UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06481
Franklin Municipal Securities Trust
(Exact name of registrant as specified in charter)
One Franklin Parkway, San Mateo, CA 94403-1906
(Address of principal executive offices) (Zip code)
Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
Date of fiscal year end: 5/31
Date of reporting period: 5/31/16
Item 1. Reports to Stockholders.
| |
| Contents | |
| |
| Annual Report | |
| Municipal Bond Market Overview | 3 |
| Franklin California High Yield Municipal Fund | 5 |
| Franklin Tennessee Municipal Bond Fund | 13 |
| Financial Highlights and Statements of Investments | 19 |
| Financial Statements | 41 |
| Notes to Financial Statements | 44 |
| Report of Independent Registered | |
| Public Accounting Firm | 53 |
| Tax Information | 54 |
| Board Members and Officers | 55 |
| Shareholder Information | 60 |
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Municipal Bond Market Overview
The municipal bond market outperformed the U.S. Treasury and U.S. stock markets during the 12-month period ended May 31, 2016. Investment-grade municipal bonds, as measured by the Barclays Municipal Bond Index, generated a +5.87% total return for the period, while U.S. Treasuries, as measured by the Barclays U.S. Treasury Index, posted a +3.01% total return.1 U.S. equities, as represented by the Standard & Poor’s® 500 Index, underperformed with a +1.72% total return for the reporting period.1 The underperformance of U.S. equities was partly fueled by concerns about global economic growth, particularly a continuing slowdown in China and sluggish economic activity in Europe and Japan. Sustained price declines in the commodities markets also put downward pressure on U.S. equities. These factors led to a perceived flight to quality, which seemed to benefit municipal bondholders. In addition, in our opinion, municipal bonds continued to offer significant value relative to Treasuries because of their tax-exempt yields and relatively low risk.
The Federal Reserve (Fed) raised its target interest-rate range to 0.25%–0.50% in December, citing labor market improvement and continued U.S. economic growth. This action ended a seven-year period of near-zero short-term interest rates. At the time, the Fed indicated the move would be followed by a “gradual” tightening of monetary policy. Benchmark 10-year and 30-year tax-exempt interest rates ended the period lower than where they began.
Municipal bond funds finished the period with nine consecutive months of inflows, reflecting solid demand for tax-exempt debt. Bonds with longer maturities generally performed better than bonds with shorter maturities. In addition, investment-grade municipal bonds fared better than high yield municipal bonds. High yield tax-exempt bonds, as measured by the Barclays High Yield Municipal Bond Index, generated a +4.70% total return for the period.1 Approximately $341 billion in bonds were issued over the past 12 months; this was offset, however, by the nearly $339 billion in bonds that either matured or were called out of the market, making net supply flat for the period.2
Several developments affected Puerto Rico bonds over the reporting period. Puerto Rico and its municipal issuers continued to experience significant financial difficulties, which created additional strain on a commonwealth already facing economic stagnation and fiscal imbalances. These challenges also led to liquidity issues including reduced access to the financial markets. On February 6, 2015, a federal judge ruled that Puerto Rico’s Public Corporation Debt Enforcement and Recovery Act (the Act), signed into law on June 28, 2014, was unconstitutional. Following the ruling, which was affirmed by the U.S. Court of Appeals on July 6, 2015, independent credit rating agencies Moody’s Investors Service and Standard & Poor’s repeatedly downgraded Puerto Rico’s general obligation debt, as well as the ratings of certain related Puerto Rico issuers. On August 21, 2015, Puerto Rico petitioned the U.S. Supreme Court to review the ruling invalidating the Act. In early December, the U.S. Supreme Court granted Puerto Rico’s request, began hearing oral arguments on March 22, 2016, and shortly after period-end, upheld the lower court’s ruling that the Act was unconstitutional.
Near the end of June 2015, in conjunction with announcing that Puerto Rico’s debt was “not payable,” Governor Alejandro Garcia Padilla publicly called for a restructuring of Puerto Rico debt obligations, while certain other Puerto Rico issuers continued to negotiate with creditors for a financial restructuring. During the reporting period, Puerto Rico’s financial issues led to partial defaults by Puerto Rico’s Public Finance Corporation on its debt service payments beginning on August 3, 2015. In September, Governor Garcia Padilla’s working group issued a preliminary report regarding the island’s financial situation and potential restructuring recommendations. In recent months, the government has released two different restructuring proposals to creditors. Both plans seek to reduce the amount of debt outstanding and lessen annual debt service payments. The government proposed doing this through an exchange into two bonds, at levels below current principal values.
Franklin Templeton has been a member of a creditors’ committee (Ad Hoc Group) made up of bondholders of the Puerto Rico Electric Power Authority (PREPA) with the goal of achieving a negotiated, market-based, long-term solution to PREPA’s liquidity and structural issues. On December 23, 2015, a Restructuring Support Agreement was signed. The agreement, which has attained legislative approval, provides for the Ad Hoc Group to exchange its bonds at 85 cents on the
1. Source: Morningstar. Treasuries, if held to maturity, offer a fixed rate of return and a fixed principal value; their interest payments and principal are guaranteed.
2. Source: Goldman Sachs Securities Division, Bloomberg.
See www.franklintempletondatasources.com for additional data provider information.
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dollar into a new “securitization” bond. There are still many details that need to be resolved, and the formulation of the exchange offer and necessary legislation may take several months. However, we are satisfied that implementation of this agreement would allow PREPA to provide reliable and lower cost service, fund its capital needs for the medium term, ensure environmental compliance, diversify generation resources to include more natural gas and provide jobs. One of the conditions to the agreement was for the Puerto Rico legislature to pass legislation to establish the necessary securitization framework for the new PREPA debt, and this was completed on February 16, 2016. On May 19, 2016, certain bondholders purchased half of $115 million principal of bonds pursuant to the Bond Purchase Agreement. The second half is expected to close in June 2016 after certain conditions are met.
On October 21, 2015, the Obama Administration presented a plan with its proposals to help address the Puerto Rico situation to the U.S. Congress. The plan’s proposals included: granting Puerto Rico a “super-Chapter 9” framework by which ALL of Puerto Rico’s debts could be reorganized, a Congressionally-created independent fiscal oversight board for the island, equal treatment for Puerto Rico on the disbursement of Medicaid benefits and participation in the Earned Income Tax Credit program. The House Committee on Natural Resources introduced a second bill, named the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) on May 19, 2016, that would provide an oversight board as well as restructuring process. During April, Governor Padilla also enacted a debt moratorium on most debt issued by Puerto Rico and its agencies.
The legislation further stays all related litigation until January 2017. As a result of the moratorium, the Government Development Bank defaulted on a significant debt service payment in early May 2016. However, on May 16, 2016, the Puerto Rico Senate approved legislation exempting certain securitizations, including the proposed PREPA securitization bond. Puerto Rico and several of its agencies have large debt service payments due in July and August 2016. It remains unclear if the Governor will declare any additional moratoriums in the near future and which bond might experience defaults.
At period-end, we maintained our positive view of the municipal bond market. We believe municipal bonds continue to be an attractive asset class among fixed income securities, and we intend to follow our solid discipline of investing to maximize income while seeking value in the municipal bond market.
The foregoing information reflects our analysis, opinions and portfolio holdings as of May 31, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Franklin California High Yield Municipal Fund
We are pleased to bring you Franklin California High Yield Municipal Fund’s annual report for the fiscal year ended May 31, 2016.
Your Fund’s Goal and Main Investments
The Fund seeks to provide a high level of income exempt from federal and California personal income taxes by investing at least 80% of its net assets in municipal securities in any rating category, including higher yielding, lower rated securities, that pay interest free from such taxes.1 Its secondary goal is capital appreciation to the extent possible and consistent with its principal goal.
Credit Quality Breakdown*
5/31/16
| | |
| | % of Total | |
| Ratings | Investments | |
| AAA | 1.60 | % |
| AA | 26.42 | % |
| A | 19.76 | % |
| BBB | 12.11 | % |
| Below Investment Grade | 15.89 | % |
| Refunded | 5.53 | % |
| Not Rated | 18.69 | % |
*Securities, except for those labeled Not Rated, are assigned ratings by one or
more Nationally Recognized Statistical Credit Rating Organizations (NRSROs),
such as Standard & Poor’s, Moody’s and Fitch, that can be considered by the
investment manager as part of its independent securities analysis. When ratings
from multiple agencies are available, the highest is used, consistent with the
portfolio investment process. Ratings reflect an NRSRO’s opinion of an issuer’s
creditworthiness and typically range from AAA (highest) to D (lowest). The Below
Investment Grade category consists of bonds rated below BBB-. The Refunded
category generally consists of refunded bonds secured by U.S. government or
other high-quality securities and not rerated by an NRSRO. The Not Rated category
consists of ratable securities that have not been rated by an NRSRO. Cash and
equivalents are excluded from this breakdown.
Performance Overview
The Fund’s Class A share price, as measured by net asset value, rose from $10.65 on May 31, 2015, to $11.10 on May 31, 2016. The Fund’s Class A shares paid dividends totaling 42.15 cents per share for the reporting period.2 The Performance Summary beginning on page 8 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.47% based on an annualization of May’s 3.35 cent per share monthly dividend and the maximum offering price of $11.59 on May 31, 2016. An investor in the 2016 maximum combined effective federal and California personal income tax bracket of 50.83% (including 3.8% Medicare tax) would need to earn a distribution rate of 7.06% from a taxable investment to match the Fund’s Class A tax-free distribution rate. For the Fund’s Class C and Advisor shares’ performance, please see the Performance Summary. Dividend distributions were affected by lower interest rates during the period. This and other factors resulted in reduced income for the portfolio and caused dividends to be lower at the end of the period.
| | | |
| Dividend Distributions* | | | |
| 6/1/15–5/31/16 | | | |
| | Dividend per Share (cents) |
| Month | Class A | Class C | Advisor Class |
| June | 3.60 | 3.12 | 3.69 |
| July | 3.60 | 3.12 | 3.69 |
| August | 3.55 | 3.07 | 3.64 |
| September | 3.55 | 3.08 | 3.63 |
| October | 3.55 | 3.08 | 3.63 |
| November | 3.55 | 3.08 | 3.63 |
| December | 3.50 | 3.00 | 3.58 |
| January | 3.50 | 3.00 | 3.58 |
| February | 3.50 | 3.00 | 3.58 |
| March | 3.45 | 2.94 | 3.54 |
| April | 3.45 | 2.94 | 3.54 |
| May | 3.35 | 2.84 | 3.44 |
| Total | 42.15 | 36.27 | 43.17 |
*The distribution amount is the sum of the dividend payments to shareholders for
the period shown and includes only estimated tax-basis net investment income.
Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the date you
purchased your shares and any account activity. All Fund distributions will vary
depending upon current market conditions, and past distributions are not indicative
of future trends.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
1. The Fund may invest up to 100% of its assets in bonds whose interest payments are subject to federal alternative minimum tax. All or a significant portion of the income on
these obligations may be subject to such tax. Distributions of capital gains are generally taxable. To avoid imposition of 28% backup withholding on all Fund distributions and
redemption proceeds, U.S. investors must be properly certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. The distribution amount is the sum of the dividend payments to shareholders for the period shown and includes only estimated tax-basis net investment income. All Fund
distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 22.
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FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
State Update
California’s large and diverse economy continued to expand during the past 12 months under review. Higher education institutions, a wide range of businesses in innovative sectors and declining—but still relatively high—debt ratios supported the state’s expansion. Unemployment declined throughout the period from 6.4% in May 2015 to 5.2% at period-end, although it was still above the 4.7% national rate.3 The state gained jobs in most sectors with the largest increases including education and health services; professional and business services; trade, transportation and utilities; and leisure and hospitality sectors. In contrast, relatively fewer jobs were lost in the mining and logging and manufacturing sectors. Sales of California homes declined during the period as housing prices generally increased.
During fiscal year 2016, California paid down budgetary debts and continued to align recurring revenues and expenses. The state’s budgetary reserve levels also improved due to a redirection of capital gains-related and tax revenues continued to outperform the state’s forecast. California’s proposed 2017 budget includes significant improvements for the state, including funding for K-12 and higher education, the expansion of Medi-Cal benefits, improvements to transportation-related infrastructure, additional legislation to mitigate climate change, support of the state’s Emergency Drought Response—which went into effect in January 2014—and additional measures realigning the state’s inmate rehabilitation and reentry programs. In April 2016, the governor also enacted new legislation that could eventually lead to a minimum wage of $15.00 per hour, up from $10.00 per hour, by 2022.
California’s net tax-supported debt was $2,323 per capita and 4.7% of personal income, compared with the $1,025 and 2.5% national medians.4 In May 2016, S&P upgraded its rating on the state’s general obligations bonds from AA- to AA+ and indicated the upgrade reflected a recent verification of the state’s ability to fully pay all interest and principal due on bonds in an escrow fund controlled by the state.5
Investment Strategy
We use a consistent, disciplined strategy in an effort to maximize tax-exempt income for our shareholders while balancing risk and return within the Fund’s range of allowable investments. We generally employ a buy-and-hold approach
| | |
| Portfolio Breakdown | | |
| 5/31/16 | | |
| | % of Total | |
| | Investments* | |
| Tax-Supported | 24.9 | % |
| General Obligation | 16.0 | % |
| Transportation | 14.1 | % |
| Hospital & Health Care | 10.7 | % |
| Utilities | 9.3 | % |
| Refunded** | 6.9 | % |
| Other Revenue | 5.9 | % |
| Higher Education | 5.6 | % |
| Subject to Government Appropriations | 3.6 | % |
| Housing | 3.0 | % |
*Does not include cash and cash equivalents.
**Includes all refunded bonds; the percentage may differ from that in the Credit
Quality Breakdown.
and invest in securities we believe should provide the most relative value in the market. We do not use leverage or derivatives, nor do we use hedging techniques that could add volatility and contribute to underperformance in adverse markets.
Manager’s Discussion
Consistent with our strategy, we sought to remain invested in bonds that maintain an average weighted maturity of 15 to 30 years with good call features. Based on the combination of our value-oriented philosophy of investing primarily for income and a positively sloping municipal yield curve, in which interest rates for longer term bonds are higher than those for shorter term bonds, we favored the use of longer term bonds. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.
The Fund holds a small portion of its assets in Puerto Rico bonds, which experienced declines over the period. Puerto Rico and its municipal issuers continued to experience significant financial difficulties, which we discussed in the Municipal Bond Market Overview on page 3. The Fund is not required to sell securities that have been downgraded to below investment grade, and may invest in municipal securities in any rating category. Rating actions combined with news related to the commonwealth’s financial position and future financing endeavors caused the Puerto Rico bond market to experience
3. Source: Bureau of Labor Statistics.
4. Source: Moody’s Investors Services, State Debt Medians 2016: Medians – Total Debt Remains Static in 2016, 5/6/16.
5. This does not indicate S&P’s rating of the Fund.
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FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
volatility during the reporting period. We continue to closely monitor developments in Puerto Rico; however, the municipal bond market’s overall fundamentals, such as creditworthiness and low default rates, remained stable.
Thank you for your continued participation in Franklin California High Yield Municipal Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of May 31, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, state, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
Performance Summary as of May 31, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance tables and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
| | | | | |
| Net Asset Value | | | | | |
| Share Class (Symbol) | | 5/31/16 | | 5/31/15 | Change |
| A (FCAMX) | $ | 11.10 | $ | 10.65 | +$0.45 |
| C (FCAHX) | $ | 11.17 | $ | 10.72 | +$0.45 |
| Advisor (FVCAX) | $ | 11.12 | $ | 10.67 | +$0.45 |
| |
| |
| Distributions1 (6/1/15–5/31/16) | | | | | |
| | | Dividend | | | |
| Share Class | | Income | | | |
| A | $ | 0.4215 | | | |
| C | $ | 0.3627 | | | |
| Advisor | $ | 0.4317 | | | |
See page 11 for Performance Summary footnotes.
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FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
PERFORMANCE SUMMARY
Performance as of 5/31/16
Cumulative total return excludes sales charges. Average annual total returns include maximum sales charges. Class A: 4.25% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only; Advisor Class: no sales charges.
| | | | | | | | |
| | Cumulative | | Average Annual | | Average Annual | | Total Annual | |
| Share Class | Total Return2 | | Total Return3 | | Total Return (6/30/16)4 | | Operating Expenses5 | |
| A | | | | | | | 0.63 | % |
| 1-Year | +8.37 | % | +3.79 | % | +7.41 | % | | |
| 5-Year | +52.69 | % | +7.90 | % | +8.26 | % | | |
| 10-Year | +74.86 | % | +5.29 | % | +5.62 | % | | |
| C | | | | | | | 1.18 | % |
| 1-Year | +7.73 | % | +6.73 | % | +10.61 | % | | |
| 5-Year | +48.35 | % | +8.21 | % | +8.63 | % | | |
| 10-Year | +65.54 | % | +5.17 | % | +5.49 | % | | |
| Advisor6 | | | | | | | 0.53 | % |
| 1-Year | +8.46 | % | +8.46 | % | +12.28 | % | | |
| 5-Year | +53.33 | % | +8.92 | % | +9.33 | % | | |
| 10-Year | +76.72 | % | +5.86 | % | +6.18 | % | | |
| |
| |
| | Distribution | | Taxable Equivalent | | 30-Day | | Taxable Equivalent 30-Day | |
| Share Class | Rate7 | | Distribution Rate8 | | Standardized Yield9 | | Standardized Yield8 | |
| A | 3.47 | % | 7.06 | % | 2.41 | % | 4.90 | % |
| C | 3.05 | % | 6.20 | % | 1.95 | % | 3.97 | % |
| Advisor | 3.71 | % | 7.55 | % | 2.61 | % | 5.31 | % |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 11 for Performance Summary footnotes.
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FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
See page 11 for Performance Summary footnotes.
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PERFORMANCE SUMMARY
All investments involve risks, including possible loss of principal. Because municipal bonds are sensitive to interest rate movements, the Fund’s yield and share
price will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a
rise in interest rates, the Fund’s share price may decline. Because the Fund invests principally in a single state, it is subject to greater risk of adverse economic
and regulatory changes in that state than a geographically diversified fund. Investments in lower rated bonds include higher risk of default and loss of principal.
The Fund holds a small portion of its assets in Puerto Rico municipal bonds that have been impacted by recent adverse economic and market changes, which
may cause the Fund’s share price to decline. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or
guarantor, may affect the bond’s value. The Fund may invest a significant part of its assets in municipal securities that finance similar types of projects, such as
utilities, hospitals, higher education and transportation. A change that affects one project would likely affect all similar projects, thereby increasing market risk.
The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also
includes a description of the main investment risks.
| |
| Class C: | These shares have higher annual fees and expenses than Class A shares. |
| Advisor Class: | Shares are available to certain eligible investors as described in the prospectus. |
1. The distribution amount is the sum of the dividend payments to shareholders for the period shown and includes only estimated tax-basis net investment income.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, ifany,hasnotbeen
annualized.
4. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
5. Figures are as stated in the current Fund’s prospectus and may differ from the expense ratios disclosed in the Financial Highlights of this report. In periods of market volatility,
assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Effective 11/15/06, the Fund began offering Advisor class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the
following methods of calculation: (a) For periods prior to 11/15/06, a restated figure is used based upon the Fund’s Class A performance, excluding the effect of Class A’s
maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 11/15/06, actual Advisor class performance is used reflecting all
charges and fees applicable to that class. Since 11/15/06 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +69.35%
and +5.68%.
7. Distribution rate is based on an annualization of the respective class’s May dividend and the maximum offering price (NAV for Classes C and Advisor) per share on 5/31/16.
8. Taxable equivalent distribution rate and yield assume the published rates as of 12/21/15 for the maximum combined effective federal and California state personal income tax
rate of 50.83%, based on the federal income tax rate of 39.60% plus 3.8% Medicare tax.
9. The Fund’s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal
the Fund’s actual income distribution rate, which reflects the Fund’s past dividends paid to shareholders.
10. Source: Morningstar. The Barclays Municipal Bond Index is a market value-weighted index engineered for the long-term tax-exempt bond market. To be included in the
index, bonds must be fixed rate, have at least one year to final maturity and be rated investment grade (Baa3/BBB- or higher) by at least two of the following agencies: Moody’s,
S&P and Fitch.
11. Source: Bureau of Labor Statistics, bls.gov/cpi. The Consumer Price Index is a commonly used measure of the inflation rate.
See www.franklintempletondatasources.com for additional data provider information.
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FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
| | If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. |
| 2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
| | If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
| | | | | | |
| | | Beginning Account | | Ending Account | | Expenses Paid During |
| Share Class | | Value 12/1/15 | | Value 5/31/16 | | Period* 12/1/15–5/31/16 |
| A | | | | | | |
| Actual | $ | 1,000 | $ | 1,054.20 | $ | 3.49 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.60 | $ | 3.44 |
| C | | | | | | |
| Actual | $ | 1,000 | $ | 1,051.00 | $ | 6.31 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.85 | $ | 6.21 |
| Advisor | | | | | | |
| Actual | $ | 1,000 | $ | 1,054.60 | $ | 2.98 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,022.10 | $ | 2.93 |
*Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.68%; C: 1.23%; and Advisor: 0.58%),
multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period.
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Franklin Tennessee Municipal Bond Fund
We are pleased to bring you Franklin Tennessee Municipal Bond Fund’s annual report for the fiscal year ended May 31, 2016.
Your Fund’s Goal and Main Investments
The Fund seeks to maximize income exempt from federal and Tennessee personal income taxes, consistent with prudent investing and the preservation of capital, by investing at least 80% of its net assets in investment grade municipal securities that pay interest free from such taxes.1
Credit Quality Breakdown*
5/31/16
| | |
| | % of Total | |
| Ratings | Investments | |
| AAA | 1.66 | % |
| AA | 56.48 | % |
| A | 14.73 | % |
| BBB | 4.14 | % |
| Below Investment Grade | 3.40 | % |
| Refunded | 17.82 | % |
| Not Rated | 1.77 | % |
*Securities, except for those labeled Not Rated, are assigned ratings by one or
more Nationally Recognized Statistical Credit Rating Organizations (NRSROs),
such as Standard & Poor’s, Moody’s and Fitch, that can be considered by the
investment manager as part of its independent securities analysis. When ratings
from multiple agencies are available, the highest is used, consistent with the
portfolio investment process. Ratings reflect an NRSRO’s opinion of an issuer’s
creditworthiness and typically range from AAA (highest) to D (lowest). The Below
Investment Grade category consists of bonds rated below BBB-. The Refunded
category generally consists of refunded bonds secured by U.S. government or
other high-quality securities and not rerated by an NRSRO. The Not Rated category
consists of ratable securities that have not been rated by an NRSRO. Cash and
equivalents are excluded from this breakdown.
Performance Overview
The Fund’s Class A share price, as measured by net asset value, inceased from $11.38 on May 31, 2015, to $11.44 on May 31, 2016. The Fund’s Class A shares paid dividends totaling 39.90 cents per share for the reporting period.2 The Performance Summary beginning on page 16 shows that at the end of this reporting period the Fund’s Class A shares’ distribution rate was 3.31%. An investor in the 2016 maximum combined effective federal and Tennessee personal income tax bracket of 47.02% (including 3.8% Medicare tax) would need to earn a distribution rate of 6.25% from a taxable investment to match the Fund’s Class A tax-free distribution rate.
| |
| Dividend Distributions* | |
| 6/1/15–5/31/16 | |
| | Dividend per Share (cents) |
| Month | Class A |
| June | 3.30 |
| July | 3.30 |
| August | 3.30 |
| September | 3.30 |
| October | 3.30 |
| November | 3.35 |
| December | 3.35 |
| January | 3.35 |
| February | 3.35 |
| March | 3.35 |
| April | 3.35 |
| May | 3.30 |
| Total | 39.90 |
*The distribution amount is the sum of the dividend payments to shareholders for
the period shown and includes only estimated tax-basis net investment income.
Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the date you
purchased your shares and any account activity. All Fund distributions will vary
depending upon current market conditions, and past distributions are not indicative
of future trends.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
State Update
During the past 12 months ended May 31, 2016, Tennessee’s diverse economy grew. The state is a distribution and manufacturing hub partly due to its access to the Mississippi River, transportation network and abundant supply of land. These factors contributed to its strong—yet cyclical—trade and manufacturing businesses. Employment began the period at
1. The Fund may invest up to 100% of its assets in bonds whose interest payments are subject to federal alternative minimum tax. All or a significant portion of the income on
these obligations may be subject to such tax. Distributions of capital gains are generally taxable. To avoid imposition of 28% backup withholding on all Fund distributions and
redemption proceeds, U.S. investors must be properly certified on Form W-9 and non-U.S. investors on Form W-8BEN.
2. The distribution amount is the sum of the dividend payments to shareholders for the period shown and includes only estimated tax-basis net investment income. All Fund
distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 37.
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Annual Report
13
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
5.8%, decreased or remained flat for each month during the period under review and ended the period at 4.1%, well below the nation’s 4.7% average.3 The state gained jobs in all private sectors and declined slightly in the government sector.
Tennessee’s fiscal year 2016 ended with better-than-budgeted revenue performance and supported the recently enacted fiscal year 2017 budget surplus. The state’s budget management framework continued to perform well, implementing cost-containment measures to ensure that the financial position stayed as close to the budget as possible throughout fiscal year 2016. The newly enacted budget is also structurally balanced and aims to continue building rainy day reserves.
Tennessee’s net tax-supported debt was $298 per capita and 0.7% of personal income, compared with the $1,025 and 2.5% national medians.4 Near period-end, independent credit rating agency Standard & Poor’s (S&P) upgraded its ratings on the state’s general obligation bonds from AA+ to AAA with a stable outlook.5 In S&P’s view, the rating reflected the state’s strong growth, improving rainy day reserves, strong financial management practices and performance, long-standing funding of the state’s retirement obligations and low debt burden. The outlook reflected S&P’s view of Tennessee’s excellent management of its long-term liabilities and that the state could continue to exhibit economic growth, supported by its growing employment.
Investment Strategy
We use a consistent, disciplined strategy in an effort to maximize tax-exempt income for our shareholders while balancing risk and return within the Fund’s range of allowable investments. We generally employ a buy-and-hold approach and invest in securities we believe should provide the most relative value in the market. We do not use leverage or derivatives, nor do we use hedging techniques that could add volatility and contribute to underperformance in adverse markets.
Manager’s Discussion
Consistent with our strategy, we sought to remain invested in bonds that maintain an average weighted maturity of 15 to 30 years with good call features. Based on the combination of our value-oriented philosophy of investing primarily for
| | |
| Portfolio Breakdown | | |
| 5/31/16 | | |
| | % of Total | |
| | Investments* | |
| Utilities | 26.1 | % |
| Refunded** | 24.0 | % |
| Hospital & Health Care | 14.9 | % |
| Higher Education | 9.9 | % |
| General Obligation | 7.9 | % |
| Transportation | 6.5 | % |
| Other Revenue | 5.5 | % |
| Housing | 3.2 | % |
| Tax-Supported | 2.0 | % |
*Does not include cash and cash equivalents.
**Includes all refunded bonds; the percentage may differ from that in the Credit
Quality Breakdown.
income and a positively sloping municipal yield curve, in which interest rates for longer term bonds are higher than those for shorter term bonds, we favored the use of longer term bonds. We believe our conservative, buy-and-hold investment strategy can help us achieve high, current, tax-free income for shareholders.
The Fund holds a small portion of its assets in Puerto Rico bonds, which experienced declines over the period. Puerto Rico and its municipal issuers continued to experience significant financial difficulties, which we discussed in the Municipal Bond Market Overview on page 3. The Fund is not required to sell securities that have been downgraded to below investment grade, but it is prohibited from making further purchases of such securities as long as the securities are not rated investment grade by at least one U.S. nationally recognized rating service. Rating actions combined with news related to the commonwealth’s financial position and future financing endeavors caused the Puerto Rico bond market to experience volatility during the reporting period. We continue to closely monitor developments in Puerto Rico; however, the municipal bond market’s overall fundamentals, such as creditworthiness and low default rates, remained stable.
Thank you for your continued participation in Franklin Tennessee Municipal Bond Fund. We look forward to serving your future investment needs.
3. Source: Bureau of Labor Statistics.
4. Source: Moody’s Investors Services, State Debt Medians 2016: Medians – Total Debt Remains Static in 2016, 5/6/16.
5. This does not indicate S&P’s rating of the Fund.
14 Annual Report
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FRANKLIN TENNESSEE MUNICIPAL BOND FUND
The foregoing information reflects our analysis, opinions and portfolio
holdings as of May 31, 2016, the end of the reporting period. The way
we implement our main investment strategies and the resulting
portfolio holdings may change depending on factors such as market
and economic conditions. These opinions may not be relied upon as
investment advice or an offer for a particular security. The information
is not a complete analysis of every aspect of any market, state,
industry, security or the Fund. Statements of fact are from sources
considered reliable, but the investment manager makes no
representation or warranty as to their completeness or accuracy.
Although historical performance is no guarantee of future results,
these insights may help you understand our investment management
philosophy.
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Annual Report
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FRANKLIN TENNESSEE MUNICIPAL BOND FUND
Performance Summary as of May 31, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance tables and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
| | | | | |
| Net Asset Value | | | | | |
| Share Class (Symbol) | | 5/31/16 | | 5/31/15 | Change |
| A (FRTIX) | $ | 11.44 | $ | 11.38 | +$0.06 |
| |
| Distributions1 (6/1/15–5/31/16) | | | | | |
| | | Dividend | | | |
| Share Class | | Income | | | |
| A | $ | 0.3990 | | | |
Performance
Cumulative total return excludes sales charges. Average annual total returns include maximum sales charges. Class A: 4.25% maximum initial sales charge.
| | | | | | | | |
| | Cumulative | | Average Annual | | Average Annual | | Total Annual | |
| Share Class | Total Return2 | | Total Return3 | | Total Return (6/30/16)4 | | Operating Expenses5 | |
| A | | | | | | | 0.72 | % |
| 1-Year | +4.12 | % | -0.35 | % | +2.06 | % | | |
| 5-Year | +22.44 | % | +3.23 | % | +3.54 | % | | |
| 10-Year | +50.15 | % | +3.69 | % | +3.92 | % | | |
| |
| |
| | Distribution | | Taxable Equivalent | | 30-Day | | Taxable Equivalent 30-Day | |
| Share Class | Rate6 | | Distribution Rate7 | | Standardized Yield8 | | Standardized Yield7 | |
| A | 3.31 | % | 6.25 | % | 1.39 | % | 2.62 | % |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 17 for Performance Summary footnotes.
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FRANKLIN TENNESSEE MUNICIPAL BOND FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
All investments involve risks, including possible loss of principal. Because municipal bonds are sensitive to interest rate movements, the Fund’s yield and share
price will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a
rise in interest rates, the Fund’s share price may decline. Because the Fund invests principally in a single state, it is subject to greater risk of adverse economic
and regulatory changes in that state than a geographically diversified fund. The Fund holds a small portion of its assets in Puerto Rico municipal bonds thathave
been impacted by recent adverse economic and market changes, which may cause the Fund’s share price to decline. Changes in the credit rating of a bond, or in
the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. The Fund may invest a significant part of its assets in
municipal securities that finance similar types of projects, such as utilities, hospitals, higher education and transportation. A change that affects one project
would likely affect all similar projects, thereby increasing market risk. The Fund is actively managed but there is no guarantee that the manager’s investment
decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The distribution amount is the sum of the dividend payments to shareholders for the period shown and includes only estimated tax-basis net investment income.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, ifany,hasnotbeen
annualized.
4. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights of this report. In periods of market volatility,
assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
6. Distribution rate is based on an annualization of the current 3.30 cent per share May dividend and the maximum offering price of $11.95 per share on 5/31/16.
7. Taxable equivalent distribution rate and yield assume the published rates as of 12/21/15 for the maximum combined effective federal and Tennessee state personal income
tax rate of 47.02%, based on the federal income tax rate of 39.60% plus 3.8% Medicare tax.
8. The Fund’s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal
the Fund’s actual income distribution rate, which reflects the Fund’s past dividends paid to shareholders.
9. Source: Morningstar. The Barclays Municipal Bond Index is a market value-weighted index engineered for the long-term tax-exempt bond market. To be included in the index,
bonds must be fixed rate, have at least one year to final maturity and be rated investment grade (Baa3/BBB- or higher) by at least two of the following agencies: Moody’s, S&P
and Fitch.
10. Source: Bureau of Labor Statistics, bls.gov/cpi. The Consumer Price Index is a commonly used measure of the inflation rate.
See www.franklintempletondatasources.com for additional data provider information.
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Annual Report
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FRANKLIN TENNESSEE MUNICIPAL BOND FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
| | If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6. |
| 2. | Multiply the result by the number under the heading “Expenses Paid During Period.” |
| | If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50. |
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
| | | | | | |
| | | Beginning Account | | Ending Account | | Expenses Paid During |
| Share Class | | Value 12/1/15 | | Value 5/31/16 | | Period* 12/1/15–5/31/16 |
| A | | | | | | |
| Actual | $ | 1,000 | $ | 1,030.30 | $ | 3.65 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.40 | $ | 3.64 |
*Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.72%), multiplied by the average
account value over the period, multiplied by 183/366 to reflect the one-half year period.
18 Annual Report
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| | | | | | FRANKLIN MUNICIPAL SECURITIES TRUST | |
| |
| |
| Financial Highlights | | | | | | | | | | | | | | | |
| Franklin California High Yield Municipal Fund | | | | | | | | | | | | | | | |
| | | | | | Year Ended May 31, | | | | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Class A | | | | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | | | | |
| (for a share outstanding throughout the year) | | | | | | | | | | | | | | | |
| Net asset value, beginning of year | $ | 10.65 | | $ | 10.42 | | $ | 10.59 | | $ | 10.40 | | $ | 9.07 | |
| Income from investment operationsa: | | | | | | | | | | | | | | | |
| Net investment incomeb | | 0.41 | | | 0.44 | | | 0.49 | | | 0.46 | | | 0.49 | |
| Net realized and unrealized gains (losses) | | 0.46 | | | 0.24 | | | (0.18 | ) | | 0.17 | | | 1.34 | |
| Total from investment operations | | 0.87 | | | 0.68 | | | 0.31 | | | 0.63 | | | 1.83 | |
| Less distributions from net investment income | | (0.42 | ) | | (0.45 | ) | | (0.48 | ) | | (0.44 | ) | | (0.50 | ) |
| Net asset value, end of year. | $ | 11.10 | | $ | 10.65 | | $ | 10.42 | | $ | 10.59 | | $ | 10.40 | |
| |
| Total returnc | | 8.37 | % | | 6.63 | % | | 3.22 | % | | 6.10 | % | | 20.65 | % |
| |
| Ratios to average net assets | | | | | | | | | | | | | | | |
| Expenses | | 0.65 | % | | 0.63 | % | | 0.63 | % | | 0.61 | % | | 0.62 | % |
| Net investment income | | 3.83 | % | | 4.17 | % | | 4.95 | % | | 4.31 | % | | 5.05 | % |
| |
| Supplemental data | | | | | | | | | | | | | | | |
| Net assets, end of year (000’s) | $ | 1,442,703 | | $ | 1,294,192 | | $ | 1,203,532 | | $ | 1,330,444 | | $ | 1,238,396 | |
| Portfolio turnover rate | | 12.23 | % | | 11.98 | % | | 22.26 | % | | 5.47 | % | | 6.67 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
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The accompanying notes are an integral part of these financial statements. | Annual Report 19
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| FRANKLIN MUNICIPAL SECURITIES TRUST | | | | | | | | | | | | | | | |
| FINANCIAL HIGHLIGHTS | | | | | | | | | | | | | | | |
| |
| |
| Franklin California High Yield Municipal Fund (continued) | | | | | | | | | | | | | | | |
| | | | | | Year Ended May 31, | | | | | | | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Class C | | | | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | | | | |
| (for a share outstanding throughout the year) | | | | | | | | | | | | | | | |
| Net asset value, beginning of year | $ | 10.72 | | $ | 10.49 | | $ | 10.65 | | $ | 10.46 | | $ | 9.13 | |
| Income from investment operationsa: | | | | | | | | | | | | | | | |
| Net investment incomeb | | 0.36 | | | 0.39 | | | 0.44 | | | 0.40 | | | 0.44 | |
| Net realized and unrealized gains (losses) | | 0.45 | | | 0.23 | | | (0.18 | ) | | 0.17 | | | 1.33 | |
| Total from investment operations | | 0.81 | | | 0.62 | | | 0.26 | | | 0.57 | | | 1.77 | |
| Less distributions from net investment income | | (0.36 | ) | | (0.39 | ) | | (0.42 | ) | | (0.38 | ) | | (0.44 | ) |
| Net asset value, end of year. | $ | 11.17 | | $ | 10.72 | | $ | 10.49 | | $ | 10.65 | | $ | 10.46 | |
| |
| Total returnc | | 7.73 | % | | 6.01 | % | | 2.74 | % | | 5.48 | % | | 19.86 | % |
| |
| Ratios to average net assets | | | | | | | | | | | | | | | |
| Expenses | | 1.20 | % | | 1.18 | % | | 1.18 | % | | 1.16 | % | | 1.17 | % |
| Net investment income | | 3.28 | % | | 3.62 | % | | 4.40 | % | | 3.76 | % | | 4.50 | % |
| |
| Supplemental data | | | | | | | | | | | | | | | |
| Net assets, end of year (000’s) | $ | 377,550 | | $ | 326,456 | | $ | 278,775 | | $ | 322,824 | | $ | 293,895 | |
| Portfolio turnover rate | | 12.23 | % | | 11.98 | % | | 22.26 | % | | 5.47 | % | | 6.67 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
20 Annual Report | The accompanying notes are an integral part of these financial statements.
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| | | | | | FRANKLIN MUNICIPAL SECURITIES TRUST | |
| | | | | | | | | FINANCIAL HIGHLIGHTS | |
| |
| |
| Franklin California High Yield Municipal Fund (continued) | | | | | | | | | | | | | | | |
| | | | | | Year Ended May 31, | | | | | | | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Advisor Class | | | | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | | | | |
| (for a share outstanding throughout the year) | | | | | | | | | | | | | | | |
| Net asset value, beginning of year | $ | 10.67 | | $ | 10.44 | | $ | 10.61 | | $ | 10.41 | | $ | 9.09 | |
| Income from investment operationsa: | | | | | | | | | | | | | | | |
| Net investment incomeb | | 0.43 | | | 0.45 | | | 0.50 | | | 0.47 | | | 0.50 | |
| Net realized and unrealized gains (losses) | | 0.45 | | | 0.24 | | | (0.18 | ) | | 0.18 | | | 1.33 | |
| Total from investment operations | | 0.88 | | | 0.69 | | | 0.32 | | | 0.65 | | | 1.83 | |
| Less distributions from net investment income | | (0.43 | ) | | (0.46 | ) | | (0.49 | ) | | (0.45 | ) | | (0.51 | ) |
| Net asset value, end of year. | $ | 11.12 | | $ | 10.67 | | $ | 10.44 | | $ | 10.61 | | $ | 10.41 | |
| |
| Total return | | 8.46 | % | | 6.73 | % | | 3.32 | % | | 6.30 | % | | 20.60 | % |
| |
| Ratios to average net assets | | | | | | | | | | | | | | | |
| Expenses | | 0.55 | % | | 0.53 | % | | 0.53 | % | | 0.51 | % | | 0.52 | % |
| Net investment income | | 3.93 | % | | 4.27 | % | | 5.05 | % | | 4.41 | % | | 5.15 | % |
| |
| Supplemental data | | | | | | | | | | | | | | | |
| Net assets, end of year (000’s) | $ | 635,463 | | $ | 474,392 | | $ | 315,131 | | $ | 303,904 | | $ | 241,123 | |
| Portfolio turnover rate | | 12.23 | % | | 11.98 | % | | 22.26 | % | | 5.47 | % | | 6.67 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
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The accompanying notes are an integral part of these financial statements. | Annual Report 21
FRANKLIN MUNICIPAL SECURITIES TRUST
| | | | |
| Statement of Investments, May 31, 2016 | | | | |
| Franklin California High Yield Municipal Fund | | | | |
| | | Units | | Value |
| |
| Common Stocks and Other Equity Interests (Cost $611,327) 0.0%† | | | | |
| Consumer Discretionary 0.0%† | | | | |
| a,b 1155 Island Avenue LLC, LP | | 7,830,849 | $ | 611,323 |
| |
| |
| | | Principal | | |
| | | Amount | | |
| |
| Corporate Bonds (Cost $3,993,733) 0.2% | | | | |
| Consumer Discretionary 0.2% | | | | |
| b,c 1155 Island Avenue LLC, PIK, 10.00%, 12/11/24 | $ | 3,993,733 | | 3,997,292 |
| Municipal Bonds 90.8% | | | | |
| California 86.9% | | | | |
| ABAG Finance Authority for Nonprofit Corps. Revenue, Episcopal Senior Communities, Refunding, | | | | |
| 6.125%, 7/01/41 | | 7,500,000 | | 8,668,725 |
| Alameda Corridor Transportation Authority Revenue, | | | | |
| second sub. lien, Refunding, Series B, AGMC Insured, 4.00%, 10/01/35 | | 3,250,000 | | 3,566,972 |
| second sub. lien, Refunding, Series B, AGMC Insured, 5.00%, 10/01/35 | | 3,250,000 | | 3,968,867 |
| second sub. lien, Refunding, Series B, AGMC Insured, 5.00%, 10/01/36 | | 2,000,000 | | 2,432,240 |
| second sub. lien, Refunding, Series B, AGMC Insured, 4.00%, 10/01/37 | | 2,985,000 | | 3,248,307 |
| second sub. lien, Refunding, Series B, AGMC Insured, 5.00%, 10/01/37 | | 1,000,000 | | 1,211,070 |
| Alameda Special Tax, CFD No. 13-1, Alameda Landing Public Improvements, 5.00%, 9/01/46. | | 1,400,000 | | 1,594,054 |
| Artesia RDA Tax Allocation, | | | | |
| Artesia Redevelopment Project Area, 5.50%, 6/01/42 | | 6,355,000 | | 6,358,686 |
| Artesia Redevelopment Project Area, 5.70%, 6/01/42 | | 2,970,000 | | 2,972,287 |
| Housing Set-Aside, Artesia Redevelopment Project Area, 7.70%, 6/01/46 | | 3,245,000 | | 3,556,715 |
| Azusa Special Tax, | | | | |
| CFD No. 2005-1, Rosedale, Improvement Area No. 1, 5.00%, 9/01/27 | | 1,995,000 | | 2,019,100 |
| CFD No. 2005-1, Rosedale, Improvement Area No. 1, 5.00%, 9/01/37 | | 1,665,000 | | 1,681,883 |
| Baldwin Park USD, | | | | |
| GO, Los Angeles County, Capital Appreciation, Election of 2006, AGMC Insured, zero cpn., 8/01/31 . | | 5,735,000 | | 2,459,455 |
| GO, Los Angeles County, Capital Appreciation, Election of 2006, Refunding, BAM Insured, zero | | | | |
| cpn., 8/01/42 | | 10,000,000 | | 2,257,900 |
| Bay Area Toll Authority Toll Bridge Revenue, San Francisco Bay Area, Subordinate, Series S-4, 5.25%, | | | | |
| 4/01/53 | | 15,000,000 | | 17,410,500 |
| Beaumont Financing Authority Local Agency Revenue, | | | | |
| Improvement Area No. 17B, Series A, 6.125%, 9/01/31 | | 720,000 | | 800,676 |
| Improvement Area No. 17B, Series A, 6.375%, 9/01/42 | | 5,000,000 | | 5,521,600 |
| Series C, 5.45%, 9/01/27 | | 6,435,000 | | 6,438,282 |
| Series C, 5.50%, 9/01/29 | | 855,000 | | 858,753 |
| Series C, 5.50%, 9/01/35 | | 1,035,000 | | 1,038,902 |
| Series C, 5.50%, 9/01/35 | | 3,995,000 | | 4,011,459 |
| Beaumont USD, GO, Election of 2008, Series C, AGMC Insured, 6.00%, 8/01/41 | | 1,925,000 | | 2,325,939 |
| Buena Park Community RDA Tax Allocation, Consolidated Redevelopment Project, 6.25%, 9/01/35 | | 5,000,000 | | 5,430,550 |
| California County Tobacco Securitization Agency Tobacco Settlement Revenue, Asset-Backed, Los | | | | |
| Angeles County Securitization Corp., 5.70%, 6/01/46 | | 3,000,000 | | 3,050,790 |
| California Municipal Finance Authority Revenue, | | | | |
| American Heritage Education Foundation Project, Refunding, Series A, 5.00%, 6/01/36 | | 1,000,000 | | 1,138,250 |
| American Heritage Education Foundation Project, Refunding, Series A, 5.00%, 6/01/46 | | 1,750,000 | | 1,954,120 |
| California School Finance Authority School Facility Revenue, | | | | |
| Aspire Public Schools, Refunding, Series B, 5.00%, 8/01/45 | | 1,100,000 | | 1,235,652 |
| Green Dot Public School Project, Series A, 5.00%, 8/01/35 | | 2,525,000 | | 2,765,633 |
| Green Dot Public School Project, Series A, 5.00%, 8/01/45 | | 3,500,000 | | 3,777,200 |
| Kipp LA Projects, Series A, 5.00%, 7/01/35 | | 1,200,000 | | 1,327,116 |
| Kipp LA Projects, Series A, 5.00%, 7/01/45 | | 1,675,000 | | 1,808,029 |
22 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| California State Educational Facilities Authority Revenue, | | | | |
| Chapman University, 5.00%, 4/01/40 | $ | 5,000,000 | $ | 5,854,900 |
| College and University Financing Program, Pre-Refunded, 5.00%, 2/01/26 | | 250,000 | | 257,415 |
| College and University Financing Program, Pre-Refunded, 5.00%, 2/01/30 | | 615,000 | | 633,241 |
| Pepperdine University, Refunding, 5.00%, 10/01/41 | | 2,735,000 | | 3,308,858 |
| University of San Francisco, 6.125%, 10/01/36 | | 2,000,000 | | 2,443,200 |
| University of the Pacific, Refunding, 5.00%, 11/01/36. | | 3,000,000 | | 3,578,250 |
| California State GO, | | | | |
| Various Purpose, 6.00%, 11/01/39. | | 13,000,000 | | 15,174,380 |
| Various Purpose, FGIC Insured, 6.00%, 8/01/19 | | 30,000 | | 30,277 |
| Various Purpose, Refunding, 5.00%, 9/01/36 | | 12,050,000 | | 14,855,360 |
| Various Purpose, Refunding, 5.00%, 3/01/45 | | 5,000,000 | | 5,976,200 |
| California State Health Facilities Financing Authority Revenue, | | | | |
| California Nevada Methodist Homes, Refunding, California Mortgage Insured, 5.00%, 7/01/45 | | 4,500,000 | | 5,332,230 |
| El Camino Hospital, Refunding, Series A, 5.00%, 2/01/40. | | 7,000,000 | | 8,031,800 |
| Lucile Salter Packard Children’s Hospital at Stanford, Series A, 5.00%, 8/15/43 | | 7,160,000 | | 8,398,322 |
| Providence Health and Services, Series C, Pre-Refunded, 6.50%, 10/01/33 | | 4,000,000 | | 4,526,720 |
| Sutter Health, Series A, 5.00%, 11/15/41 | | 25,000,000 | | 29,859,500 |
| California State Municipal Finance Authority Charter School Lease Revenue, | | | | |
| Santa Rosa Academy Project, 5.125%, 7/01/35 | | 450,000 | | 473,495 |
| Santa Rosa Academy Project, 5.375%, 7/01/45 | | 1,400,000 | | 1,464,918 |
| California State Municipal Finance Authority Charter School Revenue, | | | | |
| King Chavez Academy of Excellence Project, Refunding, Series A, 5.00%, 5/01/36. | | 2,675,000 | | 2,858,131 |
| King Chavez Academy of Excellence Project, Refunding, Series A, 5.00%, 5/01/46. | | 2,775,000 | | 2,912,030 |
| Palmdale Aerospace Academy Project, 5.00%, 7/01/31 | | 1,000,000 | | 1,098,900 |
| Palmdale Aerospace Academy Project, 5.00%, 7/01/36 | | 2,750,000 | | 2,983,283 |
| Palmdale Aerospace Academy Project, 5.00%, 7/01/41 | | 1,750,000 | | 1,877,400 |
| Palmdale Aerospace Academy Project, 5.00%, 7/01/46 | | 1,670,000 | | 1,785,881 |
| California State Municipal Finance Authority COP, | | | | |
| Community Hospitals of Central California, Pre-Refunded, 5.25%, 2/01/46. | | 1,895,000 | | 1,953,044 |
| Community Hospitals of Central California, Refunding, 5.25%, 2/01/46 | | 14,070,000 | | 14,386,294 |
| Community Hospitals of Central California Obligated Group, 5.25%, 2/01/24 | | 5,000,000 | | 5,487,250 |
| Community Hospitals of Central California Obligated Group, 5.375%, 2/01/29 | | 7,000,000 | | 7,685,580 |
| Community Hospitals of Central California Obligated Group, 5.50%, 2/01/39 | | 10,600,000 | | 11,556,544 |
| California State Municipal Finance Authority Mobile Home Park Revenue, | | | | |
| Caritas Affordable Housing Inc. Projects, Senior, Series A, 5.00%, 8/15/30. | | 1,000,000 | | 1,125,040 |
| Caritas Affordable Housing Inc. Projects, Senior, Series A, 5.25%, 8/15/39. | | 1,200,000 | | 1,353,072 |
| Caritas Affordable Housing Inc. Projects, Senior, Series A, 5.25%, 8/15/49. | | 3,500,000 | | 3,914,610 |
| Windsor Mobile Country Club, Refunding, Series A, 5.625%, 11/15/33. | | 1,000,000 | | 1,131,140 |
| Windsor Mobile Country Club, Refunding, Series A, 6.00%, 11/15/48 | | 4,000,000 | | 4,602,600 |
| California State Municipal Finance Authority Revenue, | | | | |
| Baptist University, Series A, 5.375%, 11/01/40 | | 5,000,000 | | 5,352,250 |
| Baptist University, Series A, 5.50%, 11/01/45 | | 10,000,000 | | 10,736,100 |
| Biola University, Refunding, Series A, 5.625%, 10/01/23. | | 6,000,000 | | 6,497,820 |
| Biola University, Refunding, Series A, 5.80%, 10/01/28 | | 7,500,000 | | 8,200,575 |
| Biola University, Refunding, Series A, 5.875%, 10/01/34. | | 6,000,000 | | 6,463,440 |
| Community Medical Centers, Series A, 5.00%, 2/01/40 | | 5,000,000 | | 5,659,750 |
| Harbor Regional Center Project, Pre-Refunded, 8.50%, 11/01/39 | | 5,000,000 | | 6,256,350 |
| Harbor Regional Center Project, Refunding, 5.00%, 11/01/32 | | 3,020,000 | | 3,588,273 |
| Harbor Regional Center Project, Refunding, 5.00%, 11/01/39 | | 6,525,000 | | 7,541,595 |
| Inland Regional Center Project, Refunding, 5.00%, 6/15/37 | | 9,965,000 | | 11,565,877 |
franklintempleton.com
Annual Report
23
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| California State Municipal Finance Authority Revenue, (continued) | | | | |
| Kern Regional Center Project, Series A, 7.50%, 5/01/39 | $ | 9,000,000 | $ | 10,504,260 |
| NorthBay Healthcare Group, 5.00%, 11/01/35. | | 1,100,000 | | 1,256,299 |
| NorthBay Healthcare Group, 5.00%, 11/01/44. | | 1,050,000 | | 1,188,380 |
| South Central Los Angeles Regional Center Project, 5.50%, 12/01/33 | | 3,115,000 | | 3,562,283 |
| South Central Los Angeles Regional Center Project, 5.75%, 12/01/43 | | 7,000,000 | | 7,921,970 |
| Southwest Community Health Center, California Mortgage Insured, 6.125%, 2/01/40 | | 4,000,000 | | 4,412,680 |
| California State Municipal Finance Authority Student Housing Revenue, | | | | |
| Bowles Hall Foundation, Series A, 5.00%, 6/01/35. | | 600,000 | | 674,844 |
| Bowles Hall Foundation, Series A, 5.00%, 6/01/50. | | 3,250,000 | | 3,581,207 |
| California State Public Works Board Lease Revenue, | | | | |
| California State Prison Los Angeles, Various Buildings, Series C, 5.75%, 10/01/31 | | 4,640,000 | | 5,777,914 |
| Various Capital Projects, Series A, 5.125%, 10/01/31. | | 3,605,000 | | 4,243,373 |
| California State School Finance Authority Charter School Revenue, | | | | |
| Aspire Public Schools, Refunding, 5.00%, 8/01/36. | | 3,200,000 | | 3,689,824 |
| Aspire Public Schools, Refunding, 5.00%, 8/01/46. | | 2,500,000 | | 2,806,225 |
| Aspire Public Schools, Refunding, Series A, 5.00%, 8/01/35 | | 1,000,000 | | 1,154,790 |
| California State Statewide CDA Senior Living Health Facility Revenue, Series A, 5.00%, 8/01/44 | | 2,450,000 | | 2,816,888 |
| California State University Revenue, | | | | |
| Systemwide, Refunding, Series A, 4.00%, 11/01/37 | | 2,000,000 | | 2,222,900 |
| Systemwide, Refunding, Series A, 4.00%, 11/01/45 | | 2,800,000 | | 3,076,276 |
| Systemwide, Refunding, Series A, 5.00%, 11/01/47 | | 14,980,000 | | 18,075,018 |
| California Statewide CDA Revenue, | | | | |
| Aldersly, Refunding, Series A, 5.00%, 5/15/32 | | 750,000 | | 871,433 |
| Aldersly, Refunding, Series A, 5.00%, 5/15/40 | | 1,010,000 | | 1,148,814 |
| American Baptist Homes of the West, Refunding, 6.25%, 10/01/39 | | 5,000,000 | | 5,747,800 |
| Bentley School, Refunding, Series A, 7.00%, 7/01/40 | | 8,675,000 | | 10,261,310 |
| California Baptist University, Refunding, 7.25%, 11/01/31 | | 1,250,000 | | 1,493,488 |
| California Baptist University, Refunding, 7.50%, 11/01/41 | | 2,750,000 | | 3,259,547 |
| California Baptist University, Refunding, Series A, 5.40%, 11/01/27 | | 7,440,000 | | 7,914,226 |
| California Baptist University, Refunding, Series A, 5.50%, 11/01/38 | | 4,500,000 | | 4,760,505 |
| California Baptist University, Series A, 5.125%, 11/01/23 | | 715,000 | | 792,098 |
| California Baptist University, Series A, 6.125%, 11/01/33 | | 1,565,000 | | 1,777,480 |
| California Baptist University, Series A, 6.375%, 11/01/43 | | 4,035,000 | | 4,424,579 |
| Catholic Healthcare West, Series C, 5.625%, 7/01/35 | | 5,000,000 | | 5,425,700 |
| Covenant Retirement Communities Inc., Series C, 5.625%, 12/01/36 | | 8,000,000 | | 9,324,240 |
| Eskaton Properties Inc. Obligated Group, Refunding, 5.25%, 11/15/34 | | 4,350,000 | | 4,749,286 |
| Henry Mayo Newhall Memorial Hospital, Series B, California Mortgage Insured, Pre-Refunded, | | | | |
| 5.20%, 10/01/37 | | 3,500,000 | | 3,851,855 |
| Huntington Memorial Hospital, Refunding, Series B, 5.00%, 7/01/44 | | 4,450,000 | | 5,122,039 |
| Insured, Enloe Medical Center, Refunding, 5.00%, 8/15/38 | | 6,000,000 | | 7,142,280 |
| Lancer Educational Student Housing Project, 5.625%, 6/01/33 | | 3,000,000 | | 3,080,880 |
| Loma Linda University Medical Center, Refunding, Series A, 5.25%, 12/01/44 | | 8,550,000 | | 9,614,560 |
| Loma Linda University Medical Center, Series A, 5.00%, 12/01/41 | | 5,500,000 | | 6,107,420 |
| Loma Linda University Medical Center, Series A, 5.00%, 12/01/46 | | 5,000,000 | | 5,543,350 |
| Loma Linda University Medical Center, Series A, 5.25%, 12/01/56 | | 6,500,000 | | 7,266,220 |
| Methodist Hospital of Southern California Project, FHA Insured, Pre-Refunded, 6.75%, 2/01/38 | | 8,980,000 | | 10,594,963 |
| Monterey Institute International, 5.50%, 7/01/31 | | 8,270,000 | | 9,139,756 |
| Statewide Community Infrastructure Program, Emerson Ranch Project, 5.00%, 9/02/35 | | 2,000,000 | | 2,230,140 |
| Statewide Community Infrastructure Program, Emerson Ranch Project, 5.00%, 9/02/45 | | 3,810,000 | | 4,182,161 |
| Statewide Community Infrastructure Program, Refunding, Series R1, 5.00%, 9/02/40 | | 2,745,000 | | 2,933,389 |
24 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| California Statewide CDA Revenue, (continued) | | | | |
| Statewide Community Infrastructure Program, Series A, 5.00%, 9/02/36 | $ | 1,035,000 | $ | 1,161,974 |
| Statewide Community Infrastructure Program, Series A, 5.00%, 9/02/45 | | 2,255,000 | | 2,484,785 |
| California Statewide CDA Special Tax Revenue, | | | | |
| CFD No. 2015-01, Improvement Area No. 1, University District, Refunding, Series A, 5.00%, | | | | |
| 9/01/36 | | 1,000,000 | | 1,101,770 |
| CFD No. 2015-01, Improvement Area No. 1, University District, Refunding, Series A, 5.00%, | | | | |
| 9/01/45 | | 1,500,000 | | 1,623,315 |
| California Statewide CDA Student Housing Revenue, | | | | |
| CHF-Irvine LLC, UCI East Campus Apartments, Phase II, Pre-Refunded, 5.75%, 5/15/32 | | 10,000,000 | | 10,978,400 |
| University of California Irvine, East Campus Apartments, CHF-Irvine LLC, Refunding, 5.00%, | | | | |
| 5/15/30 | | 2,000,000 | | 2,414,520 |
| University of California Irvine, East Campus Apartments, CHF-Irvine LLC, Refunding, 5.00%, | | | | |
| 5/15/32 | | 1,250,000 | | 1,499,375 |
| University of California Irvine, East Campus Apartments, CHF-Irvine LLC, Refunding, 5.00%, | | | | |
| 5/15/33 | | 2,625,000 | | 3,143,621 |
| University of California Irvine, East Campus Apartments, CHF-Irvine LLC, Refunding, 5.00%, | | | | |
| 5/15/34 | | 1,750,000 | | 2,090,690 |
| University of California Irvine, East Campus Apartments, CHF-Irvine LLC, Refunding, 5.00%, | | | | |
| 5/15/35 | | 2,205,000 | | 2,619,474 |
| University of California Irvine, East Campus Apartments, CHF-Irvine LLC, Refunding, 5.00%, | | | | |
| 5/15/40 | | 4,500,000 | | 5,315,895 |
| Capistrano USD, CFD No. 2005-1 Special Tax, 5.50%, 9/01/43 | | 4,955,000 | | 5,401,842 |
| Carson RDA, Tax Allocation Housing, Series A, 5.25%, 10/01/36 | | 1,965,000 | | 2,144,778 |
| Centinela Valley UHSD, | | | | |
| GO, County of Los Angeles, Capital Appreciation, Election of 2010, Series B, AGMC Insured, zero | | | | |
| cpn., 8/01/45 | | 42,000,000 | | 8,419,320 |
| GO, County of Los Angeles, Election of 2008, Series C, 5.00%, 8/01/35 | | 4,195,000 | | 4,914,065 |
| Ceres USD, | | | | |
| GO, Capital Appreciation, Election of 2008, Series A, zero cpn., 8/01/39 | | 6,450,000 | | 1,477,244 |
| GO, Capital Appreciation, Election of 2008, Series A, zero cpn., 8/01/40 | | 6,730,000 | | 1,434,567 |
| Chatom USD, GO, Capital Appreciation, Election of 2006, Series C, XLCA Insured, zero cpn., 8/01/47 | | 9,450,000 | | 1,637,969 |
| Chino CFD Special Tax, No. 2003-3, Improvement Area No. 6, 5.00%, 9/01/45 | | 1,665,000 | | 1,780,551 |
| City of Fullerton Special Assessment, | | | | |
| Community Facilities District No. 2, Amerige Heights, 4.00%, 9/01/24 | | 110,000 | | 117,184 |
| Community Facilities District No. 2, Amerige Heights, 5.00%, 9/01/34 | | 1,075,000 | | 1,153,851 |
| Community Facilities District No. 2, Amerige Heights, 5.00%, 9/01/44 | | 2,450,000 | | 2,605,796 |
| Clovis USD, | | | | |
| GO, Capital Appreciation, Election of 2004, Series A, NATL Insured, zero cpn., 8/01/27 | | 7,500,000 | | 5,565,975 |
| GO, Capital Appreciation, Election of 2004, Series A, NATL Insured, zero cpn., 8/01/28 | | 3,000,000 | | 2,136,690 |
| Coachella Valley USD, | | | | |
| GO, Capital Appreciation, Election of 2005, Series D, zero cpn., 8/01/42 | | 8,500,000 | | 3,207,645 |
| GO, Capital Appreciation, Election of 2005, Series D, zero cpn., 8/01/43 | | 3,000,000 | | 1,087,800 |
| Coalinga PFAR, | | | | |
| Water and Wastewater Refinancing Projects, Refunding, 5.00%, 4/01/35 | | 1,000,000 | | 1,103,350 |
| Water and Wastewater Refinancing Projects, Refunding, 5.00%, 4/01/48 | | 6,350,000 | | 6,720,840 |
| Compton Community College District GO, | | | | |
| Election of 2002, Series B, Pre-Refunded, 6.625%, 8/01/27 | | 3,085,000 | | 3,633,112 |
| Election of 2002, Series B, Pre-Refunded, 6.75%, 8/01/34 | | 4,000,000 | | 4,726,240 |
franklintempleton.com
Annual Report
25
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| Compton CRDA Tax Allocation, | | | | |
| Redevelopment Project, second lien, Series B, 5.70%, 8/01/30 | $ | 2,255,000 | $ | 2,419,232 |
| Redevelopment Project, second lien, Series B, 6.00%, 8/01/42 | | 3,460,000 | | 3,696,629 |
| Compton USD, | | | | |
| GO, Election of 2002, Series C, AMBAC Insured, 5.00%, 6/01/31 | | 3,270,000 | | 3,279,810 |
| GO, Election of 2002, Series C, AMBAC Insured, Pre-Refunded, 5.00%, 6/01/31 | | 1,730,000 | | 1,730,000 |
| Corona CFD No. 2001-2 Special Tax, Improvement Areas Nos. 1 and 2, Series A, 6.25%, 9/01/32 | | 1,825,000 | | 1,832,939 |
| Corona CFD No. 2003-2 Special Tax, Highlands Collection, 5.20%, 9/01/34 | | 770,000 | | 770,608 |
| Corona-Norco USD, | | | | |
| Special Tax, Refunding, CFD No. 5-1, 5.00%, 9/01/36 | | 1,000,000 | | 1,143,900 |
| Special Tax, Refunding, CFD No. 5-1, 4.00%, 9/01/45 | | 2,000,000 | | 2,073,160 |
| b Cotati South Sonoma Business Park AD Special Assessment, Limited Obligation Improvement, 6.50%, | | | | |
| 9/02/33 | | 4,690,000 | | 4,236,993 |
| Cotati-Rohnert Park USD, GO, Election of 2014, Series C, BAM Insured, 5.00%, 8/01/45 | | 4,000,000 | | 4,678,400 |
| CSD San Bernardino County GO, | | | | |
| Election of 2008, Series C, 5.00%, 8/01/44. | | 3,615,000 | | 4,253,590 |
| Election of 2014, Series A, 5.00%, 8/01/44. | | 7,375,000 | | 8,677,794 |
| Refunding, 5.00%, 8/01/47 | | 6,000,000 | | 7,125,060 |
| Cudahy Community Development Commission Tax Allocation, City-Wide Redevelopment Project, | | | | |
| Redevelopment Projects, Series B, 7.75%, 10/01/27 | | 3,795,000 | | 4,729,215 |
| Daly City Housing Development Finance Agency Mobile Home Park Revenue, Franciscan Mobile Home | | | | |
| Park Acquisition Project, sub. bond, Refunding, Series B, 5.85%, 12/15/47 | | 4,835,000 | | 5,124,423 |
| Dana Point CFD Special Tax No. 2006-1, | | | | |
| 5.00%, 9/01/38 | | 1,000,000 | | 1,084,540 |
| 5.00%, 9/01/45 | | 2,500,000 | | 2,701,450 |
| Del Mar Race Track Authority Revenue, Refunding, 5.00%, 10/01/35 | | 2,000,000 | | 2,216,440 |
| Del Paso Manor Water District Revenue COP, Phase I Improvement Project, 5.50%, 7/01/41 | | 3,050,000 | | 3,471,113 |
| Duarte RDA Tax Allocation, Capital Appreciation, Merged Redevelopment Project, ETM, zero cpn., | | | | |
| 12/01/28 | | 30,795,000 | | 17,617,204 |
| Eastern Municipal Water District Water and Wastewater Revenue, | | | | |
| Subordinate, Refunding, Series A, 5.00%, 7/01/37. | | 2,755,000 | | 3,387,245 |
| Subordinate, Refunding, Series A, 5.00%, 7/01/38. | | 1,930,000 | | 2,363,227 |
| Subordinate, Refunding, Series A, 5.00%, 7/01/39. | | 2,030,000 | | 2,477,574 |
| Subordinate, Refunding, Series A, 5.00%, 7/01/42. | | 5,000,000 | | 6,072,600 |
| El Dorado County Special Tax, | | | | |
| CFD No. 2005-1, 5.00%, 9/01/21 | | 1,000,000 | | 1,002,670 |
| CFD No. 2005-1, 5.15%, 9/01/25 | | 2,075,000 | | 2,079,399 |
| CFD No. 2005-1, 5.25%, 9/01/35 | | 6,705,000 | | 6,716,533 |
| El Rancho USD, GO, Capital Appreciation, Election of 2003, NATL Insured, zero cpn., 8/01/29 | | 2,400,000 | | 1,574,232 |
| Etiwanda School District Community Facilities District No. 9 Special Tax, Refunding, 5.00%, 9/01/35 | | 4,260,000 | | 4,978,662 |
| Fairfield Special Tax, | | | | |
| CFD No. 3, North Cordelia General Improvements, 6.00%, 9/01/32 | | 1,200,000 | | 1,317,588 |
| CFD No. 3, North Cordelia General Improvements, 6.00%, 9/01/37 | | 5,810,000 | | 6,352,305 |
| Fillmore Special Tax, | | | | |
| CFD No. 5 Improvement Area, Series A, 5.00%, 9/01/40 | | 1,500,000 | | 1,625,850 |
| CFD No. 5 Improvement Area, Series A, 5.00%, 9/01/45 | | 2,630,000 | | 2,837,744 |
| Foothill/Eastern Transportation Corridor Agency Toll Road Revenue, | | | | |
| Capital Appreciation, Refunding, Series A, zero cpn., 1/15/42 | | 75,000,000 | | 25,157,250 |
| Capital Appreciation, senior lien, Refunding, Series A, zero cpn., 1/15/33. | | 19,000,000 | | 9,951,630 |
| junior lien, Refunding, Series C, 6.50%, 1/15/43 | | 40,000,000 | | 47,519,200 |
26 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| Fremont CFD No. 1 Special Tax, | | | | |
| Pacific Commons, Refunding, 5.00%, 9/01/40 | $ | 4,655,000 | $ | 5,190,511 |
| Pacific Commons, Refunding, 5.00%, 9/01/45 | | 3,255,000 | | 3,610,479 |
| Golden State Tobacco Securitization Corp. Enhanced Tobacco Settlement Revenue, | | | | |
| Asset-Backed, Refunding, Senior Series A-1, 5.00%, 6/01/33 | | 24,500,000 | | 24,688,895 |
| Asset-Backed, Series A, 5.00%, 6/01/45 | | 36,975,000 | | 43,920,754 |
| Capital Appreciation, Asset-Backed, second subordinate, Refunding, Series C, zero cpn., 6/01/47 | | 50,000,000 | | 2,090,000 |
| Goleta RDA Tax Allocation, Goleta Old Town Redevelopment Project, 8.00%, 6/01/44 | | 5,000,000 | | 5,144,100 |
| Hanford Joint UHSD, | | | | |
| GO, Capital Appreciation, Election of 2004, Series B, AGMC Insured, zero cpn., 8/01/32 | | 3,635,000 | | 2,145,195 |
| GO, Capital Appreciation, Election of 2004, Series B, AGMC Insured, zero cpn., 8/01/33 | | 3,705,000 | | 2,098,512 |
| GO, Capital Appreciation, Election of 2004, Series B, AGMC Insured, zero cpn., 8/01/35 | | 4,120,000 | | 2,131,152 |
| Hartnell Community College District GO, | | | | |
| Monterey and San Benito Counties, Capital Appreciation, Election of 2002, Series D, Pre-Refunded, | | | | |
| zero cpn., 8/01/44 | | 30,000,000 | | 4,499,400 |
| Monterey and San Benito Counties, Capital Appreciation, Election of 2002, Series D, zero cpn., | | | | |
| 8/01/49 | | 10,000,000 | | 2,888,700 |
| Hemet USD Financing Authority Special Tax Revenue, 5.00%, 9/01/39 | | 1,100,000 | | 1,229,470 |
| Imperial Community College District GO, Imperial County, Capital Appreciation, Election of 2010, Series | | | | |
| A, AGMC Insured, 6.75%, 8/01/40. | | 3,500,000 | | 4,697,420 |
| b Imperial County Special Tax, | | | | |
| CFD No. 98-1, 6.45%, 9/01/17 | | 520,000 | | 521,617 |
| CFD No. 98-1, 6.50%, 9/01/31 | | 5,705,000 | | 5,721,830 |
| Independent Cities Finance Authority Mobile Home Park Revenue, | | | | |
| Lamplighter Salinas MobileHome Park, Series A, 6.25%, 7/15/45 | | 2,465,000 | | 2,705,831 |
| Lamplighter Salinas MobileHome Park, Series A, 6.25%, 7/15/50 | | 2,000,000 | | 2,191,400 |
| Pillar Ridge, Series A, 5.25%, 5/15/44 | | 2,015,000 | | 2,218,172 |
| Pillar Ridge, Series A, 5.25%, 5/15/49 | | 4,800,000 | | 5,246,064 |
| San Juan Mobile Estates, Refunding, 5.00%, 8/15/45 | | 5,000,000 | | 5,498,600 |
| San Juan Mobile Estates, Refunding, 5.00%, 8/15/50 | | 4,900,000 | | 5,348,693 |
| Indio CFD Special Tax Revenue, No. 2004-3, Terra Lago, Improvement Area No. 1, Refunding, 5.00%, | | | | |
| 9/01/35 | | 1,250,000 | | 1,367,975 |
| Inland Valley Development Agency Successor Agency Tax Allocation, | | | | |
| Refunding, Series A, 5.25%, 9/01/37 | | 7,500,000 | | 8,731,275 |
| Refunding, Series A, 5.00%, 9/01/44 | | 9,000,000 | | 10,083,330 |
| Irvine Special Tax Revenue, | | | | |
| CFD No. 2013-3, Great Park, Improvement Area No. 1, 5.00%, 9/01/39 | | 1,000,000 | | 1,117,190 |
| CFD No. 2013-3, Great Park, Improvement Area No. 1, 5.00%, 9/01/44 | | 1,500,000 | | 1,670,070 |
| CFD No. 2013-3, Great Park, Improvement Area No. 1, 5.00%, 9/01/49 | | 2,750,000 | | 3,057,615 |
| Irvine USD Special Tax, CFD No. 06-1, Portola Springs, 6.70%, 9/01/35 | | 2,565,000 | | 2,984,916 |
| Jurupa PFA Special Tax Revenue, | | | | |
| Refunding, Series A, 5.00%, 9/01/42 | | 2,220,000 | | 2,540,324 |
| Refunding, Series A, 5.00%, 9/01/43 | | 4,000,000 | | 4,568,600 |
| sub. lien, Series B, 5.00%, 9/01/40 | | 4,000,000 | | 4,319,160 |
| Kaweah Delta Health Care District Revenue, Serie B, 5.00%, 6/01/40 | | 3,250,000 | | 3,747,997 |
| La Verne COP, Brethren Hillcrest Homes, 5.00%, 5/15/36 | | 1,430,000 | | 1,545,515 |
| La Verne Mobile Home Revenue, Copacbana Mobile HomePark, Refunding, 5.00%, 6/15/49 | | 1,765,000 | | 1,985,802 |
| Lake Elsinore PFA Local Agency Revenue, | | | | |
| AD No. 93-1, Refunding, Series B, 5.125%, 9/02/30. | | 4,980,000 | | 5,418,638 |
| Canyon Hills Improvement Area Development, Series A, 5.75%, 9/01/44 | | 3,240,000 | | 3,414,053 |
| CFD No. 98-1, Series C, 5.25%, 9/01/33 | | 8,000,000 | | 8,412,320 |
franklintempleton.com
Annual Report
27
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | �� | | |
| California (continued) | | | | |
| Lake Tahoe USD, GO, Election of 2008, zero cpn. to 7/31/25, 5.30% thereafter, 8/01/40 | $ | 1,140,000 | $ | 896,325 |
| Lancaster Financing Authority Tax Allocation Revenue, Redevelopment Project Nos. 5 and 6, School | | | | |
| Districts, Refunding, 5.40%, 2/01/29 | | 475,000 | | 476,620 |
| Lancaster RDA Tax Allocation, | | | | |
| Combined Redevelopment Project Areas, 6.875%, 8/01/34 | | 2,000,000 | | 2,274,740 |
| Combined Redevelopment Project Areas, 6.875%, 8/01/39 | | 830,000 | | 944,017 |
| Combined Redevelopment Project Areas, Pre-Refunded, 6.875%, 8/01/39 | | 1,170,000 | | 1,384,952 |
| Las Virgenes USD, GO, Election of 2006, Series C, zero cpn. to 8/01/26, 6.75% thereafter, 8/01/33 | | 8,050,000 | | 7,232,361 |
| Lathrop Financing Authority Revenue, | | | | |
| Mossdale Village, Refunding, Series A, 6.00%, 9/02/28 | | 1,010,000 | | 1,173,842 |
| Mossdale Village, Refunding, Series A, 6.00%, 9/02/29 | | 1,070,000 | | 1,233,935 |
| Mossdale Village, Refunding, Series A, 6.00%, 9/02/30 | | 1,075,000 | | 1,234,530 |
| Mossdale Village, Refunding, Series A, 5.50%, 9/02/35 | | 3,670,000 | | 3,953,324 |
| Lee Lake PFAR, | | | | |
| Special Tax, junior lien, Refunding, Series B, 5.25%, 9/01/32 | | 1,450,000 | | 1,573,366 |
| Special Tax, junior lien, Refunding, Series B, 5.375%, 9/01/35 | | 1,065,000 | | 1,153,459 |
| Lemon Grove CDA Successor Agency Tax Allocation, Lemon Grove Redevelopment Project Area, | | | | |
| Refunding, AGMC Insured, 4.00%, 8/01/34 | | 1,000,000 | | 1,096,620 |
| Lemon Grove School District GO, Capital Appreciation, Election of 2008, Series B, AGMC Insured, zero | | | | |
| cpn. to 8/01/28, 6.10% thereafter, 8/01/45 | | 6,500,000 | | 5,252,520 |
| d Live Oak School District COP, School Financing Projects, Refunding, AGMC Insured, 5.00%, 8/01/39 | | 2,500,000 | | 2,950,700 |
| Long Beach Bond Finance Authority Natural Gas Purchase Revenue, Series A, 5.00%, 11/15/29 | | 4,630,000 | | 5,660,082 |
| Long Beach Marina Revenue, | | | | |
| Los Angeles County, Alamitos Bay Marina Project, 5.00%, 5/15/34 | | 1,300,000 | | 1,504,945 |
| Los Angeles County, Alamitos Bay Marina Project, 5.00%, 5/15/40 | | 3,500,000 | | 3,975,195 |
| Los Angeles County, Alamitos Bay Marina Project, 5.00%, 5/15/45 | | 2,500,000 | | 2,816,675 |
| Los Alamitos USD, | | | | |
| COP, Capital Appreciation, Capital Projects, zero cpn. to 7/31/24, 5.95% thereafter, 8/01/34 | | 1,500,000 | | 1,319,925 |
| COP, Capital Appreciation, Capital Projects, zero cpn. to 7/31/24, 5.95% thereafter, 8/01/42 | | 4,500,000 | | 3,826,035 |
| Los Angeles County Schools Regionalized Business Services Corp. COP, Pooled Financing Program, | | | | |
| Series C, 5.00%, 6/01/30 | | 2,200,000 | | 2,466,552 |
| Los Angeles Department of Airports Revenue, | | | | |
| Los Angeles International Airport, Subordinate, Refunding, Series C, 5.00%, 5/15/34 | | 2,135,000 | | 2,564,434 |
| d Los Angeles International Airport, Subordinate, Series A, 5.00%, 5/15/33 | | 2,000,000 | | 2,408,680 |
| d Los Angeles International Airport, Subordinate, Series A, 5.00%, 5/15/35 | | 2,000,000 | | 2,397,080 |
| Los Angeles Department of Water and Power Revenue, Power Systems, Refunding, Series A, 5.00%, | | | | |
| 7/01/40 | | 2,175,000 | | 2,641,755 |
| Mendocino-Lake Community College District GO, | | | | |
| Capital Appreciation, Election of 2006, Series B, AGMC Insured, zero cpn. to 8/01/21, 6.55% | | | | |
| thereafter, 8/01/36 | | 5,150,000 | | 5,725,409 |
| Capital Appreciation, Election of 2006, Series B, AGMC Insured, zero cpn. to 8/01/26, 6.85% | | | | |
| thereafter, 8/01/40 | | 7,500,000 | | 7,142,625 |
| Merced RDA Tax Allocation, Merced Gateways Redevelopment Project, Series A, Pre-Refunded, 6.50%, | | | | |
| 9/01/39 | | 6,250,000 | | 7,351,125 |
| Merced UHSD, GO, Capital Appreciation, Election of 2008, Series C, Pre-Refunded, zero cpn., 8/01/41 | | 10,000,000 | | 2,321,100 |
| Monrovia Financing Authority Water and Sewer Revenue, AGMC Insured, 5.00%, 12/01/45 | | 3,000,000 | | 3,530,490 |
| Moreland School District GO, Election of 2010, Series B, 5.00%, 8/01/41 | | 4,045,000 | | 4,773,869 |
| M-S-R Energy Authority Gas Revenue, Series B, 6.50%, 11/01/39 | | 32,300,000 | | 47,098,245 |
| Murrieta CFD No. 2004-1 Special Tax, Bremerton, 5.625%, 9/01/34 | | 670,000 | | 671,139 |
28 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| Napa Valley USD, | | | | |
| GO, Refunding, Series C, 5.00%, 8/01/41 | $ | 5,000,000 | $ | 6,065,350 |
| GO, Refunding, Series E, 5.00%, 8/01/44 | | 5,000,000 | | 6,050,450 |
| North Natomas CFD Special Tax, No. 4, Refunding, Series E, 5.25%, 9/01/33 | | 3,000,000 | | 3,400,920 |
| Northern California Transmission Agency Revenue, | | | | |
| California-Oregon Project, Refunding, Series A, 5.00%, 5/01/36 | | 2,500,000 | | 3,050,525 |
| California-Oregon Project, Refunding, Series A, 5.00%, 5/01/37 | | 3,610,000 | | 4,383,731 |
| California-Oregon Project, Refunding, Series A, 5.00%, 5/01/38 | | 1,750,000 | | 2,118,253 |
| California-Oregon Project, Refunding, Series A, 5.00%, 5/01/39 | | 1,885,000 | | 2,274,328 |
| Oak Park USD, GO, Capital Appreciation, Series A, zero cpn. to 8/01/21, 7.10% thereafter, 8/01/38 | | 6,600,000 | | 7,118,562 |
| Oakdale PFAR, Refunding, 5.00%, 9/01/35 | | 1,270,000 | | 1,401,331 |
| Oakland USD Alameda County GO, Election of 2012, 6.625%, 8/01/38. | | 5,000,000 | | 5,976,600 |
| Oakley PFAR, | | | | |
| Contra Costa County, Refunding, 5.30%, 9/02/34 | | 995,000 | | 1,126,867 |
| Contra Costa County, Refunding, BAM Insured, 5.00%, 9/02/36 | | 1,500,000 | | 1,754,700 |
| Orange County 1915 Act Special Assessment, Limited Obligation, AD No. 01-1-GP1, 5.10%, 9/02/33 | | 1,745,000 | | 1,748,525 |
| Orange County CFD, | | | | |
| No. 2015-1, Esencia Village, Series A, 5.00%, 8/15/34 | | 1,530,000 | | 1,775,687 |
| No. 2015-1, Esencia Village, Series A, 5.25%, 8/15/45 | | 5,000,000 | | 5,755,100 |
| Orchard School District GO, Election of 2001, Series B, AGMC Insured, 6.00%, 8/01/36 | | 3,000,000 | | 3,538,560 |
| Oro Grande Elementary School District COP, | | | | |
| 5.875%, 9/15/37 | | 14,000,000 | | 16,005,360 |
| 6.125%, 9/15/40 | | 1,500,000 | | 1,726,080 |
| Pajaro Valley USD, GO, Election of 2012, Series C, 5.00%, 8/01/40 | | 3,310,000 | | 3,962,831 |
| Palomar Pomerado Health Care District COP, | | | | |
| 6.00%, 11/01/30 | | 10,000,000 | | 10,822,000 |
| 6.75%, 11/01/39 | | 15,550,000 | | 17,168,910 |
| Paramount USD, GO, County of Los Angeles, Capital Appreciation, Election of 2006, BAM Insured, zero | | | | |
| cpn., 8/01/51 | | 25,000,000 | | 2,723,750 |
| Paso Robles Joint USD, GO, Capital Appreciation, Election of 2006, Series A, zero cpn., 9/01/45 | | 15,000,000 | | 4,505,100 |
| Perris CFD No. 2001-1 Special Tax, | | | | |
| Improvement Area No. 4, May Farms, Series A, 5.10%, 9/01/30 | | 865,000 | | 873,451 |
| Improvement Area No. 4, May Farms, Series A, 5.15%, 9/01/35 | | 1,075,000 | | 1,084,847 |
| Perris CFD No. 2001-2 Special Tax, Villages of Avalon, Refunding, Series A, 5.25%, 9/01/32 | | 4,500,000 | | 4,800,870 |
| Perris Joint Powers Authority Local Agency Revenue, | | | | |
| CFD No. 2001-1, Improvement Area Nos. 6 and 7, Refunding, Series E, 4.25%, 9/01/38 | | 4,250,000 | | 4,320,762 |
| May Farms Improvement Area Nos. 1, 2 and 3, Refunding, Series A, 5.375%, 9/01/33. | | 2,000,000 | | 2,142,760 |
| Willowbrook, Refunding, Series B, 5.25%, 9/01/33. | | 3,950,000 | | 4,166,104 |
| Perris PFAR Tax Allocation, Housing Loan, Series A, 6.125%, 10/01/40 | | 3,135,000 | | 3,458,689 |
| Pico Rivera Water Authority Revenue, Refunding, Series A, 6.25%, 12/01/32 | | 6,360,000 | | 6,366,678 |
| Pittsburg USD, | | | | |
| GO, Capital Appreciation, Election of 2010, Series C, zero cpn., 8/01/47 | | 9,000,000 | | 1,824,750 |
| GO, Capital Appreciation, Election of 2010, Series C, zero cpn., 8/01/52 | | 15,000,000 | | 2,177,250 |
| Porterville PFA Sewer Revenue, Series A, 5.625%, 10/01/36 | | 5,000,000 | | 6,046,500 |
| Poway RDA Successor Agency Tax Allocation, Paguay Redevelopment Project, Refunding, Series A, | | | | |
| 5.00%, 12/15/30 | | 3,500,000 | | 4,373,215 |
| Poway USD PFA Special Tax, | | | | |
| CFD No. 15, Del Sur East, Improvement Area C, 5.00%, 9/01/41 | | 1,125,000 | | 1,280,599 |
| CFD No. 15, Del Sur East, Improvement Area C, 5.00%, 9/01/46 | | 2,000,000 | | 2,265,520 |
franklintempleton.com
Annual Report
29
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| Rancho Cordova CFD No. 2003-1 Special Tax, | | | | |
| Sunridge Anatolia, 5.25%, 9/01/25. | $ | 2,235,000 | $ | 2,240,476 |
| Sunridge Anatolia, 5.375%, 9/01/30 | | 1,650,000 | | 1,654,373 |
| Sunridge Anatolia, 5.375%, 9/01/37 | | 7,130,000 | | 7,260,265 |
| Sunridge Anatolia, 5.50%, 9/01/37. | | 2,635,000 | | 2,642,510 |
| Rancho Cordova CFD No. 2005-1 Special Tax, | | | | |
| Sunridge North Douglas, 5.00%, 9/01/40 | | 1,200,000 | | 1,337,040 |
| Sunridge North Douglas, 5.00%, 9/01/45 | | 1,250,000 | | 1,384,438 |
| Redondo Beach USD, GO, Election of 2008, Capital Appreciation, Series E, zero cpn. to 8/01/22, 6.20% | | | | |
| thereafter, 8/01/31 | | 2,750,000 | | 2,825,433 |
| Redwood City Special Tax, CFD No. 2010-1, One Marina, 7.75%, 9/01/41. | | 2,000,000 | | 2,077,400 |
| Richland School District GO, Capital Appreciation, Election of 2008, Refunding, Series C, AGMC | | | | |
| Insured, zero cpn., 8/01/49 | | 22,000,000 | | 5,974,100 |
| Rio Elementary School District CFD No. 1 GO, Election of 2014, Series B, AGMC Insured, 4.00%, | | | | |
| 8/01/45 | | 2,800,000 | | 3,043,600 |
| Rio Elementary School District CFD No. 1 Special Tax, 5.50%, 9/01/39. | | 6,915,000 | | 7,708,565 |
| Rio Hondo Community College District GO, Capital Appreciation, Election of 2004, Series C, zero cpn. to | | | | |
| 8/01/24, 6.85% thereafter, 8/01/42. | | 13,000,000 | | 13,522,340 |
| Riverbank USD, | | | | |
| GO, Election of 2005, Series B, Assured Guaranty, zero cpn., 8/01/38 | | 6,690,000 | | 2,860,510 |
| GO, Election of 2005, Series B, Assured Guaranty, zero cpn., 8/01/43 | | 8,750,000 | | 2,985,062 |
| Riverside County RDA Tax Allocation, | | | | |
| Desert Communities Redevelopment Project Area, second lien, Series D, 7.00%, 12/01/31 | | 1,425,000 | | 1,748,190 |
| Desert Communities Redevelopment Project Area, second lien, Series D, 7.25%, 12/01/37 | | 2,505,000 | | 3,097,808 |
| Housing, Series A, 6.00%, 10/01/39. | | 3,000,000 | | 3,476,100 |
| Housing, Series A, 7.125%, 10/01/42 | | 1,750,000 | | 2,141,510 |
| Jurupa Valley Redevelopment Project Area, Series B, 6.75%, 10/01/30 | | 1,200,000 | | 1,445,556 |
| Riverside County Redevelopment Successor Agency Tax Allocation, Refunding, Series A, 4.00%, | | | | |
| 10/01/37 | | 6,000,000 | | 6,471,180 |
| Riverside County Special Tax, CFD No. 03-1, Newport Road, Refunding, 5.00%, 9/01/30 | | 1,500,000 | | 1,593,540 |
| Riverside County Transportation Commission Toll Revenue, | | | | |
| Capital Appreciation, senior lien, Series B, zero cpn., 6/01/43 | | 7,500,000 | | 2,191,500 |
| senior lien, Series A, 5.75%, 6/01/44 | | 5,000,000 | | 5,766,300 |
| Riverside PFA Local Measure Sales Tax Revenue, Payment Rehabilitation Project, AGMC Insured, | | | | |
| 5.00%, 6/01/33 | | 4,280,000 | | 4,933,042 |
| Road 17 Levee Area PFA Assessment Revenue, Road 17 Levee Improvement Project, 6.75%, 9/01/29 | | 2,630,000 | | 2,999,962 |
| The Romoland School District Special Tax, | | | | |
| CFD No. 2004-1, Heritage Lake, Improvement Area No. 3, Refunding, 5.00%, 9/01/36. | | 1,500,000 | | 1,654,920 |
| CFD No. 2004-1, Heritage Lake, Improvement Area Nos. 1 and 2, Refunding, 5.00%, 9/01/35 | | 4,690,000 | | 5,284,739 |
| CFD No. 2004-1, Heritage Lake, Improvement Area Nos. 1 and 2, Refunding, 5.00%, 9/01/38 | | 3,000,000 | | 3,337,590 |
| Roseville Special Tax, | | | | |
| CFD No. 1, Fiddyment Ranch, 5.00%, 9/01/19 | | 980,000 | | 984,684 |
| CFD No. 1, Fiddyment Ranch, 5.125%, 9/01/21 | | 980,000 | | 984,263 |
| CFD No. 1, Fiddyment Ranch, 5.125%, 9/01/26 | | 4,945,000 | | 4,962,604 |
| CFD No. 1, Fiddyment Ranch, 5.25%, 9/01/36 | | 7,880,000 | | 7,903,010 |
| CFD No. 1, HP Campus Oaks, Public Facilities, 5.00%, 9/01/36 | | 800,000 | | 828,496 |
| CFD No. 1, HP Campus Oaks, Public Facilities, 5.50%, 9/01/46 | | 2,500,000 | | 2,669,325 |
| CFD No. 1, Public Facilities, 5.00%, 9/01/29 | | 500,000 | | 552,905 |
| CFD No. 1, Public Facilities, 5.00%, 9/01/34 | | 1,100,000 | | 1,191,806 |
| CFD No. 1, Public Facilities, 5.00%, 9/01/39 | | 1,885,000 | | 2,028,505 |
| CFD No. 1, Public Facilities, 5.00%, 9/01/44 | | 1,650,000 | | 1,769,609 |
30 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| Roseville Special Tax, (continued) | | | | |
| CFD No. 1, Stone Point, 6.375%, 9/01/24 | $ | 1,440,000 | $ | 1,444,954 |
| CFD No. 1, Stone Point, 6.375%, 9/01/28 | | 2,060,000 | | 2,066,036 |
| CFD No. 1, Westpark, Public Facilities, Refunding, 5.00%, 9/01/32 | | 1,120,000 | | 1,320,424 |
| CFD No. 1, Westpark, Public Facilities, Refunding, 5.00%, 9/01/33 | | 1,000,000 | | 1,173,610 |
| CFD No. 1, Westpark, Public Facilities, Refunding, 5.00%, 9/01/37 | | 1,250,000 | | 1,441,738 |
| Rowland USD, | | | | |
| GO, Capital Appreciation, Election of 2006, Series B, zero cpn., 8/01/34 | | 5,000,000 | | 2,721,800 |
| GO, Capital Appreciation, Election of 2006, Series B, zero cpn., 8/01/39 | | 15,000,000 | | 6,541,350 |
| GO, Capital Appreciation, Election of 2006, Series B, zero cpn., 8/01/42 | | 10,750,000 | | 4,098,652 |
| Sacramento Area Flood Control Agency Special Assessment, Natomas Basin Local Assessment, | | | | |
| Refunding, BAM Insured, 5.00%, 10/01/44 | | 2,000,000 | | 2,275,360 |
| Sacramento County Airport System Revenue, Senior, Series B, AGMC Insured, 5.25%, 7/01/39 | | 7,000,000 | | 7,506,590 |
| d Sacramento County Special Tax, | | | | |
| CFD No. 2005-2, North Vineyard Station No. 1, Refunding, 5.00%, 9/01/40 | | 1,350,000 | | 1,565,636 |
| CFD No. 2005-2, North Vineyard Station No. 1, Refunding, 5.00%, 9/01/45 | | 1,650,000 | | 1,904,183 |
| San Bernardino Community College District GO, | | | | |
| Capital Appreciation, Election of 2008, Series A, zero cpn., 8/01/44 | | 12,495,000 | | 4,252,798 |
| Election of 2008, Series D, 5.00%, 8/01/45 | | 2,755,000 | | 3,295,779 |
| Election of 2008, Series D, 5.00%, 8/01/48 | | 3,760,000 | | 4,487,898 |
| San Bernardino County Special Tax, | | | | |
| CFD No. 2006-1, Improvement Area No. 1, Lytle Creek North, 5.00%, 9/01/40 | | 1,000,000 | | 1,091,940 |
| CFD No. 2006-1, Improvement Area No. 2, Lytle Creek North, 5.50%, 9/01/44 | | 1,965,000 | | 2,027,369 |
| CFD No. 2006-1, Improvement Area No. 2, Lytle Creek North, Refunding, 5.00%, 9/01/45 | | 1,000,000 | | 1,087,060 |
| San Buenaventura Revenue, | | | | |
| Community Memorial Health System, 8.00%, 12/01/31 | | 10,000,000 | | 12,532,700 |
| Community Memorial Health System, 7.50%, 12/01/41 | | 5,000,000 | | 6,050,200 |
| San Clemente Special Tax, | | | | |
| CFD No. 2006-1, 5.00%, 9/01/40 | | 1,795,000 | | 2,039,407 |
| CFD No. 2006-1, 5.00%, 9/01/46 | | 2,500,000 | | 2,831,875 |
| d San Diego Public Facilities Financing Authority Water Revenue, | | | | |
| Series A, 5.00%, 8/01/41 | | 4,000,000 | | 4,836,360 |
| Series A, 5.00%, 8/01/45 | | 4,475,000 | | 5,401,862 |
| San Diego RDA Tax Allocation Revenue, | | | | |
| City Heights Redevelopment Project, Series A, 5.625%, 9/01/40 | | 2,315,000 | | 2,683,432 |
| Naval Training Center Redevelopment Project, Series A, 5.75%, 9/01/40 | | 3,000,000 | | 3,422,670 |
| San Diego USD, | | | | |
| GO, Capital Appreciation, Election of 2008, Series A, Pre-Refunded, zero cpn. to 7/01/19, 6.00% | | | | |
| thereafter, 7/01/33 | | 10,000,000 | | 11,509,500 |
| GO, Capital Appreciation, Election of 2008, Series C, zero cpn. to 7/01/30, 6.625% thereafter, | | | | |
| 7/01/47 | | 26,025,000 | | 18,851,469 |
| GO, Dedicated Unlimited Ad Valorem Property Tax, Capital Appreciation, Election of 2008, Series | | | | |
| E, zero cpn. to 7/01/32, 5.25% thereafter, 7/01/42 | | 6,940,000 | | 4,282,813 |
| GO, Dedicated Unlimited Ad Valorem Property Tax, Capital Appreciation, Election of 2008, Series | | | | |
| E, zero cpn. to 7/01/32, 5.375% thereafter, 7/01/47 | | 13,500,000 | | 8,308,980 |
| San Francisco City and County RDA Successor Agency CFD No. 6 Special Tax, Mission Bay South | | | | |
| Public Improvements, Capital Appreciation, Refunding, Series C, zero cpn., 8/01/43 | | 10,000,000 | | 2,277,100 |
| San Francisco City and County RDA Successor Agency Tax Allocation, | | | | |
| Mission Bay North Redevelopment Project, Refunding, Series A, 5.00%, 8/01/37 | | 1,700,000 | | 2,040,357 |
| Mission Bay South Redevelopment Project, Refunding, Series C, NATL Insured, 5.00%, 8/01/41 | | 2,500,000 | | 3,025,225 |
| Mission Bay South Redevelopment Project, Series A, 5.00%, 8/01/43 | | 2,500,000 | | 2,847,825 |
franklintempleton.com
Annual Report
31
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| San Francisco City and County RDA Successor Agency Tax Allocation, (continued) | | | | |
| Mission Bay South Redevelopment Project, Series B, NATL Insured, 5.00%, 8/01/43. | $ | 1,500,000 | $ | 1,809,180 |
| San Francisco City and County Redevelopment Financing Authority Tax Allocation, | | | | |
| Mission Bay North Redevelopment Project, Series C, Pre-Refunded, 6.75%, 8/01/41 | | 1,000,000 | | 1,256,530 |
| Mission Bay South Redevelopment Project, Series D, Pre-Refunded, 7.00%, 8/01/33 | | 1,000,000 | | 1,265,250 |
| Mission Bay South Redevelopment Project, Series D, Pre-Refunded, 6.625%, 8/01/39 | | 2,265,000 | | 2,663,527 |
| Mission Bay South Redevelopment Project, Series D, Pre-Refunded, 7.00%, 8/01/41 | | 1,500,000 | | 1,897,875 |
| San Francisco City and County Redevelopment Financing Authority Tax Allocation Revenue, San | | | | |
| Francisco Redevelopment Projects, Series B, 6.625%, 8/01/41 | | 2,500,000 | | 2,964,275 |
| San Gorgonio Memorial Healthcare District GO, Riverside County, Refunding, 5.00%, 8/01/39 | | 15,000,000 | | 17,250,450 |
| San Jacinto CFD Special Tax, | | | | |
| No. 2002-1, Refunding, 5.00%, 9/01/28 | | 1,080,000 | | 1,248,610 |
| No. 2002-1, Refunding, 5.00%, 9/01/29 | | 1,165,000 | | 1,341,381 |
| No. 2002-1, Refunding, 5.00%, 9/01/32 | | 1,000,000 | | 1,137,380 |
| San Joaquin County Public Facilities FICO Revenue COP, Wastewater Conveyance Project, 6.00%, | | | | |
| 8/01/37 | | 1,000,000 | | 1,008,480 |
| San Joaquin Delta Community College District GO, Capital Appreciation, Election of 2004, Series B, | | | | |
| AGMC Insured, zero cpn., 8/01/30 | | 3,900,000 | | 1,903,551 |
| San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, | | | | |
| Capital Appreciation, junior lien, ETM, zero cpn., 1/01/28 | | 19,150,000 | | 14,729,031 |
| Capital Appreciation, Refunding, Series A, NATL Insured, zero cpn., 1/15/26 | | 19,475,000 | | 14,821,059 |
| Capital Appreciation, Refunding, Series A, NATL Insured, zero cpn., 1/15/32 | | 50,225,000 | | 29,894,924 |
| junior lien, Refunding, Series B, 5.25%, 1/15/44 | | 35,000,000 | | 39,134,200 |
| junior lien, Refunding, Series B, 5.25%, 1/15/49 | | 75,000,000 | | 83,157,000 |
| San Jose RDA Tax Allocation, | | | | |
| Merged Area Redevelopment Project, Series B, XLCA Insured, 5.00%, 8/01/28 | | 13,245,000 | | 13,536,920 |
| Merged Area Redevelopment Project, Series B, XLCA Insured, 4.25%, 8/01/36 | | 5,000,000 | | 5,045,500 |
| San Mateo Special Tax, | | | | |
| CFD No. 2008-1, Bay Meadows, 5.875%, 9/01/32 | | 1,500,000 | | 1,677,660 |
| CFD No. 2008-1, Bay Meadows, 5.375%, 9/01/38 | | 2,500,000 | | 2,777,025 |
| CFD No. 2008-1, Bay Meadows, 6.00%, 9/01/42 | | 5,000,000 | | 5,611,950 |
| CFD No. 2008-1, Bay Meadows, 5.50%, 9/01/44 | | 3,300,000 | | 3,674,979 |
| Santa Barbara Elementary School District GO, Capital Appreciation, Election of 2010, Series A, zero | | | | |
| cpn. to 8/01/23, 7.00% thereafter, 8/01/36 | | 8,000,000 | | 8,581,680 |
| Santa Cruz County RDA Tax Allocation, 6.625%, 9/01/29 | | 2,650,000 | | 3,113,485 |
| Santa Margarita Water District Special Tax, | | | | |
| CFD No. 2013-1, Village of Sendero, 5.625%, 9/01/36 | | 3,000,000 | | 3,386,220 |
| CFD No. 2013-1, Village of Sendero, 5.625%, 9/01/43 | | 10,000,000 | | 11,219,600 |
| Santa Paula Utility Authority Wastewater Enterprise Revenue, Series A, 5.00%, 2/01/40 | | 7,105,000 | | 8,222,545 |
| Santee Community Development Commission Tax Allocation, | | | | |
| Santee Community Redevelopment Project, Series A, 7.00%, 8/01/31 | | 1,800,000 | | 2,195,874 |
| Santee Community Redevelopment Project, Series A, 7.00%, 8/01/41 | | 2,820,000 | | 3,440,203 |
| Saugus Castaic School Facilities Financing Authority Special Tax, | | | | |
| CFD No. 2006-1C, 5.875%, 9/01/33. | | 1,370,000 | | 1,494,971 |
| CFD No. 2006-1C, 6.00%, 9/01/43 | | 3,470,000 | | 3,926,756 |
| Saugus USD Special Tax, | | | | |
| CFD No. 2006-2, Improvement Area No. 2, 4.25%, 9/01/44 | | 2,000,000 | | 2,022,100 |
| Senior CFD No. 2006-1, 4.25%, 9/01/39. | | 1,150,000 | | 1,169,964 |
| Senior CFD No. 2006-1, 4.25%, 9/01/44. | | 2,500,000 | | 2,536,375 |
32 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| Saugus/Hart School Facilities Financing Authority Special Tax, | | | | |
| CFD No. 2006-1 Saugus USD, Refunding, 5.00%, 9/01/41 | $ | 1,250,000 | $ | 1,405,813 |
| CFD No. 2006-1 Saugus USD, Refunding, 5.00%, 9/01/46 | | 1,250,000 | | 1,399,238 |
| Sierra View Local Health Care District Revenue, Pre-Refunded, 5.25%, 7/01/32. | | 3,000,000 | | 3,147,630 |
| Silicon Valley Clean Water Waste Water Revenue, | | | | |
| 5.00%, 8/01/40 | | 2,500,000 | | 3,022,475 |
| 5.00%, 8/01/45 | | 1,500,000 | | 1,803,930 |
| Simi Valley 1915 Act Special Assessment, AD No. 98-1, Madera, 7.30%, 9/02/24 | | 1,600,000 | | 1,610,144 |
| Siskiyou UHSD, GO, Capital Appreciation, Election of 2008, Series B, AGMC Insured, zero cpn., 8/01/49 . | | 15,015,000 | | 3,858,254 |
| Sonoma CDA Tax Allocation, Redevelopment Project, 7.00%, 12/01/30 | | 2,115,000 | | 2,728,900 |
| Southern California Public Power Authority Transmission Project Revenue, Southern Transmission | | | | |
| Project, 6.125%, 7/01/18 | | 50,000 | | 50,219 |
| Southern Kern USD, GO, Election of 2014, Series B, 4.00%, 11/01/45 | | 7,500,000 | | 8,112,000 |
| St. Helena USD, GO, Capital Appreciation, zero cpn. to 8/01/25, 6.45% thereafter, 6/01/36 | | 10,000,000 | | 9,956,900 |
| Susanville PFAR, | | | | |
| Utility Enterprises Project, Refunding, Sub Series B, 5.50%, 6/01/30 | | 1,185,000 | | 1,285,050 |
| Utility Enterprises Project, Refunding, Sub Series B, 5.875%, 6/01/35 | | 1,660,000 | | 1,805,383 |
| Utility Enterprises Project, Refunding, Sub Series B, 6.00%, 6/01/45 | | 6,180,000 | | 6,708,266 |
| Susanville School District GO, Capital Appreciation, Election of 2008, AGMC Insured, zero cpn., 8/01/49 . | | 17,505,000 | | 4,352,443 |
| Temecula RDA Tax Allocation Revenue, | | | | |
| Housing, Redevelopment Project No. 1, Series A, 7.00%, 8/01/39 | | 2,100,000 | | 2,665,509 |
| sub. lien, Escrow, Redevelopment Project No. 1, 5.625%, 12/15/38 | | 1,825,000 | | 1,861,080 |
| Tobacco Securitization Authority Northern California Tobacco Settlement Revenue, | | | | |
| Asset-Backed, Series A-1, 5.375%, 6/01/38 | | 5,000,000 | | 4,999,750 |
| Asset-Backed, Series A-1, 5.50%, 6/01/45 | | 800,000 | | 799,968 |
| Capital Appreciation, Asset-Backed, Series A-2, 5.40%, 6/01/27 | | 1,250,000 | | 1,259,000 |
| Tobacco Securitization Authority Southern California Tobacco Settlement Revenue, Second Sub. Capital | | | | |
| Appreciation, Refunding, Series C, zero cpn., 6/01/46 | | 25,000,000 | | 1,093,750 |
| Torrance USD, GO, Capital Appreciation, Election of 2008, Measure Z, Series B-1, zero cpn., 8/01/34 | | 5,640,000 | | 2,755,591 |
| Truckee-Donner PUD Special Tax, | | | | |
| CFD No. 04-1, 5.20%, 9/01/25 | | 3,000,000 | | 3,003,720 |
| CFD No. 04-1, 5.75%, 9/01/29 | | 2,975,000 | | 2,978,213 |
| CFD No. 04-1, 5.25%, 9/01/30 | | 5,050,000 | | 5,051,969 |
| CFD No. 04-1, 5.80%, 9/01/35 | | 4,515,000 | | 4,518,206 |
| Tulare RDA Tax Allocation, Merged Tulare Redevelopment Projects, Series A, 6.25%, 8/01/40. | | 3,540,000 | | 4,143,889 |
| Tulare Sewer Revenue, Pre-Refunded, 6.50%, 11/15/45 | | 10,000,000 | | 11,979,800 |
| Turlock PFA Tax Allocation Revenue, 7.50%, 9/01/39 | | 3,750,000 | | 4,623,450 |
| Tustin CFD No. 06-1 Special Tax, Legacy/Columbus Villages, Series A, 5.00%, 9/01/37 | | 1,000,000 | | 1,158,630 |
| Tustin CFD No. 07-1 Special Tax, | | | | |
| Tustin Legacy, Pre-Refunded, 6.00%, 9/01/37 | | 2,100,000 | | 2,238,180 |
| Tustin Legacy/Retail Center, Refunding, Series A, 5.00%, 9/01/37 | | 2,330,000 | | 2,667,244 |
| Tustin CFD No. 14-1 Special Tax, | | | | |
| Legacy/Standard Pacific, Series A, 5.00%, 9/01/40 | | 750,000 | | 852,120 |
| Legacy/Standard Pacific, Series A, 5.00%, 9/01/45 | | 1,000,000 | | 1,131,040 |
| Tustin USD, | | | | |
| CFD No. 06-1 Special Tax, 5.75%, 9/01/30 | | 1,000,000 | | 1,117,240 |
| CFD No. 06-1 Special Tax, 6.00%, 9/01/40 | | 3,000,000 | | 3,407,610 |
| Union City CRDA Successor Agency Tax Allocation Revenue, | | | | |
| Community Redevelopment Project, Refunding, Series A, 5.00%, 10/01/35 | | 1,365,000 | | 1,634,751 |
| Community Redevelopment Project, Refunding, Series A, 5.00%, 10/01/36 | | 1,000,000 | | 1,191,230 |
| Union Elementary School District GO, Santa Clara County, Election of 2014, Series A, 5.00%, 9/01/49 | | 2,375,000 | | 2,760,985 |
franklintempleton.com
Annual Report
33
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| California (continued) | | | | |
| University of California Revenue, Refunding, Series AO, 5.00%, 5/15/40 | $ | 5,000,000 | $ | 6,027,950 |
| Val Verde USD Special Tax Revenue, | | | | |
| Refunding, 5.00%, 9/01/29 | | 3,200,000 | | 3,579,200 |
| Refunding, 5.00%, 9/01/37 | | 2,000,000 | | 2,205,200 |
| Vallejo RDA Tax Allocation, Housing Set-Aside, Refunding, Series A, 7.00%, 10/01/31 | | 3,605,000 | | 3,619,636 |
| Vernon Electric System Revenue, Series A, 5.50%, 8/01/41. | | 7,500,000 | | 8,753,775 |
| Victor Elementary School District GO, Election of 2008, Refunding, Series B, 5.00%, 8/01/42 | | 5,455,000 | | 6,295,015 |
| Victor Valley Community College District GO, Capital Appreciation, Election of 2002, Series C, zero cpn., | | | | |
| 6/01/49 | | 11,940,000 | | 3,178,667 |
| Washington Township Health Care District Revenue, Series A, 5.50%, 7/01/38 | | 2,890,000 | | 3,085,133 |
| West Hollywood Community Development Commission Tax Allocation, | | | | |
| East Side Redevelopment Project, Series A, 7.25%, 9/01/31 | | 1,000,000 | | 1,294,780 |
| East Side Redevelopment Project, Series A, 7.50%, 9/01/42 | | 5,000,000 | | 6,362,500 |
| d Western Riverside County Trust and Wastewater Financing Authority Revenue, Local Agency, Refunding, | | | | |
| Series A, 5.00%, 9/01/44 | | 2,000,000 | | 2,345,000 |
| Woodland Davis Clean Water Agency Water Revenue, Subordinated Woodland Davis Clean Water | | | | |
| Agency, Refunding, Series A, AGMC Insured, 5.00%, 3/01/39 | | 1,600,000 | | 1,898,304 |
| Woodland Finance Authority Water Revenue, | | | | |
| 6.00%, 3/01/36 | | 1,000,000 | | 1,201,240 |
| 6.00%, 3/01/41 | | 1,500,000 | | 1,795,785 |
| Yorba Linda RDA Tax Allocation, sub. lien, Redevelopment Project, Series A, 6.50%, 9/01/32 | | 2,750,000 | | 3,364,652 |
| Yucaipa Special Tax, | | | | |
| CFD No. 98-1 Chapman Heights, Refunding, 5.00%, 9/01/26 | | 1,000,000 | | 1,098,380 |
| CFD No. 98-1 Chapman Heights, Refunding, 5.375%, 9/01/30 | | 1,800,000 | | 2,002,248 |
| Yucca Valley RDA Tax Allocation, | | | | |
| Yucca Valley Redevelopment Project No. 1, 5.50%, 6/01/28 | | 2,110,000 | | 2,216,829 |
| Yucca Valley Redevelopment Project No. 1, 5.75%, 6/01/38 | | 5,485,000 | | 5,758,592 |
| | | | | 2,133,896,039 |
| |
| |
| U.S. Territories 3.9% | | | | |
| Guam 1.5% | | | | |
| Government of Guam GO, | | | | |
| Series A, Pre-Refunded, 5.00%, 11/15/23 | | 6,745,000 | | 7,162,650 |
| Series A, Pre-Refunded, 5.25%, 11/15/37 | | 6,500,000 | | 6,925,880 |
| Series A, Pre-Refunded, 7.00%, 11/15/39 | | 5,000,000 | | 6,012,950 |
| Guam Government Waterworks Authority Water and Wastewater System Revenue, | | | | |
| 5.625%, 7/01/40 | | 4,000,000 | | 4,494,560 |
| 5.00%, 1/01/46 | | 10,000,000 | | 11,615,000 |
| | | | | 36,211,040 |
| Northern Mariana Islands 0.1% | | | | |
| Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Senior Series A, 6.60%, | | | | |
| 3/15/28 | | 1,260,000 | | 1,307,275 |
| Puerto Rico 2.3% | | | | |
| Puerto Rico Commonwealth GO, Public Improvement, Refunding, Series A, 5.50%, 7/01/39 | | 10,000,000 | | 6,175,000 |
| Puerto Rico Electric Power Authority Power Revenue, | | | | |
| Refunding, Series A, 5.00%, 7/01/29 | | 10,000,000 | | 5,900,000 |
| Refunding, Series A, 5.00%, 7/01/42 | | 6,000,000 | | 3,540,000 |
| Series A, 7.00%, 7/01/33 | | 25,000,000 | | 14,750,000 |
| Series A, 6.75%, 7/01/36 | | 11,735,000 | | 6,923,650 |
| Series A, 7.00%, 7/01/43 | | 5,000,000 | | 2,950,000 |
34 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin California High Yield Municipal Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| U.S. Territories (continued) | | | | |
| Puerto Rico (continued) | | | | |
| Puerto Rico Electric Power Authority Revenue, Series A-4, zero cpn., 7/01/19 | $ | 1,601,766 | $ | 1,605,915 |
| Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Financing | | | | |
| Authority Revenue, Cogeneration Facility, AES Puerto Rico Project, 6.625%, 6/01/26 | | 5,500,000 | | 5,337,310 |
| Puerto Rico PBA Guaranteed Revenue, Government Facilities, Refunding, Series U, 5.25%, 7/01/42 | | 20,000,000 | | 10,600,000 |
| | | | | 57,781,875 |
| Total U.S. Territories | | | | 95,300,190 |
| Total Municipal Bonds (Cost $1,980,714,739) | | | | 2,229,196,229 |
| |
| Total Investments before Short Term Investments (Cost $1,985,319,799) | | | | 2,233,804,844 |
| |
| Short Term Investments 4.8% | | | | |
| Municipal Bonds 4.8% | | | | |
| California 4.8% | | | | |
| e California State GO, | | | | |
| Kindergarten, Refunding, Series A3, Daily VRDN and Put, 0.25%, 5/01/34 | | 13,100,000 | | 13,100,000 |
| Series A, Sub Series A-2, Daily VRDN and Put, 0.27%, 5/01/33 | | 29,125,000 | | 29,125,000 |
| Series A-1, Daily VRDN and Put, 0.25%, 5/01/33 | | 29,600,000 | | 29,600,000 |
| Various Purpose, Refunding, Series A, Sub Series A1-2, Weekly VRDN and Put, 0.37%, 5/01/40 | | 6,900,000 | | 6,900,000 |
| e Irvine 1915 Act Special Assessment, Limited Obligation Improvement, AD No. 94-15, Refunding, Daily | | | | |
| VRDN and Put, 0.30%, 9/02/20. | | 2,353,000 | | 2,353,000 |
| e Los Angeles Department of Water and Power Revenue, Water System, Series B, Sub Series B-2, Daily | | | | |
| VRDN and Put, 0.26%, 7/01/35. | | 32,900,000 | | 32,900,000 |
| e The Metropolitan Water District of Southern California Water Revenue, Refunding, Series B-3, Daily | | | | |
| VRDN and Put, 0.29%, 7/01/35. | | 3,900,000 | | 3,900,000 |
| Total Short Term Investments (Cost $117,878,000) | | | | 117,878,000 |
| Total Investments (Cost $2,103,197,799) 95.8% | | | | 2,351,682,844 |
| Other Assets, less Liabilities 4.2% | | | | 104,032,886 |
| Net Assets 100.0% | | | $ | 2,455,715,730 |
See Abbreviations on page 52.
†Rounds to less than 0.1% of net assets.
aNon-income producing.
bSecurity has been deemed illiquid because it may not be able to be sold within seven days. At May 31, 2016, the aggregate value of these securities was $15,089,055,
representing 0.61% of net assets.
cIncome may be received in additional securities and/or cash.
dSecurity purchased on a when-issued basis. See Note 1(b).
eVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to
receive payment of the principal balance plus accrued interest at specified dates. The coupon rate shown represents the rate at period end.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Annual Report 35
| | | | | | | | | | | | | | | |
| FRANKLIN MUNICIPAL SECURITIES TRUST | | | | | | | | | | | | | | | |
| |
| |
| |
| Financial Highlights | | | | | | | | | | | | | | | |
| Franklin Tennessee Municipal Bond Fund | | | | | | | | | | | | | | | |
| | | | | | Year Ended May 31, | | | | | | | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Class A | | | | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | | | | |
| (for a share outstanding throughout the year) | | | | | | | | | | | | | | | |
| Net asset value, beginning of year | $ | 11.38 | | $ | 11.47 | | $ | 11.88 | | $ | 11.94 | | $ | 11.19 | |
| Income from investment operationsa: | | | | | | | | | | | | | | | |
| Net investment incomeb | | 0.40 | | | 0.41 | | | 0.43 | | | 0.41 | | | 0.44 | |
| Net realized and unrealized gains (losses) | | 0.06 | | | (0.08 | ) | | (0.42 | ) | | (0.06 | ) | | 0.75 | |
| Total from investment operations | | 0.46 | | | 0.33 | | | 0.01 | | | 0.35 | | | 1.19 | |
| Less distributions from net investment income | | (0.40 | ) | | (0.42 | ) | | (0.42 | ) | | (0.41 | ) | | (0.44 | ) |
| Net asset value, end of year. | $ | 11.44 | | $ | 11.38 | | $ | 11.47 | | $ | 11.88 | | $ | 11.94 | |
| |
| Total returnc | | 4.12 | % | | 2.86 | % | | 0.20 | % | | 2.93 | % | | 10.84 | % |
| |
| Ratios to average net assets | | | | | | | | | | | | | | | |
| Expenses before waiver and payments by affiliates | | 0.72 | % | | 0.72 | % | | 0.72 | % | | 0.70 | % | | 0.71 | % |
| Expenses net of waiver and payments by affiliates | | 0.72 | % | | 0.71 | % | | 0.70 | % | | 0.70 | % | | 0.70 | % |
| Net investment income | | 3.55 | % | | 3.60 | % | | 3.82 | % | | 3.40 | % | | 3.82 | % |
| |
| Supplemental data | | | | | | | | | | | | | | | |
| Net assets, end of year (000’s) | $ | 307,294 | | $ | 293,580 | | $ | 273,142 | | $ | 344,157 | | $ | 312,688 | |
| Portfolio turnover rate | | 4.50 | % | | 11.64 | % | | 7.86 | % | | 7.89 | % | | 5.71 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
36 Annual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
| | | | |
| Statement of Investments, May 31, 2016 | | | | |
| Franklin Tennessee Municipal Bond Fund | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds 98.1% | | | | |
| Tennessee 93.6% | | | | |
| Anderson County Water Authority Water and Sewer Revenue, 5.00%, 6/01/36 | $ | 1,000,000 | $ | 1,126,090 |
| Blount County PBA Revenue, | | | | |
| Local Government Public Improvement, Refunding, Series B-15-A, Assured Guaranty, 5.00%, 6/01/28 | | 220,000 | | 236,698 |
| Local Government Public Improvement, Refunding, Series B-15-A, Assured Guaranty, 5.00%, 6/01/32 | | 1,590,000 | | 1,706,102 |
| Local Government Public Improvement, Series B-15-A, Assured Guaranty, Pre-Refunded, 5.00%, | | | | |
| 6/01/28 | | 880,000 | | 952,988 |
| Local Government Public Improvement, Series B-15-A, Assured Guaranty, Pre-Refunded, 5.00%, | | | | |
| 6/01/32 | | 975,000 | | 1,055,866 |
| Chattanooga Electric System Revenue, | | | | |
| The Electric Power Board of Chattanooga, Refunding, Series C, 5.00%, 9/01/40 | | 2,750,000 | | 3,314,217 |
| The Electric Power Board of Chattanooga, Series A, Pre-Refunded, 5.00%, 9/01/33 | | 7,500,000 | | 8,047,200 |
| Chattanooga Health Educational and Housing Facility Board Revenue, | | | | |
| Catholic Health Initiatives, Series D, 6.25%, 10/01/33 | | 500,000 | | 557,170 |
| Student Housing, CDFI Phase I LLC, University of Tennessee at Chattanooga Project, Refunding, | | | | |
| 5.00%, 10/01/35 | | 1,000,000 | | 1,148,480 |
| Chattanooga-Hamilton County Hospital Authority Hospital Revenue, | | | | |
| Erlanger Health System, AGMC Insured, Pre-Refunded, 5.00%, 10/01/22 | | 775,000 | | 871,317 |
| Erlanger Health System, Refunding, AGMC Insured, 5.00%, 10/01/22 | | 2,475,000 | | 2,774,846 |
| Clarksville Electric System Revenue, | | | | |
| Refunding, 5.00%, 9/01/31 | | 1,000,000 | | 1,214,240 |
| Series A, 5.00%, 9/01/34 | | 2,000,000 | | 2,283,220 |
| Series A, 5.00%, 9/01/35 | | 3,185,000 | | 3,631,792 |
| XLCA Insured, Pre-Refunded, 5.00%, 9/01/23 | | 2,325,000 | | 2,449,527 |
| XLCA Insured, Pre-Refunded, 5.00%, 9/01/32 | | 4,000,000 | | 4,214,240 |
| Clarksville Water Sewer and Gas Revenue, Refunding, 5.00%, 2/01/38 | | 3,000,000 | | 3,445,560 |
| Columbia Waterworks System Revenue, 5.00%, 12/01/32 | | 3,000,000 | | 3,498,360 |
| Franklin Special School District GO, Refunding and Improvement, 5.00%, 6/01/29. | | 1,000,000 | | 1,241,190 |
| Gallatin Water and Sewer Revenue, | | | | |
| Assured Guaranty, Pre-Refunded, 5.00%, 1/01/33 | | 2,215,000 | | 2,362,010 |
| Refunding and Improvement, 5.00%, 1/01/32 | | 1,500,000 | | 1,818,825 |
| Greene County GO, Rural School, Refunding, Series B, NATL Insured, 5.00%, 6/01/24 | | 1,000,000 | | 1,003,260 |
| Hallsdale-Powell Utility District of Knox County Waterworks and Sewer Revenue, Improvement, NATL | | | | |
| Insured, 5.00%, 4/01/31 | | 1,000,000 | | 1,032,540 |
| Harpeth Valley Utilities District of Davidson and Williamson Counties Revenue, | | | | |
| Refunding, 5.00%, 9/01/42 | | 3,000,000 | | 3,585,420 |
| Utilities, 5.00%, 9/01/44. | | 4,400,000 | | 5,111,568 |
| Utilities, Improvement, NATL Insured, Pre-Refunded, 5.00%, 9/01/35 | | 3,700,000 | | 3,898,172 |
| Hawkins County First Utility District Waterworks Revenue, Series B, Assured Guaranty, Pre-Refunded, | | | | |
| 5.00%, 6/01/42 | | 1,250,000 | | 1,353,675 |
| Jackson Hospital Revenue, | | | | |
| Jackson-Madison County General Hospital, Improvement, Pre-Refunded, 5.50%, 4/01/33 | | 2,125,000 | | 2,298,549 |
| Jackson-Madison County General Hospital, Refunding, 5.00%, 4/01/36 | | 7,000,000 | | 8,019,970 |
| Jackson-Madison County General Hospital, Refunding and Improvement, 5.50%, 4/01/33 | | 875,000 | | 941,483 |
| Johnson City Electric System Revenue, Improvement, AGMC Insured, 5.00%, 5/01/29 | | 1,000,000 | | 1,072,360 |
| Johnson City Health and Educational Facilities Board Hospital Revenue, Johnson City Medical Center | | | | |
| Hospital, Improvement, Series C, NATL Insured, Pre-Refunded, 5.125%, 7/01/25 | | 215,000 | | 215,512 |
| Kingsport GO, Series B, Assured Guaranty, Pre-Refunded, 5.00%, 3/01/29 | | 1,030,000 | | 1,137,995 |
| Kingsport IDB, MFHR, Model City Apartments Project, GNMA Secured, 5.50%, 7/20/39 | | 2,995,000 | | 3,037,709 |
franklintempleton.com
Annual Report
37
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin Tennessee Municipal Bond Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| Tennessee (continued) | | | | |
| Knox County First Utility District Water and Sewer Revenue, | | | | |
| 5.00%, 12/01/32 | $ | 1,000,000 | $ | 1,208,930 |
| NATL Insured, Pre-Refunded, 5.00%, 12/01/24 | | 1,790,000 | | 1,829,720 |
| NATL Insured, Pre-Refunded, 5.00%, 12/01/25 | | 1,000,000 | | 1,022,190 |
| Refunding and Improvement, 5.00%, 12/01/26 | | 1,390,000 | | 1,576,872 |
| Knox County Health Educational and Housing Facility Board Hospital Revenue, Covenant Health, Capital | | | | |
| Appreciation, Refunding and Improvement, Series A, zero cpn., 1/01/36 | | 2,000,000 | | 760,220 |
| Knox County Health Educational and Housing Facility Board Revenue, | | | | |
| University Health System Inc., Refunding, 5.25%, 4/01/27 | | 2,500,000 | | 2,580,775 |
| University Health System Inc., Refunding, 5.25%, 4/01/36 | | 5,000,000 | | 5,154,400 |
| Knox-Chapman Utility District of Knox County Water and Sewer Revenue, | | | | |
| 5.25%, 1/01/36 | | 1,500,000 | | 1,722,135 |
| Refunding and Improvement, 5.00%, 1/01/33 | | 1,470,000 | | 1,783,727 |
| Refunding and Improvement, 4.00%, 1/01/40 | | 4,000,000 | | 4,266,640 |
| Knoxville Wastewater System Revenue, Improvement, Refunding, Series A, 4.00%, 4/01/42 | | 5,000,000 | | 5,303,300 |
| Lawrenceburg PBA, GO, Electric System, Refunding, AMBAC Insured, 5.00%, 7/01/22 | | 2,440,000 | | 2,743,853 |
| Loudon Water and Sewer Revenue, | | | | |
| Exempt Facility, Series A, 4.00%, 3/01/28 | | 1,000,000 | | 1,053,450 |
| Exempt Facility, Series A, 5.00%, 3/01/32 | | 1,300,000 | | 1,468,402 |
| Manchester GO, Refunding, AGMC Insured, 5.00%, 6/01/38. | | 2,665,000 | | 3,010,944 |
| Maryville Water and Sewer Revenue, Series A, Assured Guaranty, 5.00%, 6/01/38 | | 5,500,000 | | 5,883,570 |
| Maury County GO, Public Improvement, Refunding, 4.00%, 4/01/34 | | 1,775,000 | | 1,975,770 |
| Memphis Electric System Revenue, 5.00%, 12/01/34 | | 1,000,000 | | 1,211,550 |
| Memphis GO, | | | | |
| General Improvement, Assured Guaranty, Pre-Refunded, 5.00%, 4/01/27 | | 1,975,000 | | 2,198,807 |
| General Improvement, Refunding, 5.00%, 5/01/36 | | 4,135,000 | | 4,762,610 |
| Memphis-Shelby County Airport Authority Airport Revenue, | | | | |
| Refunding, Series B, 5.75%, 7/01/25 | | 2,500,000 | | 2,871,675 |
| Refunding, Series D, 5.00%, 7/01/25. | | 3,000,000 | | 3,473,280 |
| Series A, AGMC Insured, 5.00%, 7/01/35 | | 5,000,000 | | 5,601,150 |
| Series A, AGMC Insured, 5.00%, 7/01/39 | | 2,565,000 | | 2,860,591 |
| Memphis-Shelby County Sports Authority Inc. Revenue, Memphis Arena Project, Refunding, Series B, | | | | |
| 5.375%, 11/01/29 | | 5,000,000 | | 5,695,600 |
| Metropolitan Government of Nashville and Davidson County Electric System Revenue, | | | | |
| Series A, 5.00%, 5/15/36 | | 3,500,000 | | 4,031,685 |
| Series A, 5.00%, 5/15/39 | | 4,000,000 | | 4,754,960 |
| Series A, Pre-Refunded, 5.00%, 5/15/33 | | 3,000,000 | | 3,243,900 |
| Metropolitan Government of Nashville and Davidson County GO, | | | | |
| Improvement, Series A, Pre-Refunded, 5.00%, 1/01/33 | | 5,000,000 | | 6,134,350 |
| a Refunding, 4.00%, 1/01/33 | | 5,000,000 | | 5,736,400 |
| Series B, Pre-Refunded, 5.00%, 8/01/25 | | 5,000,000 | | 5,036,500 |
| Metropolitan Government of Nashville and Davidson County Health and Educational Facilities Board | | | | |
| Revenue, | | | | |
| Series A, 5.00%, 7/01/46 | | 4,000,000 | | 4,653,400 |
| Vanderbilt University, Refunding, Series A, 5.50%, 10/01/29 | | 2,670,000 | | 3,062,250 |
| Vanderbilt University, Series A, Pre-Refunded, 5.50%, 10/01/29 | | 830,000 | | 951,055 |
| Vanderbilt University, Series B, Pre-Refunded, 5.00%, 10/01/39 | | 9,000,000 | | 10,181,610 |
| Metropolitan Government of Nashville and Davidson County Sports Authority Revenue, | | | | |
| Public Improvement, Ballpark Project, Series A, 5.00%, 8/01/38 | | 3,000,000 | | 3,486,720 |
| Public Improvement, Ballpark Project, Series A, 5.00%, 8/01/43 | | 2,075,000 | | 2,402,808 |
| Metropolitan Nashville Airport Authority Revenue, Improvement, Series A, 5.00%, 7/01/45 | | 4,000,000 | | 4,722,080 |
38 Annual Report
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin Tennessee Municipal Bond Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| |
| Municipal Bonds (continued) | | | | |
| Tennessee (continued) | | | | |
| Pigeon Forge IDB Revenue, Public Facility, 5.00%, 6/01/34 | $ | 1,250,000 | $ | 1,435,737 |
| Rutherford County Health and Educational Facilities Board Revenue, Ascension Health Senior Credit Group, | | | | |
| Series C, 5.00%, 11/15/40. | | 10,000,000 | | 11,201,100 |
| Shelby County Health Educational and Housing Facility Board Revenue, | | | | |
| Baptist Memorial Health Care, Series A, 5.00%, 9/01/19 | | 3,015,000 | | 3,349,906 |
| Educational Facilities, Rhodes College, 5.00%, 8/01/40. | | 750,000 | | 890,490 |
| Educational Facilities, Rhodes College, 5.50%, 8/01/40. | | 5,000,000 | | 5,862,000 |
| Educational Facilities, Rhodes College, 5.00%, 8/01/45. | | 1,700,000 | | 2,009,349 |
| Methodist Healthcare, Series B, AGMC Insured, Pre-Refunded, 5.25%, 9/01/27. | | 5,000,000 | | 5,381,900 |
| St. Jude Children’s Research Hospital, Refunding, 5.00%, 7/01/36 | | 5,000,000 | | 5,014,650 |
| South Blount County Utility District Waterworks Revenue, | | | | |
| Refunding and Improvement, AGMC Insured, 5.00%, 12/01/33 | | 1,000,000 | | 1,118,910 |
| Refunding and Improvement, AGMC Insured, 5.25%, 12/01/39 | | 3,310,000 | | 3,708,822 |
| Tennessee HDA Residential Financing Program Revenue, Issue 1C, 4.00%, 7/01/43 | | 2,430,000 | | 2,605,519 |
| Tennessee HDA Revenue, | | | | |
| Homeownership Program, Series 1, 5.00%, 7/01/29 | | 985,000 | | 1,026,695 |
| Homeownership Program, Series 2C, 3.80%, 7/01/43 | | 1,645,000 | | 1,768,095 |
| Tennessee State School Bond Authority Revenue, | | | | |
| Higher Educational Facilities, Second Program, Refunding, Series B, 5.00%, 11/01/40 | | 10,000,000 | | 12,075,400 |
| Higher Educational Facilities, Second Program, Refunding, Series B, 5.00%, 11/01/45 | | 5,000,000 | | 6,020,950 |
| Higher Educational Facilities, Second Program, Series A, Pre-Refunded, 5.00%, 5/01/39 | | 3,000,000 | | 3,348,930 |
| Higher Educational Facilities, Second Program, Series B, Pre-Refunded, 5.50%, 5/01/38 | | 4,000,000 | | 4,356,600 |
| West Wilson Utility District of Wilson County Water Revenue, | | | | |
| 5.00%, 6/01/33 | | 3,000,000 | | 3,450,390 |
| Refunding & Improvement, 5.00%, 6/01/40 | | 1,545,000 | | 1,828,446 |
| | | | | 287,529,919 |
| |
| |
| U.S. Territories 4.5% | | | | |
| Guam 1.7% | | | | |
| Guam Economic Development and Commerce Authority Revenue, Tobacco Settlement, Asset-Backed, | | | | |
| Refunding, 5.25%, 6/01/32 | | 1,475,000 | | 1,482,936 |
| Guam Government Limited Obligation Revenue, Section 30, Series A, 5.625%, 12/01/29 | | 3,205,000 | | 3,610,272 |
| | | | | 5,093,208 |
franklintempleton.com
Annual Report
39
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS
| | | | |
| Franklin Tennessee Municipal Bond Fund (continued) | | | | |
| | | Principal | | |
| | | Amount | | Value |
| Municipal Bonds (continued) | | | | |
| U.S. Territories (continued) | | | | |
| Puerto Rico 2.8% | | | | |
| Puerto Rico Electric Power Authority Power Revenue, Series XX, 5.25%, 7/01/40 | $ | 5,000,000 | $ | 2,950,000 |
| Puerto Rico PBA Guaranteed Revenue, Government Facilities, Series S, 6.00%, 7/01/41. | | 2,000,000 | | 1,092,500 |
| Puerto Rico Sales Tax FICO Sales Tax Revenue, | | | | |
| first subordinate, Series A, 6.50%, 8/01/44 | | 7,500,000 | | 3,084,375 |
| first subordinate, Series C, 5.50%, 8/01/40 | | 4,000,000 | | 1,630,000 |
| | | | | 8,756,875 |
| Total U.S. Territories | | | | 13,850,083 |
| Total Municipal Bonds (Cost $287,593,409) 98.1% | | | | 301,380,002 |
| Other Assets, less Liabilities 1.9% | | | | 5,913,553 |
| Net Assets 100.0% | | | $ | 307,293,555 |
See Abbreviations on page 52.
aSecurity purchased on a when-issued basis. See Note 1(b).
40 Annual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUNICIPAL SECURITIES TRUST
| | | | | | | |
| Financial Statements | | | | | | | |
| |
| |
| Statements of Assets and Liabilities | | | | | | | |
| May 31, 2016 | | | | | | | |
| |
| | | | Franklin | | | Franklin | |
| | | | California | | | Tennessee | |
| | | | High Yield | | | Municipal | |
| | | | Municipal Fund | | | Bond Fund | |
| Assets: | | | | | | | |
| Investments in securities: | | | | | | | |
| Cost | $ | | 2,103,197,799 | | $ | 287,593,409 | |
| Value. | $ | | 2,351,682,844 | | $ | 301,380,002 | |
| Cash | | | 106,147,388 | | | 7,641,228 | |
| Receivables: | | | | | | | |
| Capital shares sold | | | 4,547,342 | | | 886,765 | |
| Interest | | | 25,775,149 | | | 3,825,589 | |
| Affiliates | | | 62,521 | | | — | |
| Other assets | | | 1,218 | | | 156 | |
| Total assets | | | 2,488,216,462 | | | 313,733,740 | |
| Liabilities: | | | | | | | |
| Payables: | | | | | | | |
| Investment securities purchased | | | 24,909,243 | | | 5,688,600 | |
| Capital shares redeemed | | | 4,565,726 | | | 443,270 | |
| Management fees | | | 951,409 | | | 137,193 | |
| Distribution fees | | | 328,487 | | | 25,798 | |
| Transfer agent fees | | | 139,802 | | | 20,605 | |
| Distributions to shareholders | | | 1,479,413 | | | 74,938 | |
| Accrued expenses and other liabilities. | | | 126,652 | | | 49,781 | |
| Total liabilities | | | 32,500,732 | | | 6,440,185 | |
| Net assets, at value | $ | | 2,455,715,730 | | $ | 307,293,555 | |
| Net assets consist of: | | | | | | | |
| Paid-in capital | $ | | 2,304,200,233 | | $ | 300,472,041 | |
| Undistributed net investment income | | | 3,126,930 | | | 450,309 | |
| Net unrealized appreciation (depreciation) | | | 248,485,045 | | | 13,786,593 | |
| Accumulated net realized gain (loss) | | | (100,096,478 | ) | | (7,415,388 | ) |
| Net assets, at value | $ | | 2,455,715,730 | | $ | 307,293,555 | |
| Class A: | �� | | | | | | |
| Net assets, at value | $ | | 1,442,702,939 | | $ | 307,293,555 | |
| Shares outstanding. | | | 130,027,250 | | | 26,858,373 | |
| Net asset value per sharea | | $ | 11.10 | | $ | 11.44 | |
| Maximum offering price per share (net asset value per share ÷ 95.75%) | | $ | 11.59 | | $ | 11.95 | |
| Class C: | | | | | | | |
| Net assets, at value | $ | | 377,549,964 | | | | |
| Shares outstanding. | | | 33,797,238 | | | | |
| Net asset value and maximum offering price per share | | $ | 11.17 | | | | |
| Advisor Class: | | | | | | | |
| Net assets, at value | $ | | 635,462,827 | | | | |
| Shares outstanding. | | | 57,158,434 | | | | |
| Net asset value and maximum offering price per share | | $ | 11.12 | | | | |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Annual Report 41
| | | | | | |
| FRANKLIN MUNICIPAL SECURITIES TRUST | | | | | | |
| FINANCIAL STATEMENTS | | | | | | |
| |
| |
| Statements of Operations | | | | | | |
| for the year ended May 31, 2016 | | | | | | |
| |
| | | Franklin | | | Franklin | |
| | | California | | | Tennessee | |
| | | High Yield | | | Municipal | |
| | | Municipal Fund | | | Bond Fund | |
| Investment income: | | | | | | |
| Interest | $ | 99,922,651 | | $ | 12,549,021 | |
| Expenses: | | | | | | |
| Management fees (Note 3a) | | 10,270,507 | | | 1,573,266 | |
| Distribution fees: (Note 3c) | | | | | | |
| Class A | | 1,352,906 | | | 294,599 | |
| Class C | | 2,221,862 | | | — | |
| Transfer agent fees: (Note 3e) | | | | | | |
| Class A | | 494,614 | | | 126,084 | |
| Class C | | 124,538 | | | — | |
| Advisor Class. | | 193,448 | | | — | |
| Custodian fees | | 18,965 | | | 2,616 | |
| Reports to shareholders | | 62,837 | | | 11,267 | |
| Registration and filing fees | | 70,048 | | | 7,081 | |
| Professional fees | | 201,430 | | | 58,398 | |
| Trustees’ fees and expenses | | 61,771 | | | 8,317 | |
| Other | | 729,326 | | | 25,756 | |
| Total expenses | | 15,802,252 | | | 2,107,384 | |
| Net investment income | | 84,120,399 | | | 10,441,637 | |
| Realized and unrealized gains (losses): | | | | | | |
| Net realized gain (loss) from investments | | (3,670,661 | ) | | (1,191,121 | ) |
| Net change in unrealized appreciation (depreciation) on investments | | 98,799,680 | | | 2,575,461 | |
| Net realized and unrealized gain (loss) | | 95,129,019 | | | 1,384,340 | |
| Net increase (decrease) in net assets resulting from operations | $ | 179,249,418 | | $ | 11,825,977 | |
42 Annual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
| | | | | | | | | | | | |
| | | | | | FRANKLIN MUNICIPAL SECURITIES TRUST | |
| | | | | | | | | FINANCIAL STATEMENTS | |
| |
| |
| Statements of Changes in Net Assets | | | | | | | | | | | | |
| |
| | | Franklin California | | | Franklin Tennessee | |
| | | High Yield Municipal Fund | | | Municipal Bond Fund | |
| | | Year Ended May 31, | | | Year Ended May 31, | |
| | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
| Increase (decrease) in net assets: | | | | | | | | | | | | |
| Operations: | | | | | | | | | | | | |
| Net investment income | $ | 84,120,399 | | $ | 80,336,132 | | $ | 10,441,637 | | $ | 10,135,430 | |
| Net realized gain (loss) | | (3,670,661 | ) | | 5,162,029 | | | (1,191,121 | ) | | (324,127 | ) |
| Net change in unrealized appreciation (depreciation) | | 98,799,680 | | | 35,837,571 | | | 2,575,461 | | | (1,922,664 | ) |
| Net increase (decrease) in net assets resulting from | | | | | | | | | | | | |
| operations | | 179,249,418 | | | 121,335,732 | | | 11,825,977 | | | 7,888,639 | |
| Distributions to shareholders from: | | | | | | | | | | | | |
| Net investment income: | | | | | | | | | | | | |
| Class A | | (52,806,784 | ) | | (53,034,252 | ) | | (10,343,510 | ) | | (10,170,322 | ) |
| Class C | | (11,394,081 | ) | | (11,238,791 | ) | | — | | | — | |
| Advisor Class | | (21,295,565 | ) | | (17,287,886 | ) | | — | | | — | |
| Total distributions to shareholders | | (85,496,430 | ) | | (81,560,929 | ) | | (10,343,510 | ) | | (10,170,322 | ) |
| Capital share transactions: (Note 2) | | | | | | | | | | | | |
| Class A | | 92,169,914 | | | 64,853,862 | | | 12,230,945 | | | 22,719,591 | |
| Class C | | 36,708,855 | | | 41,310,047 | | | — | | | — | |
| Advisor Class | | 138,044,150 | | | 151,663,957 | | | — | | | — | |
| Total capital share transactions | | 266,922,919 | | | 257,827,866 | | | 12,230,945 | | | 22,719,591 | |
| Net increase (decrease) in net assets | | 360,675,907 | | | 297,602,669 | | | 13,713,412 | | | 20,437,908 | |
| Net assets: | | | | | | | | | | | | |
| Beginning of year | | 2,095,039,823 | | | 1,797,437,154 | | | 293,580,143 | | | 273,142,235 | |
| End of year. | $ | 2,455,715,730 | | $ | 2,095,039,823 | | $ | 307,293,555 | | $ | 293,580,143 | |
| Undistributed net investment income included in net assets: | | | | | | | | | | | | |
| End of year. | $ | 3,126,930 | | $ | 5,806,673 | | $ | 450,309 | | $ | 352,918 | |
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The accompanying notes are an integral part of these financial statements. | Annual Report 43
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Franklin Municipal Securities Trust (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of two separate funds (Funds) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
|
| Class A |
| Franklin Tennessee Municipal Bond Fund |
| Class A, Class C & Advisor Class |
| Franklin California High Yield Municipal Fund |
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Funds calculate the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds’ pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value.
The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
b. Securities Purchased on a When-Issued Basis
Certain or all Funds purchase securities on a when-issued basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
c. Income Taxes
It is each Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each Fund intends to distribute to shareholders substantially all of its income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
Each Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of May 31, 2016, each Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
d. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividends from net investment income are normally declared daily; these dividends may be reinvested or paid monthly to shareholders. Distributions to shareholders are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the Fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
e. Insurance
The scheduled payments of interest and principal for each insured municipal security in the Trust are insured by either a new issue insurance policy or a secondary insurance policy. Some municipal securities in the Funds are secured by collateral guaranteed by an agency of the U.S. government. Depending on the type of coverage, premiums for insurance are either added to the cost basis of the security or paid by a third party.
Insurance companies typically insure municipal bonds that tend to be of very high quality, with the majority of underlying municipal bonds rated A or better. However, an event involving an insurer could have an adverse effect on the value of the securities insured by that insurance company. There can be no assurance the insurer will be able to fulfill its obligations under the terms of the policy.
f. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest
At May 31, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
| | | | | | | | | | |
| | Franklin California | | Franklin Tennessee | |
| | High Yield Municipal Fund | | Municipal Bond Fund | |
| | Shares | | | Amount | | Shares | | | Amount | |
| Class A Shares: | | | | | | | | | | |
| Year ended May 31, 2016 | | | | | | | | | | |
| Shares sold | 30,832,731 | | $ | 332,124,577 | | 3,943,392 | | $ | 44,794,337 | |
| Shares issued in reinvestment of distributions | 4,080,352 | | | 44,055,673 | | 817,838 | | | 9,280,939 | |
| Shares redeemed | (26,391,263 | ) | | (284,010,336 | ) | (3,691,266 | ) | | (41,844,331 | ) |
| Net increase (decrease) | 8,521,820 | | $ | 92,169,914 | | 1,069,964 | | $ | 12,230,945 | |
| Year ended May 31, 2015 | | | | | | | | | | |
| Shares sold | 28,917,496 | | $ | 307,735,923 | | 4,401,520 | | $ | 50,647,129 | |
| Shares issued in reinvestment of distributions | 4,002,390 | | | 42,528,258 | | 759,985 | | | 8,741,901 | |
| Shares redeemed | (26,903,050 | ) | | (285,410,319 | ) | (3,190,560 | ) | | (36,669,439 | ) |
| Net increase (decrease) | 6,016,836 | | $ | 64,853,862 | | 1,970,945 | | $ | 22,719,591 | |
| Class C Shares: | | | | | | | | | | |
| Year ended May 31, 2016 | | | | | | | | | | |
| Shares sold | 6,876,895 | | $ | 74,909,800 | | | | | | |
| Shares issued in reinvestment of distributions | 808,943 | | | 8,791,576 | | | | | | |
| Shares redeemed | (4,335,827 | ) | | (46,992,521 | ) | | | | | |
| Net increase (decrease) | 3,350,011 | | $ | 36,708,855 | | | | | | |
| Year ended May 31, 2015 | | | | | | | | | | |
| Shares sold | 6,546,407 | | $ | 69,976,837 | | | | | | |
| Shares issued in reinvestment of distributions | 800,399 | | | 8,562,458 | | | | | | |
| Shares redeemed | (3,480,379 | ) | | (37,229,248 | ) | | | | | |
| Net increase (decrease) | 3,866,427 | | $ | 41,310,047 | | | | | | |
| Advisor Class Shares: | | | | | | | | | | |
| Year ended May 31, 2016 | | | | | | | | | | |
| Shares sold | 20,333,235 | | $ | 220,443,000 | | | | | | |
| Shares issued in reinvestment of distributions | 1,270,053 | | | 13,749,421 | | | | | | |
| Shares redeemed | (8,901,598 | ) | | (96,148,271 | ) | | | | | |
| Net increase (decrease) | 12,701,690 | | $ | 138,044,150 | | | | | | |
| Year ended May 31, 2015 | | | | | | | | | | |
| Shares sold | 19,382,205 | | $ | 205,805,608 | | | | | | |
| Shares issued in reinvestment of distributions | 990,180 | | | 10,559,655 | | | | | | |
| Shares redeemed | (6,102,813 | ) | | (64,701,306 | ) | | | | | |
| Net increase (decrease) | 14,269,572 | | $ | 151,663,957 | | | | | | |
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Funds are also officers and/or directors of the following subsidiaries:
| |
| Subsidiary | Affiliation |
| Franklin Advisers, Inc. (Advisers) | Investment manager |
| Franklin Templeton Services, LLC (FT Services) | Administrative manager |
| Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
| Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Funds pay an investment management fee to Advisers based on the average daily net assets of each of the Funds as follows:
| | |
| Annualized Fee Rate | | Net Assets |
| 0.625 | % | Up to and including $100 million |
| 0.500 | % | Over $100 million, up to and including $250 million |
| 0.450 | % | Over $250 million, up to and including $7.5 billion |
| 0.440 | % | Over $7.5 billion, up to and including $10 billion |
| 0.430 | % | Over $10 billion, up to and including $12.5 billion |
| 0.420 | % | Over $12.5 billion, up to and including $15 billion |
| 0.400 | % | Over $15 billion, up to and including $17.5 billion |
| 0.380 | % | Over $17.5 billion, up to and including $20 billion |
| 0.360 | % | In excess of $20 billion |
For the year ended May 31, 2016, each Fund’s annualized effective investment management fee rate based on average daily net assets was as follows:
| | | |
| Franklin | | Franklin | |
| California | | Tennessee | |
| High Yield | | Municipal | |
| Municipal Fund | | Bond Fund | |
| |
| 0.461 | % | 0.535 | % |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on each of the Funds’ average daily net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds’ Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds’ Class C compensation distribution plans, Franklin California High Yield Municipal Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of each Fund’s shares up to the maximum annual plan rate. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each Fund.
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
| 3. | Transactions with Affiliates (continued) |
| c. | Distribution Fees (continued) |
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
| | | | |
| | Franklin | | Franklin | |
| | California | | Tennessee | |
| | High Yield | | Municipal | |
| | Municipal Fund | | Bond Fund | |
| |
| Reimbursement Plans: | | | | |
| Class A | 0.15 | % | 0.15 | % |
| Compensation Plans: | | | | |
| Class C | 0.65 | % | — | |
Distributors has agreed to limit the current rate to 0.10% per year for each of the Funds for Class A.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Funds. These charges are deducted from the proceeds of sales of fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the year:
| | | | |
| | | Franklin | | Franklin |
| | | California | | Tennessee |
| | | High Yield | | Municipal |
| | | Municipal Fund | | Bond Fund |
| |
| Sales charges retained net of commissions paid to | | | | |
| unaffiliated brokers/dealers | $ | 333,565 | $ | 84,024 |
| CDSC retained | $ | 76,380 | $ | 64 |
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets.
For the year ended May 31, 2016, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
| | | | |
| | | Franklin | | Franklin |
| | | California | | Tennessee |
| | | High Yield | | Municipal |
| | | Municipal Fund | | Bond Fund |
| |
| Transfer agent fees | $ | 240,264 | $ | 30,808 |
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
f. Interfund Transactions
Certain or all Funds engaged in purchases and sales of investments with funds or other accounts that have a common investment manager (or affiliated investment managers), directors, trustees, or officers. Purchases and sales for the year ended May 31, 2016, were as follows:
| | | |
| | | Franklin | Franklin |
| | | California | Tennessee |
| | | High Yield | Municipal |
| | | Municipal Fund | Bond Fund |
| |
| Purchases | $ | 50,478,000 | $ — |
| Sales | $ | — | $ — |
4. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
| | | | |
| At May 31, 2016, the capital loss carryforwards were as follows: | | |
| |
| | | Franklin | | Franklin |
| | | California | | Tennessee |
| | | High Yield | | Municipal |
| | | Municipal Fund | | Bond Fund |
| Capital loss carryforwards subject to expiration: | | | | |
| 2017 | $ | 5,767,799 | $ | 810,129 |
| 2018 | | 32,781,484 | | – |
| 2019 | | 21,604,912 | | – |
| Capital loss carryforwards not subject to expiration: | | | | |
| Short term | | 23,746,678 | | 3,538,963 |
| Long term | | 15,507,537 | | 3,066,296 |
| Total capital loss carryforwards | $ | 99,408,410 | $ | 7,415,388 |
On May 31, 2016, Franklin California High Yield Municipal Fund had expired capital loss carryforwards of $1,572,273, which were reclassified to paid-in capital.
The tax character of distributions paid during the years ended May 31, 2016 and 2015, was as follows:
| | | | | | | | |
| | | Franklin California | | Franklin Tennessee |
| | | High Yield Municipal Fund | | Municipal Bond Fund |
| | | 2016 | | 2015 | | 2016 | | 2015 |
| Distributions from tax exempt income | $ | 85,496,430 | $ | 81,560,929 | $ | 10,343,510 | $ | 10,170,322 |
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes (continued)
At May 31, 2016, the cost of investments, net unrealized appreciation (depreciation), undistributed tax exempt and ordinary income for income tax purposes were as follows:
| | | | | | |
| | | Franklin | | | Franklin | |
| | | California | | | Tennessee | |
| | | High Yield | | | Municipal | |
| | | Municipal Fund | | | Bond Fund | |
| |
| Cost of investments | $ | 2,101,831,453 | | $ | 287,411,551 | |
| |
| Unrealized appreciation | $ | 292,426,569 | | $ | 22,959,770 | |
| Unrealized depreciation | | (42,575,178 | ) | | (8,991,319 | ) |
| Net unrealized appreciation (depreciation) | $ | 249,851,391 | | $ | 13,968,451 | |
| |
| Undistributed tax exempt income | $ | 2,512,991 | | $ | 343,388 | |
| Undistributed ordinary income | | 117,820 | | | — | |
| Distributable earnings. | $ | 2,630,811 | | $ | 343,388 | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of bond discounts and premiums.
5. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended May 31, 2016, were as follows:
| | | | |
| | | Franklin | | Franklin |
| | | California | | Tennessee |
| | | High Yield | | Municipal |
| | | Municipal Fund | | Bond Fund |
| |
| Purchases | $ | 465,571,985 | $ | 31,078,546 |
| Sales | $ | 247,466,444 | $ | 13,006,938 |
6. Credit Risk
At May 31, 2016, Franklin California High Yield Municipal Fund had 27.55% of its portfolio invested in high yield securities, rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
7. Concentration of Risk
Certain or all Funds invest a large percentage of their total assets in obligations of issuers within their respective state and U.S. territories. Such concentration may subject the Funds to risks associated with industrial or regional matters, and economic, political or legal developments occurring within those states and U.S. territories. Investing in Puerto Rico securities may expose the Funds to heightened risks due to recent adverse economic and market changes, credit downgrades and ongoing restructuring discussions. In addition, investments in these securities are sensitive to interest rate changes and credit risk of the issuer and may subject the Funds to increased market volatility. The market for these investments may be limited, which may make them difficult to buy or sell.
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
8. Credit Facility
Certain or all Funds, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statements of Operations. During the year ended May 31, 2016, the Funds did not use the Global Credit Facility.
9. Fair Value Measurements
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of May 30, 2016, in valuing the Funds’ assets carried at fair value, is as follows:
| | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Franklin California High Yield Municipal Fund | | | | | | | | |
| Assets: | | | | | | | | |
| Investments in Securities: | | | | | | | | |
| Common Stocks and Other Equity Interests | $ | — | $ | — | $ | 611,323 | $ | 611,323 |
| Corporate Bonds | | — | | 3,997,292 | | — | | 3,997,292 |
| Municipal Bonds | | — | | 2,228,102,479 | | 1,093,750 | | 2,229,196,229 |
| Short Term Investments | | — | | 117,878,000 | | — | | 117,878,000 |
| Total Investments in Securities | $ | — | $ | 2,349,977,771 | $ | 1,705,073 | $ | 2,351,682,844 |
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FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
| | | | | | | | |
| 9. Fair Value Measurements (continued) | | | | | | | | |
| |
| |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Franklin Tennessee Municipal Bond Fund | | | | | | | | |
| Assets: | | | | | | | | |
| Investments in Securities: | | | | | | | | |
| Municipal Bonds | $ | — | $ | 301,380,002 | $ | — | $ | 301,380,002 |
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.
10. Subsequent Events
The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
| | | |
| Abbreviations | | |
| |
| Selected Portfolio | | |
| |
| 1915 Act | Improvement Bond Act of 1915 | GNMA | Government National Mortgage Association |
| ABAG | The Association of Bay Area Governments | GO | General Obligation |
| AD | Assessment District | HDA | Housing Development Authority/Agency |
| AGMC | Assured Guaranty Municipal Corp. | IDB | Industrial Development Bond/Board |
| AMBAC | American Municipal Bond Assurance Corp. | MFHR | Multi-Family Housing Revenue |
| BAM | Build America Mutual Assurance Co. | NATL | National Public Financial Guarantee Corp. |
| CDA | Community Development Authority/Agency | PBA | Public Building Authority |
| CFD | Community Facilities District | PFA | Public Financing Authority |
| COP | Certificate of Participation | PFAR | Public Financing Authority Revenue |
| CRDA | Community Redevelopment Authority/Agency | PIK | Payment-In-Kind |
| CSD | Central School District | PUD | Public Utility District |
| ETM | Escrow to Maturity | RDA | Redevelopment Agency/Authority |
| FGIC | Financial Guaranty Insurance Co. | UHSD | Unified/Union High School District |
| FHA | Federal Housing Authority/Agency | USD | Unified/Union School District |
| FICO | Financing Corp. | XLCA | XL Capital Assurance |
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FRANKLIN MUNICIPAL SECURITIES TRUST
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Franklin Municipal Securities Trust
In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin California High Yield Municipal Fund and Franklin Tennessee Municipal Bond (separate portfolios of Franklin Municipal Securities Trust, hereafter referred to as the "Fund") at May 31, 2016, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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. An audit 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 management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at May 31, 2016 by correspondence with the custodian, transfer agent and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
July 15, 2016
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FRANKLIN MUNICIPAL SECURITIES TRUST
Tax Information (unaudited)
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby report 100% of the distributions paid from net investment income as exempt-interest dividends for the fiscal year ended May 31, 2016. A portion of the Fund’s exempt-interest dividends may be subject to the federal alternative minimum tax. By mid-February 2017, shareholders will be notified of amounts for use in preparing their 2016 income tax returns.
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Board Members and Officers
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex, are shown below. Generally, each board member serves until that person’s successor is elected and qualified.
| | | | |
| Independent Board Members | | | |
| |
| | | | Number of Portfolios in | |
| Name, Year of Birth | | Length of | Fund Complex Overseen | Other Directorships Held |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| |
| Harris J. Ashton (1932) | Trustee | Since 1991 | 145 | Bar-S Foods (meat packing company) |
| One Franklin Parkway | | | | (1981-2010). |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive |
| Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). | |
| |
| Mary C. Choksi (1950) | Trustee | Since 2014 | 121 | Avis Budget Group Inc. (car rental) |
| One Franklin Parkway | | | | (2007-present), Omnicom Group Inc. |
| San Mateo, CA 94403-1906 | | | | (advertising and marketing |
| | | | | communications services) |
| | | | | (2011-present) and H.J. Heinz |
| | | | | Company (processed foods and allied |
| | | | | products) (1998-2006) |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Advisor, Strategic Investment Group (investment management group) (2015-present); director of various companies; and formerly, |
| Founding Partner and Senior Managing Director, Strategic Investment Group (1987–2015); Founding Partner and Managing Director, Emerging |
| Markets Management LLC (investment management firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension Investment |
| Officer, World Bank Group (international financial institution) (1977-1987). | |
| |
| Edith E. Holiday (1952) | Trustee | Since 1998 | 145 | Hess Corporation (exploration and |
| One Franklin Parkway | | | | refining of oil and gas) (1993-present), |
| San Mateo, CA 94403-1906 | | | | Canadian National Railway (railroad) |
| | | | | (2001-present), White Mountains |
| | | | | Insurance Group, Ltd. (holding |
| | | | | company) (2004-present), RTI |
| | | | | International Metals, Inc. (manufacture |
| | | | | and distribution of titanium) |
| | | | | (1999-2015) and H.J. Heinz Company |
| | | | | (processed foods and allied products) |
| | | | | (1994-2013). |
| Principal Occupation During at Least the Past 5 Years: | | |
| Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the |
| Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant |
| Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). | |
| |
| J. Michael Luttig (1954) | Trustee | Since 2009 | 145 | Boeing Capital Corporation (aircraft |
| One Franklin Parkway | | | | financing) (2006-2013). |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); |
| and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006). | |
| |
| Frank A. Olson (1932) | Trustee | Since 2005 | 145 | Hess Corporation (exploration and |
| One Franklin Parkway | | | | refining of oil and gas) (1998-2013). |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Director of various companies; and formerly, Chairman of the Board, The Hertz Corporation (car rental) (1980-2000) and Chief Executive |
| Officer (1977-1999); and Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines) (June – December 1987). |
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| | | | |
| Independent Board Members (continued) | | |
| |
| |
| |
| | | | Number of Portfolios in | |
| Name, Year of Birth | | Length of | Fund Complex Overseen | Other Directorships Held |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| |
| Larry D. Thompson (1945) | Trustee | Since 2007 | 145 | The Southern Company (energy |
| One Franklin Parkway | | | | company) (2014-present; previously |
| San Mateo, CA 94403-1906 | | | | 2010-2012), Graham Holdings |
| | | | | Company (education and media |
| | | | | organization) (2011-present) and |
| | | | | Cbeyond, Inc. (business |
| | | | | communications provider) |
| | | | | (2010-2012). |
| Principal Occupation During at Least the Past 5 Years: | | |
| Director of various companies; John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015-present; |
| previously 2011-2012); and formerly, Executive Vice President - Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. |
| (consumer products) (2012-2014); Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); |
| Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney |
| General, U.S. Department of Justice (2001-2003). | | | |
| |
| John B. Wilson (1959) | Lead | Trustee since | 121 | None |
| One Franklin Parkway | Independent | 2006 and Lead | | |
| San Mateo, CA 94403-1906 | Trustee | Independent | | |
| | | Trustee since | | |
| | | 2008 | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| President, Staples Europe (office supplies) (2012-present); President and Founder, Hyannis Port Capital, Inc. (real estate and private equity |
| investing); serves on private and non-profit boards; and formerly, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) |
| (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (1992-1996); Senior Vice President – |
| Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) |
| (1986-1990). | | | | |
| |
| |
| Interested Board Members and Officers | | |
| |
| | | | Number of Portfolios in | |
| Name, Year of Birth | | Length of | Fund Complex Overseen | Other Directorships Held |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| |
| **Gregory E. Johnson (1961) | Trustee | Since 2007 | 160 | None |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Chairman of the Board, Member - Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director |
| or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin |
| Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015). |
| |
| **Rupert H. Johnson, Jr. (1940) | Chairman of | Chairman of the | 145 | None |
| One Franklin Parkway | the Board and | Board and Trustee | | |
| San Mateo, CA 94403-1906 | Trustee | since 2013 | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior Vice |
| President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of |
| Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. | |
| |
| Sheila Amoroso (1959) | Vice President | Since 1999 | Not Applicable | Not Applicable |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Vice President, Franklin Advisers, Inc.; and officer of seven of the investment companies in Franklin Templeton Investments. |
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| | | | |
| Interested Board Members and Officers (continued) | |
| |
| |
| |
| | | | Number of Portfolios in | |
| Name, Year of Birth | | Length of | Fund Complex Overseen | Other Directorships Held |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| |
| Alison E. Baur (1964) | Vice President | Since 2012 | Not Applicable | Not Applicable |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 |
| of the investment companies in Franklin Templeton Investments. | | |
| |
| Rafael R. Costas, Jr. (1965) | Vice President | Since 1999 | Not Applicable | Not Applicable |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Vice President, Franklin Advisers, Inc.; and officer of seven of the investment companies in Franklin Templeton Investments. |
| |
| Laura F. Fergerson (1962) | Chief | Since 2009 | Not Applicable | Not Applicable |
| One Franklin Parkway | Executive | | | |
| San Mateo, CA 94403-1906 | Officer – | | | |
| | Finance and | | | |
| | Administration | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Vice President, Franklin Templeton Services, LLC; Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC; and |
| officer of 45 of the investment companies in Franklin Templeton Investments. | |
| |
| Gaston Gardey (1967) | Treasurer, | Since 2009 | Not Applicable | Not Applicable |
| One Franklin Parkway | Chief Financial | | | |
| San Mateo, CA 94403-1906 | Officer and | | | |
| | Chief | | | |
| | Accounting | | | |
| | Officer | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin |
| Templeton Investments. | | | | |
| |
| Aliya S. Gordon (1973) | Vice President | Since 2009 | Not Applicable | Not Applicable |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton |
| Investments. | | | | |
| |
| Steven J. Gray (1955) | Vice President | Since 2009 | Not Applicable | Not Applicable |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and Franklin |
| Alternative Strategies Advisers, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. |
| |
| Robert Lim (1948) | Vice President | Since May 2016 | Not Applicable | Not Applicable |
| One Franklin Parkway | – AML | | | |
| San Mateo, CA 94403-1906 | Compliance | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton |
| Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. |
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| | | | |
| Interested Board Members and Officers (continued) | |
| |
| |
| |
| | | | Number of Portfolios in | |
| Name, Year of Birth | | Length of | Fund Complex Overseen | Other Directorships Held |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| |
| Christopher J. Molumphy | President and | Since 2010 | Not Applicable | Not Applicable |
| (1962) | Chief | | | |
| One Franklin Parkway | Executive | | | |
| San Mateo, CA 94403-1906 | Officer – | | | |
| | Investment | | | |
| | Management | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer of |
| some of the other subsidiaries of Franklin Resources, Inc. and of 22 of the investment companies in Franklin Templeton Investments. |
| |
| Kimberly H. Novotny (1972) | Vice President | Since 2013 | Not Applicable | Not Applicable |
| 300 S.E. 2nd Street | | | | |
| Fort Lauderdale, FL 33301-1923 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the |
| South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment |
| companies in Franklin Templeton Investments. | | | |
| |
| Robert C. Rosselot (1960) | Chief | Since 2013 | Not Applicable | Not Applicable |
| 300 S.E. 2nd Street | Compliance | | | |
| Fort Lauderdale, FL 33301-1923 | Officer | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the |
| investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments |
| (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013). | |
| |
| Karen L. Skidmore (1952) | Vice President | Since 2006 | Not Applicable | Not Applicable |
| One Franklin Parkway | and Secretary | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton |
| Investments. | | | | |
| |
| Navid Tofigh (1972) | Vice President | Since November | Not Applicable | Not Applicable |
| One Franklin Parkway | | 2015 | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. |
| |
| Craig S. Tyle (1960) | Vice President | Since 2005 | Not Applicable | Not Applicable |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, |
| Inc. and of 45 of the investment companies in Franklin Templeton Investments. | |
| |
| Thomas Walsh (1961) | Vice President | Since 1999 | Not Applicable | Not Applicable |
| One Franklin Parkway | | | | |
| San Mateo, CA 94403-1906 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Vice President, Franklin Advisers, Inc.; and officer of seven of the investment companies in Franklin Templeton Investments. |
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| | | | |
| Interested Board Members and Officers (continued) | |
| |
| |
| |
| | | | Number of Portfolios in | |
| Name, Year of Birth | | Length of | Fund Complex Overseen | Other Directorships Held |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| |
| Lori A. Weber (1964) | Vice President | Since 2011 | Not Applicable | Not Applicable |
| 300 S.E. 2nd Street | | | | |
| Fort Lauderdale,FL 33301-1923 | | | | |
| Principal Occupation During at Least the Past 5 Years: | | |
| Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and |
| Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. |
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These
portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Trust under the federal securities laws due to his position as an officer and director of Franklin
Resources, Inc. (Resources), which is the parent company of the Trust’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person
of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit
Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined
that there is at least one such financial expert on the Audit Committee and has designated John B. Wilson as its audit committee financial expert. The Board
believes that Mr. Wilson qualifies as such an expert in view of his extensive business background and experience, including service as chief financial officer of
Staples, Inc. from 1992 to 1996. Mr. Wilson has been a Member and Chairman of the Fund’s Audit Committee since 2006. As a result of such background and
experience, the Board believes that Mr. Wilson has acquired an understanding of generally accepted accounting principles and financial statements, the general
application of such principles in connection with the accounting estimates, accruals and reserves, and analyzing and evaluating financial statements that
present a breadth and level of complexity of accounting issues generally comparable to those of the Fund, as well as an understanding of internal controls and
procedures for financial reporting and an understanding of audit committee functions. Mr. Wilson is an independent Board member as that term is defined under
the relevant Securities and Exchange Commission Rules and Releases.
The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request.
Shareholders may call (800) DIAL BEN/342-5236 to request the SAI.
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Shareholder Information
Board Review of Investment Management Agreement
At a meeting held February 23, 2016, the Board of Trustees (Board), including a majority of trustees that are not “interested persons” as such term is defined in section 2(a)(19) of the Investment Company Act of 1940 (hereinafter referred to as “non-interested Trustees” or “independent Trustees”), approved renewal of the investment management agreement for each of the two separate tax-exempt funds within the Franklin Municipal Securities Trust (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, along with periodic reports on expenses, shareholder services, legal and compliance matters, risk controls pricing and other services provided by the Investment Manager (Manager) and its affiliates, as well as marketing support payments made to financial intermediaries. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent organization, as well as additional material, including a Fund profitability analysis prepared by management. The Broadridge reports, which utilized data from Lipper, Inc. (Lipper), compared each Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis discussed the profitability to Franklin Templeton Investments (FTI) from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Additional material accompanying such profitability analysis included information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates to U.S. funds and other accounts, including management’s explanation of differences where relevant. Such material also included a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the FTI organization, as well as a memorandum relating to economies of scale and an analysis concerning transfer agent fees charged by an affiliate of the Manager. The Board also received a report on all marketing support payments made by FTI to financial intermediaries during the past year, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the U.S. Securities and Exchange Commission (SEC) relating to mutual fund distribution and sub-accounting fees.
In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for both Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of such Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board’s opinion was based, in part, upon periodic reports furnished to it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided to Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of shares of different funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management’s continual efforts and expenditures in establishing effective business continuity plans and developing strategies to address cybersecurity threats. Additionally, the Board noted the Manager’s continued attention to pricing and valuation issues, particularly with respect to complex securities. Consideration was also given to the experience of each Fund’s portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management’s determination of a portfolio manager’s bonus compensation was the relative investment performance of the funds he or she managed and that a portion
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of such bonus was required to be invested in a predesignated list of funds within such person’s fund management area so as to be aligned with the interests of shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager and steps taken by FTI to enhance analytical support to the investment management groups and provide additional oversight of liquidity risk and complex securities. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Funds and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests, as well as the strong financial position of the Manager’s parent company and its commitment to the mutual fund business as evidenced by its continued introduction of new funds and reassessment of the fund offerings in response to the market environment.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Broadridge reports furnished for the agreement renewals. The Broadridge report prepared for each individual Fund showed its investment performance in comparison with a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended December 31, 2015, and the previous 10 years ended that date. The following summarizes the performance results for each of the Funds.
Franklin California High Yield Municipal Fund - The performance universe for this Fund consisted of the Fund and all retail and institutional California municipal debt funds as selected by Lipper. Such comparison showed the Fund’s income return during 2015, as shown in the Broadridge report, and during the previous three-, five- and 10-year periods on an annualized basis to be in the highest quintile of its performance universe. The Broadridge report showed the Fund’s total return during 2015 to be in the highest performing quintile of its Lipper performance universe and on an annualized basis to also be in the highest performing quintile of such universe for each of the previous three-, five- and 10-year periods. The Board was satisfied with the Fund’s performance as shown in the Broadridge report.
Franklin Tennessee Municipal Bond Fund - The performance universe for this Fund consisted of the Fund and all retail and institutional “other states” municipal debt funds as selected by Lipper. Such comparison showed the Fund’s income return in 2015, as shown in the Broadridge report, to be in the second-highest quintile of its performance universe, and during each of the previous three-, five- and 10-year periods on an annualized basis to also be in the second-highest quintile of such universe. The Broadridge report showed the Fund’s total return during 2015 to be in the lowest performing quintile of its Lipper performance universe, and on an annualized basis to be in the second-lowest performing quintile of its performance universe for the previous three-year period and the middle performing quintile of such universe for the previous five- and 10-year periods. The Board was satisfied with the Fund’s performance as shown in the Broadridge report given its income-oriented investment objective.
COMPARATIVE EXPENSES. Consideration was given to the management fees and total expense ratio of each Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from each fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund’s contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expense ratio of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of a management fee, and total expenses, for comparative consistency, were shown by Lipper for Fund Class A shares for funds with multiple classes of shares. The Broadridge report for Franklin California High Yield Municipal Fund showed its contractual investment management fee rate to be below the median of its Lipper expense group, and its actual total expense ratio to be the second least expensive within such expense group. The Broadridge report for Franklin Tennessee Municipal Bond Fund showed its contractual investment management fee rate to be 2.1 basis points above the median of its Lipper expense group, but its actual total expense ratio to be the least expensive
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within such expense group. The Board was satisfied with the comparative expenses of both Funds.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton’s U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2015, being the most recent fiscal year-end for Franklin Resources, Inc., the Manager’s parent. In reviewing the analysis, the Board recognized that allocation methodologies are inherently subjective and various allocation methodologies may be reasonable while producing different results. In this respect, the Board noted that while management continuously makes refinements to its methodologies in response to organizational and product related changes, the overall approach as defined by the primary drivers and activity measurements has remained consistent with that used in the Funds’ profitability report presentations from prior years. Additionally, the Funds’ independent registered public accounting firm had been engaged by the Manager to periodically review the reasonableness of the allocation methodologies to be used solely by the Funds’ Board in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management’s expenditures in improving shareholder services provided the Funds, as well as the need to implement systems and meet additional regulatory and compliance requirements resulting from statutes such as the Sarbanes-Oxley and Dodd-Frank Acts and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager’s parent on an overall basis to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including revenues generated from transfer agent services, potential benefits resulting from personnel and systems enhancements necessitated by fund growth, as well as increased leverage with the service providers and counterparties. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appeared as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such fund. The Board also noted that any economies of scale are shared with each of these Funds and their shareholders through management fee breakpoints existing in each of the Fund’s investment management agreements so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the management contract for each Fund provides an initial fee of 0.625% on the first $100 million of net assets; 0.50% on the next $150 million of net assets; and 0.45% on the next $7.25 billion of net assets with additional breakpoints continuing thereafter until reaching a final breakpoint of 0.36% for net assets in excess of $20 billion. As of December 31, 2015, the net assets of Franklin California High Yield Municipal Fund had increased to approximately $2.24 billion and those of Franklin Tennessee Municipal Bond Fund had increased to approximately $291 million. The Board believed that to the extent economies of scale may be realized by the Manager and its affiliates, the schedule of fees under the investment management agreement for each Fund provided a sharing of benefits with the Fund and its shareholders as the Fund grows.
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and
62 Annual Report
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FRANKLIN MUNICIPAL SECURITIES TRUST
SHAREHOLDER INFORMATION
Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
Householding of Reports and Prospectuses
You will receive each Fund’s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.
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Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.
Item 3. Audit Committee Financial Expert.
(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.
(2) The audit committee financial expert is John B. Wilson and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $71,257 for the fiscal year ended May 31, 2016 and $70,983 for the fiscal year ended May 31, 2015.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $957 for the fiscal year ended May 31, 2016 and $0 for the fiscal year ended May 31, 2015. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4 were $663,151 for the fiscal year ended May 31, 2016 and $9,000 for the fiscal year ended May 31, 2015. The services for which these fees were paid included preparation and review of materials provided to the fund Board in connection with the investment management contract renewal process and derivatives assessment, and review of system processes related to fixed income securities.
(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $664,108 for the fiscal year ended May 31, 2016 and $9,000 for the fiscal year ended May 31, 2015.
(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
Item 5. Audit Committee of Listed Registrants. N/A
Item 6. Schedule of Investments. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A
Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There have been no changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.
Item 12. Exhibits.
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN MUNICIPAL SECURITIES TRUST
By /s/Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date July 27, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date July 27, 2016
By /s/Gaston Gardey
Gaston Gardey
Chief Financial Officer and Chief Accounting Officer
Date July 27, 2016
