4.0%) and then lower in 2001 (4.2% vs. 4.7%) and in 2002 (5.7% vs. 5.8%).
The unemployment rate and its effects vary among geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Trust or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year (FY) or fiscal biennium in a deficit position. Most State operations
are financed through the General Revenue Fund (GRF), for which the personal
income and sales-use taxes are the major sources. Growth and depletion of GRF
ending fund balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable and
increased during more favorable economic periods. The State has well-established
procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods such as the
current fiscal biennium. Those procedures include general and selected
reductions in appropriations spending.
Recent biennium ending GRF balances were:
Biennium Fund Balance Cash Balance
1992-93 $111,013,000 $ 393,634,000
1994-95 928,019,000 1,312,234,000
1996-97 834,933,000 1,367,750,000
1998-99 976,778,000 1,512,528,000
2000-01 219,414,000 817,069,000
2002-03 52,338,000 396,539,000
Actions have been and may be taken by the State during less favorable
economic periods to ensure resource/expenditure balances (particularly in the
GRF), some of which are described below. None of those actions were or are being
applied to appropriations or expenditures needed for debt service or lease
payments relating to any State obligations.
The following is a selective general discussion of State finances,
particularly GRF receipts and expenditures, for the recent and the current
bienniums.
1992-93. State and national fiscal uncertainties necessitated several actions
to achieve positive GRF ending balances. An interim appropriations act was
enacted effective July 1, 1991 that included appropriations for both years of
the biennium for debt service and lease rental payments on State obligations
payable from the GRF, even though most other GRF appropriations were made for
only one month. The general appropriations act for the entire biennium was then
passed on July 11, 1991. Included in the GRF resources appropriated was a
transfer of $200,000,000 from the Budget Stabilization fund (BSF) to the GRF.
To address a projected Fiscal Year 1992 imbalance, the Governor ordered most
State agencies to reduce GRF spending in the final six months of that Fiscal
Year by a total of $184,000,000, the entire $100,400,000 BSF balance and
additional amounts from certain other funds were transferred to the GRF, and
other revenue and spending actions were taken.
Steps to ensure positive biennium-ending GRF balances for Fiscal Year 1993
included the Governor ordering selected GRF spending reductions totaling
$350,000,000 and tax revisions that produced additional revenue of $194,500,000.
As a first step toward BSF replenishment, $21,000,000 from the GRF ending
balance was deposited in the BSF.
1994-95. Expenditures were below those authorized, primarily as the result of
lower than expected Medicaid spending, and tax receipts (primarily auto
sales/use) were significantly above estimates. Transfers from the
biennium-ending GRF fund balance included $535,200,000 to the BSF and
$322,800,000 to other funds, including a family services stabilization fund in
anticipation of possible federal programs changes.
1996-97. From a higher than forecasted mid-biennium GRF fund balance,
$100,000,000 was transferred for elementary and secondary school computer
network purposes and $30,000,000 to a new State transportation infrastructure
fund. Approximately $400,800,000 served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. Of the GRF biennium-ending fund
balance, $250,000,000 was directed to school buildings, $94,400,000 to the
school computer network, $44,200,000 to school textbooks and instructional
materials and a distance learning program, $34,400,000 to the BSF, and
$262,900,000 to the State Income Tax Reduction Fund (ITRF).
1998-99. GRF appropriations of approximately $36 billion provided for
significant increases in funding for primary and secondary education. Of the
first Fiscal Year (ended on June 30, 1998) ending fund balance of over $1.08
billion, approximately $701,400,000 was transferred to the ITRF, $200,000,000
into public school assistance programs, and $44,184,200 into the BSF. Of the GRF
biennium-ending fund balance, $325,700,000 was transferred to school building
assistance, $293,185,000 to the ITRF, $85,400,000 to SchoolNet (a program to
supply computers for classrooms), $4,600,000 to interactive video distance
learning, and $46,374,000 to the BSF.
2000-01. The State's financial situation varied substantially in the 2000-01
biennium. The first Fiscal Year of the biennium ended with a GRF cash balance of
$1,506,211,000 and a fund balance of $855,845,000. A transfer of $49,200,000
from that balance increased the BSF to $1,002,491,000 (or 5% of GRF revenue for
the preceding Fiscal Year). An additional $610,400,000 was transferred to the
State Income Tax Reduction Fund.
In the middle of the second year of the biennium, the State enacted
supplemental appropriations of $645,300,000 to address shortfalls in its
Medicaid and disability assistance programs. The State's share of this
additional funding was $247,600,000, with $125,000,000 coming from Fiscal Year
2001 GRF spending reductions and the remainder from available GRF moneys. The
reductions were implemented by OBM prior to March 1, 2001 by a 1 to 2% cut
applying to most State departments and agencies. Expressly excluded from the
reductions, in addition to debt service and lease rental payments relating to
State obligations, were elementary and secondary education.
In March 2001, new lowered revenue estimates for Fiscal Year 2001 and for
Fiscal Years 2002 and 2003 were announced. Based on indications that the Ohio
economy continued to be affected by the national economic downturn, GRF revenue
estimates for Fiscal Year 2001 were reduced by $288,000,000. In addition, OBM
projected higher than previously anticipated Medicaid expenditures. Among the
more significant steps taken to ensure the positive GRF ending fund balance at
June 30, 2001 were further spending reductions (with the same exceptions
mentioned above for debt service and education) and authorization to transfer
from the BSF to the GRF amounts necessary to ensure an ending GRF fund balance
of $188,200,000. The State ended Fiscal Year 2001 with a GRF fund balance of
$219,414,000, making that transfer unnecessary.
2002-03. Ongoing and rigorous consideration was given by the Governor and the
General Assembly to revenues and expenditures throughout Fiscal Years 2002-03,
primarily as a result of continuing economic conditions. Budgetary pressures
during this period were primarily due to continuing lower than previously
anticipated levels of receipts from certain major revenue sources.
Consideration came in four general time frames - the June 2001 biennial
appropriation act, late fall and early winter 2001, late spring and summer 2002,
and late winter/spring 2003. Significant remedial steps included authorization
to draw down and use the entire BSF balance, increased cigarette taxes, and use
of tobacco settlement moneys previously earmarked for other purposes.
The biennial GRF appropriations act passed in June 2001 provided for biennial
GRF expenditures of approximately $45.1 billion without increases in any major
State taxes. Some of the major program funding increases over the original
appropriations for the preceding 2000-01 biennium were: Medicaid, 29%; primary
and secondary education, 17%; adult and juvenile corrections, 6.2%; mental
health and mental retardation, 2.8%; and higher education, 2.4%.
That original appropriations act provided for the following uses of certain
reserves, aimed at achieving Fiscal Year and biennium ending positive GRF fund
balances, based on then current estimates and projections:
o Transfer of up to $150,000,000 from the BSF to the GRF for increased
Medicaid costs.
o An additional $10,000,000 transfer from the BSF to an emergency
purposes fund.
o Transfer to the GRF in Fiscal Year 2002 of the entire $100,000,000
balance in the Family Services Stabilization Fund.
Necessary GRF debt service and lease rental appropriations for the biennium
were requested in the Governor's proposed budget, incorporated in the related
appropriations bills as introduced, and included in the versions as passed by
the House and the Senate and in the act as passed and signed. The same was true
for separate appropriations acts that included lease-rental appropriations for
certain OBA-financed projects for the departments of Transportation and Public
Safety, and Bureau of Workers' Compensation.
The Ohio economy continued to be negatively affected by the national economic
downturn and by national and international events, and in October 2001 OBM
lowered its GRF revenue estimates. Based on reduced revenue collections in
certain categories (particularly personal income taxes and, at that time, sales
taxes), OBM then projected GRF revenue shortfalls of $709,000,000 for Fiscal
Year 2002 and $763,000,000 for Fiscal Year 2003. Executive and legislative
actions were taken based on those new estimates, including:
o The Governor promptly ordered reduced appropriations spending by
most State agencies (expressly excepted were appropriations for or
relating to debt service on State obligations), and limits on hiring
and major purchases. Reductions were at the annual rate of 6% for
most State agencies (including higher education institutions), with
lesser reductions for correctional and other institutional agencies,
and with exemptions for primary and secondary education and the
adjutant general.
o December 2001 legislation, the more significant aspects of which
included:
o Authorizing transfer of up to $248,000,000 from the BSF to
the GRF during the current biennium. This was in addition to
the $160,000,000 in transfers from the BSF provided for in
the original appropriations act (and would reduce the BSF
balance to approximately $604,000,000).
o Reallocating to the GRF a $260,000,000 portion of tobacco
settlement receipts in Fiscal Years 2002 and 2003, intended
to be replenished from settlement receipts in Fiscal Years
2013 and 2014.
o Reducing appropriation spending authorizations for the
legislative and judicial branches.
o Making certain tax-related changes (including accelerating
the time for certain payments).
o Authorizing Ohio's participation in a multi-state lottery
game, estimated to generate $41,000,000 in Fiscal Year 2003.
This participation has begun, although litigation has
sought, to date unsuccessfully, to enjoin the authorization
on State constitutional grounds.
Continuing economic conditions, among other factors, then led OBM in the
spring of 2002 to project a higher than previously estimated GRF revenue
shortfall. Among areas of continuing concern were lower than anticipated levels
of receipts from personal income and corporate franchise taxes. These updated
GRF shortfall estimates were approximately $763,000,000 in Fiscal Year 2002 and
$1.15 billion in Fiscal Year 2003. Further executive and legislative actions
were taken for Fiscal Year 2002 to ensure a positive GRF fund balance for Fiscal
Year 2002 and the biennium. In addition to further administrative and management
steps, such as additional restraints on spending, those actions included
legislation providing for among other things:
o Authorization of additional transfers to the GRF from the BSF of its
entire previously unappropriated balance ($607,000,000) as needed in
Fiscal Years 2002 and 2003, and of $50,800,000 of unclaimed funds to
the GRF.
o $50,000,000 reduction in the Fiscal Year 2002 ending GRF balance (to
$100,000,000 from its previously budgeted level of $150,000,000).
o Increased cigarette tax by 31(cent) per pack (to a total 55(cent) a
pack), estimated by OBM to produce approximately $283,000,000 in
Fiscal Year 2003.
o Transfers to the GRF of $345,000,000 from tobacco settlement money
received in Fiscal Years 2002 and 2003. That amount had previously
been earmarked and appropriated for elementary and secondary school
facilities construction; moneys for that purpose will instead by
provided by way of $345,000,000 in additionally authorized general
obligation bonds.
o Extension of the State income tax to Ohio-based trusts (a "sunset"
provision ends this tax December 31, 2004), and exemption of certain
Ohio business taxes from recent federal tax law "economic stimulus
changes" by modifying existing State law tie-ins to the federal tax
base. The combination was and is estimated by OBM to produce
approximately $283,000,000 in Fiscal Year 2003.
o Selective additional appropriation cuts for certain departments.
Certain other provisions of the legislation were aimed at the future, rather
than the 2002-03 biennium, including the indexing of State income tax brackets
to the Gross Domestic Product beginning in July 2005.
Several categories of Fiscal Year 2002 GRF tax receipts were below those in
the prior Fiscal Year. Overall, total GRF tax receipts were 1.1% below those in
Fiscal Year 2001. Fiscal Year 2002 nevertheless did end with positive GRF
balances of $108,306,000 (fund) and $619,217,000 (cash). This was accomplished
by the remedial steps described above, including significant transfers from the
BSF ($534,300,000) and from tobacco settlement moneys ($289,600,000). The Fiscal
Year ending BSF balance was $427,904,000, with that entire balance appropriated
for GRF use if needed in Fiscal Year 2003.
On July 1, 2002, the first day of the new Fiscal Year, the Governor issued an
executive order directing a total of approximately $375,000,000 in GRF spending
cutbacks for Fiscal Year 2003 (based on prior appropriations) by agencies and
departments in his administration, as well as limitations on hiring, travel and
major purchases. This cutback order reflected and was consistent with prior
budget balancing discussions between the Governor and General Assembly. Annual
cutbacks ranged generally from 7.5% to 15%, with allocation of amounts and
manners determined by the OBM Director in consultation with the affected
agencies and departments. Excluded from those cutbacks were elementary and
secondary education, higher education, alcohol and drug addiction services, and
the adjutant general. Also expressly excluded were appropriations for debt
service including lease rental contracts and all State office building rent, and
ad valorem property tax relief payments (made to local taxing entities).
Based on continuing reduced revenue collections (particularly, personal
income taxes and sales tax receipts for the holidays) and projected additional
Medicaid spending of $40,000,000, OBM in late January announced an additional
GRF shortfall of $720,000,000 for Fiscal Year 2003. The Governor ordered
immediate additional reductions in appropriations spending intended to generate
an estimated $121,600,000 of GRF savings through the end of the Fiscal Year
(expressly excepted were appropriations for or relating to debt service on State
obligations). The Governor also proposed for the General Assembly's prompt
consideration the following additional revenue enhancements, transfers and
expenditure reductions for Fiscal Year 2003 requiring legislative authorization
to achieve the indicated financial effects as estimated by OBM:
o A 2.5% reduction in local government fund distributions to most
subdivisions and local libraries, producing an estimated $30,000,000
savings. This reduction is in addition to the prior local government
fund distribution adjustments noted below.
o Transfers to the GRF from unclaimed funds ($35,000,000) and various
rotary funds ($21,400,000).
o A one-month acceleration in sales tax collections by vendors filing
electronically, to produce $286,000,000.
o An additional increase in the cigarette tax of 45 cents per pack (to a
total of $1.00 a pack), to produce approximately $140,000,000.
o A doubling of the current taxes on spirituous liquor and beer and
wine, to net an additional $18,700,000.
The Governor proposed enactment of these legislative authorizations by
March 1, 2003 in order to produce the indicated financial effects by the June 30
end of the Fiscal Year and biennium. The General Assembly gave its final
approval on February 25 to legislation authorizing the first three elements (see
above) of the Governor's proposal, but that legislation did not include the
proposed additional taxes on cigarettes and spirituous liquor and beer and wine.
OBM projected at the time that the Governor's proposal to the General
Assembly and the additional expenditure reductions ordered by the Governor in
January, coupled with the previously authorized transfer to the GRF of the then
available and unused balance in the BSF, would result in a positive GRF fund
balance at June 30, 2003. To offset the General Assembly's enactment of
legislation that did not include the proposed additional taxes on cigarettes and
liquor, beer and wine, the Governor on March 25 ordered additional reductions in
GRF appropriations spending aggregating $142.5 million for the balance of Fiscal
Year 2003. Included were reductions (generally at an annualized rate of 2.5%) of
$90.6 million in State foundation and parity aid to school districts and an
additional $9.3 million in Department of Education administration spending,
$39.2 million in instructional support to higher education institutions, and
other selected reductions totaling $3.4 million. The Governor also identified
approximately $20 million in excess food stamp administration funds available to
offset the need for further expenditure reductions. Expressly excepted from
those reductions were appropriations for or relating to debt service on State
obligations.
Based on the Administration's continuing monitoring of revenues, and as an
anticipated step in the then ongoing 2004-05 biennial budget and appropriations
process, OBM reported revised revenue estimates to the General Assembly on June
11, 2003. Those estimates revised Fiscal Year 2003 revenues downward by an
additional $200,000,000 over OBM's January 2003 adjusted baseline, based
primarily on updated income and sales tax receipts through May 31. The Governor
and OBM addressed this additional Fiscal Year 2003 revenue shortfall through
additional expenditure controls and by drawing upon $193,000,000 of federal
block grant aid made available to the State prior to June 30 under a federal law
effective on May 28, 2003.
The State ended the 2002-03 biennium with a GRF fund and cash balances of
$52,338,000 and $396,539,000, respectively, and a balance in the BSF of
$180,705,000.
Additional appropriations actions during the biennium, affecting most
subdivisions and local libraries in the State, relate to the various local
government assistance funds. The original appropriations act capped the amount
to be distributed in Fiscal Years 2002 and 2003 to essentially the equivalent
monthly payment amounts in Fiscal Years 2000 and 2001. Subsequent legislation
amended the level to the lesser of those prior Fiscal Year amounts or the amount
that would have been distributed under the standard formula.
Current Biennium. The GRF appropriations bill for the current biennium
(beginning July 1, 2003) was passed by the General Assembly on June 19, 2003 and
promptly signed (with selective vetoes) by the Governor June 26. Necessary GRF
debt service and lease-rental appropriations for the entire biennium were
requested in the Governor's proposed budget, incorporated in the related
appropriations bill as introduced and in the bill's versions as passed by the
House and the Senate, and in the Act as passed and signed. (The same is true for
the separate Department of Transportation and Bureau of Workers' Compensation
appropriations acts containing lease-rental appropriations for certain
OBA-financed ODOT, DPS and BWC projects.)
The Act provides for total GRF biennial expenditures of approximately $48.8
billion. Those authorized GRF expenditures for Fiscal Year 2004 are
approximately 5.8% higher than the actual Fiscal Year 2003 expenditures (taking
into account Fiscal Year 2003 expenditure reductions), and for Fiscal Year 2005
are approximately 3.5% higher than for Fiscal Year 2004. The following are
examples of increases in authorized GRF biennial expenditures compared with
actual 2002-03 expenditures in major program categories: primary and secondary
education 5.1%; higher education 4.4%; mental health and mental retardation
4.1%; Medicaid 19.9%; and adult and juvenile corrections 5.7%.
The above expenditure levels reflect among other expenditure controls in the
Act: Medicaid cost containment measures including pharmacy cost management
initiatives, limited expenditure growth for institutional services and
implementation of managed care for higher-cost populations; continued phase-out
of certain tangible personal property tax relief payments to local governments;
the closing by consolidation of three institutional facilities during the
biennium; adjustments in eligibility guidelines for subsidized child care from
185% to 150% of the federal poverty level and freezing certain reimbursement
rates; no compensation increases for most State employees in Fiscal Year 2004
and limited one-time increases in Fiscal Year 2005; and continued limitation on
local government assistance fund distributions to most subdivisions and local
libraries to the lesser of the equivalent monthly payments in Fiscal Years 2000
and 2001 or the amount that would have been distributed under the standard
formula.
The GRF expenditure authorizations for the biennium also reflect and are
supported by revenue enhancement actions contained in the Act including:
o A one cent increase in the State sales tax (to six percent) for the
biennium (expiring June 30, 2005), projected to generate
approximately $1.25 billion in each Fiscal Year to which it applies.
o Expansion of the sales tax base to include dry-cleaning/laundry
services, towing, personal care and other services, and satellite
television, projected in the aggregate to produce approximately
$69,000,000 annually. (The inclusion of satellite television in the
sales tax base, projected to produce approximately $21,000,000
annually, is subject to a legal challenge.)
o Moving local telephone companies from the public utility tax base to
the corporate franchise and sales tax, projected to produce
approximately $29,000,000 annually.
o Elimination of the sales tax exemption for WATS and 800 telecom
services coupled with the enactment of a more limited exemption for
call centers, projected to produce approximately $64,000,000
annually.
o Adjustments in the corporate franchise tax through the adoption of
the Uniform Division of Income for Tax Purposes Act (UDITPA) for
apportionment of business income among states, and an increase in
the corporate alternative minimum tax, projected in the aggregate to
produce approximately $35,000,000 annually.
The Act also reflects the draw down during the biennium of an additional
approximately $582,000,000 of federal block grant and Medicaid assistance aid
made available to the State under a federal law effective May 28, 2003.
Litigation pending in the Ohio Court of Claims contests the Ohio Department
of Human Services (ODHS, now Ohio Department of Job and Family Services) former
Medicaid financial eligibility rules for married couples when one spouse is
living in a nursing facility and the other resides in the community. ODHS
promulgated new eligibility rules effective January 1, 1996. ODHS appealed an
order of the federal court directing it to provide notice to persons potentially
affected by the former rules from 1990 through 1995, and the Court of Appeals
ruled in favor of ODHS; plaintiff's petition for certiorari was not granted by
the U.S. Supreme Court. As to the Court of Claims case, it is not possible to
state the period (beyond the current Fiscal Year) during which necessary
additional Medicaid expenditures would have to be made. Plaintiffs have
estimated total additional Medicaid expenditures at $600,000,000 for the
retroactive period and, based on current law, it is estimated that the State's
share of those additional expenditures would be approximately $240,000,000. The
Court of Appeals has certified the class action and notice has been sent to the
members of the class. Trial for liability only was completed in the Court of
Claims in January 2003 and all post-trial briefs have been filed with that
Court.
The incurrence or assumption of debt by the State without a popular vote is,
with limited exceptions, prohibited by the State Constitution. The State may
incur debt to cover casual deficits or to address failures in revenues or to
meet expenses not otherwise provided for, but limited in amount to $750,000. The
Constitution expressly precludes the State from assuming the debts of any
county, city, town or township, or of any corporation. (An exception in both
cases is for debts incurred to repel invasion, suppress insurrection, or defend
the State in war.) The Constitution provides that "Except the debts above
specified . . . no debt whatever shall hereafter be created by, or on behalf of
the state."
By 17 constitutional amendments approved from 1921 to present, Ohio voters
have authorized the incurrence of State general obligation (GO) debt and the
pledge of taxes or excises to its payment. All related to the financing of
capital facilities, except for three that funded bonuses for veterans and one
that funded coal technology research and development. Currently, tax supported
general obligation debt of the State is authorized to be incurred for the
following purposes: highways, local infrastructure, coal development, natural
resources, higher education, common schools, and conservation. Although
supported by the general obligation pledge, highway debt is backed by a pledge
of and has always been paid from the State's motor fuel taxes and other highway
user receipts that are constitutionally restricted in use to highway related
purposes.
A 1999 constitutional amendment provides an annual debt service "cap"
applicable to future issuances of State general obligations and other State
direct obligations payable from the GRF or net State lottery proceeds.
Generally, new bonds may not be issued if future Fiscal Year debt service on
those new and the then outstanding bonds of those categories would exceed 5% of
the total estimated GRF revenues plus net State lottery proceeds during the
Fiscal Year of issuance. Those direct obligations of the State include, for
example, special obligation bonds issued by the Ohio Building Authority and the
Treasurer of State, and previously by the Ohio Public Facilities Commission
(OPFC), that are paid from GRF appropriations, but exclude bonds such as highway
bonds that are paid from highway user receipts. Pursuant to the amendment and
implementing legislation, the Governor has designated the OBM Director as the
State official to make the 5% determinations and certifications. Application of
the cap may be waived in a particular instance by a three-fifths vote of each
house of the General Assembly and may be changed by future constitutional
amendments.
In addition to its issuance of highway bonds, the State has also financed
selected highway infrastructure projects by entering into agreements that call
for payments to be made from federal transportation funds allocated to the
State. Payments by the State under those agreements are subject to biennial
appropriations by the General Assembly. OBM estimates the highest future Fiscal
Year payments under those current arrangements to be $79,602,448. In the event
of any insufficiency in those anticipated federal allocations to make payments
on State bonds, the payments are to be made from any lawfully available federal
moneys appropriated to ODOT for the purpose, and in the case of continued
insufficiency the ODOT Director is to request a General Assembly appropriation
for the purpose.
State agencies also have participated in office building and non-highway
transportation projects that have local as well as State use and benefit, in
connection with which the State has entered into lease-purchase agreements with
terms ranging from 7 to 20 years. Certificates of Participation (COPs) have been
issued that represent fractionalized interests in or are payable from the
State's anticipated payments. The number and amount of COPs issued in connection
with those agreements have varied and will continue to vary. OBM estimates the
highest future Fiscal Year payments under those agreements, which are primarily
made from GRF appropriations, to be $4,603,524. Payments by the State are
subject to biennial appropriations by the General Assembly with the lease terms
subject to renewal if appropriations are made. Generally, the OBM Director's
approval of such agreements is required, particularly if COPs are to be
publicly-offered in connection with those agreements.
A statewide economic development program assists the financing of facilities
and equipment for industry, commerce, research and distribution, including
technology innovation, by providing loans and loan guarantees. The law
authorizes the issuance of State bonds and notes secured by a pledge of portions
of the State profits from liquor sales. The General Assembly has authorized the
issuance of these obligations with a general maximum of $500,000,000 to be
outstanding at any one time (excluding bonds issued to meet guarantees, if any).
The aggregate amount from the liquor profits to be used in any Fiscal Year in
connection with these bonds (except for bonds issued to meet guarantees) may not
exceed $45,000,000. The total of unpaid guaranteed loan amounts and unpaid
principal of direct loans may not exceed $800,000,000. A 1996 issue of
$168,740,000 of taxable bonds refunded outstanding bonds and provided additional
loan moneys for facilities and equipment. $101,980,000 of taxable forward
purchase bonds were issued in 1998 to refund, as of 2006, term bonds of the 1996
issue stated to mature in 2016 and 2021. The State, in July 2003, issued
$50,000,000 in bonds for Innovation Ohio projects and in November 2003, issued
$50,000,000 in bonds for research and development projects. Pursuant to a 2000
constitutional, the State has issued a first series of $50,000,000 of bonds for
revitalization purposes that are also payable from State liquor profits. The
maximum annual debt service on all state bonds payable from State liquor profits
is $26,777,576 in Fiscal Year 2009.
Certain State agencies issue revenue bonds that are payable from revenues
from or relating to revenue producing facilities, such as those issued by the
Ohio Turnpike Commission. By judicial interpretation, such revenue bonds do not
constitute "debt" under the constitutional provisions described above. The
Constitution authorizes State bonds for certain housing purposes (issued by the
Ohio Housing Finance Agency) to which tax moneys may not be obligated or
pledged.
Litigation, similar to that in other states, has been pending in Ohio courts
since 1991 questioning the constitutionality of Ohio's system of school funding
and compliance with the constitutional requirement that the State provide a
"thorough and efficient system of common schools". On December 11, 2002, the
Ohio Supreme Court, in a 4-3 decision on a motion to reconsider its own decision
rendered in September 2001, concluded (as it had in its 1997 and 2000 opinions
in that litigation) that the State did not comply with that requirement, even
after again noting and crediting significant State steps in recent years.
In its prior decisions, the Court stated as general base threshold
requirements that every school district have enough funds to operate, an ample
number of teachers, sound and safe buildings, and equipment sufficient for all
students to be afforded an educational opportunity.
With particular respect to funding sources, the Court concluded in 1997 and
2000 decisions that property taxes no longer may be the primary means of school
funding in Ohio.
On March 4, 2003, the plaintiffs filed with the original trial court a motion
to schedule and conduct a conference to address compliance with the orders of
the court in that case, the State petitioned the Supreme Court to issue a writ
prohibiting that conference on compliance, and the trial court subsequently
petitioned the Supreme Court for guidance as to the proper course to follow. On
May 16, 2003, the Supreme Court granted that writ and ordered the dismissal of
the motion before the trial court. And on October 20, 2003 the United States
Supreme Court declined to accept the plaintiff's subsequent petition requesting
further review of the case.
The General Assembly has taken several steps, including significantly
increasing State funding for public schools, as discussed below. In addition, at
the November 1999 election electors approved a constitutional amendment
authorizing the issuance of State general obligation debt for school buildings
and for higher education facilities. December 2000 legislation addressed certain
mandated programs and reserves, characterized by the plaintiffs and the Court as
"unfunded mandates."
Under the current financial structure, Ohio's 612 public school districts and
49 joint vocational school districts receive a major portion (but less than 50%)
of their operating moneys from State subsidy appropriations (the primary portion
of which is known as the Foundation Program) distributed in accordance with
statutory formulas that take into account both local needs and local taxing
capacity. The Foundation Program amounts have steadily increased in recent
years, including small aggregate increases even in those Fiscal Years in which
appropriations cutbacks were imposed.
School districts also rely upon receipts from locally voted taxes. In part
because of provisions of some State laws, such as that partially limiting the
increase (without further vote of the local electorate) in voted property tax
collections that would otherwise result from increased assessed valuations, some
school districts have expressed varying degrees of difficulty in meeting
mandated and discretionary increased costs. Local electorates have largely
determined the total moneys available for their schools. Locally elected boards
of education and their school administrators are responsible for managing school
programs and budgets within statutory requirements.
The State's present school subsidy formulas are structured to encourage both
program quality and local taxing effort. Until the late 1970's, although there
were some temporary school closings, most local financial difficulties that
arose were successfully resolved by the local districts themselves by some
combination of voter approval of additional property tax levies, adjustments in
program offerings, or other measures. For more than 20 years, requirements of
law and levels of State funding have sufficed to prevent school closings for
financial reasons, which in any case are prohibited by current law.
To broaden the potential local tax revenue base, local school districts also
may submit for voter approval income taxes on the district income of individuals
and estates. Many districts have submitted the question, and income taxes are
currently approved in 127 districts.
Original State basic aid appropriations for the 1992-93 biennium of $9.5
billion provided for 1.5% and 4.8% increases in the two Fiscal Years of the
biennium over appropriations in the preceding biennium. The reduction in
appropriations spending for Fiscal Year 1992 included a 2.5% overall reduction
in annual Foundation Program appropriations, and a 6% reduction in other primary
and secondary education programs. The reductions were in varying amounts, and
had varying effects, with respect to individual districts; there were no
reductions for the 172 districts with the lowest per pupil tax valuations.
Foundation payments were excluded from the Governor's Fiscal Year 1993 cutback
order.
Subsequent biennial school funding State appropriations from the GRF and
Lottery Profits Education Fund (but excluding federal and other special revenue
funds) were:
o 1994-95 - $8.9 billion provided for 2.4% and 4.6% increases,
respectively, in State aid in the biennium's two Fiscal Years.
o 1996-97 - $10.1 billion representing a 13.6% increase over the
preceding biennium total.
o 1998-99 - $11.6 billion (18.3% over the previous biennium).
o 2000-01 - $13.3 billion (15% over the previous biennium).
o 2002-03 - $15.2 billion (17% over the previous biennium before the
expenditure reductions).
State appropriations for the purpose made for the 2004-05 biennium were $15.7
billion (3.3% over the previous biennium), and represented an increase of 0.01%
in Fiscal Year 2004 over 2003 and 2.2% in Fiscal Year 2005 over 2004 when
compared to original State appropriations.
Those total State 2004-05 biennial appropriations excluded non-GRF and
federal appropriations, but include appropriations from the GRF and the lottery
profits education fund (LPEF). The amount of lottery profits transferred to the
LPEF totaled $686,020,000 in Fiscal Year 2000, $655,036,000 in Fiscal Year 2001,
$635,150,000 in Fiscal Year 2002, and $671,352,000 in Fiscal Year 2003. Ohio
participation in the multi-state lottery commenced in May 2002. A constitutional
provision requires that net lottery profits be paid into LPEF to be used solely
for the support of elementary, secondary, vocational and special education
purposes, including application to debt service on general obligation bonds to
finance common school facilities.
In response to the 1997 Ohio Supreme Court decision holding certain
provisions for local school district borrowing unconstitutional, the General
Assembly created the school district solvency assistance program. Beginning in
Fiscal Year 1999, local school districts in fiscal emergency status as certified
by the Auditor of State could apply for an advancement of future year Foundation
Program distributions. The amount advanced was then deducted, interest free,
from the district's foundation payments over the following two-year period. Six
school districts received a total of approximately $12,100,000 in solvency
assistance advancements during Fiscal Year 1999, with another six districts
receiving a total of approximately $8,657,000 in Fiscal Year 2000. This solvency
assistance program was held to be not in compliance with the Constitution by the
Supreme Court. In Fiscal Year 2001 four districts received approximately
$3,800,000 under a restructured solvency assistance program. The program was
further modified in December 2000 to allow districts that experience an
unforeseen catastrophic event to apply for a grant. In Fiscal Year 2002, three
districts received catastrophic grants totaling $2,569,970 and one district
received a solvency advance in the amount of $421,000. In Fiscal Year 2003,
three districts received solvency advances in the amount of $8,742,000 and no
districts received catastrophic grants.
Legislation was enacted in 1996 to address school districts in financial
straits. It is similar to that for municipal "fiscal emergencies" and "fiscal
watch", but is particularly tailored to certain school districts and their then
existing or potential fiscal problems. There are currently seven school
districts in fiscal emergency status and five in fiscal watch status. New
legislation has created a third, more preliminary, category of "fiscal caution."
A current listing of school districts in each status is on the Internet at
http://www.auditor.state.oh.us.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes to finance their operations. With other subdivisions,
they also receive local government support and property tax relief moneys from
State resources.
For those few municipalities and school districts that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Eight municipalities and
one township are in "fiscal emergency" status and seven municipalities in
preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
local taxing districts. The Constitution has since 1934 limited the amount of
the aggregate levy of ad valorem property taxes on particular property, without
a vote of the electors or municipal charter provision, to 1% of true value in
money, and statutes limit the amount of that aggregate levy without a vote or
charter provision to 10 mills per $1 of assessed valuation -- commonly referred
to in the context of Ohio local government finance as the "ten-mill limitation."
Oklahoma Risk Factors
Economic Outlook. Oklahoma is an attractive place in which to live and
conduct business. The state enjoys a very low cost of doing business, has a
highly skilled work force and is geographically well positioned for interstate
commercial activity. For example, Oklahoma lies at the crossroads of U.S.
Interstates 35, 40 and 44, three of the nation's most important transportation
and shipping corridors, allowing state businesses to take advantage of
opportunities anywhere in the United States. Our pioneering Career and
Technology Education system is a national leader in developing training programs
for industry. Oklahoma remains committed to improving the quality of its
education system.
Oklahoma is also known for its abundant resources. The state remains a
leading producer of oil and natural gas, allowing Oklahoma manufacturers to take
advantage of some of the lowest energy prices in the nation. Oklahoma is a
leading producer of agricultural products, ranking in the top ten in production
of wheat, peanuts, grain sorghum, pecans, rye, hogs and cattle. Oklahomans also
enjoy many opportunities for outdoor recreation and due to its many man-made
reservoirs, Oklahoma has more miles of shoreline than any state.
Oklahoma has been experiencing some of the same weakness in revenue
collections observed in most other states. The Oklahoma Constitution mandates
that if collections of certified funds are insufficient to cover the
appropriation from that fund, appropriations are to be reduced prorata. During
fiscal year 2003, budget reductions totaled $301.0 million, or 6.7%. While the
average agency experienced a 6.7% cut, basic health care, human services and
public safety programs experienced only minimal reductions. The legislature also
appropriated $72.4 million from the Constitutional Reserve Fund.
The current fiscal year, 2004, has shown consistent increases in revenue over
fiscal year 2003 levels. Through the end of November, 2003, revenue collections
were above the same period in the prior year. Income tax, sales tax, gross
production tax and motor vehicle tax are all above the prior year levels.
The State Board of Equalization has made a finding that will invoke a trigger
mechanism decreasing the maximum individual income tax rate from 7% to 6.65% and
expanding the low income sales tax credit. At its December 2003 meeting, the
Equalization Board estimated that General Revenue Fund collections for the year
ending June 30, 2005 will exceed its revenue estimate for the year ending June
30, 2004. This finding requires that the maximum income tax rate be reduced to
6.65%.
Oklahoma has come through the revenue decline experienced by other states. In
spite of these past challenges, the State's financial condition is healthy. The
state's general obligation debt load remains modest and the State's revenue
picture is improving.
Cash Management. State law requires full collateralization of all State
Treasurer bank balances. Generally, the Treasurer promulgates rules that
establish the amount of collateral that must be pledged against deposits.
However, component units of the State reporting entity may have
collateralization policies that differ from those of the State Treasurer. The
State Treasurer is required to keep at least 80% of available cash invested.
Debt Administration. General obligation bonds are backed by the full faith
and credit of the State, including the State's power to levy additional taxes to
ensure repayment of the debt. Accordingly, all general obligation debt currently
outstanding was approved by a vote of the citizens. The general obligation bonds
of the State are rated "Aa3" by Moody's Investors Service and "AA" by Standard &
Poor's (confirmed on September 22, 2004). Prior to a 1993 general obligation
bond program, except for refunding bonds, the State last issued general
obligation bonds in 1968. Certain maturities of those bonds were advance
refunded in 1977. As of June 30, 2003, the outstanding general obligation net
debt of the State of Oklahoma was $531.2 million. This figure excludes the
self-supporting taxable bonds of the Oklahoma Industrial Finance Authority,
which are secured by the repayment of loans made to private businesses. State
revenues have never been required to support debt service payments on these
obligations.
Each Oklahoma Trust is susceptible to political, economic or regulatory
factors affecting issuers of Oklahoma municipal obligations (the "Oklahoma
Municipal Obligations"). These include the possible adverse effects of certain
Oklahoma constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Oklahoma and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Oklahoma or
contained in Official Statements for various Oklahoma Municipal Obligations.
Oregon Risk Factors
Government Profile. The State provides services to Oregon's citizens through
a wide range of programs including education, human resources, public safety,
economic and community development, natural resources, transportation, consumer
and business services, administrative support, legislative, and judicial
programs. Oregon's primary government as reported in the accompanying financial
statements consists of just over 100 state agencies. In addition to the primary
government, we report two entities as discretely presented component units to
emphasize that they are legally separate from the State. Oregon's Legislature
adopts a budget each biennium, which forms the foundation for the State's
financial planning and control. Details of the budget process and budgetary
monitoring are presented in the notes to the required supplementary information.
Economic Condition and Outlook. Recent indicators reveal Oregon's economy is
bottoming out of the recession. Several factors have contributed to this
downturn over the past few years. Repercussions from the economic slump in Asia
continued to dampen economic growth in 1999 and 2000. Added to this, the
information technology sector crash and the ensuing manufacturing slump
continued to slow business investment spending. While the State's economy was
flirting with a recession in early 2001, the September 2001 terrorist attacks
further softened job growth and reduced consumer confidence. During 2002, year
over year job growth has marginally improved. The most recent Blue Chip Job
Growth rankings placed Oregon 28th in the nation for year over year job growth
between September 2001 and September 2002.
Although present conditions suggest that this recession is deeper than the
last recession in 1990-1991, the extent of the downturn is milder than the
1980-1982 recession. On a year over year basis, job growth in the second quarter
of 2002 was negative 1.4 percent. Again in the third quarter of 2002, employment
growth was negative 0.6 percent. While these declines were spread across all
sectors, the industries most impacted by job losses on a year over year basis
include electrical machinery, non-electrical machinery, and construction.
In the near term, Oregon's employment growth is expected to remain weak.
Although it appears the Oregon economy is bottoming out, the speed and strength
of the recovery is uncertain, with a rising possibility of falling back into
recession. This year will mark the fifth in a row that Oregon will grow slower
than the U.S. economy. We expect Oregon's economy to finish 2002 with employment
growth of negative 0.9 percent. The State's economic growth in 2003 should stay
close to national growth rates. Employment growth of 1.3 percent is expected in
2003, followed by employment growth of 2.4 percent in 2004.
We expect several sectors to post gains in the next year or so, while other
industries will likely decline. Manufacturing will likely post modest gains in
2003 and 2004, as the uncertainty of the economy gradually clears and businesses
begin spending more on capital equipment. The high technology sector is expected
to show a substantial drop for 2002; however, the slowdown in this sector will
slowly reverse and post job gains in 2003. Even with continued low mortgage
interest rates, growth in the construction sector is expected to be flat in 2003
with only marginal growth, largely due to the weak industrial and commercial
side. Additional information on specific industries within the State is
available on the Office of Economic Analysis web site at
http://www.oea.das.state.or.us.
Employment growth is only one indicator of economic performance; there are
many other factors to consider. For example, changes in personal income as well
as wage and salary growth are reflective of ongoing economic conditions. We
expect the State's personal income to finish 2002 with a rise of 3.4 percent, up
from 2.5 percent growth in 2001. Stronger growth of 4.7 percent is expected for
personal income in 2003, followed by 5.9 percent growth in 2004. In comparison,
personal income for the U.S. will grow 3.2 percent in 2002, 5.0 percent in 2003,
and 6.1 percent in 2004. Wage and salary income in Oregon will finish 2002 with
mild growth of 1.1 percent followed by higher growth of 4.8 percent in 2003, and
will increase in 2004 with growth of 7.2 percent.
Unemployment rates and population are also impacted by the changing economy.
Oregon's unemployment rate started 2002 at 8.1 percent, fully 2.5 percentage
points higher than the nation's rate. By October, Oregon's rate had declined to
7.0 percent, still 1.3 points above that of the nation. Oregon's rate is
expected to remain above the nation's rate for at least a year or two as its
capital goods manufacturing industries slowly adjust and recover. With the
quality of life we enjoy, Oregon is still attracting new residents although not
as rapidly as during the mid-1990's. The State's population will increase from
3.505 million in 2002 to 3.716 million in 2007, with an annual growth rate
ranging from 0.96 to 1.3 percent.
The changing demographics in Oregon will continue to influence the type of
services that citizens need their State government to provide. The fastest
growth will occur in the 45-64 year olds and the 18-24 year olds. This is due to
the baby boom generation and their children entering these age groups. The rapid
growth in 18- 24 year olds through the next five years will place enrollment
pressures on community colleges and public universities. These enrollment
pressures have already surfaced for this fall's entering class. Within the
elderly population of those 65 and older, the greatest increase will occur in
the 85 and older age group. This will provide a significant challenge to
Oregonians in determining how to care for our aging citizens.
There are several risks now facing the Oregon economy. Primary risks include
the uncertain impact of the war on terrorism, a further major stock market
correction, rising energy prices, and slower than expected recovery for
semiconductors, software, and communications. If the stock market experienced
another major correction, this could further slow already dampened consumer
spending which is the main driving force in the economy.
In summary, Oregon's economy appears to be bottoming out of the recession,
although the strength and speed of the expected recovery is uncertain.
Employment growth is expected to be relatively flat during the upcoming year,
with modest growth for the next several years, beginning in 2004. The
manufacturing sector is expected to benefit from renewed business investment
spending starting in the second half of 2003. The strength of personal income
and consumer confidence will also have a significant impact on Oregon's economic
recovery.
Cash Management. The State Treasurer is responsible for the control of cash
and the investment of State of Oregon funds. The Oregon Investment Council, of
which the State Treasurer is a member, establishes investment policy for all
State funds. To further Oregon's economic growth, the Council's continuing
policy has been to invest locally when they can find investments of comparable
yield, quality, and maturity in-state without damaging portfolio diversity.
Fortunately for Oregonians, State-imposed safeguards minimize the dangers of
investing in highly leveraged financial instruments, which have been a cause of
national concern.
State agencies deposit monies collected into the State Treasury. The State
Treasurer pools all available cash into the Oregon Short-term Fund (OSTF), which
invests in a variety of instruments. For the year ended December 31, 2001, the
average monthly portfolio balance of the OSTF was $7.5 billion and the average
yield on these investments was 4.2 percent. The State Treasurer also manages
separate investments for the Oregon Public Employees Retirement Fund, the
Industrial Accident Fund, the Local Government Investment Pool, and numerous
smaller funds such as the Insurance Fund and the Common School Fund.
The federal Cash Management Improvement Act requires that the federal
government advance cash to the State in a timely manner. Conversely, the State
must not draw federal cash in advance of needs. The State has established
policies and procedures to comply with this act.
Risk Management. The Department of Administrative Services, through an
insurance fund within the Central Services Fund, provides for the State's
self-insurance programs and for the administration, investigation, and
settlement of claims against the insurance fund. We explain this more fully in
the notes accompanying the basic financial statements. In accordance with
legislative directives, the insurance fund must operate on an actuarially sound
basis.
Debt Administration. The State Debt Policy Advisory Commission advises the
Governor and the legislative assembly regarding policies and actions that
enhance and preserve the State's credit rating and maintain the future
availability of low-cost capital financing. The State's debt credit ratings,
which are an indication of the State's ability to repay its debt and a
reflection of the State's sound financial management, are, for the most recent
general obligation bond issues, Aa3 (Moody's Investors Service) and AA (Standard
& Poor's Rating Group), confirmed on September 22, 2003.
Each Oregon Trust is susceptible to political, economic or regulatory factors
affecting issuers of Oregon municipal obligations (the "Oregon Municipal
Obligations"). These include the possible adverse effects of certain Oregon
constitutional amendments, legislative measures, voter initiatives and other
matters. The information provided is only a brief summary of the complex factors
affecting the financial situation in Oregon and is derived from sources that are
generally available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
preceding information. It is based in part on information obtained from various
State and local agencies in Oregon or contained in Official Statements for
various Oregon Municipal Obligations.
Pennsylvania Risk Factors
Recent Economic Trends. During the past three years, most measures of
economic activity have consistently performed below expectations. Recent
economic indictors at the national level suggest that a more robust and
sustainable recovery may be starting to take shape. However, reasons for caution
remain. Growth in real Gross Domestic Product has been erratic over the past 2
years, with a quarter of strong economic gains more often than not followed by
growth levels that were well below the prior quarter and also well below
expectations.
Productivity gains and the shedding of excess capacity by businesses have
resulted in falling payrolls and an unemployment rate that rose to a nine-year
high during 2003. The degree of success of the emerging recovery will eventually
turn on whether improvements can be achieved in the labor markets. Caution
regarding the prospects for sustainable job creation within the national economy
is warranted. The pace of growth in employment so far is well below a typical
recovery.
A national economy that creates 150,000 net new jobs per month is generally
the benchmark for expected positive improvements to the unemployment rate. The
current economy averaged only 70,000 monthly net new jobs at the national level
over the past four months. Participation in the national labor force fell to a
12-year low during the fall of 2003. As result, the national unemployment rate
declined. However this decline was solely a function of lack of growth in the
labor force, not the result of positive gains in job growth. Lack of job growth
is constraining U.S. consumer demand. Low growth in wages and personal income is
also constraining U.S. economic growth. Business investment appears to be
increasing, following three years in which business investment saw either
absolute reductions or very low rates of growth. Much of the growth in real GDP
and consumer spending during the third quarter of 2003 appears to have been
driven by temporary fiscal stimuli in the form of federal tax cuts, tax refunds
and mortgage refinancing. Of these, only the federal tax cuts are recurring.
It is expected that growth in the national economy will remain positive but
slow significantly from the extraordinary pace set in the third quarter of 2003,
led by a slowing in the rate of growth of consumer spending. The result is
likely to be an annual rate of growth in real GDP of 3 percent for 2003 and
slightly over 4 percent for 2004. Typical recovery periods average between 5 and
7 percent real GDP growth. Economic forecasts currently anticipate that the
recovery will continue in 2004 but gradually shift from consumerled to
business-led drivers of demand, generally in the form of higher capital
spending, inventory rebuilding and increased exports. Recent evidence suggests
that consumers are becoming more cautious in their spending, and consequently,
consumption growth for 2004 is expected to be positive but moderate.
The Outlook for Pennsylvania. The Commonwealth of Pennsylvania
("Pennsylvania" or the "Commonwealth") historically has been identified as a
heavy industry state, although that reputation has been changing as the
industrial composition of Pennsylvania's economy continues to diversify into the
service sector, including trade, medical and health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, particularly in
crop and livestock products as well as agribusiness and food related industries.
Pennsylvania's labor market continues to struggle through the recovery. Job
losses and lack of significant growth following the recent recession continue to
adversely impact the Commonwealth. Pennsylvania has been experiencing a lower
unemployment rate than the U.S. as a whole. However, this is because of the lack
of growth in the State's labor force over the past few years. Pennsylvania's
labor force is down 2.1 percent and employment is down 1.2 percent since January
2003. As a result, most reductions in the Pennsylvania unemployment rate seen
since February 2003 are primarily the result of a smaller labor force rather
than actual job creation.
Employment growth in Pennsylvania has been moving in the opposite direction
from the national economy. As opposed to the moderately growing national
employment base, Pennsylvania has been experiencing a net loss in employment
growth since January 2003. A struggling recovery and the lack of job growth are
also having impacts on national and State personal income growth. Growth in real
personal income within Pennsylvania lagged the national rate during the most
recent period when the economy was expanding. However, growth in national real
personal income slowed to a level below that of the Commonwealth during the
recession and the subsequent "non-recovery" period. The prior trend of
Pennsylvania growth lagging below U.S. growth is expected to re-appear as U.S.
economic growth accelerates to more robust levels. Since the national economy is
projected to expand, the divergence between the growth in State and national
real personal income is projected to reappear. Uncertainty remains regarding the
relative strength and sustainability of the current recovery, particularly in
Pennsylvania.
Commonwealth Financial Structure. The Constitution and the laws of the
Commonwealth require all payments from the State Treasury, with the exception of
refunds of taxes, licenses, fees and other charges, to be made only by duly
enacted appropriations. Amounts appropriated from a fund may not exceed its
actual and estimated revenues for the fiscal year plus any unappropriated
surplus available. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund (a lapse) if not spent or encumbered by the
end of the fiscal year. The Commonwealth's fiscal year begins July 1 and ends
June 30.
The General Fund. The General Fund, the Commonwealth's largest operating
fund, may be used to assess Pennsylvania's financial position and activities for
the fiscal year ended June 30, 2003. It accounts for all revenues and other
receipts that are not required by law to be accounted for or deposited in other
special funds and reflects a significant portion of Commonwealth expenditures.
Tax revenues, principally personal and corporate income and sales and use taxes,
constitute approximately two-thirds of the General Fund budgetary basis
revenues. The functional assignments for General Fund expenditures are:
direction and supportive services, protection of persons and property, health
and human services, public education, recreation and cultural enrichment,
economic development, transportation and transfers to debt service funds for all
obligations except those incurred for highway or other special revenue fund
purposes.
During the five-year period from fiscal year 1998 through fiscal year 2002,
total revenues and other sources increased by an average of 4.7 percent
annually. Tax revenues during the same period increased by an annual average of
2.1 percent. Recent slow economic growth and the resulting slow growth from tax
revenues have caused fees and license income and other financing sources such as
transfers from other funds to become a larger portion of income to the General
Fund for fiscal year 2002. Operating transfers, transfers from components and
other additions totaled $474.1 million in fiscal year 2002, an increase of
$395.8 million from the prior fiscal year. Increased transfers from balances
held by the state-owned liquor store system, a legislated transfer of prior-year
unspent funds from Tobacco Settlement Fund and a transfer of equity by the
Pennsylvania Industrial Development Board account for the major portion of this
increase. Expenditures and other uses during the fiscal years 1998 through 2002
rose an average annual rate of 6.5 percent.
The General Fund balance at June 30, 2002 totaled $2,902.4 million, a
decrease of $1,582.7 million from the balance at June 30, 2001 (restated). The
transfer of $853.9 million of accumulated tobacco settlement receipts and
associated investment earnings to the Tobacco Settlement Fund, a special revenue
fund, accounts for a major portion of the General Fund's decline in fund
balance. The fiscal year 2002 year-end unreserved-undesignated portion of the
fund balance was $1,483.3 million, $41.5 million below the amount recorded for
fiscal year 2001.
Debt Administration. The Constitution of the Commonwealth permits the
Commonwealth to incur the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate debt
approval, (iii) debt for capital projects subject to an aggregate debt limit of
1.75 times the annual average tax returns of the preceding five fiscal years and
(iv) tax anticipation notes payable in the fiscal year of issuance. All debt
except tax anticipation notes must be amortized in substantial and regular
amounts. Debt service on Commonwealth general obligation debt is paid from
appropriations out of the General Fund except for debt issued for highway
purposes, which is paid from Motor License Fund appropriations.
Net outstanding general obligation debt totaled $6,059.3 million at June 30,
2002, a net increase of $643.1 million from June 30, 2001. Nearly 20 percent of
this increase was attributed to a $116.3 million decline in sinking fund
balances during the fiscal year. By using balances to pay debt service, fiscal
year 2002 debt service appropriation amounts from the General Fund were reduced.
Over the 10-year period ended June 30, 2002, total net outstanding general
obligation debt increased at an annual rate of 2.2 percent. Within the most
recent 5-year period, outstanding general obligation debt has increased at an
annual rate of 4.8 percent.
Risk Management. The Commonwealth maintains ongoing training and information
programs to reduce risks associated with employee injury and negligence,
contract compliance, tort liabilities and property losses. The Commonwealth
became self-insured for employee disability and medical claims on July 1, 1983.
The Commonwealth is also self-insured for annuitant medical/hospital benefits
and tort liabilities, including automobile, employee and transportation-related
claims. Reserves have been established to fund self-insured claims. Third-party
coverage is obtained for property losses in excess of $1 million per occurrence,
to a limit of $100 million per occurrence. Coverage for property losses less
than $1 million or more than $100 million is maintained through the
Commonwealth's self-insurance program.
Employment. Non-agricultural employment in Pennsylvania over the ten years
ending in 2002 increased at an average annual rate of 1.0 percent compared with
a 1.0 percent rate for the Middle Atlantic region and 1.8 percent rate for the
U.S. Pennsylvania's annual average unemployment rate was equivalent to the
national average throughout the 1990's. From 1998 through 2002, Pennsylvania's
annual average unemployment rate was below the Middle Atlantic Region's average,
but slightly higher than that of the U.S. As of February 2003, Pennsylvania had
a seasonally adjusted unemployment rate of 6.2 percent.
Philadelphia. The City of Philadelphia ("Philadelphia") is the largest city
in the Commonwealth, with an estimated 1998 population of 1.43 million according
to the U.S. Bureau of the Census, ranking 6th in metropolitan areas of the U.S.
Philadelphia functions both as a first class city and county for the purpose of
administering various governmental programs.
Ratings. All outstanding general obligation bonds of the Commonwealth of
Pennsylvania are rated AA by Standard & Poor's Ratings Services; Aa2 by Moody's
Investor's Service, Inc.; and AA by Fitch IBCA, Inc. Any explanation concerning
the significance of such ratings must be obtained from the rating agencies.
There is no assurance that any ratings will continue for any period of time or
that they will not be revised or withdrawn.
Local Issuances. It should be noted that the creditworthiness of obligations
issued by local Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on such local
obligations in the event of default.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of bonds contained in the
Pennsylvania IM-IT and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of such obligations
are subject. Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of such bonds, could affect or could have an adverse impact on the
financial condition of the Commonwealth and various agencies and political
subdivisions thereof. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of the bonds contained in
the Pennsylvania IM-IT, the market value or marketability of such bonds or the
ability of the respective issuers of such bonds acquired by the Pennsylvania
IM-IT to pay interest on or principal of such bonds.
The Pennsylvania IM-IT is susceptible to political, economic or regulatory
factors affecting issuers of Pennsylvania municipal obligations (the
"Pennsylvania Municipal Obligations"). These include the possible adverse
effects of certain Pennsylvania constitutional amendments, legislative measures,
voter initiatives and other matters that are described. The information provided
above is only a brief summary of the complex factors affecting the financial
situation in Pennsylvania and is derived from sources that are generally
available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from various
State and local agencies in Pennsylvania or contained in Official Statements for
various Pennsylvania Municipal Obligations.
Puerto Rico Risk Factors
Geographic Location and Demography. The Commonwealth of Puerto Rico ("Puerto
Rico" or the "Commonwealth"), the fourth largest of the Caribbean islands, is
located approximately 1,600 miles southeast of New York City. It is
approximately 100 miles long and 35 miles wide. The official languages of Puerto
Rico are Spanish and English.
According to the United States Census Bureau, the population of Puerto Rico
was 3,808,610 in 2000, compared to 3,522,000 in 1990. As of 2000, the population
of San Juan, the island's capital and largest city, was 434,375.
Relationship with the United States. Puerto Rico came under United States
sovereignty pursuant to the Treaty of Paris, signed on December 10, 1898, which
ended the Spanish-American War. Puerto Ricans have been citizens of the United
States since 1917. In 1950, after a long evolution toward greater
self-government for Puerto Rico, the Congress of the United States enacted
Public Law 600, which is "in the nature of a compact" and which became effective
upon its acceptance by the electorate of Puerto Rico. It provides that those
sections of existing law which defined the political, economic, and fiscal
relationship between Puerto Rico and the United States would remain in full
force. It also authorized the people of Puerto Rico to draft and adopt their own
Constitution. The Constitution was drafted by a popularly elected constitutional
convention, overwhelmingly approved in a special referendum by the people of
Puerto Rico and approved by the United States Congress and the President of the
United States, becoming effective upon proclamation of the Governor of Puerto
Rico on July 25, 1952. Puerto Rico's relationship with the United States is
referred to herein as commonwealth status.
The United States and the Commonwealth share a common defense, market, and
currency. The Commonwealth exercises virtually the same control over its
internal affairs as do the fifty states. It differs from the states, however, in
its relationship with the federal government. The people of Puerto Rico are
citizens of the United States but do not vote in national elections. They are
represented in Congress by a Resident Commissioner who has a voice in the House
of Representatives but no vote. Most federal taxes, except those such as Social
Security taxes which are imposed by mutual consent, are not levied in Puerto
Rico. No federal income tax is collected from Puerto Rico residents on income
earned in Puerto Rico, except for certain federal employees who are subject to
taxes on their salaries.
Governmental Structure. The Constitution of the Commonwealth provides for the
separation of powers of the executive, legislative, and judicial branches of
government. The Governor is elected every four years. The Legislature consists
of a Senate and a House of Representatives, the members of which are elected for
four-year terms. The highest court within the local jurisdiction is the Supreme
Court of Puerto Rico. Puerto Rico constitutes a District in the Federal
Judiciary and has its own United States District Court. Decisions of this court
may be appealed to the United States Court of Appeals for the First Circuit and
from there to the Supreme Court of the United States.
Governmental responsibilities assumed by the central government of the
Commonwealth are similar in nature to those of the various state governments. In
addition, the central government assumes responsibility for local police and
fire protection, education, public health and welfare programs, and economic
development.
Puerto Rico's Economy, Generally. The Commonwealth has established policies
and programs directed principally at developing the manufacturing and services
sectors of the economy and expanding and modernizing the Commonwealth's
infrastructure. Domestic and foreign investments have been stimulated by
selective tax exemptions, development loans, and other financial and tax
incentives. Infrastructure expansion and modernization have been to a large
extent financed by bonds and notes issued by the Commonwealth, its public
corporations, and municipalities. Economic progress has been aided by
significant increases in the levels of education and occupational skills of the
island's population.
Puerto Rico has enjoyed two decades of almost continuous economic expansion.
Almost every sector of the economy has participated in this expansion, and
record levels of employment have been achieved. Factors contributing to this
expansion included government-sponsored economic development programs, increases
in the level of federal transfer payments, a significant expansion in
construction investment driven by infrastructure projects and private
investment, primarily in housing, the relatively low cost of borrowing, and low
oil prices in many years during this period.
Personal income, both aggregate and per capita, has increased consistently
each fiscal year from 1985 to 2003. In fiscal year 2003, aggregate personal
income was $43.6 billion ($41.7 billion in 2000 prices) and personal income per
capita was $11,279 ($10,784 in 2000 prices). Personal income includes transfer
payments to individuals in Puerto Rico under various social programs. Total
federal payments to Puerto Rico, which include transfers to local government
entities and expenditures of federal agencies in Puerto Rico, in addition to
federal transfer payments to individuals, are lower on a per capita basis in
Puerto Rico than in any state of the United States. Transfer payments to
individuals in fiscal year 2003 were $9.6 billion, of which $7.4 billion, or
76.6%, represented entitlements to individuals who had previously performed
services or made contributions under programs such as Social Security, Veterans'
Benefits, Medicare and U.S. Civil Service retirement pensions.
Total average employment (as measured by the Department of Labor and Human
Resources Household Employment Survey) has also increased. For example, from
fiscal year 1999 to fiscal year 2003, average employment increased from
1,146,700 to 1,210,800.
The dominant sectors of the Puerto Rico economy are manufacturing and
services. The manufacturing sector has undergone fundamental changes over the
years as a result of increased emphasis on higher wage, high technology
industries, such as pharmaceuticals, biotechnology, electronics, computers,
microprocessors, professional and scientific instruments, and certain high
technology machinery and equipment. The services sector, including finance,
insurance, real estate, wholesale and retail trade, and tourism, also plays a
major role in the economy. It ranks second only to manufacturing in contribution
to Puerto Rico's gross domestic product and leads all sectors in providing
employment.
The economy of Puerto Rico is closely linked to the United States economy.
Factors affecting the United States economy usually have a significant impact on
the performance of the Puerto Rico economy. These include exports, direct
investment, the amount of federal transfer payments, the level of interest
rates, the level of oil prices, the rate of inflation, and tourist expenditures.
Consequently, the economic slowdown in the United States in 2001 and 2002 and
the subsequent recovery in 2003, which continues in 2004, have also been
reflected in the Puerto Rico economy. During fiscal year 2003 (July 2002 through
June 2003), approximately 86% of Puerto Rico's exports went to the United States
mainland, which was also the source of approximately 49% of Puerto Rico's
imports. In fiscal year 2003, Puerto Rico experienced a $21.4 billion positive
merchandise trade balance.
Since the 1950s, the Puerto Rico Planning Board (the "Planning Board") has
prepared a complete set of macroeconomic measures like those prepared for the
United States by the Bureau of Economic Analysis ("BEA") of the Department of
Commerce. In contrast with the BEA, which computes the economic accounts on a
quarterly basis, the Planning Board computes the economic accounts on an annual
basis. Like the BEA, the Planning Board revises the macroeconomic numbers on a
regular basis. The Planning Board has always classified the latest annual
numbers as preliminary until they are revised and made final in conjunction with
the release of new data each year. At present, all macroeconomic accounts for
fiscal year 2003 are preliminary until the revised figures are released.
Fiscal Year 2003 -- The Planning Board's preliminary reports of the
performance of the Puerto Rico economy during fiscal year 2003 indicate that the
economy registered an increase of 1.9% in real gross product. Gross product was
$47.4 billion in fiscal year 2003 ($42.7 billion in 2000 prices) compared to
$45.0 billion in fiscal year 2002 ($41.9 billion in 2000 prices). This
represents an increase in nominal gross product of 5.2%. Aggregate personal
income increased from $42.2 billion in fiscal year 2002 ($40.8 billion in 2000
prices) to $43.6 billion in fiscal year 2003 ($41.7 billion in 2000 prices), and
personal income per capita increased from $10,969 in fiscal year 2002 ($10,603
in 2000 prices) to $11,279 in fiscal year 2003 ($10,784 in 2000 prices).
According to the Department of Labor and Human Resources Household Employment
Survey (the "Household Survey"), total monthly employment averaged 1,210,800 in
fiscal year 2003 compared to 1,169,600 in fiscal year 2002, an increase of 3.5%.
Notwithstanding this increase in average monthly employment, the unemployment
rate increased from 12.0% during fiscal year 2002 to 12.1% during fiscal year
2003 due to a higher labor participation rate and a significant increase in the
civilian population aged 16 years and over.
Fiscal Year 2004 -- The Planning Board's current real gross product forecast
for fiscal years 2004 and 2005, released in February 2004, projects an increase
of 2.9% and 2.7%, respectively. According to the Household Survey, total monthly
seasonally adjusted employment for the period from July 2003 to March 2004
averaged 1,232,100, an increase of 2.3% compared to 1,204,700 for the same
period during fiscal year 2003. The seasonally adjusted unemployment rate for
the first nine months of fiscal year 2004 was 11.2%, a decrease from 12.1% for
the same period in fiscal year 2003. As in the past, the economy of Puerto Rico
is expected to follow the performance of the United States economy. Construction
activity is expected to be a driving force for economic growth in the short and
medium-term. The Planning Board's forecast for construction investment, both
public and private, for fiscal year 2004 is $6.7 billion, in nominal terms,
which represents a real growth of 4.6% when compared to fiscal year 2003.
Employment and Unemployment. The number of persons employed in Puerto Rico
during fiscal year 2003 averaged 1,210,800. Unemployment, although at relatively
low historical levels, remains above the United States average. The average
unemployment rate decreased from 12.5% in fiscal year 1999 to 12.1% in fiscal
year 2003, and to 11.2% in March 2004.
Tax Incentives. One of the factors that has promoted and continues to promote
the development of the manufacturing sector in Puerto Rico has been the various
local and federal tax incentives available, particularly those under Puerto
Rico's Industrial Incentives Program and, until recently, Sections 30A and 936
of the Code.
Industrial Incentives Program - Since 1948, Puerto Rico has had various
industrial incentives laws designed to stimulate industrial investment in the
island. Under these laws, companies engaged in manufacturing and certain other
designated activities were eligible to receive full or partial exemption from
income, property, and other local taxes. The most recent of these industrial
incentives laws is the 1998 Tax Incentives Act, a law aimed at promoting
investment in Puerto Rico.
The benefits provided by the 1998 Tax Incentives Act are available to new
companies as well as companies currently conducting tax exempt operations in
Puerto Rico that choose to renegotiate their existing tax exemption grant. The
activities eligible for tax exemption include manufacturing, certain designated
services performed for markets outside Puerto Rico, the production of energy
from local renewable sources for consumption in Puerto Rico and laboratories for
scientific and industrial research. For companies qualifying thereunder, the
1998 Tax Incentives Act imposes income tax rates ranging from 2% to 7% for
periods ranging from 10 to 25 years. In addition, it grants 90% exemption from
property taxes, 100% exemption from municipal license taxes during the first
three semesters of operations and between 80% and 60% thereafter, and 100%
exemption from excise taxes with respect to raw materials and certain machinery
and equipment used in the exempt activities. The 1998 Tax Incentives Act also
provides various special deductions designed to stimulate employment and
productivity, research and development and capital investment in Puerto Rico.
Under the 1998 Tax Incentives Act, companies can repatriate or distribute
their profits free of Puerto Rico dividend taxes. In addition, passive income
derived from the investment of eligible funds in Puerto Rico financial
institutions, obligations of the Commonwealth and other designated investments
are fully exempt from income and municipal license taxes. Individual
shareholders of an exempted business are allowed a credit against their Puerto
Rico income taxes equal to 30% of their proportionate share of the exempted
business's income tax liability. Gain from the sale or exchange of shares of an
exempted business by its shareholders during the exemption period is subject to
a 4% income tax rate.
Incentives under the Code - United States corporations operating in Puerto
Rico have been subject to special tax provisions since the Revenue Act of 1921.
Prior to enactment of the Tax Reform Act of 1976, under Section 931 of the Code,
United States corporations operating in Puerto Rico (and meeting certain source
of income tests) were taxed only on income arising from sources within the
United States.
The Tax Reform Act of 1976 created Section 936 of the Code, which revised the
tax treatment of United States corporations operating in Puerto Rico by taxing
such corporations on their worldwide income in a manner similar to that
applicable to any other United States corporation but providing such
corporations a full credit for the federal tax on their business and qualified
investment income in Puerto Rico. The credit provided an effective 100% federal
tax exemption for operating and qualifying investment income from Puerto Rico
sources.
As a result of amendments to Section 936 made in 1996 (the "1996
Amendments"), the tax credit is being phased out over a ten-year period for
companies that were operating in Puerto Rico in 1995 and is no longer available
for corporations that establish operations in Puerto Rico after October 13,
1995. The 1996 Amendments also eliminated the credit previously available for
income derived from certain qualified investments in Puerto Rico.
Section 30A - The 1996 Amendments added Section 30A to the Code. Section 30A
permits a "qualifying domestic corporation" ("QDC") that meets certain gross
income tests to claim a credit (the "Section 30A Credit") against the federal
income tax imposed on taxable income derived from sources outside the United
States from the active conduct of a trade or business in Puerto Rico or from the
sale of substantially all the assets used in such business ("possession
income"). The Section 30A Credit will not be available for taxable years
commencing after 2005.
The Section 30A Credit is limited to the sum of (i) 60% of qualified
possession wages as defined in the Code, which includes wages up to 85% of the
maximum earnings subject to the OASDI portion of Social Security taxes plus an
allowance for fringe benefits of 15% of qualified possession wages, (ii) a
specified percentage of depreciation deductions ranging between 15% and 65%,
based on the class life of tangible property, and (iii) a portion of Puerto Rico
income taxes paid by the QDC, up to a 9% effective tax rate (but only if the QDC
does not elect the profit-split method for allocating income from intangible
property).
In the case of taxable years beginning after December 31, 2001, the amount of
possession income that qualifies for the Section 30A Credit is subject to a cap
based on the QDC's possession income for an average adjusted base period ending
before October 14, 1995.
Section 936 -- Under Section 936 of the Code, as amended by the 1996
Amendments, United States corporations that meet certain requirements and elect
its application ("Section 936 Corporations") are entitled to credit against
their United States corporate income tax the portion of such tax attributable to
income derived from the active conduct of a trade or business within Puerto Rico
("active business income") and from the sale or exchange of substantially all
assets used in the active conduct of such trade or business.
Under Section 936, a Section 936 Corporation may elect to compute its active
business income, eligible for the Section 936 credit, under one of three
formulas: (i) a cost-sharing formula, whereby it is allowed to claim all profits
attributable to manufacturing intangibles and other functions carried out in
Puerto Rico provided it makes a cost sharing payment in the amount required
under Section 936; (ii) a profit-split formula, whereby it is allowed to claim
50% of the combined net income of its affiliated group from the sale of products
manufactured in Puerto Rico; or (iii) a cost-plus formula, whereby it is allowed
to claim a reasonable profit on the manufacturing costs incurred in Puerto Rico.
The Section 936 credit is now only available to companies that were operating
in Puerto Rico on October 13, 1995, and had elected the percentage of income
credit provided by Section 936. Such percentage of income credit is equal to 40%
of the federal income tax otherwise imposable on the Puerto Rico active business
income or derived from the sale or exchange of substantially all assets used in
such business.
In the case of taxable years beginning on or after 1998, the possession
income subject to the Section 936 credit is subject to a cap based on the
Section 936 Corporation's possession income for an average adjusted base period
ending on October 14, 1995. The Section 936 credit is eliminated for taxable
years commencing after 2005.
Controlled Foreign Corporations - Because of the credit limitations and
impending phase out of Sections 30A and 936, many corporations previously
operating thereunder have reorganized their operations in Puerto Rico to become
controlled foreign corporations ("CFCs"). A CFC is a corporation which is
organized outside the United States and is controlled by United States
shareholders. In general, a CFC may defer the payment of federal income taxes on
its trade or business income until such income is repatriated to the United
States in the form of dividends or through investments in certain United States
properties. The Puerto Rico Office of Industrial Tax Exemption has received
notification from over eighty corporations that have converted part or all of
their operations to CFCs. These include most of the major pharmaceutical,
instrument and electronics companies manufacturing in Puerto Rico.
CFCs operate under transfer pricing rules for intangible income that are
different from those applicable to corporations operating under Sections 936 and
30A. In many cases, they are allowed to attribute a larger share of this income
to their Puerto Rico operation, but must make a royalty payment "commensurate
with income" to their U.S. affiliates. Section 936 companies were exempted from
Puerto Rico withholding taxes on any cost sharing payments they might have opted
to make, but CFCs are subject to a ten percent Puerto Rico withholding tax on
royalty payments.
Public Sector Debt. Public sector debt comprises bonds and notes of the
Commonwealth, its municipalities, and public corporations ("notes" as used in
this section refers to certain types of non-bonded debt regardless of maturity),
subject to the exclusions described below. The Constitution of Puerto Rico
limits the amount of general obligation (full faith and credit) debt that can be
issued or guaranteed by the Commonwealth. The Commonwealth's policy has been and
continues to be to maintain the amount of such debt prudently below the
constitutional limitation. Direct debt of the Commonwealth is supported by
Commonwealth taxes. Debt of municipalities, other than bond anticipation notes,
is supported by real and personal property taxes and municipal license taxes.
Debt of public corporations, other than bond anticipation notes, is generally
supported by the revenues of such corporations from rates charged for services
or products. However, certain debt of public corporations is supported, in whole
or in part, directly or indirectly, by Commonwealth appropriations or taxes.
Direct debt of the Commonwealth is issued pursuant to specific legislation
approved in each particular case. Debt of the municipalities is issued pursuant
to resolutions adopted by the respective municipal assemblies. Debt of public
corporations is issued pursuant to resolutions adopted by the governing bodies
of the public corporations in accordance with their enabling statutes.
Taxes, Revenues and Expenditures. The Secretary of the Treasury has custody
of the funds of the central government and is responsible for the accounting,
disbursement and investment of such funds. Central government funds are grouped
into three major categories or "types" of funds, as follows: (i) Governmental
Fund Types, which include the General, Special Revenue, Debt Service (also
referred to herein as Redemption), and Capital Project Funds; (ii) Proprietary
Fund Types, which include the Enterprise and Internal Service Funds; and (iii)
Fiduciary Fund Types, which include the Trust and Agency Funds. These funds do
not include funds of the municipalities, because the municipalities are
governmental entities with independent treasuries. The Special Revenue Fund is
incorporated into the General Fund for financial reporting purposes (but not for
budgetary purposes).
The General Fund is the primary operating fund of the Commonwealth. General
Fund revenues are broadly based and include revenues raised internally as well
as those from non-Puerto Rico sources. Internal revenues consist principally of
income taxes and excise taxes. Revenues from non-Puerto Rico sources are derived
from federal excise taxes and customs duties returned to the Commonwealth. The
primary expenditures of the Commonwealth through the General Fund are for grants
and subsidies, and personal and other services.
The following table presents the revenues and expenditures of the General
Fund on a cash basis for fiscal year 2000 through fiscal year 2003 and the
budgeted revenues and expenditures for fiscal year 2004. The information through
fiscal year 2003 is based on actual fiscal year-end results. (The information
relating to fiscal year 2003 is preliminary and subject to audit adjustments.)
The information relating to fiscal year 2004 is based on the current budget of
revenues and expenditures for fiscal year 2004.
The amounts shown on the table as expenditures may be different than those
reflected in the budget or in the Commonwealth's financial statements because
the table shows only cash disbursements, while the budget includes all
authorized expenditures, regardless of when the related cash is actually
disbursed. In addition, transfers to the Redemption Fund (used to pay debt
service on the Commonwealth's bonds), which are included in the budget under
"debt service," are shown as a deduction from total revenues in calculating
"adjusted revenues" in the table and are not included under "expenditures."
Finally, certain expenditures incurred in excess of budgeted amounts may not be
reflected in the table as expenditures to the extent they are paid from reserve
funds, such as moneys in the Budgetary Fund. For example, in fiscal year 2003,
there were approximately $150 million of such expenditures that are not
reflected in the table.
Amounts listed under "Other Income" represent recurring General Fund revenues
not appropriately attributable to other revenue line items, such as repayment of
General Fund advances to municipalities and government agencies and funds.
"Other Expenditures" represent recurring General Fund expenditures not
appropriately attributable to other expenditures line items, such as advances to
government agencies and municipalities, which advances are to be reimbursed to
the General Fund by law. Amounts listed under Outlays and Other Debt Service"
represent debt service on obligations and capital expenditures for which the
Legislature has by resolution agreed to appropriate funds. "Transfers to
Agencies" represents moneys appropriated for the operation of the Health
Facilities and Services Administration or, after the dissolution of that
Administration, the Department of Health. General Fund revenues, expenditures
and transfers as presented in the table differ from the General Fund revenues,
expenditures and transfers as presented in the financial statements of the
Commonwealth, as the latter statements reflect an expanded General Fund entity
in accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
COMMONWEALTH OF PUERTO RICO
GENERAL FUND REVENUES, EXPENDITURES, AND CHANGES IN CASH BALANCE
(in thousands)
2000 2001 2002 2003 (p) 2004 (c)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning cash balance $ 474,759 $ 287,055 $ 125,154 $ 350,284 $ 179,058
Revenues from internal sources:
Income Taxes:
Individuals 2,352,066 2,259,090 2,471,782 2,517,678 2,816,000
Corporations 1,781,862 1,696,766 1,584,719 1,776,985 1,826,000
Partnerships 2,339 3,026 2,670 2,101 2,000
Withheld from non-residents 557,276 696,835 583,256 517,141 560,000
Tollgate taxes 111,130 49,511 59,515 45,321 22,000
Interest 11,674 14,782 14,310 11,278 13,000
Dividends 39,664 58,580 62,548 49,790 47,000
-------- -------- -------- -------- --------
Total income taxes 4,856,011 4,778,590 4,778,800 4,920,294 5,286,000
-------- -------- -------- -------- --------
Commonwealth excise taxes:
Alcoholic beverages 236,374 237,512 249,705 299,582 313,000
Cigarettes 115,157 119,135 116,055 149,487 159,000
Motor vehicles 389,995 406,252 418,024 499,252 543,000
Other excise taxes 668,820 579,050 674,762 703,029 738,000
-------- -------- -------- -------- --------
Total Commonwealth excise taxes 1,410,346 1,341,949 1,458,546 1,651,350 1,753,000
-------- -------- -------- -------- --------
Property taxes 1,131 287 -- -- --
Inheritance and gift taxes 3,109 7,475 1,962 2,825 3,000
Licenses 73,801 76,338 82,575 85,876 87,000
Other:
Lottery 63,779 57,482 61,358 67,621 66,000
Electronic Lottery 70,209 70,211 57,897 89,443 88,000
Miscellaneous non-tax revenues 169,246 299,758 668,226 438,457 292,000
-------- -------- -------- -------- --------
Total Other 303,234 427,451 787,481 595,521 446,000
-------- -------- -------- -------- --------
Total revenues from internal source: 6,647,632 6,632,090 7,109,364 7,255,866 7,575,000
-------- -------- -------- -------- --------
Revenues from non-Commonwealth sources:
Federal excise taxes 245,750 286,890 314,253 309,958 330,000
Customs 50,231 43,154 30,595 25,918 20,000
-------- -------- -------- -------- --------
Total revenues from
non-Commonwealth sources 295,981 330,044 344,848 335,876 350,000
-------- -------- -------- -------- --------
Total revenues 6,943,613 6,962,134 7,454,212 7,591,742 7,925,000
-------- -------- -------- -------- --------
Other Income (refunds)2 64,325 84,878 111,411 (78,927) 305,468
Transfer to Redemption Fund3 (410,046) (245,814) (274,773) (331,925) (407,948)
Proceeds of notes and other borrowings4 778,863 825,703 1,161,856 2,259,775 1,568,397
Repayment of notes and other borrowings5 (787,155) (686,024) (1,201,084) (2,021,832) (1,574,634)
-------- -------- -------- -------- --------
Adjusted revenues 6,589,600 6,940,877 7,251,622 7,418,833 7,816,283
-------- -------- -------- -------- --------
Expenditures:
Grants and subsidies 2,864,215 3,078,505 2,862,288 3,773,579 2,626,738
Personal services. 2,737,159 2,779,989 2,884,636 3,119,476 4,718,184
Other services 745,194 778,236 764,655 583,343 344,406
Material and supplies 109,081 106,072 106,294 80,491 146,036
Equipment purchases 56,404 48,326 20,397 33,170 21,187
Capital outlays and other debt service.101,178 33,235 73,806 -- --
Transfer to agencies 164,073 280,415 314,416 -- --
Prior year disbursements -- -- -- -- --
Total expenditures. 6,777,304 7,102,778 7,026,492 7,590,059 7,944,984
-------- -------- -------- -------- --------
Adjusted revenues less expenditures (187,704) (161,901) 225,130 (171,226) (128,701)
-------- -------- -------- -------- --------
Ending cash balance $ 287,055 $ 125,154 $ 350,284 $ 179,058 $ 50,357
-------- -------- -------- -------- --------
</TABLE>
(p) Preliminary
(c) Current budget.
1 Includes certain non-recurring revenues totaling $244.1 million.
2 Consists of net revenue from General Fund's non budgetary fund plus a
reserve for future taxes refunds reduced by estimated tax refunds.
3 Consists of amounts to pay principal of and interest on general
obligation bonds and notes of the Commonwealth. Does not include
amounts deposited directly to the Redemption Fund from non-General
Fund revenues.
4 Consists of proceeds of Commonwealth tax and revenue anticipation
notes and borrowings from Government Development Bank.
5 Consists of repayment of Commonwealth tax and revenue anticipation
notes and borrowings from Government Development Bank.
Litigation. The Commonwealth is a defendant in numerous legal proceedings
pertaining to matters incidental to the performance of routine governmental
operations. Under Act No. 104 of the Legislature of Puerto Rico, approved on
June 25, 1955, as amended ("Act No. 104"), persons are authorized to sue the
Commonwealth only for causes of actions specified in said Act. The Commonwealth
may be liable under Act No. 104 for damages up to a maximum amount of $75,000 or
$150,000 if the suit involves actions for damages to more than one person or
where a single injured party is entitled to several causes of action. Under
certain circumstances, as provided in Act No. 9 of the Legislature of Puerto
Rico, approved on November 26, 1975, as amended ("Act No. 9"), the Commonwealth
may provide its officers and employees, including directors of public
corporations and government instrumentalities and mayors of the municipalities
of the Commonwealth, with legal representation, as well as assume the payment of
any judgment that may be entered against them. There is no limitation on the
amount of the judgment that may be paid under Act No. 9.
With respect to pending and threatened litigation, as of June 30, 2003, the
Commonwealth will include in its financial statements reported liabilities of
approximately $70 million for awarded and anticipated unfavorable judgments.
This amount represented the amount estimated at the time as a probable liability
or a liability with a fixed or expected due date, which would require future
available financial resources for its payment. The Commonwealth believes that
the ultimate liability in excess of amounts provided in the financial
statements, if any, would not be significant.
The Commonwealth is a defendant in two lawsuits filed in local and federal
district court by an association of insurance companies seeking to recover from
the Commonwealth approximately $74 million of compulsory insurance premiums
allegedly belonging to the insurance companies or their policyholders which were
transferred by the Secretary of the Treasury to the General Fund. The
Commonwealth believes that its ultimate liability, if any, would not be
significant.
The Commonwealth is a defendant in a lawsuit alleging violations of civil
rights. The amounts claimed approximate $23 million; however, the ultimate
liability cannot be presently determined. No provision for any liability that
may result upon adjudication of this lawsuit has been recognized in the
financial statements by the Commonwealth. The Commonwealth believes that the
ultimate liability, if any, would not be significant.
Several officers of the Commonwealth are defendants in a class action lawsuit
filed in 1979 in the United States District Court for the District of Puerto
Rico by various inmates who alleged that their constitutional rights were being
violated because of overcrowding and lack of adequate healthcare in the island's
correctional system. In 1980, the United States District Court issued a
preliminary injunction and required the defendants to provide additional
capacity for the cells of the correctional facilities and to improve the
healthcare services available to inmates. Fines in the amount of $280 million
have been assessed against the defendants in order to assure compliance with the
space and healthcare requirements imposed by the United States District Court.
Of the fines imposed, $150 million have already been paid by the Commonwealth.
Ratings. As of August 11, 2004, all outstanding general obligation bonds of
the Commonwealth were rated A- (negative outlook) by Standard & Poor's Ratings
Services and Baa1 (stable outlook) by Moody's Investor's Service, Inc. Any
explanation concerning the significance of such ratings must be obtained from
the rating agencies. There is no assurance that any ratings will continue for
any period of time or that they will not be revised or withdrawn.
Each Trust containing a concentration of issuers located in Puerto Rico may
be susceptible to political, economic or regulatory factors affecting issuers of
Puerto Rico municipal obligations (the "Puerto Rico Municipal Obligations").
These include the possible adverse effects of certain Puerto Rico constitutional
amendments, legislative measures, voter initiatives and other matters that are
described. The information provided is only a brief summary of the complex
factors affecting the financial situation in Puerto Rico and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various Commonwealth and local agencies in Puerto Rico
or contained in Official Statements for various Puerto Rico Municipal
Obligations.
South Carolina Risk Factors
Governmental Overview. South Carolina stretches from the Atlantic Ocean to
the Blue Ridge Mountains, containing 30,111 square miles. The coastal area,
which is one of the leading recreation centers on the east coast, is the anchor
of the State's thriving tourism industry. Since 1970, 565,000 people have
relocated to South Carolina to take advantage of its growing economy and to
retire here.
South Carolina's government is divided into three separate branches:
legislative, executive, and judicial. State government provides a full range of
services to South Carolina's citizens including educational, health,
social/human, transportation, public safety, regulatory, and
conservation/natural resources services. In addition, the State provides grants
and loans to local governments, including school districts, within its borders.
South Carolina is primarily a manufacturing state. While the textile industry
is still the major industrial employer in the State, the State's economy has
undergone a gradual transition to other sectors. Since 1950, the State's
economic base has diversified into other sectors such as trade, health care,
services, and durable goods manufacturing.
Economic Condition and Outlook. Over the last three decades, South Carolina's
economy has grown, and continues to grow, faster than that of the rest of the
country. Businesses have migrated here from all over the world to take advantage
of the State's skilled labor force, competitive wages, lower-priced land,
excellent port facilities, accessibility to markets, and in recent years,
substantial tax incentives.
Several global companies have located corporate headquarters or
multi-million-dollar manufacturing facilities within South Carolina. BMW
recently announced that it plans to invest an additional $400 million in its
Upstate factory, creating 400 more jobs. In addition to BMW, other newly
announced plants and expansions of existing facilities are expected to
contribute to South Carolina's continued economic growth.
An impressive influx of people into South Carolina over the last three
decades has generated tremendous economic growth in the State's coastal regions.
These areas continue to distinguish themselves as leading tourist, recreation,
and retirement centers relative to the entire United States East Coast. The
growth along the coast has contributed significantly to the burgeoning economy
of the State as a whole.
Since 1970, total South Carolina personal income increased over 1,200 percent
and grew 20 percent faster than total United States personal income through
2000. During this period, 1970's personal income grew at an average annual
compound rate of 11.9 percent in South Carolina (compared to 10.7 percent
nationwide). During the 1980's, the State's personal income grew 8.7 percent per
year (compared to 7.8 percent nationwide). Even in the 1990's, when inflation
was lower, personal income in South Carolina grew a healthy 5.7 percent per year
(compared to 5.6 percent nationwide). Despite the recent recession, South
Carolina's total personal income still managed to grow 20 percent faster than
the rest of the country.
Between 1970 and 2000, employment in South Carolina grew approximately 40
percent faster than in the United States as a whole. Despite the recent slowdown
in the economy, employment levels in South Carolina have continued to fare
better than in the nation as a whole. In fact, South Carolina had at least
246,000 jobs more in September 2003 than it had during the recession of 1991.
Major Initiatives. In June 2003, Governor Mark Sanford issued an executive
order establishing the Governor's Commission on Management, Accountability and
Performance (the MAP Commission). This fourteen-member Commission, comprised of
prominent business leaders and state officials, was charged with the
responsibility of analyzing government systems and services in South Carolina
and was directed to propose changes to "reduce costs, increase accountability,
improve service, consolidate similar functions, return functions to the private
sector, and help South Carolina be more competitive in a world economy."
The MAP Commission issued a comprehensive report on September 30, 2003, which
can be found on the Internet at www.state.sc.us/governor. The report recommended
sweeping changes for the structure of state government and focused on a number
of areas dealing with its fiscal management.
Among some of the MAP Commission recommendations are proposals to increase
the accuracy and reliability of revenue forecasting upon which the state
appropriations act is based each year; increase the Constitutionally-established
set-aside for capital and nonrecurring purposes from 2% to 3%; discontinue the
practice of funding recurring expenses with non-recurring revenues; adopt a
performance-based budgeting process instead of the current practice of
incremental budgeting; and gradually eliminate the mismatch in revenues and
expenditures resulting from using a "13th month" accrual of selected revenues.
The MAP Commission also recommended implementing a statewide capital
budgeting process that would improve the current multi-year planning process
contained in the State Comprehensive Permanent Improvement Plan by establishing
a Capital Budgeting Authority to analyze and screen capital projects planned
over the next three to five years and establishing a separate maintenance
budget. Many of these recommendations will require authorization by the General
Assembly and, in some cases, amendments to the State Constitution. It is
expected that many of the recommendations included in the MAP Commission report
will be reviewed and considered in the 2004 session of the General Assembly.
Cash Management. The State Treasurer is responsible for managing the State's
cash and investments, except for certain component units included within the
reporting entity that manage and invest their own funds. State law requires full
collateralization of all State Treasurer bank balances. Some component units may
have collateralization policies that differ from those of the State Treasurer.
Investment income includes appreciation and depreciation in the fair value of
investments. Increases in fair value during the current year, however, do not
necessarily represent trends that will continue; nor is it always possible to
realize such amounts, particularly in the case of temporary changes in the fair
value of investments that the State plans to hold to maturity.
Risk Management. The State conducts various risk control programs to help
minimize losses to which it is exposed. The health insurance program conducts
extensive wellness education programs that promote development and maintenance
of healthful lifestyles for covered employees. The State self-funds many types
of general liability and property losses rather than purchasing insurance.
Bond Ratings. Moody's Investors Service has rated South Carolina's general
obligation bonds as "Aaa," and Standard & Poor's and Fitch, Inc., rate these
bonds as "AAA," the highest ratings that these services award. The Comptroller
General's Office annually furnishes the State's Comprehensive Annual Financial
Report and related information to the bond rating firms. This process is
critical to ensuring that the State maintains its current high bond ratings.
Each South Carolina Trust is susceptible to political, economic or regulatory
factors affecting issuers of South Carolina municipal obligations (the "South
Carolina Municipal Obligations"). These include the possible adverse effects of
certain South Carolina constitutional amendments, legislative measures, voter
initiatives and other matters. The information provided is only a brief summary
of the complex factors affecting the financial situation in South Carolina and
is derived from sources that are generally available to investors and are
believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the preceding information. It is based in
part on information obtained from various State and local agencies in South
Carolina or contained in Official Statements for various South Carolina
Municipal Obligations.
Tennessee Risk Factors
Government Overview. The State of Tennessee was admitted to the union in
1796, as the sixteenth state. Tennessee has 41,219 square miles and a population
estimated to be 5.9 million. The State has three branches of government, the
Executive, Legislative and Judicial. The Executive branch is headed by the
Governor, who appoints commissioners to lead the various departments. The
Legislative branch is bicameral, with 99 members of the House of Representatives
and 33 Senators. The Representatives serve two-year terms. The Senators serve
four-year terms, with about one half being elected every two years. The Judicial
branch rules on the constitutionality of laws enacted by the Legislature and the
legality of administrative policies and regulations of the Executive branch.
The financial reporting entity of the State includes all the funds of the
primary government as well as all its component units. Component units are
legally separate entities for which the primary government is financially
accountable. The government provides a full range of services including
education, health and social services, transportation, law, correction, safety,
resources and regulation, and business and economic development.
In addition to internal controls, the State maintains budgetary controls. The
objective of these budgetary controls is to ensure compliance with legal
provisions embodied in the annually appropriated budget approved by the
Legislature. Activities of the general fund, special revenue funds (except Fraud
and Economic Crime, Community Development and the Dairy Promotion Board) and
debt service fund are included in the annually appropriated budget. Budgetary
control is maintained at the departmental level by the encumbrance of estimated
purchase amounts prior to the release of purchase orders to vendors. Purchase
orders which result in an overrun of available balances are not released until
budget revisions are approved or additional appropriations are made. Open
encumbrances are reported as reservations of fund balance at June 30, 2003.
State statutes require an annual audit of all financial statements of the State.
Economic Condition and Outlook. The State's economic diversity has improved
substantially over the last several years. Investments announced in new and
expanding manufacturing businesses exceeded $1 billion every year since 1983,
and exceeded $3 billion in the last five years. Announced manufacturing capital
investments in 2002 were $3.72 billion. This growth has created 15,443 new jobs
in this year alone, and has had a positive effect on employment and the State's
economy. Additionally, investments in headquarters, distribution and selected
services grew to $6.3 billion in 2002 and created 26,117 new jobs. For June
2003, the state unemployment rate of 5.6% was under the national average of
6.5%. The financial impact of these events is presented later in this letter.
Based on current projections, the State's overall growth is expected to exceed
the national average over the next several years. While having a positive
impact, this growth also presents significant challenges for the State. If the
present level of services is to be maintained and an ambitious program for major
improvements in the educational system is to continue to be implemented, the
State must continue to conservatively manage its financial resources.
The national recession appears to be ending. As evidence, the real
(inflation-adjusted) gross domestic product increased only 2.9 percent during
the calendar year 2002 and increased 3.2 percent during the first three quarters
of 2003. The Federal Reserve has left interest rates at historic lows.
Financial Highlights. The new Administration took office in January 2003 and
produced a State budget that provided a 9 percent reduction in discretionary
appropriations from general fund tax sources. Decisions used to develop the
reductions followed extraordinary, open hearings during the budget development
process and program-by-program review of the budget. The legislature accepted
the plan with few changes and as a result the State's credit rating remained
stable at AA.
The assets of the State exceeded its liabilities at June 30, 2003, by $20.278
billion (reported as net assets). Of this amount, $262.9 million may be used to
meet the State's obligations not funded by restricted net assets. However,
$18.130 billion of this amount represents invested in capital assets, net of
related debt, which cannot be used to fund ongoing activities of the government.
The State's net assets increased by $814.7 million. Most of this increase
results from the State's decision to utilize the modified approach for reporting
infrastructure capital assets. Because of this decision, the State capitalized
infrastructure expenditures of $675.1 million and did not record depreciation
expense. Other capital assets are depreciated. Component units reported net
assets of $3.27 billion, an increase of $181.4 million.
At June 30, 2003, the State's governmental funds reported combined ending
fund balances of $1.6 billion, an increase of $104 million in comparison to the
prior year. Of the combined fund balance approximately $202.7 million is
available for spending at management's discretion (unreserved fund balance),
however $178 million of this amount is designated for revenue fluctuations.
The State's total debt increased by $.9 million during the fiscal year to
total $1.26 billion. This increase is the difference between commercial paper
draws for short-term financing and commercial paper and bond principal payments,
i.e., commercial paper draws slightly exceeded bond principal payments. This
minute change reflects the continuing tight budgetary situation faced by the
State in which capital projects have not been authorized in the legislative
process.
Debt Administration. In accordance with the Constitution, the State has the
authority to issue general obligation debt that is backed by the full faith and
credit of the State. The Legislature authorizes a certain amount of debt each
year and the State Funding Board has oversight responsibility to issue the debt
for capital projects. Capital spending is also authorized by the Legislature and
the State Building Commission has oversight responsibility for all capital
projects exceeding $100 thousand (for new construction) and maintenance to
existing facilities. The State issues Commercial Paper as a short-term financing
mechanism for capital purposes and the Commercial Paper is typically redeemed
with long-term bonds.
The State's outstanding general obligation debt (expressed in thousands) as
of June 30, 2003 was $1,249,331. The State did not issue bonds during the fiscal
year; however, taxable and tax-exempt bonds were issued in the first quarter of
the new fiscal year primarily to redeem commercial paper. More than half of the
outstanding debt has been issued either for capital projects of two of the
State's major Component Units--University of Tennessee and Tennessee Board of
Regents--or provided to local governments as capital grants; assets acquired
with this debt belong to those entities. The State has not issued bonds to fund
infrastructure since 1976; infrastructure has been funded on a pay-as-you-go
basis. The State's bond ratings have not changed since the previous year. The
State's bonds, as of June 30, 2004, were rated AA, Aa2, and AA by Fitch
Investors Service, Moody's Investors Service, and Standard & Poor's Rating
Group, respectively. Under current State statutes, the general obligation debt
issuances are subject to an annual legal debt service limitation based on a
pledged portion of certain current year revenues. As of June 30, 2003, the
State's annual debt service limit of $550.211 million was well above the debt
service required $148.079 million, with a legal debt service margin of $402.132
million.
Each Tennessee Trust is susceptible to political, economic or regulatory
factors affecting issuers of Tennessee municipal obligations (the "Tennessee
Municipal Obligations"). These include the possible adverse effects of certain
Tennessee constitutional amendments, legislative measures, voter initiatives and
other matters. The information provided is only a brief summary of the complex
factors affecting the financial situation in Tennessee and is derived from
sources that are generally available to investors and are believed to be
accurate. No independent verification has been made of the accuracy or
completeness of any of the preceding information. It is based in part on
information obtained from various State and local agencies in Tennessee or
contained in Official Statements for various Tennessee Municipal Obligations.
Texas Risk Factors
Economic Outlook. After losing jobs in 2002 for the first time in fifteen
years, Texas was back on the growth track in 2003. The state added 39,600 jobs
from November 2002 through November 2003, but this number paled in comparison to
average annual growth levels of 214,000 over the period from 1987 through 2001.
The 2003 job recovery did not take hold until the second half of the year, with
Texas nonfarm employment advancing over 50,000 jobs from July through November.
Manufacturing was clearly hit hardest among industries, losing 30,800 jobs
statewide over the past year, but these losses were more than counterbalanced by
additions in two other industries. That is, education and health services added
35,000 jobs, while federal, state, and local government--including
schools--added 30,700.
Once again, Texas fared better economically than most of the nation in 2003.
Texas continued to be buffeted during the year by a U.S. economy that has been
losing jobs since 2001 and has only begun to generate some job growth during the
last one-third of 2003. Overall, U.S. employment fell -0.2 percent from November
2002 to November 2003, while the Texas job count inched up by 0.4 percent.
Although the state's job growth during 2003 was anemic compared to that of
recent decades, Texas added more jobs than all but two states and exceeded
two-thirds of the states in the rate of employment growth over the past year.
The Comptroller's Leading Economic Indicators Index improved during the
second half of calendar year 2003. The index is designed to forecast the state's
employment growth four to six months in advance. The index has mostly moved
downward or laterally since 2000, but found some renewed vigor in 2003,
indicating that longawaited economic growth has begun.
Also after declining through most of three years, consumer confidence in the
West South Central States has again achieved a measure of stability. It still
bounces in reaction to the most recent political, economic, or business news,
but consumer's assessment of present and future economic conditions did improve
slightly in 2003. Through much of the year, consumer spending remained fairly
strong in Texas, even with new motor vehicle revenues dropping after three years
of robust growth. Consumers and businesses did not break down the doors in 2003,
but non-auto sales activity, based on sales tax collections, did squeeze out 0.4
percent growth in 2003. Particularly positive was residential construction,
which took advantage of low mortgage rates to grow by 9.6 percent in 2003, on
the heels of an equally strong boost in 2002.
The biggest economic problems during the year were a weak manufacturing
sector, a still tepid level of business investment, and a weak global economy.
These problems contributed to Texas' highest average unemployment rate in ten
years, although declines in recent months indicate that it has peaked and is
improving now. The business investment downturn badly hurt the state's
once-booming industry producing computers, electronic components,
telecommunications, and other high tech products, but renewed investment
emerging in 2003 gave signs of a recovery here too. Personal consumption
spending, federal defense expenditures, and nonresidential construction all rose
in Texas in 2003.
During the first ten months of 2003, Texas averaged 8,204 incorporations per
month, for its highest level since the Comptroller's office has tracked this
indicator. New business incorporations do not necessarily predict a strong
economy, as the number says nothing about the economic viability of newly
incorporated businesses. (A layoff may inspire someone to incorporate a
business, or incorporations may follow the failure of an owner's previous
business.) Still, the ongoing entrepreneurial spirit of Texans is reflected in
the unusually large number of Texans taking on the challenges of a new business.
At the close of calendar 2003, eight of the state's ten leading economic
indicators were pointing toward a stronger upcoming state economy. Positive
signs included retail sales growth, rises in stock values and oil prices, a
growth in housing permits and new business incorporations, fewer initial claims
for unemployment compensation, rising consumer confidence, and a rising national
index of leading economic indicators. The only two indicators pointing to slower
economic growth were a smaller number of helpwanted ads and a shorter average
manufacturing workweek than in the previous year.
The Texas unemployment rate improved for about eight years before rising
steeply in 2001 and 2002. Texas' unemployment had fallen from 7.7 percent in
1992 to a monthly low of 3.9 percent in December 2000. As terrorist attacks
trampled an already weakened economy, the unemployment rate soared to a peak of
6.8 percent in May 2003 and to a ten-year annual average high of 6.6 percent.
Since the summer, however, the percentage of unemployed Texas workers has inched
back downward (to 6.3 percent by November). In the early stages of renewed
growth, the unemployment rate usually is slow to improve, since employers
generally require evidence of a stronger cash flow before they begin renewed
hiring. Recent improvement in the unemployment rate is another heartening hint
that a new bout of economic growth has taken hold in Texas.
The Texas economy is on track to improve over the next two years. Nationally,
increases in output have been boosted by productivity increases not seen in a
generation, so one of the slowest economic revivals in over fifty years has
finally shown signs of taking hold. Still, boom times are not likely to be
around the corner. Texas' economic growth is forecasted to be healthy over the
next two years, but the economy is far from overheating. Underlying renewed
growth in Texas are an improving national economy, a hefty rise in buying
intentions registered by a survey of purchasing executives, a strong uptick of
investment (as high tech purchases made in 1999 are being replaced), a boost in
export trade resulting from declines in the dollar's value, continued low
inflation, and little pressure--for now--to ratchet up mortgage and interest
rates.
The Comptroller's forecast model predicts that Texas' real gross state
product will expand by 4.2 percent annually in both 2004 and 2005. This will
match forecasted
U.S. growth in 2004 and outstrip it as national economic growth matures.
With Texas' relatively low costs, a location at the buckle of the nation's
fastest growing southern and western regions, and sustained migration into the
state, the state's gross product growth is forecast to outperform the U.S. by
nearly a percentage point in 2005.
Financial Analysis. Total assets of the state on August 31, 2003, were $132.8
billion, a decrease of $0.4 billion. Total liabilities as of August 31, 2003
were $35.7 billion, a decrease of $2.7, or 7 percent. This results in a net
asset balance of $97.1 billion in fiscal year 2003, an increase of $2.3 billion,
or 2 percent. Of the state's net assets, $55 billion were invested in capital
assets, net of related debt, while $36 billion were restricted by statute or
other legal requirements and were not available to finance day-to-day operations
of the state. Unrestricted net assets were $6.1 billion.
The state earned program revenues of $47.1 billion and general revenues
(including Extraordinary Items) of $28.8 billion, for total revenues (including
Extraordinary Items) of $75.9 billion, an increase of $11.3 billion, or 17
percent. The expenses of the state were $73.9 billion, an increase of $5.1
billion, or 7 percent. As a result of revenues exceeding expenses, the state's
total net assets increased by $2.3 billion.
Debt Management. The state's bonded indebtedness was $15.8 billion, which
included new issuances of $3.1 billion in state bonds to finance new
construction, housing, water conservation, and other projects. Approximately
$2.1 billion in bonded debt was retired or refunded.
The State of Texas issues both General Obligation bonds and Revenue bonds.
Each series of revenue bonds is backed by the pledged revenue source and
restricted funds specified in the bond resolution. Most revenue bonds are
designed to be self-supporting from a primary revenue source related to the
program financed.
During fiscal year 2003, Texas' state agencies and universities issued $3.1
billion in state bonds to finance new construction, housing, water conservation
and treatment, and other projects. General obligation debt accounted for $786
million of state bonds issued in fiscal year 2003. This debt, which can only be
authorized by a constitutional amendment, carries the full faith and credit of
the state. The remaining $2.3 billion is due to new issuances of revenue bonds,
which are serviced by the revenue flows of individual entity projects. Bonds
retired were composed of $311 million in general obligation bonds and $346
million in revenue bonds during the year. Also, $442 million in general
obligation bonds and $980 million in revenue bonds were refunded. The total
outstanding general obligation debt of the state after new issuances,
retirements, and refundings as of August 31, 2003, was $5.8 billion. This
represents an increase of only $31 million from fiscal year 2002. An additional
$5 billion is authorized but has not been issued. Total revenue bonds
outstanding were $10 billion, which is an increase of $0.9 billion, or 10
percent, from fiscal year 2002.
Bond Ratings. As of August 31 2003, Texas general obligation bonds are rated
AA by Standard & Poor's, Aa1 by Moody's Investors Service and AA+ by Fitch IBCA,
Inc. There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local Texas issuers may be unrelated to the creditworthiness of obligations
issued by the State of Texas, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of default.
Each Texas Trust is susceptible to political, economic or regulatory factors
affecting issuers of Texas municipal obligations (the "Texas Municipal
Obligations"). These include the possible adverse effects of certain Texas
constitutional amendments, legislative measures, voter initiatives and other
matters. The information provided is only a brief summary of the complex factors
affecting the financial situation in Texas and is derived from sources that are
generally available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
preceding information. It is based in part on information obtained from various
State and local agencies in Texas or contained in Official Statements for
various Texas Municipal Obligations.
Virginia Risk Factors
Economic Outlook. The Commonwealth of Virginia's ("Virginia" or the
"Commonwealth") fiscal year 2003 can be thought of as something of a
transitional fiscal year for the Virginia economy. Emerging from fiscal year
2002, which included the September 11 terrorist attacks and the end to a brief
recession, the Commonwealth's economy began to grow in fiscal year 2003. Several
economic indicators including wages and salaries, personal income, new privately
owned housing units authorized, and retail sales finished the fiscal year with
positive gains. While employment finished the fiscal year slightly lower,
unemployment remained at the same level as fiscal year 2002.
Virginia is a leader in telecommunications, semiconductors, microelectronics,
information technology, medical research and biotechnology, and chemical
synthesis research. Additionally, Dulles International Airport and the Hampton
Roads ports are important factors in the State's increasing role as a major
exporter. Canada and Japan are its most important trade partners, followed by
Belgium, South Korea, Germany and Mexico.
Unemployment. Virginia's unemployment was 4.0 percent in Fiscal year 2003. In
comparison, the United States had an unemployment rate nearly two percentage
points higher at 5.9 percent. Over the past three fiscal years, Virginia's
unemployment rate has been on average 1.6 percent less than the Nation's.
Budgetary Process. The Governor is the chief planning and budget officer of
the Commonwealth. The Secretary of Finance and the Department of Planning and
Budget assist the Governor in the preparation of executive budget documents. The
Governor's Secretaries advise the Governor and the Department of Planning and
Budget on the relative priority of the budget requests from their respective
agencies.
The Governor is required by statute to present a bill detailing his budget
(the "Budget Bill") and a narrative summary of the bill to the General Assembly
by December 20th in the year immediately prior to each even-year session. The
Budget Bill is introduced in both the House of Delegates and the Senate. It is
referred to the House Appropriations and Senate Finance Committees, which hold
joint meetings to hear from citizens, from other General Assembly members and
from agency representatives. The Budget Bill is then approved by each Committee
in an open session and reported to the respective floors for consideration,
debate, amendment and passage. After the bill has passed both houses,
differences between the House and Senate versions are reconciled by a conference
committee with equal representation from both houses.
The Budget Bill and the corresponding act enacted by the General Assembly
approving the budget and making appropriations provided for therein (the
"Appropriation Act") relate to a biannual period commencing on July 1 in even
number years. Advanced planning involving development of the Budget Bill begins
over a year prior to the commencement of a biennium.
Under constitutional provisions, the Governor retains the right, in his
review of legislative action on the Budget Bill, to suggest alterations to or to
veto appropriations made by the General Assembly.
In the odd-year sessions of the General Assembly, amendments are considered
to the Appropriation Act enacted in the previous year. The Governor submits a
Budget Bill by December 20th which includes his proposed amendments. It is then
introduced in both houses and is considered in the same manner as the regular
biennial Budget Bill. The Appropriation Act enacted in the odd-year session is
effective upon passage, whereas the regular biennial Appropriation Act is
effective July 1, the beginning of the biennium.
An appropriation for a project or service is initially contained in the
Appropriation Act enacted by the General Assembly. An agency request for an
increase or other adjustments to its legislative appropriation must be reviewed
and approved by the Department of Planning and Budget. Under the Constitution,
no money may be paid out of the State Treasury except pursuant to appropriations
made by law. No such appropriation may be made which is payable more than two
years and six months after the end of the session of the General Assembly at
which the appropriation was enacted.
The 2004 Appropriation Act. On December 17, 2003, Governor Warner presented
the 2004 Budget Bill (House Bill 30/Senate Bill 30) for the 2004-2006 biennium.
The Governor's objectives in the bill were to continue Virginia's long tradition
of fiscal responsibility and restore structural balance in the budget; to
maintain core services in K-12 education, higher education, law enforcement and
corrections, safety net programs, and transportation; to begin to replenish the
Revenue Stabilization Fund; and to keep statutory commitments such as those to
reduce the car tax, the food tax, and the premium tax. The 2004 Budget Bill
included a number of actions to balance a shortfall of $1.9 billion over the
biennium between projected resources and spending requirements. These actions
included $181.5 million in budget reductions, $358.4 million in anticipated
balances from fiscal year 2004, and a tax reform package that would provide
$419.2 million in net revenue.
The House and Senate could not reach agreement on the 2004-2006 biennial
budget. The Governor called a Special Session of the 2004 General Assembly and,
on May 7, 2004, the General Assembly passed a compromise budget for the
2004-2006 biennium that included significant portions of the Governor's proposed
budget. Tax reforms adopted by the General Assembly include the following:
increased the sales tax by one-half cent effective September 1, 2004; reduced
the sales tax on food in one-half cent increments over the next three years;
increased the cigarette tax to 20 cents per pack effective September 1, 2004,
and to 30 cents per pack effective July 1, 2005; increased the personal and
dependent exemption for individual income tax; eliminated the "marriage penalty"
for married filers, raised the income tax filing threshold for individuals;
added a new low-income credit, required an income test for future seniors
claiming the age deduction; eliminated sales tax exemptions for utilities and
telecommunications companies; closed certain corporative income tax loopholes
for intangible holding companies and pass-through-entities, and increased by 10
cents per hundred the tax levied for recording a deed. These tax reforms are
projected to generate additional revenue of $616.3 million in fiscal year 2005
and $775.6 million in fiscal year 2006.
On June 6, 2004, Governor Warner returned the enrolled Budget Bill (House
Bill 5001) to the General Assembly with 43 recommended amendments for action at
its one-day reconvened session held on June 16, 2004. The General Assembly
adopted 27 of the 43 recommended amendments during the reconvened session. On
June 25, 2004, Governor Warner signed House Bill 5001, as amended, and vetoed 8
items. The bill became effective on July 1, 2004, as Chapter 4, Acts of Assembly
- 2004 Special Session I.
Summary of General Fund Revenues, Expenditures and Changes in Fund Balance.
The General Fund balance at June 30, 2003 was equal to approximately
$554,791,000, a $78.2 million (12.4 percent) decrease from fiscal year 2002.
Overall tax revenues increased by 1.6 percent from fiscal year 2002 to fiscal
year 2003. Individual and Fiduciary Income tax revenues increased by 1.0
percent. Additional tax revenue growth occurred in the form of a 18.3 percent
increase in Corporation Income taxes, a 13.8 percent increase in Premiums of
Insurance Companies taxes and a 18.3 percent increase in Public Service
Corporations taxes. A decline occurred in State Sales and Use taxes, which
decreased by 3.9%. Overall revenue increased by 2.3 percent and non-tax revenues
increased by 18.3 percent. Overall expenditures fell by 0.6 percent in fiscal
year 2003, compared to a 17.8 percent increase in fiscal 2002. Individual and
family service expenditures grew by $219.8 million, or 8.6 percent, while
education expenditures fell by $100.7 million, or 1.8 percent. In addition,
general government expenditures increased by $16.2 million or 1.2 percent.
Of the June 30, 2003 $554.8 million fund balance, $247.5 million was reserved
for the Revenue Stabilization Fund. This fund is segregated from the General
Fund and can only be used for Constitutionally authorized purposes. Virginia law
directs that the fund be included as a component of the General Fund only for
financial reporting purposes. During fiscal year 2003, no deposit other than
interest earnings was made to the Revenue Stabilization Fund. However, a
withdrawal of $247.5 was made and deposited to the General Fund. A deposit is
not required in fiscal year 2004 based on fiscal year 2003 revenue collections.
General Fund Revenues. Individual and fiduciary income taxes are the
principal component of General Fund revenues. These revenues support a number of
government functions, primarily education, individual and family services,
public safety and general government. General Fund revenues are available for
payment of debt service obligations of the Commonwealth.
In fiscal year 2003, 96.3 percent of total tax revenues were derived from
five major taxes imposed by the Commonwealth: Individual and Fiduciary Income
Taxes, State Sales and Use Taxes, Corporate Income Taxes, Taxes on Premiums of
Insurance Companies and Taxes on Deeds, Contracts, Wills and Suits.
General Fund Expenditures. General Fund expenditures relate to resources used
for those services traditionally provided by a state government, which are not
accounted for in any other fund. These services include general government,
legislative, public safety, judicial, health and mental health, human resources,
licensing and regulation, and primary and secondary education.
Nongeneral Fund Revenues. Nongeneral fund revenues consist of all revenues
not accounted for in the General Fund. Included in this category are special
taxes and user charges earmarked for specific purposes, the majority of
institutional revenues and revenues from the sale of property and commodities,
and receipts from the federal government.
Approximately 50 percent of the nongeneral revenues are accounted for by
grants and donations from the federal government, motor vehicle taxes and
institutional revenues. Institutional revenues consist primarily of fees and
charges collected by institutions of higher education, medical and mental
hospitals and correctional institutions. Motor vehicle related taxes include the
motor vehicle fuel tax, motor vehicle sales and use tax, oil excise tax,
driver's license fee, title registration fee, motor vehicle registration fee and
other miscellaneous revenues.
Debt. The Constitution of Virginia, in Section 9 of Article X, provides for
the issuance of debt by or on behalf of the Commonwealth. Sections 9(a), (b) and
(c) provide for the issuance of debt to which the Commonwealth's full faith and
credit is pledged and Section 9(d) provides for the issuance of debt not secured
by the full faith and credit of the Commonwealth, but which may be supported by
and paid from Commonwealth tax collections subject to appropriations by the
General Assembly. The Commonwealth may also enter into leases and contracts that
are classified on its financial statements as long-term indebtedness. Certain
authorities and institutions of the Commonwealth may also issue debt.
Section 9(a) of Article X provides that the General Assembly may contract
general obligation debt: (1) to meet certain types of emergencies, (2) subject
to limitations on amount and duration, to meet casual deficits in the revenue or
in anticipation of the collection of revenues of the Commonwealth and (3) to
redeem a previous debt obligation of the Commonwealth. Total indebtedness issued
pursuant to Section 9(a)(2) shall not exceed 30 percent of an amount equal to
1.15 times the annual tax revenues "derived from taxes on income and retail
sales, as certified by the Auditor of Public Accounts, for the preceding fiscal
year."
Section 9(b) of Article X provides that the General Assembly may authorize
the creation of general obligation debt for capital projects. Such debt is
required to be authorized by an affirmative vote of a majority of the members
elected to each house of the General Assembly and approved in a statewide
referendum. The outstanding amount of such debt is limited in the aggregate to
an amount equal to 1.15 times the average annual tax revenues "derived from
taxes on income and retail sales, as certified by the Auditor of Public
Accounts," for the three immediately preceding fiscal years ("9(b) Debt Limit").
Thus, the amount of such debt that can be issued is the 9(b) Debt Limit less the
total amount of such debt outstanding ("Debt Margin"). An additional 9(b) debt
authorization restriction is calculated in order to determine the amount of such
debt that the General Assembly may authorize for the current fiscal year. The
additional borrowing authorization restriction is limited to 25% of the 9(b)
Debt Limit less 9(b) debt authorized in the current and prior three fiscal
years.
The phrase "taxes on income and retail sales" is not defined in the
Constitution or by statute. The record made in the process of adopting the
Constitution, however, suggests an intention to include only income taxes
payable by individuals, fiduciaries and corporations and the state sales and use
tax.
Section 9(c) of Article X provides that the General Assembly may authorize
the creation of general obligation debt for revenue producing capital projects
for executive branch agencies and institutions of higher learning. Such debt is
required to be authorized by an affirmative vote of two-thirds of the members
elected to each house of the General Assembly and approved by the Governor. The
Governor must certify before the enactment of the bond legislation and again
before the issuance of the bonds that the net revenues pledged are expected to
be sufficient to pay principal and interest on the bonds issued to finance the
projects.
The outstanding amount of Section 9(c) debt is limited in the aggregate to an
amount equal to 1.15 times the average annual tax revenues "derived from taxes
on income and retail sales, as certified by the Auditor of Public Accounts," for
the three immediately preceding fiscal years ("9(c) Debt Limit"). While the debt
limits under Sections 9(b) and 9(c) are each calculated as the same percentage
of the same average tax revenues, these debt limits are separately computed and
apply separately to each type of debt.
When the Commonwealth issues bonds to refund outstanding bonds issued
pursuant to Section 9(b) or 9(c) of Article X of the Constitution, the refunded
bonds are considered paid for purposes of the constitutional limitations upon
debt incurrence and issuance and the refunding bonds are counted in the
computations of such limitations. Section 9(a)(3) provides that in the case of
the refunding of debt incurred in accordance with Section 9(c) of Article X, the
debt evidenced by the refunding bonds will be counted against the 9(c) Debt
Limit unless the Governor does not provide the net revenue sufficiency
certification, in which case the debt evidenced by the refunding bonds will be
counted against the 9(b) Debt Limit.
Tax-supported debt of the Commonwealth includes both general obligation debt
and debt of agencies, institutions, boards and authorities for which debt
service is expected to be made in whole or in part from appropriations of tax
revenues.
Outstanding Section 9(b) debt includes the unamortized portion of (a) $613
million and $50.4 million of general obligation bonds authorized and approved by
the voters in November 1992 and November 2002, respectively, and (b) refunding
bonds issued in (i) 1996, 1998 and 2002 to refund certain 9(b) bonds issued in
1993, 1994 and 1996 (ii) 1993 to refund certain 9(c) transportation bonds issued
in 1988, and (iii) 2003 to refund certain of the refunding bonds issued in 1993
to refund certain 9(c) transportation bonds issued in 1988. Outstanding Section
9(c) debt includes various series of Higher Educational Institutions Bonds
(including refunding bonds) issued from 1979 to 2003, six series of
Transportation Facilities Bonds (including refunding bonds) issued from 1989 to
2003 and three series of Parking Facilities Bonds (including refunding bonds)
issued in 1996, 2002 and 2003. Outstanding general obligation debt does not
include 9(b) and 9(c) refunded bonds for which funds have been deposited in
irrevocable escrow accounts in amounts sufficient to meet all required future
debt service (advance refunded bonds).
Section 9(d) of Article X provides that the restrictions of Section 9 are not
applicable to any obligation incurred by the Commonwealth or any of its
institutions, agencies or authorities if the full faith and credit of the
Commonwealth is not pledged or committed to the payment of such obligation.
There are currently outstanding various types of 9(d) revenue bonds issued by
authorities, political subdivisions and agencies for which the Commonwealth's
full faith and credit is not pledged. Certain of these bonds, however, are paid
in part or in whole from revenues received as appropriations by the General
Assembly from general tax revenues, while others are paid solely from revenues
derived from enterprises related to the operation of the financed capital
projects.
The debt repayments of the Virginia Public Building Authority, the Virginia
College Building Authority 21st Century College and Equipment Program, The
Innovative Technology Authority, the Virginia Biotechnology Research Park
Authority and several other long-term capital leases have been supported all or
in large part by General Fund appropriations. Together, payments to these
authorities for debt service totaled approximately $197.4 million in fiscal year
2003.
The Commonwealth Transportation Board ("CTB") has issued various series of
bonds authorized under the State Revenue Bond Act. These bonds are secured by
and payable from funds appropriated by the General Assembly from the
Transportation Trust Fund for such purpose. The Transportation Trust Fund was
established by the General Assembly in 1986 as a special non-reverting fund
administered and allocated by the Transportation Board for the purpose of
increased funding for construction, capital and other needs of state highways,
airports, mass transportation and ports.
The Virginia Port Authority ("VPA") has issued bonds in the amount of $279.4
million which are payable from income of a portion of the Transportation Trust
Fund. In April 1998, the VPA issued $71.0 million of refunding bonds to refund
the aggregate outstanding balance of its Series 1988 bonds in the amount of
$75.7 million. The fund balance of the Commonwealth Transportation Fund
administered by the Transportation Board at June 30, 2003 was $1,251.6 million.
Debt Management. The Debt Capacity Advisory Committee (the "Committee") is
charged by statute with annually estimating the amount of tax-supported debt,
which may prudently be authorized, consistent with the financial goals, capital
needs and policies of the Commonwealth. Such estimate is provided to the
Governor and General Assembly. The Committee is also required to review annually
the amount and condition of bonds, notes and other security obligations of the
Commonwealth's agencies, institutions, boards and authorities which are either
secured by a moral obligation pledge to replenish reserve fund deficiencies or
for which the Commonwealth has a contingent or limited liability. The Committee
also provides its recommendations on the prudent use of such obligations to the
Governor and the General Assembly.
The Committee also reviews the amounts and provisions of bonds, notes and
other security obligations of the Commonwealth's agencies, institutions, boards
and authorities which are neither tax-supported debt or obligations secured by a
moral obligation pledge to replenish reserve fund deficiencies. The Committee
may recommend limits, when appropriate, on these other obligations.
The Department of Planning and Budget has prepared a Six-Year Capital Outlay
Plan (the "Plan") for the Commonwealth. The Plan lists proposed capital
projects, and it recommends how the proposed projects should be financed. More
specifically, the Plan distinguishes between immediate demands and longer-term
needs, assesses the state's ability to meet its highest priority needs, and
outlines an approach for addressing priorities in terms of costs, benefits and
financing mechanisms. The 2002 General Assembly set out new requirements for the
funding of capital projects at a level not less than 2 percent of the General
Fund revenues for the biennium, and the portion of that amount that may be
recommended for bonded indebtedness.
Litigation. The Commonwealth, its officials and employees are named as
defendants in legal proceedings which occur in the normal course of governmental
operations, some involving claims for substantial amounts. It is not possible at
the present time to estimate the ultimate outcome or liability, if any, of the
Commonwealth with respect to these lawsuits. However, any ultimate liability
resulting from these suits is not expected to have a material adverse effect on
the financial condition of the Commonwealth.
Tobacco Settlement. The Commonwealth is a party to the national tobacco
settlement (the "Settlement") between leading United States tobacco product
manufacturers, 45 other states, the District of Columbia and 5 territories. The
Settlement provides that tobacco companies pay a total of $206 billion to the
participating states by the year 2025; significantly curb their advertising; and
disband industry trade groups. The Commonwealth's share of the total amount to
be paid to states through 2025 would be approximately $4.1 billion. The exact
dollar amount is contingent upon certain adjustments as set forth in the
Settlement. Under the Settlement, the tobacco companies will make three types of
payments. Tobacco companies made five "initial payments" totaling approximately
$13 billion over the six year period ending in January 2003. In addition, the
tobacco companies make "annual payments" beginning on April 15, 2000. Such
payments will be paid annually into perpetuity and will be adjusted annually
based on inflation and volume adjustments as determined by future sales of
cigarettes. Approximately $8.6 billion of the Settlement will be deposited into
a strategic contribution fund and allocated based on the states' contribution
toward resolving the Settlement. The "strategic contribution payments" will be
made in equal installments over a 10-year period beginning in 2008.
Of the total Settlement, $1.5 billion is dedicated to finance a national
public education fund for tobacco control and $250 million is set aside for a
foundation dedicated to reducing teen smoking. To ensure the industry complies
with the agreement, the Settlement would be enforceable through consent decrees,
which could be entered in each state court. In addition, the industry will pay
$50 million to be used to assist states in enforcing and implementing the
agreement and to investigate potential violations of state tobacco laws. States
will also be reimbursed for costs, expenses, and attorney fees incurred as a
result of the Settlement.
Ratings. As of August 9, 2004, all outstanding general obligation bonds of
the Commonwealth were rated AAA by Standard & Poor's Ratings Services and Aaa by
Moody's Investor's Service, Inc. Any explanation concerning the significance of
such ratings must be obtained from the rating agencies. There is no assurance
that any ratings will continue for any period of time or that they will not be
revised or withdrawn.
Each Virginia Trust is susceptible to political, economic or regulatory
factors affecting issuers of Virginia municipal obligations (the "Virginia
Municipal Obligations"). These include the possible adverse effects of certain
Virginia constitutional amendments, legislative measures, voter initiatives and
other matters that are described. The information provided is only a brief
summary of the complex factors affecting the financial situation in Virginia and
is derived from sources that are generally available to investors and are
believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the preceding information. It is based in
part on information obtained from various State and local agencies in Virginia
or contained in Official Statements for various Virginia Municipal Obligations.
West Virginia Risk Factors
Profile of the Government. The State of West Virginia provides a full range
of services including: education, social and health services, transportation,
public safety, conservation of natural resources, and economic development.
Budgetary control is maintained through legislative appropriations and the
Executive Branch quarterly allotment process. Agencies submit budgetary requests
to the Department of Administration. The Department of Administration compiles
the Executive Budget on behalf of the Governor who submits it to the
Legislature. After the approval of the budget, the Department of Administration
maintains control over the spending patterns of the State at the activity level
and by use of the quarterly allotments. The State Auditor exercises control over
spending at the annual appropriation level. All appropriations, except funds
which are reappropriated, expire 31 days after fiscal year-end.
Economic Conditions and Outlook. West Virginia's long-term growth depends in
part on the national economy. Twenty years ago the West Virginia economy was
driven by coal mining, forestry, and petroleum. Today the State's economy is
dominated by service industries while the goods producing sector, which includes
manufacturing, construction, and mining, represents 17% of all employment.
The West Virginia economy is now less dependent on one or two major
industries. Because of this diversity across industries, its job growth rate of
..7% during the 1997-2002 period lagged slightly behind the national rate of job
growth of 1.2%.
The following illustrate trends in West Virginia's economy: While nearly all
sectors of the state economy are not performing as well as they did during the
last half of the 1990's, several sectors have continued to add jobs, although at
a slower rate. The leisure and hospitality sector, as well as financial
activities, have consistently continued to add jobs. The health care and other
services sector has continued to grow during the last two years, with health
care driving the increases. West Virginia's population stabilized at about 1.8
million, as the negative natural increase (births minus deaths) was balanced by
a small net migration into the State. Real per capita personal income growth for
2003 was 1.8% and is forecast to grow 1.8% annually between 2004 and 2008. West
Virginia's real personal income remains well below the national average, but
even on an inflation-adjusted basis, the State continues to gradually improve
its standard of living. The State's real per capital personal income has
gradually risen since the mid-1980's, even though it remains well below the
national average. As of 2002, West Virginia's per capita personal income was
$23,628 (before adjusting for inflation), which was 23.4 % below the national
level of $30,832. However, the State has made progress during the last two years
in closing the gap with the national economy. The gap is now at its lowest level
since 1995.
According to the Bureau of Business & Economic Research (BBER) at West
Virginia University, continued growth is expected in employment. That growth is
fueled by the service sector. This continued positive economic performance is
expected to result in a moderate real personal income growth. BBER forecasts
that growth in real personal income will continue at an average 1.8% per year
over the next five years, but at a slightly slower rate than the national
forecast of 2.6%.
Financial Highlights. Government-wide: The assets of the primary government
exceeded its liabilities at the close of the fiscal year by $3.7 billion
(reported as "net assets"). Governmental activities reported $6.1 billion in net
assets (a $736 million increase, up 13.6% from last year), while the
business-type activities reported a deficit of $2.4 billion, an increase of $623
million in the deficit. Fund Level: For fiscal year 2003, the governmental funds
reported a combined ending fund balance of $1.8 billion, an increase of $138
million or 8.5% in comparison with the restated prior year. At the end of June
30, 2003, the unreserved and the reserved fund balance for the general fund was
$313 million or 5.2% and $316.6 million or 5.3% of total general fund
expenditures. Long-Term Obligations: The net decrease in the State's long-term
obligations was $5 million. This decrease includes bond and lease principal
payments of $108 million, offset by new debt issues of $98 million. Significant
changes in the obligation included a decline in compensated absences of $33
million and an increase in the net pension obligation of $33 million.
Contents of Post-Effective Amendment
to Registration Statement
This Post-Effective Amendment to the Registration Statement comprises the
following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Registered Public Accounting Firm
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Van Kampen Focus Portfolios, Municipal Series 346, certifies that it meets all
of the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, all in the City of Chicago
and State of Illinois on the 25th day of July, 2005.
Van Kampen Focus Portfolios, Municipal Series 346
(Registrant)
By VAN KAMPEN FUNDS INC.
(Depositor)
By: John F. Tierney
Executive Director
(Seal)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below on July 25, 2005 by the
following persons who constitute a majority of the Board of Directors of Van
Kampen Funds Inc.:
SIGNATURE TITLE
Mitchell M. Merin Chairman )
Michael P Kiley Managing Director )
Jonathan S. Thomas Managing Director )
Edward C. Wood, III Managing Director )
/s/ JOHN F. TIERNEY
---------------
(Attorney-in-fact*)
--------------------
* An executed copy of each of the related powers of attorney is filed
herewith or was filed with the Securities and Exchange Commission in
connection with the Registration Statement on Form S-6 of Van Kampen Unit
Trusts, Series 482 (File No. 333-120865) dated January 27, 2005 and the same
hereby is incorporated herein by reference.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated May 27, 2005 accompanying the financial
statements of Van Kampen Focus Portfolios, Municipal Series 346 as of March 30,
2005, and for the period then ended, contained in this Post-Effective Amendment
No. 4 to Form S-6.
We consent to the use of the aforementioned report in the Post-Effective
Amendment and to the use of our name as it appears in the Prospectus.
Grant Thornton LLP
Chicago, Illinois
July 25, 2005