UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06481
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FRANKLIN MUNICIPAL SECURITIES TRUST
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
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Date of fiscal year end: 5/31
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Date of reporting period: 5/31/07
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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MAY 31, 2007
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Franklin California
High Yield Municipal Fund
Franklin Tennessee
Municipal Bond Fund
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ANNUAL REPORT AND SHAREHOLDER LETTER TAX-FREE INCOME
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WANT TO RECEIVE
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FRANKLIN
MUNICIPAL SECURITIES TRUST
Eligible shareholders can
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See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why
our funds can be used to build truly diversified
allocation plans covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SPECIAL FEATURE:
Understanding Interest Rates .............................................. 4
ANNUAL REPORT
Municipal Bond Market Overview ............................................ 7
Franklin California High Yield Municipal Fund ............................. 9
Franklin Tennessee Municipal Bond Fund .................................... 20
Financial Highlights and Statements of Investments ........................ 29
Financial Statements ...................................................... 53
Notes to Financial Statements ............................................. 57
Report of Independent Registered Public Accounting Firm ................... 66
Tax Designation ........................................................... 67
Meeting of Shareholders ................................................... 68
Board Members and Officers ................................................ 74
Shareholder Information ................................................... 79
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Annual Report
Municipal Bond Market Overview
For the 12 months ended May 31, 2007, the municipal bond market continued to
deliver positive performance despite a Federal Reserve Board (Fed) interest rate
hike, inflation concerns, volatile oil prices, mixed market expectations and
uncertainty regarding future economic growth. Intermediate- and longer-term
municipal yields tracked declining Treasury yields over the period. Global
equity market volatility and uncertainty regarding the impact of subprime
mortgage defaults on the housing market, economy, and Fed policy, resulted in a
flight to quality as many investors moved from equities to bonds. Largely as a
result, intermediate- and long-term yields fell. The Lehman Brothers Municipal
Bond Index returned +4.84% for the period, while the Lehman Brothers U.S.
Treasury Index returned +5.86%. 1
During the reporting period, short-term interest rates increased as the Fed
raised the federal funds target rate from 5.00% to 5.25% in June 2006. Since
then, the Fed has maintained the short-term rate at 5.25% with an inflation risk
bias, stating it is more concerned with a potential for increased inflation than
a slowing economy. Many market participants appeared to expect that the Fed was
more likely to lower the federal funds target rate than raise it. This sentiment
was reflected by an inversion of the Treasury yield curve (spread between
short-term and long-term yields) for 3-month to 2-year securities during the
reporting period. On May 31, 2007, the 2-year Treasury yielded 4.92%, the
10-year 4.90% and the 30-year 5.01%. Yields decreased 12, 22 and 20 basis
points, respectively, for the one-year period (100 basis points equal one
percentage point).
During the period, as nominal yields remained low and Treasury yields remained
inverted, credit spreads (the difference in yield between higher-grade and
lower-grade securities) continued to narrow. In this environment, the interest
rate premium decreased for assuming additional risk in the taxable fixed income
market. As a result, non-traditional municipal buyers seemed to focus on the
1. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index
is a market value-weighted index engineered for the long-term tax-exempt bond
market. All bonds included have a minimum credit rating of at least Baa. They
must have an outstanding par value of at least $7 million and be issued as part
of a transaction of at least $75 million. The bonds must be dated after
12/31/90, and must be at least one year from their maturity date. Remarketed
issues, taxable municipal bonds, bonds with floating rates and derivatives are
excluded from the index. The index has four main bond sectors: general
obligation, revenue, insured and prerefunded. The Lehman Brothers U.S. Treasury
Index includes public obligations of the U.S. Treasury with a remaining maturity
of one year or more. All issues must have at least one year to final maturity
regardless of call features, have at least $250 million par amount outstanding
and be rated investment grade (Baa3 or better). They must also be dollar
denominated, nonconvertible and publicly issued.
Annual Report | 7
municipal bond market. Non-traditional or cross-over buyers typically invest in
taxable securities; however, they will enter the municipal bond market when
municipal valuations are attractive. With historically favorable intermediate-
and longer-term municipal yields versus Treasury yields, and a positive sloping
yield curve (though flatter than usual), municipal bonds offered favorable
relative value for traditional and cross-over fixed income investors. As a
result, demand was consistently strong for intermediate- to longer-term
municipal bonds over the period, which drove performance and contributed to
further flattening of the municipal yield curve. According to Municipal Market
Data, the 2-year yield rose 9 basis points, while 10-year and 30-year yields
fell 11 and 28 basis points. 2
Generally low interest rates continued to motivate municipal issuers to access
the debt market to finance their capital needs. In 2006, new issuance was
approximately $388 billion, which was the second-highest volume after the $408
billion issued in 2005. 3 So far in 2007, supply has been unusually large with
new municipal issuance up 39.6%. 3 Refunding deals, in which issuers take
advantage of lower rates to finance higher yielding outstanding debt, were 55.8%
higher than during the first five months of 2006. 3 Strong demand from
traditional buyers such as mutual funds, individuals and insurance companies
combined with large participation of cross-over buyers enabled the municipal
bond market to absorb the comparatively large amount of new issuance throughout
the reporting period.
2. Source: Thomson Financial.
3. Source: THE BOND BUYER.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF MAY 31, 2007,
THE END OF THE REPORTING PERIOD. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, STATE, INDUSTRY, SECURITY OR FUND. STATEMENTS OF
FACT ARE FROM SOURCES CONSIDERED RELIABLE.
8 | Annual Report
Franklin California
High Yield Municipal Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin California High Yield Municipal
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 California
municipal securities including higher-yielding, lower rated securities that pay
interest free from such taxes. 1 Its secondary goal is capital appreciation.
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CREDIT QUALITY BREAKDOWN*
Franklin California High Yield Municipal Fund
Based on Total Long-Term Investments as of 5/31/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA .................................................................... 22.0%
AA ..................................................................... 5.5%
A ...................................................................... 8.3%
BBB .................................................................... 8.5%
Below Investment Grade ................................................. 3.2%
Not Rated by S&P ....................................................... 52.5%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's and
Fitch are the secondary and tertiary rating agencies. Securities not rated by an
independent rating agency are assigned comparable internal ratings. Ratings for
securities not rated by S&P are in the table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S FITCH INTERNAL
AAA or Aaa 1.7% -- 8.0%
A -- 0.3% 3.7%
BBB or Baa 1.2% 0.9% 13.3%
Below Investment Grade -- -- 23.4%
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Total 2.9% 1.2% 48.4%
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We are pleased to bring you Franklin California High Yield Municipal Fund's
annual report for the fiscal year ended May 31, 2007.
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally taxable.
To avoid the 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.
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 33.
Annual Report | 9
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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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, increased from
$10.31 on May 31, 2006, to $10.44 on May 31, 2007. The Fund's Class A shares
paid dividends totaling 48.30 cents per share for the reporting period. 2 The
Performance Summary beginning on page 13 shows that at the end of this reporting
period the Fund's Class A shares' distribution rate was 4.29%, based on an
annualization of the current 3.90 cent per share monthly dividend and the
maximum offering price of $10.90 on May 31, 2007. An investor in the 2007
maximum combined effective federal and California personal income tax bracket of
41.05% would need to earn a distribution rate of 7.28% from a taxable investment
to match the Fund's Class A tax-free distribution rate. For the Fund's Class B,
C and Advisor shares' performance, please see the Performance Summary.
The Fund experienced healthy inflows during the reporting period. Due to the
current, lower interest rate environment, the Fund was forced to invest the new
assets in lower-yielding bonds. This reduced the Fund's income and caused
dividend distributions to decline, as shown in the dividend distributions table.
STATE UPDATE
During the year under review, California's large and diverse economy experienced
strong growth and healthy tax revenue increases. In recent years, the state
performed close to or better than the nation and had a sustained trend of
moderate private sector employment and personal income growth. As of May 2007,
the state's unemployment rate was 5.2%, which was above the 4.5% national
rate. 3
The state has a history of uneven financial operations, with a large operating
deficit projected for fiscal year 2007. Tax revenue for fiscal year 2006 was up
9% over the prior year, while revenue for the first seven months of fiscal year
2007 was 4.5% above last year, which was slightly below forecasts. 4 Overall
tax-supported debt levels rose but were still moderate. Debt per capita has
nearly doubled over the past four years and could rise further if remaining
authorized debt is sold.
2. Assumes shares were purchased and held for the entire accrual period, which
differs from the calendar month. 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.
3. Source: Bureau of Labor Statistics.
4. Source: Moody's Investors Service, "California (State of)," 3/27/07.
10 | Annual Report
DIVIDEND DISTRIBUTIONS 2
Franklin California High Yield Municipal Fund
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DIVIDEND PER SHARE
----------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS*
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June 2006 4.08 cents 3.61 cents 3.61 cents --
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July 2006 4.08 cents 3.61 cents 3.61 cents --
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August 2006 4.08 cents 3.61 cents 3.61 cents --
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September 2006 4.08 cents 3.62 cents 3.61 cents --
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October 2006 4.08 cents 3.62 cents 3.61 cents --
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November 2006 4.08 cents 3.62 cents 3.61 cents 0.78 cents
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December 2006 4.03 cents 3.56 cents 3.54 cents 4.11 cents
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January 2007 4.03 cents 3.56 cents 3.54 cents 4.11 cents
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February 2007 4.03 cents 3.56 cents 3.54 cents 4.11 cents
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March 2007 3.90 cents 3.41 cents 3.41 cents 3.98 cents
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April 2007 3.90 cents 3.41 cents 3.41 cents 3.98 cents
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May 2007 3.90 cents 3.41 cents 3.41 cents 3.98 cents
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* Advisor Class shares were first offered on 11/15/06.
Moody's Investors Service assigned California's general obligation bonds a
rating of A1, reflecting strong economic and tax revenue trends, financial
performance in 2006 that exceeded expectations, and a moderately improved
financial outlook for fiscal year 2007 and beyond. 5 The rating also takes into
account the large, but still manageable, increase in long-term state debt in
recent years. The state's credit outlook is stable, with economic and revenue
trends expected to remain positive. However, California's real estate market has
declined recently, which could affect the state's overall economy.
INVESTMENT STRATEGY
We use a consistent, disciplined strategy to maximize income for our
shareholders by seeking to maintain exposure to higher coupon securities. We
generally employ a buy-and-hold approach and invest in securities that we
believe should provide the most relative value in the market. As we invest
throughout different interest rate environments, our portfolio becomes well
diversified with a broad range of coupons, calls and maturities. This broad
diversification may help mitigate interest rate risk. We generally stay fully
invested to maximize income distribution.
5. This does not indicate Moody's rating of the Fund.
Annual Report | 11
PORTFOLIO BREAKDOWN
Franklin California High Yield Municipal Fund
5/31/07
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% OF TOTAL
LONG-TERM INVESTMENTS*
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Tax-Supported 38.9%
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Prerefunded 14.0%
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Hospital & Health Care 11.6%
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General Obligation 11.0%
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Transportation 7.0%
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Other Revenue 6.0%
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Higher Education 4.9%
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Subject to Government Appropriations 3.7%
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Utilities 2.1%
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Housing 0.8%
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* Does not include short-term investments and other net assets.
MANAGER'S DISCUSSION
Our value-oriented philosophy of investing primarily for income, combined with a
relatively steep municipal yield curve compared to Treasuries, favored
longer-term bonds during the reporting period. Consistent with our strategy, we
sought to remain fully invested in bonds ranging from 15 to 30 years in maturity
with good call features. We intend to maintain our conservative, buy-and-hold
investment strategy, as we attempt to provide shareholders with high, current,
tax-free income.
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, 2007, 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.
12 | Annual Report
Performance Summary as of 5/31/07
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
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 table 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.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A (SYMBOL: FCAMX) CHANGE 5/31/07 5/31/06
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Net Asset Value (NAV) +$0.13 $ 10.44 $ 10.31
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DISTRIBUTIONS (6/1/06-5/31/07)
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Dividend Income $0.4830
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CLASS B (SYMBOL: FBCAX) CHANGE 5/31/07 5/31/06
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Net Asset Value (NAV) +$0.13 $ 10.49 $ 10.36
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DISTRIBUTIONS (6/1/06-5/31/07)
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Dividend Income $0.4262
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CLASS C (SYMBOL: FCAHX) CHANGE 5/31/07 5/31/06
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Net Asset Value (NAV) +$0.13 $ 10.48 $ 10.35
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DISTRIBUTIONS (6/1/06-5/31/07)
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Dividend Income $0.4253
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ADVISOR CLASS (SYMBOL: N/A) CHANGE 5/31/07 11/15/06
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Net Asset Value (NAV) -$0.08 $ 10.45 $ 10.53
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DISTRIBUTIONS (11/15/06-5/31/07)
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Dividend Income $0.2638
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Annual Report | 13
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY;
ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +6.03% +35.36% +77.27%
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Average Annual Total Return 2 +1.50% +5.33% +5.43%
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Avg. Ann. Total Return (6/30/07) 3 +1.06% +4.95% +5.22%
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Distribution Rate 4 4.29%
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Taxable Equivalent Distribution Rate 5 7.28%
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30-Day Standardized Yield 6 3.93%
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Taxable Equivalent Yield 5 6.67%
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Total Annual Operating Expenses 7 0.62%
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CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
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Cumulative Total Return 1 +5.43% +31.55% +58.99%
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Average Annual Total Return 2 +1.43% +5.31% +6.53%
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Avg. Ann. Total Return (6/30/07) 3 +0.80% +4.97% +6.35%
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Distribution Rate 4 3.92%
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Taxable Equivalent Distribution Rate 5 6.65%
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30-Day Standardized Yield 6 3.54%
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Taxable Equivalent Yield 5 6.00%
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Total Annual Operating Expenses 7 1.17%
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CLASS C 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +5.43% +31.56% +67.92%
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Average Annual Total Return 2 +4.43% +5.64% +5.32%
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Avg. Ann. Total Return (6/30/07) 3 +3.79% +5.30% +5.11%
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Distribution Rate 4 3.92%
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Taxable Equivalent Distribution Rate 5 6.65%
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30-Day Standardized Yield 6 3.56%
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Taxable Equivalent Yield 5 6.04%
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Total Annual Operating Expenses 7 1.17%
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ADVISOR CLASS 8 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +6.19% +35.56% +77.53%
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Average Annual Total Return 2 +6.19% +6.27% +5.91%
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Avg. Ann. Total Return (6/30/07) 3 +5.55% +5.89% +5.68%
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Distribution Rate 4 4.57%
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Taxable Equivalent Distribution Rate 5 7.75%
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30-Day Standardized Yield 6 4.23%
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Taxable Equivalent Yield 5 7.17%
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Total Annual Operating Expenses 7 0.52%
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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, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
14 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
CLASS A (6/1/97-5/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin California Lehman Brothers
Date High Yield Municipal Fund Municipal Bond Index 9 CPI 9
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6/1/1997 $ 9,573 $ 10,000 $ 10,000
6/30/1997 $ 9,708 $ 10,107 $ 10,012
7/31/1997 $ 9,977 $ 10,386 $ 10,025
8/31/1997 $ 9,931 $ 10,289 $ 10,044
9/30/1997 $ 10,116 $ 10,411 $ 10,069
10/31/1997 $ 10,195 $ 10,478 $ 10,094
11/30/1997 $ 10,285 $ 10,540 $ 10,087
12/31/1997 $ 10,443 $ 10,694 $ 10,075
1/31/1998 $ 10,534 $ 10,804 $ 10,094
2/28/1998 $ 10,545 $ 10,807 $ 10,112
3/31/1998 $ 10,545 $ 10,817 $ 10,131
4/30/1998 $ 10,535 $ 10,768 $ 10,150
5/31/1998 $ 10,705 $ 10,938 $ 10,169
6/30/1998 $ 10,766 $ 10,981 $ 10,181
7/31/1998 $ 10,806 $ 11,009 $ 10,194
8/31/1998 $ 10,969 $ 11,179 $ 10,206
9/30/1998 $ 11,132 $ 11,318 $ 10,219
10/31/1998 $ 11,122 $ 11,318 $ 10,244
11/30/1998 $ 11,194 $ 11,358 $ 10,244
12/31/1998 $ 11,211 $ 11,386 $ 10,237
1/31/1999 $ 11,312 $ 11,522 $ 10,262
2/28/1999 $ 11,288 $ 11,472 $ 10,275
3/31/1999 $ 11,306 $ 11,487 $ 10,306
4/30/1999 $ 11,324 $ 11,516 $ 10,381
5/31/1999 $ 11,246 $ 11,449 $ 10,381
6/30/1999 $ 11,051 $ 11,285 $ 10,381
7/31/1999 $ 11,069 $ 11,326 $ 10,412
8/31/1999 $ 10,904 $ 11,235 $ 10,437
9/30/1999 $ 10,900 $ 11,240 $ 10,487
10/31/1999 $ 10,637 $ 11,118 $ 10,506
11/30/1999 $ 10,731 $ 11,236 $ 10,512
12/31/1999 $ 10,454 $ 11,152 $ 10,512
1/31/2000 $ 10,285 $ 11,104 $ 10,543
2/29/2000 $ 10,447 $ 11,233 $ 10,606
3/31/2000 $ 10,776 $ 11,478 $ 10,693
4/30/2000 $ 10,739 $ 11,410 $ 10,700
5/31/2000 $ 10,691 $ 11,351 $ 10,712
6/30/2000 $ 10,845 $ 11,652 $ 10,768
7/31/2000 $ 11,034 $ 11,814 $ 10,793
8/31/2000 $ 11,348 $ 11,996 $ 10,793
9/30/2000 $ 11,333 $ 11,934 $ 10,849
10/31/2000 $ 11,433 $ 12,064 $ 10,868
11/30/2000 $ 11,441 $ 12,155 $ 10,874
12/31/2000 $ 11,623 $ 12,455 $ 10,868
1/31/2001 $ 11,725 $ 12,579 $ 10,937
2/28/2001 $ 11,768 $ 12,619 $ 10,981
3/31/2001 $ 11,871 $ 12,732 $ 11,006
4/30/2001 $ 11,691 $ 12,594 $ 11,049
5/31/2001 $ 11,830 $ 12,729 $ 11,099
6/30/2001 $ 11,910 $ 12,815 $ 11,118
7/31/2001 $ 12,087 $ 13,004 $ 11,087
8/31/2001 $ 12,360 $ 13,219 $ 11,087
9/30/2001 $ 12,321 $ 13,174 $ 11,137
10/31/2001 $ 12,463 $ 13,331 $ 11,099
11/30/2001 $ 12,387 $ 13,219 $ 11,081
12/31/2001 $ 12,248 $ 13,094 $ 11,037
1/31/2002 $ 12,441 $ 13,321 $ 11,062
2/28/2002 $ 12,473 $ 13,481 $ 11,106
3/31/2002 $ 12,283 $ 13,217 $ 11,168
4/30/2002 $ 12,441 $ 13,476 $ 11,230
5/31/2002 $ 12,537 $ 13,557 $ 11,230
6/30/2002 $ 12,671 $ 13,701 $ 11,237
7/31/2002 $ 12,755 $ 13,877 $ 11,249
8/31/2002 $ 12,890 $ 14,044 $ 11,287
9/30/2002 $ 13,115 $ 14,351 $ 11,305
10/31/2002 $ 12,893 $ 14,113 $ 11,324
11/30/2002 $ 12,863 $ 14,055 $ 11,324
12/31/2002 $ 13,078 $ 14,351 $ 11,299
1/31/2003 $ 13,059 $ 14,315 $ 11,349
2/28/2003 $ 13,223 $ 14,515 $ 11,437
3/31/2003 $ 13,218 $ 14,524 $ 11,505
4/30/2003 $ 13,304 $ 14,620 $ 11,480
5/31/2003 $ 13,563 $ 14,962 $ 11,462
6/30/2003 $ 13,530 $ 14,899 $ 11,474
7/31/2003 $ 13,163 $ 14,377 $ 11,487
8/31/2003 $ 13,224 $ 14,484 $ 11,530
9/30/2003 $ 13,514 $ 14,910 $ 11,568
10/31/2003 $ 13,509 $ 14,835 $ 11,555
11/30/2003 $ 13,706 $ 14,990 $ 11,524
12/31/2003 $ 13,837 $ 15,114 $ 11,512
1/31/2004 $ 13,955 $ 15,200 $ 11,568
2/29/2004 $ 14,156 $ 15,429 $ 11,630
3/31/2004 $ 14,193 $ 15,376 $ 11,705
4/30/2004 $ 13,993 $ 15,011 $ 11,743
5/31/2004 $ 13,947 $ 14,957 $ 11,811
6/30/2004 $ 14,013 $ 15,011 $ 11,849
7/31/2004 $ 14,191 $ 15,209 $ 11,830
8/31/2004 $ 14,428 $ 15,514 $ 11,836
9/30/2004 $ 14,551 $ 15,596 $ 11,861
10/31/2004 $ 14,675 $ 15,730 $ 11,924
11/30/2004 $ 14,627 $ 15,601 $ 11,930
12/31/2004 $ 14,807 $ 15,791 $ 11,886
1/31/2005 $ 15,017 $ 15,939 $ 11,911
2/28/2005 $ 15,009 $ 15,886 $ 11,980
3/31/2005 $ 14,972 $ 15,785 $ 12,074
4/30/2005 $ 15,242 $ 16,034 $ 12,155
5/31/2005 $ 15,380 $ 16,148 $ 12,142
6/30/2005 $ 15,503 $ 16,248 $ 12,149
7/31/2005 $ 15,492 $ 16,174 $ 12,205
8/31/2005 $ 15,706 $ 16,338 $ 12,267
9/30/2005 $ 15,573 $ 16,228 $ 12,417
10/31/2005 $ 15,500 $ 16,129 $ 12,442
11/30/2005 $ 15,638 $ 16,207 $ 12,342
12/31/2005 $ 15,807 $ 16,346 $ 12,292
1/31/2006 $ 15,824 $ 16,390 $ 12,386
2/28/2006 $ 15,978 $ 16,500 $ 12,411
3/31/2006 $ 15,903 $ 16,386 $ 12,480
4/30/2006 $ 15,936 $ 16,381 $ 12,586
5/31/2006 $ 16,015 $ 16,454 $ 12,648
6/30/2006 $ 15,985 $ 16,392 $ 12,673
7/31/2006 $ 16,189 $ 16,587 $ 12,711
8/31/2006 $ 16,425 $ 16,833 $ 12,736
9/30/2006 $ 16,552 $ 16,950 $ 12,673
10/31/2006 $ 16,680 $ 17,056 $ 12,605
11/30/2006 $ 16,824 $ 17,198 $ 12,586
12/31/2006 $ 16,809 $ 17,138 $ 12,605
1/31/2007 $ 16,793 $ 17,094 $ 12,643
2/28/2007 $ 17,002 $ 17,319 $ 12,711
3/31/2007 $ 16,968 $ 17,276 $ 12,826
4/30/2007 $ 17,031 $ 17,327 $ 12,910
5/31/2007 $ 16,971 $ 17,251 $ 12,989
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------
CLASS A 5/31/07
- ------------------------------
1-Year +1.50%
- ------------------------------
5-Year +5.33%
- ------------------------------
10-Year +5.43%
- ------------------------------
CLASS B (2/1/00-5/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin California Lehman Brothers
Date High Yield Municipal Fund Municipal Bond Index 9 CPI 9
- -----------------------------------------------------------------------------
2/1/2000 $ 10,000 $ 10,000 $ 10,000
2/29/2000 $ 10,148 $ 10,116 $ 10,059
3/31/2000 $ 10,463 $ 10,337 $ 10,142
4/30/2000 $ 10,434 $ 10,276 $ 10,148
5/31/2000 $ 10,393 $ 10,223 $ 10,160
6/30/2000 $ 10,537 $ 10,494 $ 10,213
7/31/2000 $ 10,715 $ 10,640 $ 10,237
8/31/2000 $ 11,026 $ 10,804 $ 10,237
9/30/2000 $ 11,006 $ 10,747 $ 10,290
10/31/2000 $ 11,098 $ 10,865 $ 10,308
11/30/2000 $ 11,100 $ 10,947 $ 10,314
12/31/2000 $ 11,271 $ 11,217 $ 10,308
1/31/2001 $ 11,364 $ 11,328 $ 10,373
2/28/2001 $ 11,412 $ 11,364 $ 10,415
3/31/2001 $ 11,495 $ 11,466 $ 10,438
4/30/2001 $ 11,315 $ 11,342 $ 10,480
5/31/2001 $ 11,444 $ 11,464 $ 10,527
6/30/2001 $ 11,528 $ 11,541 $ 10,545
7/31/2001 $ 11,681 $ 11,712 $ 10,515
8/31/2001 $ 11,951 $ 11,905 $ 10,515
9/30/2001 $ 11,908 $ 11,865 $ 10,563
10/31/2001 $ 12,039 $ 12,006 $ 10,527
11/30/2001 $ 11,961 $ 11,905 $ 10,509
12/31/2001 $ 11,821 $ 11,792 $ 10,468
1/31/2002 $ 12,000 $ 11,997 $ 10,492
2/28/2002 $ 12,026 $ 12,141 $ 10,533
3/31/2002 $ 11,837 $ 11,903 $ 10,592
4/30/2002 $ 11,983 $ 12,136 $ 10,652
5/31/2002 $ 12,081 $ 12,210 $ 10,652
6/30/2002 $ 12,192 $ 12,339 $ 10,658
7/31/2002 $ 12,268 $ 12,498 $ 10,669
8/31/2002 $ 12,392 $ 12,648 $ 10,705
9/30/2002 $ 12,614 $ 12,925 $ 10,723
10/31/2002 $ 12,384 $ 12,711 $ 10,741
11/30/2002 $ 12,361 $ 12,658 $ 10,741
12/31/2002 $ 12,549 $ 12,925 $ 10,717
1/31/2003 $ 12,538 $ 12,892 $ 10,764
2/28/2003 $ 12,676 $ 13,072 $ 10,847
3/31/2003 $ 12,664 $ 13,080 $ 10,912
4/30/2003 $ 12,754 $ 13,167 $ 10,889
5/31/2003 $ 12,994 $ 13,475 $ 10,871
6/30/2003 $ 12,957 $ 13,418 $ 10,883
7/31/2003 $ 12,589 $ 12,948 $ 10,895
8/31/2003 $ 12,654 $ 13,045 $ 10,936
9/30/2003 $ 12,924 $ 13,428 $ 10,972
10/31/2003 $ 12,913 $ 13,361 $ 10,960
11/30/2003 $ 13,095 $ 13,500 $ 10,930
12/31/2003 $ 13,214 $ 13,612 $ 10,918
1/31/2004 $ 13,307 $ 13,690 $ 10,972
2/29/2004 $ 13,506 $ 13,896 $ 11,031
3/31/2004 $ 13,521 $ 13,847 $ 11,102
4/30/2004 $ 13,338 $ 13,519 $ 11,137
5/31/2004 $ 13,288 $ 13,470 $ 11,203
6/30/2004 $ 13,345 $ 13,519 $ 11,238
7/31/2004 $ 13,508 $ 13,697 $ 11,220
8/31/2004 $ 13,725 $ 13,972 $ 11,226
9/30/2004 $ 13,836 $ 14,046 $ 11,250
10/31/2004 $ 13,947 $ 14,167 $ 11,309
11/30/2004 $ 13,895 $ 14,050 $ 11,315
12/31/2004 $ 14,059 $ 14,221 $ 11,274
1/31/2005 $ 14,251 $ 14,354 $ 11,297
2/28/2005 $ 14,237 $ 14,307 $ 11,363
3/31/2005 $ 14,194 $ 14,216 $ 11,451
4/30/2005 $ 14,456 $ 14,441 $ 11,528
5/31/2005 $ 14,564 $ 14,543 $ 11,517
6/30/2005 $ 14,674 $ 14,633 $ 11,523
7/31/2005 $ 14,657 $ 14,567 $ 11,576
8/31/2005 $ 14,851 $ 14,714 $ 11,635
9/30/2005 $ 14,734 $ 14,615 $ 11,777
10/31/2005 $ 14,645 $ 14,526 $ 11,801
11/30/2005 $ 14,767 $ 14,596 $ 11,706
12/31/2005 $ 14,919 $ 14,721 $ 11,659
1/31/2006 $ 14,943 $ 14,761 $ 11,748
2/28/2006 $ 15,067 $ 14,860 $ 11,771
3/31/2006 $ 14,989 $ 14,758 $ 11,836
4/30/2006 $ 15,013 $ 14,752 $ 11,937
5/31/2006 $ 15,080 $ 14,818 $ 11,996
6/30/2006 $ 15,060 $ 14,762 $ 12,020
7/31/2006 $ 15,230 $ 14,938 $ 12,056
8/31/2006 $ 15,444 $ 15,160 $ 12,079
9/30/2006 $ 15,571 $ 15,265 $ 12,020
10/31/2006 $ 15,669 $ 15,361 $ 11,955
11/30/2006 $ 15,797 $ 15,489 $ 11,937
12/31/2006 $ 15,775 $ 15,434 $ 11,955
1/31/2007 $ 15,753 $ 15,395 $ 11,991
2/28/2007 $ 15,957 $ 15,597 $ 12,056
3/31/2007 $ 15,902 $ 15,559 $ 12,165
4/30/2007 $ 15,969 $ 15,605 $ 12,244
5/31/2007 $ 15,899 $ 15,536 $ 12,319
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS B 5/31/07
- -----------------------------------
1-Year +1.43%
- -----------------------------------
5-Year +5.31%
- -----------------------------------
Since Inception (2/1/00) +6.53%
- -----------------------------------
Annual Report | 15
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------
CLASS C 5/31/07
- ------------------------------
1-Year +4.43%
- ------------------------------
5-Year +5.64%
- ------------------------------
10-Year +5.32%
- ------------------------------
CLASS C (6/1/97-5/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin California Lehman Brothers
Date High Yield Municipal Fund Municipal Bond Index 9 CPI 9
- -----------------------------------------------------------------------------
6/1/1997 $ 10,000 $ 10,000 $ 10,000
6/30/1997 $ 10,126 $ 10,107 $ 10,012
7/31/1997 $ 10,411 $ 10,386 $ 10,025
8/31/1997 $ 10,358 $ 10,289 $ 10,044
9/30/1997 $ 10,546 $ 10,411 $ 10,069
10/31/1997 $ 10,624 $ 10,478 $ 10,094
11/30/1997 $ 10,722 $ 10,540 $ 10,087
12/31/1997 $ 10,871 $ 10,694 $ 10,075
1/31/1998 $ 10,973 $ 10,804 $ 10,094
2/28/1998 $ 10,972 $ 10,807 $ 10,112
3/31/1998 $ 10,970 $ 10,817 $ 10,131
4/30/1998 $ 10,954 $ 10,768 $ 10,150
5/31/1998 $ 11,135 $ 10,938 $ 10,169
6/30/1998 $ 11,188 $ 10,981 $ 10,181
7/31/1998 $ 11,224 $ 11,009 $ 10,194
8/31/1998 $ 11,387 $ 11,179 $ 10,206
9/30/1998 $ 11,550 $ 11,318 $ 10,219
10/31/1998 $ 11,536 $ 11,318 $ 10,244
11/30/1998 $ 11,607 $ 11,358 $ 10,244
12/31/1998 $ 11,611 $ 11,386 $ 10,237
1/31/1999 $ 11,722 $ 11,522 $ 10,262
2/28/1999 $ 11,682 $ 11,472 $ 10,275
3/31/1999 $ 11,694 $ 11,487 $ 10,306
4/30/1999 $ 11,717 $ 11,516 $ 10,381
5/31/1999 $ 11,632 $ 11,449 $ 10,381
6/30/1999 $ 11,425 $ 11,285 $ 10,381
7/31/1999 $ 11,437 $ 11,326 $ 10,412
8/31/1999 $ 11,261 $ 11,235 $ 10,437
9/30/1999 $ 11,252 $ 11,240 $ 10,487
10/31/1999 $ 10,966 $ 11,118 $ 10,506
11/30/1999 $ 11,068 $ 11,236 $ 10,512
12/31/1999 $ 10,779 $ 11,152 $ 10,512
1/31/2000 $ 10,601 $ 11,104 $ 10,543
2/29/2000 $ 10,751 $ 11,233 $ 10,606
3/31/2000 $ 11,084 $ 11,478 $ 10,693
4/30/2000 $ 11,041 $ 11,410 $ 10,700
5/31/2000 $ 10,999 $ 11,351 $ 10,712
6/30/2000 $ 11,152 $ 11,652 $ 10,768
7/31/2000 $ 11,340 $ 11,814 $ 10,793
8/31/2000 $ 11,657 $ 11,996 $ 10,793
9/30/2000 $ 11,636 $ 11,934 $ 10,849
10/31/2000 $ 11,721 $ 12,064 $ 10,868
11/30/2000 $ 11,724 $ 12,155 $ 10,874
12/31/2000 $ 11,905 $ 12,455 $ 10,868
1/31/2001 $ 12,015 $ 12,579 $ 10,937
2/28/2001 $ 12,054 $ 12,619 $ 10,981
3/31/2001 $ 12,153 $ 12,732 $ 11,006
4/30/2001 $ 11,964 $ 12,594 $ 11,049
5/31/2001 $ 12,100 $ 12,729 $ 11,099
6/30/2001 $ 12,177 $ 12,815 $ 11,118
7/31/2001 $ 12,351 $ 13,004 $ 11,087
8/31/2001 $ 12,624 $ 13,219 $ 11,087
9/30/2001 $ 12,579 $ 13,174 $ 11,137
10/31/2001 $ 12,718 $ 13,331 $ 11,099
11/30/2001 $ 12,635 $ 13,219 $ 11,081
12/31/2001 $ 12,487 $ 13,094 $ 11,037
1/31/2002 $ 12,677 $ 13,321 $ 11,062
2/28/2002 $ 12,717 $ 13,481 $ 11,106
3/31/2002 $ 12,505 $ 13,217 $ 11,168
4/30/2002 $ 12,659 $ 13,476 $ 11,230
5/31/2002 $ 12,763 $ 13,557 $ 11,230
6/30/2002 $ 12,881 $ 13,701 $ 11,237
7/31/2002 $ 12,961 $ 13,877 $ 11,249
8/31/2002 $ 13,092 $ 14,044 $ 11,287
9/30/2002 $ 13,327 $ 14,351 $ 11,305
10/31/2002 $ 13,084 $ 14,113 $ 11,324
11/30/2002 $ 13,060 $ 14,055 $ 11,324
12/31/2002 $ 13,258 $ 14,351 $ 11,299
1/31/2003 $ 13,246 $ 14,315 $ 11,349
2/28/2003 $ 13,392 $ 14,515 $ 11,437
3/31/2003 $ 13,380 $ 14,524 $ 11,505
4/30/2003 $ 13,475 $ 14,620 $ 11,480
5/31/2003 $ 13,716 $ 14,962 $ 11,462
6/30/2003 $ 13,690 $ 14,899 $ 11,474
7/31/2003 $ 13,300 $ 14,377 $ 11,487
8/31/2003 $ 13,356 $ 14,484 $ 11,530
9/30/2003 $ 13,642 $ 14,910 $ 11,568
10/31/2003 $ 13,643 $ 14,835 $ 11,555
11/30/2003 $ 13,836 $ 14,990 $ 11,524
12/31/2003 $ 13,962 $ 15,114 $ 11,512
1/31/2004 $ 14,060 $ 15,200 $ 11,568
2/29/2004 $ 14,256 $ 15,429 $ 11,630
3/31/2004 $ 14,286 $ 15,376 $ 11,705
4/30/2004 $ 14,093 $ 15,011 $ 11,743
5/31/2004 $ 14,026 $ 14,957 $ 11,811
6/30/2004 $ 14,099 $ 15,011 $ 11,849
7/31/2004 $ 14,257 $ 15,209 $ 11,830
8/31/2004 $ 14,501 $ 15,514 $ 11,836
9/30/2004 $ 14,619 $ 15,596 $ 11,861
10/31/2004 $ 14,736 $ 15,730 $ 11,924
11/30/2004 $ 14,668 $ 15,601 $ 11,930
12/31/2004 $ 14,855 $ 15,791 $ 11,886
1/31/2005 $ 15,058 $ 15,939 $ 11,911
2/28/2005 $ 15,043 $ 15,886 $ 11,980
3/31/2005 $ 14,997 $ 15,785 $ 12,074
4/30/2005 $ 15,259 $ 16,034 $ 12,155
5/31/2005 $ 15,389 $ 16,148 $ 12,142
6/30/2005 $ 15,504 $ 16,248 $ 12,149
7/31/2005 $ 15,486 $ 16,174 $ 12,205
8/31/2005 $ 15,692 $ 16,338 $ 12,267
9/30/2005 $ 15,568 $ 16,228 $ 12,417
10/31/2005 $ 15,473 $ 16,129 $ 12,442
11/30/2005 $ 15,603 $ 16,207 $ 12,342
12/31/2005 $ 15,763 $ 16,346 $ 12,292
1/31/2006 $ 15,788 $ 16,390 $ 12,386
2/28/2006 $ 15,919 $ 16,500 $ 12,411
3/31/2006 $ 15,837 $ 16,386 $ 12,480
4/30/2006 $ 15,862 $ 16,381 $ 12,586
5/31/2006 $ 15,933 $ 16,454 $ 12,648
6/30/2006 $ 15,912 $ 16,392 $ 12,673
7/31/2006 $ 16,091 $ 16,587 $ 12,711
8/31/2006 $ 16,318 $ 16,833 $ 12,736
9/30/2006 $ 16,452 $ 16,950 $ 12,673
10/31/2006 $ 16,555 $ 17,056 $ 12,605
11/30/2006 $ 16,706 $ 17,198 $ 12,586
12/31/2006 $ 16,667 $ 17,138 $ 12,605
1/31/2007 $ 16,644 $ 17,094 $ 12,643
2/28/2007 $ 16,859 $ 17,319 $ 12,711
3/31/2007 $ 16,801 $ 17,276 $ 12,826
4/30/2007 $ 16,872 $ 17,327 $ 12,910
5/31/2007 $ 16,792 $ 17,251 $ 12,989
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------
ADVISOR CLASS 8 5/31/07
- ---------------------------------
1-Year +6.19%
- ---------------------------------
5-Year +6.27%
- ---------------------------------
10-Year +5.91%
- ---------------------------------
ADVISOR CLASS (6/1/97-5/31/07) 8
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin California Lehman Brothers
Date High Yield Municipal Fund Municipal Bond Index 9 CPI 9
- -----------------------------------------------------------------------------
6/1/1997 $ 10,000 $ 10,000 $ 10,000
6/30/1997 $ 10,140 $ 10,107 $ 10,012
7/31/1997 $ 10,421 $ 10,386 $ 10,025
8/31/1997 $ 10,373 $ 10,289 $ 10,044
9/30/1997 $ 10,566 $ 10,411 $ 10,069
10/31/1997 $ 10,650 $ 10,478 $ 10,094
11/30/1997 $ 10,743 $ 10,540 $ 10,087
12/31/1997 $ 10,909 $ 10,694 $ 10,075
1/31/1998 $ 11,003 $ 10,804 $ 10,094
2/28/1998 $ 11,015 $ 10,807 $ 10,112
3/31/1998 $ 11,015 $ 10,817 $ 10,131
4/30/1998 $ 11,004 $ 10,768 $ 10,150
5/31/1998 $ 11,182 $ 10,938 $ 10,169
6/30/1998 $ 11,245 $ 10,981 $ 10,181
7/31/1998 $ 11,287 $ 11,009 $ 10,194
8/31/1998 $ 11,457 $ 11,179 $ 10,206
9/30/1998 $ 11,628 $ 11,318 $ 10,219
10/31/1998 $ 11,617 $ 11,318 $ 10,244
11/30/1998 $ 11,692 $ 11,358 $ 10,244
12/31/1998 $ 11,711 $ 11,386 $ 10,237
1/31/1999 $ 11,816 $ 11,522 $ 10,262
2/28/1999 $ 11,791 $ 11,472 $ 10,275
3/31/1999 $ 11,810 $ 11,487 $ 10,306
4/30/1999 $ 11,828 $ 11,516 $ 10,381
5/31/1999 $ 11,747 $ 11,449 $ 10,381
6/30/1999 $ 11,544 $ 11,285 $ 10,381
7/31/1999 $ 11,562 $ 11,326 $ 10,412
8/31/1999 $ 11,390 $ 11,235 $ 10,437
9/30/1999 $ 11,386 $ 11,240 $ 10,487
10/31/1999 $ 11,111 $ 11,118 $ 10,506
11/30/1999 $ 11,209 $ 11,236 $ 10,512
12/31/1999 $ 10,919 $ 11,152 $ 10,512
1/31/2000 $ 10,744 $ 11,104 $ 10,543
2/29/2000 $ 10,912 $ 11,233 $ 10,606
3/31/2000 $ 11,256 $ 11,478 $ 10,693
4/30/2000 $ 11,217 $ 11,410 $ 10,700
5/31/2000 $ 11,168 $ 11,351 $ 10,712
6/30/2000 $ 11,328 $ 11,652 $ 10,768
7/31/2000 $ 11,525 $ 11,814 $ 10,793
8/31/2000 $ 11,854 $ 11,996 $ 10,793
9/30/2000 $ 11,838 $ 11,934 $ 10,849
10/31/2000 $ 11,942 $ 12,064 $ 10,868
11/30/2000 $ 11,951 $ 12,155 $ 10,874
12/31/2000 $ 12,141 $ 12,455 $ 10,868
1/31/2001 $ 12,247 $ 12,579 $ 10,937
2/28/2001 $ 12,293 $ 12,619 $ 10,981
3/31/2001 $ 12,400 $ 12,732 $ 11,006
4/30/2001 $ 12,212 $ 12,594 $ 11,049
5/31/2001 $ 12,357 $ 12,729 $ 11,099
6/30/2001 $ 12,441 $ 12,815 $ 11,118
7/31/2001 $ 12,625 $ 13,004 $ 11,087
8/31/2001 $ 12,911 $ 13,219 $ 11,087
9/30/2001 $ 12,870 $ 13,174 $ 11,137
10/31/2001 $ 13,019 $ 13,331 $ 11,099
11/30/2001 $ 12,939 $ 13,219 $ 11,081
12/31/2001 $ 12,794 $ 13,094 $ 11,037
1/31/2002 $ 12,995 $ 13,321 $ 11,062
2/28/2002 $ 13,029 $ 13,481 $ 11,106
3/31/2002 $ 12,830 $ 13,217 $ 11,168
4/30/2002 $ 12,995 $ 13,476 $ 11,230
5/31/2002 $ 13,095 $ 13,557 $ 11,230
6/30/2002 $ 13,235 $ 13,701 $ 11,237
7/31/2002 $ 13,323 $ 13,877 $ 11,249
8/31/2002 $ 13,464 $ 14,044 $ 11,287
9/30/2002 $ 13,700 $ 14,351 $ 11,305
10/31/2002 $ 13,468 $ 14,113 $ 11,324
11/30/2002 $ 13,436 $ 14,055 $ 11,324
12/31/2002 $ 13,661 $ 14,351 $ 11,299
1/31/2003 $ 13,641 $ 14,315 $ 11,349
2/28/2003 $ 13,813 $ 14,515 $ 11,437
3/31/2003 $ 13,807 $ 14,524 $ 11,505
4/30/2003 $ 13,897 $ 14,620 $ 11,480
5/31/2003 $ 14,167 $ 14,962 $ 11,462
6/30/2003 $ 14,133 $ 14,899 $ 11,474
7/31/2003 $ 13,749 $ 14,377 $ 11,487
8/31/2003 $ 13,813 $ 14,484 $ 11,530
9/30/2003 $ 14,117 $ 14,910 $ 11,568
10/31/2003 $ 14,110 $ 14,835 $ 11,555
11/30/2003 $ 14,317 $ 14,990 $ 11,524
12/31/2003 $ 14,454 $ 15,114 $ 11,512
1/31/2004 $ 14,577 $ 15,200 $ 11,568
2/29/2004 $ 14,787 $ 15,429 $ 11,630
3/31/2004 $ 14,825 $ 15,376 $ 11,705
4/30/2004 $ 14,617 $ 15,011 $ 11,743
5/31/2004 $ 14,569 $ 14,957 $ 11,811
6/30/2004 $ 14,637 $ 15,011 $ 11,849
7/31/2004 $ 14,824 $ 15,209 $ 11,830
8/31/2004 $ 15,070 $ 15,514 $ 11,836
9/30/2004 $ 15,199 $ 15,596 $ 11,861
10/31/2004 $ 15,329 $ 15,730 $ 11,924
11/30/2004 $ 15,278 $ 15,601 $ 11,930
12/31/2004 $ 15,466 $ 15,791 $ 11,886
1/31/2005 $ 15,686 $ 15,939 $ 11,911
2/28/2005 $ 15,677 $ 15,886 $ 11,980
3/31/2005 $ 15,639 $ 15,785 $ 12,074
4/30/2005 $ 15,921 $ 16,034 $ 12,155
5/31/2005 $ 16,066 $ 16,148 $ 12,142
6/30/2005 $ 16,194 $ 16,248 $ 12,149
7/31/2005 $ 16,183 $ 16,174 $ 12,205
8/31/2005 $ 16,406 $ 16,338 $ 12,267
9/30/2005 $ 16,267 $ 16,228 $ 12,417
10/31/2005 $ 16,191 $ 16,129 $ 12,442
11/30/2005 $ 16,335 $ 16,207 $ 12,342
12/31/2005 $ 16,511 $ 16,346 $ 12,292
1/31/2006 $ 16,529 $ 16,390 $ 12,386
2/28/2006 $ 16,690 $ 16,500 $ 12,411
3/31/2006 $ 16,612 $ 16,386 $ 12,480
4/30/2006 $ 16,646 $ 16,381 $ 12,586
5/31/2006 $ 16,728 $ 16,454 $ 12,648
6/30/2006 $ 16,697 $ 16,392 $ 12,673
7/31/2006 $ 16,910 $ 16,587 $ 12,711
8/31/2006 $ 17,157 $ 16,833 $ 12,736
9/30/2006 $ 17,290 $ 16,950 $ 12,673
10/31/2006 $ 17,424 $ 17,056 $ 12,605
11/30/2006 $ 17,519 $ 17,198 $ 12,586
12/31/2006 $ 17,488 $ 17,138 $ 12,605
1/31/2007 $ 17,473 $ 17,094 $ 12,643
2/28/2007 $ 17,709 $ 17,319 $ 12,711
3/31/2007 $ 17,674 $ 17,276 $ 12,826
4/30/2007 $ 17,758 $ 17,327 $ 12,910
5/31/2007 $ 17,753 $ 17,251 $ 12,989
16 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY 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. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT
MAY INVEST A GREATER PORTION OF ITS ASSETS IN ONE ISSUER THAN A DIVERSIFIED
FUND. SINCE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE STATE, IT IS
SUBJECT TO GREATER RISK OF ADVERSE ECONOMIC AND REGULATORY CHANGES IN THAT STATE
THAN A GEOGRAPHICALLY DIVERSIFIED FUND. IN GENERAL, AN INVESTOR IS PAID A HIGHER
YIELD TO ASSUME A GREATER DEGREE OF CREDIT RISK. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
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. Cumulative total return represents the change in value of an investment over
the periods indicated.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated.
3. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
4. Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (NAV for Classes B, C
and Advisor) per share on 5/31/07.
5. Taxable equivalent distribution rate and yield assume the published rates as
of 12/28/06 for the maximum combined effective federal and California state
personal income tax bracket of 41.05%, based on the federal income tax rate of
35.00%.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 5/31/07.
7. Figures are as stated in the Fund's prospectus current as of the date of this
report.
8. 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 11/14/06,
actual Advisor class performance is used reflecting all charges and fees
applicable to that class. Since 11/15/06 (commencement of sales), the aggregate
total return of Advisor class shares was +1.76%.
9. Source: Lehman Brothers Inc.; Standard & Poor's Micropal. The Lehman Brothers
Municipal Bond Index is a market value-weighted index engineered for the
long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least $7
million and be issued as part of a transaction of at least $75 million. The
bonds must be dated after 12/31/90, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating
rates and derivatives are excluded from the index. The index has four main bond
sectors: general obligation, revenue, insured and prerefunded. The Consumer
Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a
commonly used measure of the inflation rate.
Annual Report | 17
Your Fund's Expenses
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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.
18 | Annual Report
Your Fund's Expenses (CONTINUED)
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 OR
REDEMPTION FEES. 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
CLASS A VALUE 12/1/06 VALUE 5/31/07 PERIOD* 12/1/06-5/31/07
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,009.40 $3.16
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.79 $3.18
- -----------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,006.60 $5.90
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.05 $5.94
- -----------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,005.60 $5.90
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.05 $5.94
- -----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,010.90 $2.66
- -----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.29 $2.67
- -----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.63%;
B: 1.18%; C: 1.18%; and Advisor: 0.53%), multiplied by the average account value
over the period, multiplied by 182/365 to reflect the one-half year period.
Annual Report | 19
Franklin Tennessee Municipal Bond Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Tennessee Municipal Bond Fund
seeks to maximize income exempt from federal and Tennessee personal income
taxes, consistent with prudent investment management and the preservation of
capital, by investing at least 80% of its total assets in securities that pay
interest free from such taxes. 1
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY BREAKDOWN*
Franklin Tennessee Municipal Bond Fund
Based on Total Long-Term Investments as of 5/31/07**
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA ................................................................... 43.3%
AA .................................................................... 15.0%
A ..................................................................... 2.3%
BBB ................................................................... 6.7%
Not Rated by S&P ...................................................... 32.7%
* Standard & Poor's (S&P) is the primary independent rating agency; Moody's is
the secondary rating agency. Ratings for securities not rated by S&P are in the
table below.
** Does not include short-term investments and other net assets.
RATINGS MOODY'S
Aaa 26.6%
Aa 5.8%
A 0.3%
- -------------------------------------
Total 32.7%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Tennessee Municipal Bond Fund's annual AAA
report for the period ended May 31, 2007.
PERFORMANCE OVERVIEW
The Fund's Class A share price, as measured by net asset value, began and ended
the reporting period at $11.18. The Fund's Class A shares paid dividends
totaling
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally taxable.
To avoid the 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.
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 48.
20 | Annual Report
45.91 cents per share for the reporting period. 2 The Performance Summary
beginning on page 24 shows that at the end of this reporting period the Fund's
Class A shares' distribution rate was 3.80%. An investor in the 2007 maximum
combined effective federal and Tennessee personal income tax bracket of 38.90%
would need to earn a distribution rate of 6.22% from a taxable investment to
match the Fund's Class A tax-free distribution rate.
The Fund was subject to bond calls during the year under review as many
municipal bond issuers sought to take advantage of lower interest rates and
exercised call options on their outstanding higher coupon bonds issued several
years ago. In general, we were limited to reinvesting the proceeds from these
bond calls as well as from cash inflows at current, lower interest rates, which
tended to reduce the Fund's income and cause dividend distributions to decline
slightly, as shown in the dividend distributions table.
STATE UPDATE
Tennessee's economy continued to advance at a solid pace, bolstered by a strong
labor market, a diversified economic base and higher personal incomes. In April,
the state's unemployment rate fell below the national average with much of the
job growth occurring in the retail, health care and services sectors. However,
by May, Tennessee's unemployment rate grew to 4.7%, which was higher than the
4.5% national rate. 3 The manufacturing sector remained weak and continued to
shed jobs despite some stabilization. Corporate relocations to the state kept
office and industrial occupancy rates high and while home sales were generally
lower, the declines in the Nashville and Knoxville metropolitan areas were
milder than those nationally, which helped construction.
The state's financial profile was boosted by its recent history of structurally
balanced budgets; conservative revenue growth estimates; cost containment
reforms to the state's Medicaid program, TennCare; and improved general fund
revenue performance. Sales tax collections, which represent a significant
portion of state tax revenues, broadly exceeded estimates and unprecedented
revenue growth from corporate income and property taxes was expected to generate
a windfall for the state. Tennessee's TennCare health care reforms, the
centerpiece of the state's financial recovery, curbed expenditures to within 26%
of total state tax revenues. 4 Despite the recent enrollment reductions and
benefit
DIVIDEND DISTRIBUTIONS 2
Franklin Tennessee Municipal Bond Fund Class A
- --------------------------------------------------------------------------------
MONTH DIVIDEND PER SHARE
- --------------------------------------------------------------------------------
June 2006 3.85 cents
- --------------------------------------------------------------------------------
July 2006 3.85 cents
- --------------------------------------------------------------------------------
August 2006 3.85 cents
- --------------------------------------------------------------------------------
September 2006 3.85 cents
- --------------------------------------------------------------------------------
October 2006 3.85 cents
- --------------------------------------------------------------------------------
November 2006 3.85 cents
- --------------------------------------------------------------------------------
December 2006 3.80 cents
- --------------------------------------------------------------------------------
January 2007 3.80 cents
- --------------------------------------------------------------------------------
February 2007 3.80 cents
- --------------------------------------------------------------------------------
March 2007 3.80 cents
- --------------------------------------------------------------------------------
April 2007 3.80 cents
- --------------------------------------------------------------------------------
May 2007 3.80 cents
- --------------------------------------------------------------------------------
2. Assumes shares were purchased and held for the entire accrual period, which
differs from the calendar month. 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.
3. Source: Bureau of Labor Statistics.
4. Source: Standard & Poor's, "Summary: Tennessee; General Obligation,"
RATINGSDIRECT, 11/9/06.
Annual Report | 21
PORTFOLIO BREAKDOWN
Franklin Tennessee Municipal Bond Fund 5/31/07
- --------------------------------------------------------------------------------
% OF TOTAL
LONG-TERM INVESTMENTS*
- --------------------------------------------------------------------------------
Prerefunded 32.8%
- --------------------------------------------------------------------------------
Utilities 31.6%**
- --------------------------------------------------------------------------------
General Obligation 14.8%
- --------------------------------------------------------------------------------
Hospital & Health Care 7.4%
- --------------------------------------------------------------------------------
Higher Education 4.0%
- --------------------------------------------------------------------------------
Housing 3.9%
- --------------------------------------------------------------------------------
Transportation 3.1%
- --------------------------------------------------------------------------------
Subject to Government Appropriations 1.8%
- --------------------------------------------------------------------------------
Tax-Supported 0.6%
- --------------------------------------------------------------------------------
* Does not include short-term investments and other net assets.
** The Fund may invest more than 25% in municipal securities that finance
similar types of projects such as utilities. A change that affects one project
may affect all similar projects, thereby increasing market risk.
limitations, TennCare remains one of the nation's most generous Medicaid
programs. Partially as a result of the cost savings, the general fund reserve
balance, which has steadily grown over the past several years, had a record $497
million allotted for fiscal year 2007. 4 In light of the current surpluses,
Governor Phil Bredesen has proposed an overhaul of the state's education plan
known as the Basic Education Plan. The Governor's proposal, dubbed BEP 2.0,
would significantly increase funding for K-12 public education.
Independent credit rating agency Standard & Poor's assigned Tennessee's general
obligation bonds a rating of AA+ with a stable outlook, while Moody's Investors
Service's rating for the state was Aa2 with a positive outlook. 5 The ratings
and outlooks reflected the state's ongoing economic improvement, low debt burden
coupled with moderate future debt issuance, and recent strides made toward
long-term fiscal stability.
INVESTMENT STRATEGY
We use a consistent, disciplined strategy to maximize income for our
shareholders by seeking to maintain our exposure to higher coupon securities. We
generally employ a buy-and-hold approach and invest in securities that we
believe should provide the most relative value in the market. As we invest
throughout different interest rate environments, the Fund's portfolio becomes
well diversified with a broad range of coupons, calls and maturities. This broad
diversification may help mitigate interest rate risk. We generally stay fully
invested to maximize income distribution.
MANAGER'S DISCUSSION
Our value-oriented philosophy of investing primarily for income, combined with a
relatively steep municipal yield curve compared to Treasuries, favored
longer-term bonds during the reporting period. Consistent with our strategy, we
sought to remain fully invested in bonds ranging from 15 to 30 years in maturity
with good call features. Given the tight credit spreads during the period, we
primarily found value in insured, AAA-rated, water and sewer revenue bonds and
city general obligation bonds. We intend to maintain our conservative,
buy-and-hold investment strategy as we attempt to provide shareholders with
high, current, tax-free income.
5. These do not indicate ratings of the Fund.
22 | Annual Report
Thank you for your continued participation in Franklin Tennessee Municipal Bond
Fund. We look forward to serving your future investment needs.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MAY 31, 2007, 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.
Annual Report | 23
Performance Summary as of 5/31/07
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
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 table 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.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRTIX) CHANGE 5/31/07 5/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) $0.00 $11.18 $11.18
- --------------------------------------------------------------------------------
DISTRIBUTIONS (6/1/06-5/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.4591
- --------------------------------------------------------------------------------
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE.
THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------
Cumulative Total Return 2 +4.15% +26.24% +66.89%
- -------------------------------------------------------------------------------
Average Annual Total Return 3 -0.30% +3.86% +4.79%
- -------------------------------------------------------------------------------
Avg. Ann. Total Return (6/30/07) 4 -0.36% +3.57% +4.63%
- -------------------------------------------------------------------------------
Distribution Rate 5 3.80%
- -------------------------------------------------------------------------------
Taxable Equivalent Distribution Rate 6 6.22%
- -------------------------------------------------------------------------------
30-Day Standardized Yield 7 3.29%
- -------------------------------------------------------------------------------
Taxable Equivalent Yield 6 5.38%
- -------------------------------------------------------------------------------
Total Annual Operating Expense 8
- -------------------------------------------------------------------------------
Without Waiver 0.77%
- -------------------------------------------------------------------------------
With Waiver 0.70%
- -------------------------------------------------------------------------------
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, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
THE FUND'S MANAGER HAS CONTRACTUALLY AGREED IN ADVANCE TO WAIVE OR LIMIT ITS
FEES AND, IF NEEDED, TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE
PAYABLE BY THE FUND UNTIL 9/30/08. AFTER THIS DATE, THE MANAGER MAY END THIS
ARRANGEMENT AT ANY TIME UPON NOTICE TO THE BOARD.
24 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1
Total return represents the change in value of an investment over the periods
shown. It includes the maximum sales charge, Fund expenses, account fees and
reinvested distributions. The unmanaged index includes reinvestment of any
income or distributions. It differs from the Fund in composition and does not
pay management fees or expenses. One cannot invest directly in an index.
CLASS A (6/1/97-5/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Tennessee Municipal Lehman Brothers
Date Bond Fund Municipal Bond Index 9 CPI 9
- -------------------------------------------------------------------------------
6/1/1997 $ 9,571 $10,000 $10,000
6/30/1997 $ 9,678 $10,107 $10,012
7/31/1997 $ 9,983 $10,386 $10,025
8/31/1997 $ 9,866 $10,289 $10,044
9/30/1997 $10,008 $10,411 $10,069
10/31/1997 $10,070 $10,478 $10,094
11/30/1997 $10,177 $10,540 $10,087
12/31/1997 $10,357 $10,694 $10,075
1/31/1998 $10,465 $10,804 $10,094
2/28/1998 $10,462 $10,807 $10,112
3/31/1998 $10,469 $10,817 $10,131
4/30/1998 $10,419 $10,768 $10,150
5/31/1998 $10,604 $10,938 $10,169
6/30/1998 $10,667 $10,981 $10,181
7/31/1998 $10,692 $11,009 $10,194
8/31/1998 $10,861 $11,179 $10,206
9/30/1998 $11,000 $11,318 $10,219
10/31/1998 $10,958 $11,318 $10,244
11/30/1998 $11,012 $11,358 $10,244
12/31/1998 $11,043 $11,386 $10,237
1/31/1999 $11,156 $11,522 $10,262
2/28/1999 $11,093 $11,472 $10,275
3/31/1999 $11,137 $11,487 $10,306
4/30/1999 $11,141 $11,516 $10,381
5/31/1999 $11,047 $11,449 $10,381
6/30/1999 $10,823 $11,285 $10,381
7/31/1999 $10,826 $11,326 $10,412
8/31/1999 $10,631 $11,235 $10,437
9/30/1999 $10,586 $11,240 $10,487
10/31/1999 $10,349 $11,118 $10,506
11/30/1999 $10,475 $11,236 $10,512
12/31/1999 $10,329 $11,152 $10,512
1/31/2000 $10,233 $11,104 $10,543
2/29/2000 $10,372 $11,233 $10,606
3/31/2000 $10,678 $11,478 $10,693
4/30/2000 $10,581 $11,410 $10,700
5/31/2000 $10,453 $11,351 $10,712
6/30/2000 $10,773 $11,652 $10,768
7/31/2000 $10,969 $11,814 $10,793
8/31/2000 $11,176 $11,996 $10,793
9/30/2000 $11,077 $11,934 $10,849
10/31/2000 $11,211 $12,064 $10,868
11/30/2000 $11,325 $12,155 $10,874
12/31/2000 $11,696 $12,455 $10,868
1/31/2001 $11,768 $12,579 $10,937
2/28/2001 $11,829 $12,619 $10,981
3/31/2001 $11,922 $12,732 $11,006
4/30/2001 $11,766 $12,594 $11,049
5/31/2001 $11,893 $12,729 $11,099
6/30/2001 $12,009 $12,815 $11,118
7/31/2001 $12,225 $13,004 $11,087
8/31/2001 $12,420 $13,219 $11,087
9/30/2001 $12,303 $13,174 $11,137
10/31/2001 $12,477 $13,331 $11,099
11/30/2001 $12,394 $13,219 $11,081
12/31/2001 $12,207 $13,094 $11,037
1/31/2002 $12,426 $13,321 $11,062
2/28/2002 $12,590 $13,481 $11,106
3/31/2002 $12,332 $13,217 $11,168
4/30/2002 $12,566 $13,476 $11,230
5/31/2002 $12,651 $13,557 $11,230
6/30/2002 $12,771 $13,701 $11,237
7/31/2002 $12,926 $13,877 $11,249
8/31/2002 $13,071 $14,044 $11,287
9/30/2002 $13,402 $14,351 $11,305
10/31/2002 $13,089 $14,113 $11,324
11/30/2002 $13,045 $14,055 $11,324
12/31/2002 $13,332 $14,351 $11,299
1/31/2003 $13,287 $14,315 $11,349
2/28/2003 $13,480 $14,515 $11,437
3/31/2003 $13,543 $14,524 $11,505
4/30/2003 $13,665 $14,620 $11,480
5/31/2003 $14,005 $14,962 $11,462
6/30/2003 $13,934 $14,899 $11,474
7/31/2003 $13,376 $14,377 $11,487
8/31/2003 $13,486 $14,484 $11,530
9/30/2003 $13,866 $14,910 $11,568
10/31/2003 $13,806 $14,835 $11,555
11/30/2003 $13,967 $14,990 $11,524
12/31/2003 $14,066 $15,114 $11,512
1/31/2004 $14,153 $15,200 $11,568
2/29/2004 $14,365 $15,429 $11,630
3/31/2004 $14,303 $15,376 $11,705
4/30/2004 $13,940 $15,011 $11,743
5/31/2004 $13,928 $14,957 $11,811
6/30/2004 $13,979 $15,011 $11,849
7/31/2004 $14,194 $15,209 $11,830
8/31/2004 $14,448 $15,514 $11,836
9/30/2004 $14,538 $15,596 $11,861
10/31/2004 $14,691 $15,730 $11,924
11/30/2004 $14,563 $15,601 $11,930
12/31/2004 $14,756 $15,791 $11,886
1/31/2005 $14,937 $15,939 $11,911
2/28/2005 $14,898 $15,886 $11,980
3/31/2005 $14,807 $15,785 $12,074
4/30/2005 $15,016 $16,034 $12,155
5/31/2005 $15,108 $16,148 $12,142
6/30/2005 $15,174 $16,248 $12,149
7/31/2005 $15,121 $16,174 $12,205
8/31/2005 $15,240 $16,338 $12,267
9/30/2005 $15,146 $16,228 $12,417
10/31/2005 $15,065 $16,129 $12,442
11/30/2005 $15,132 $16,207 $12,342
12/31/2005 $15,239 $16,346 $12,292
1/31/2006 $15,278 $16,390 $12,386
2/28/2006 $15,399 $16,500 $12,411
3/31/2006 $15,303 $16,386 $12,480
4/30/2006 $15,315 $16,381 $12,586
5/31/2006 $15,341 $16,454 $12,648
6/30/2006 $15,284 $16,392 $12,673
7/31/2006 $15,433 $16,587 $12,711
8/31/2006 $15,639 $16,833 $12,736
9/30/2006 $15,734 $16,950 $12,673
10/31/2006 $15,815 $17,056 $12,605
11/30/2006 $15,953 $17,198 $12,586
12/31/2006 $15,894 $17,138 $12,605
1/31/2007 $15,849 $17,094 $12,643
2/28/2007 $16,058 $17,319 $12,711
3/31/2007 $15,984 $17,276 $12,826
4/30/2007 $16,038 $17,327 $12,910
5/31/2007 $15,973 $17,251 $12,989
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------
CLASS A 5/31/07
- ----------------------------------------
1-Year -0.30%
- ----------------------------------------
5-Year +3.86%
- ----------------------------------------
10-Year +4.79%
- ----------------------------------------
Annual Report | 25
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE MUNICIPAL BONDS ARE PARTICULARLY 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. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT
MAY INVEST A GREATER PORTION OF ITS ASSETS IN ONE ISSUER THAN A DIVERSIFIED
FUND. SINCE THE FUND CONCENTRATES ITS INVESTMENTS 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'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
1. The Fund's manager has contractually agreed in advance to waive or limit its
fees and, if needed, to assume as its own expense certain expenses otherwise
payable by the Fund until 9/30/08. After this date, the manager may end this
arrangement at any time upon notice to the board. If the manager had not taken
this action, the Fund's distribution rate and total return would have been
lower, and yield for the period would have been 3.22%.
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.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on an annualization of the current 3.70 cent per
share monthly dividend and the maximum offering price of $11.68 per share on
5/31/07.
6. Taxable equivalent distribution rate and yield assume the published rates as
of 12/28/06 for the maximum combined effective federal and Tennessee state
personal income tax rate of 38.90%, based on the federal income tax rate of
35.00%.
7. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 5/31/07.
8. Figures are as stated in the Fund's prospectus current as of the date of this
report.
9. Source: Standard & Poor's Micropal. The Lehman Brothers Municipal Bond Index
is a market value-weighted index engineered for the long-term tax-exempt bond
market. All bonds included have a minimum credit rating of at least Baa. They
must have an outstanding par value of at least $7 million and be issued as part
of a transaction of at least $75 million. The bonds must be dated after
12/31/90, and must be at least one year from their maturity date. Remarketed
issues, taxable municipal bonds, bonds with floating rates and derivatives are
excluded from the index. The index has four main bond sectors: general
obligation, revenue, insured and prerefunded. The Consumer Price Index (CPI),
calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of
the inflation rate.
26 | Annual Report
Your Fund's Expenses
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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.
Annual Report | 27
Your Fund's Expenses (CONTINUED)
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 OR
REDEMPTION FEES. 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
CLASS A VALUE 12/1/06 VALUE 5/31/07 PERIOD* 12/1/06-5/31/07
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,001.80 $3.49
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.44 $3.53
- -------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, of
0.70%, multiplied by the average account value over the period, multiplied by
182/365 to reflect the one-half year period.
28 | Annual Report
Franklin Municipal Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
----------------------------------------------------------------------
YEAR ENDED MAY 31,
CLASS A 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 10.31 $ 10.39 $ 9.94 $ 10.21 $ 9.97
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.48 0.50 0.53 0.56 0.54
Net realized and unrealized gains (losses) ... 0.13 (0.08) 0.47 (0.28) 0.25
----------------------------------------------------------------------
Total from investment operations ................ 0.61 0.42 1.00 0.28 0.79
----------------------------------------------------------------------
Less distributions from net investment income ... (0.48) (0.50) (0.55) (0.55) (0.55)
----------------------------------------------------------------------
Redemption fees ................................. -- -- d -- d -- --
----------------------------------------------------------------------
Net asset value, end of year .................... $ 10.44 $ 10.31 $ 10.39 $ 9.94 $ 10.21
======================================================================
Total return c .................................. 6.03% 4.13% 10.26% 2.81% 8.15%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 0.62% 0.62% 0.64% 0.65% 0.65%
Net investment income ........................... 4.58% 4.80% 5.22% 5.61% 5.36%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $1,329,255 $1,067,011 $ 777,960 $ 548,292 $ 537,770
Portfolio turnover rate ......................... 3.34% 11.18% 5.43% 8.79% 10.13%
a The 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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable.
d Amount rounds to less than $0.01 per share.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 29
Franklin Municipal Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
----------------------------------------------------------------------
YEAR ENDED MAY 31,
CLASS B 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 10.36 $ 10.44 $ 9.99 $ 10.25 $ 10.02
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.42 0.44 0.48 0.51 0.49
Net realized and unrealized gains (losses) ... 0.14 (0.08) 0.46 (0.28) 0.24
----------------------------------------------------------------------
Total from investment operations ................ 0.56 0.36 0.94 0.23 0.73
----------------------------------------------------------------------
Less distributions from net investment income ... (0.43) (0.44) (0.49) (0.49) (0.50)
----------------------------------------------------------------------
Redemption fees ................................. -- -- d -- d -- --
----------------------------------------------------------------------
Net asset value, end of year .................... $ 10.49 $ 10.36 $ 10.44 $ 9.99 $ 10.25
======================================================================
Total return c .................................. 5.43% 3.54% 9.61% 2.24% 7.52%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 1.17% 1.17% 1.19% 1.20% 1.20%
Net investment income ........................... 4.03% 4.25% 4.67% 5.06% 4.81%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 27,246 $ 29,980 $ 31,588 $ 28,197 $ 29,268
Portfolio turnover rate ......................... 3.34% 11.18% 5.43% 8.79% 10.13%
a The 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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable.
d Amount rounds to less than $0.01 per share.
30 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Municipal Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
----------------------------------------------------------------------
YEAR ENDED MAY 31,
CLASS C 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 10.35 $ 10.43 $ 9.97 $ 10.24 $ 10.01
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.42 0.44 0.48 0.51 0.48
Net realized and unrealized gains (losses) ... 0.14 (0.08) 0.47 (0.29) 0.25
----------------------------------------------------------------------
Total from investment operations ................ 0.56 0.36 0.95 0.22 0.73
----------------------------------------------------------------------
Less distributions from net investment income ... (0.43) (0.44) (0.49) (0.49) (0.50)
----------------------------------------------------------------------
Redemption fees ................................. -- -- d -- -- --
----------------------------------------------------------------------
Net asset value, end of year .................... $ 10.48 $ 10.35 $ 10.43 $ 9.97 $ 10.24
======================================================================
Total return c .................................. 5.43% 3.54% 9.72% 2.24% 7.43%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 1.17% 1.17% 1.19% 1.20% 1.20%
Net investment income ........................... 4.03% 4.25% 4.67% 5.06% 4.81%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 285,410 $ 190,670 $ 120,521 $ 79,294 $ 77,748
Portfolio turnover rate ......................... 3.34% 11.18% 5.43% 8.79% 10.13%
a The 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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable.
d Amount rounds to less than $0.01 per share.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 31
Franklin Municipal Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
--------------
PERIOD ENDED
ADVISOR CLASS MAY 31, 2007 d
--------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................................................ $ 10.53
--------------
Income from investment operations a:
Net investment income b ...................................................................... 0.26
Net realized and unrealized gains (losses) ................................................... (0.08)
--------------
Total from investment operations ................................................................ 0.18
--------------
Less distributions from net investment income ................................................... (0.26)
--------------
Redemption fees ................................................................................. --
--------------
Net asset value, end of period .................................................................. $ 10.45
==============
Total return c .................................................................................. 1.76%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................................................................ 0.52% e
Net investment income ........................................................................... 4.68% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................................................... $ 18,156
Portfolio turnover rate ......................................................................... 3.34%
a The 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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d For period November 15, 2006 (effective date) to May 31, 2007.
e Annualized.
32 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 95.6%
MUNICIPAL BONDS 95.6%
CALIFORNIA 92.2%
ABAG 1915 Act Special Assessment, Windemere Ranch AD,
1999-1, 6.20%, 9/02/20 .................................................................... $ 1,950,000 $ 2,068,346
1999-1, 6.30%, 9/02/25 .................................................................... 2,935,000 3,121,901
Series 1, 7.30%, 9/02/17 .................................................................. 9,865,000 10,307,149
Series 1, 7.35%, 9/02/20 .................................................................. 7,820,000 8,168,381
Series 1, 7.45%, 9/02/30 .................................................................. 4,815,000 5,036,394
ABAG Finance Authority for Nonprofit Corps. COP, California Mortgage Insured, 6.15%,
1/01/22 ..................................................................................... 1,175,000 1,200,474
ABAG Finance Authority for Nonprofit Corps. Revenue, Elder Care Alliance,
California Mortgage Insured, 5.60%, 8/15/34 ................................................. 4,260,000 4,518,113
Adelanto Water Authority Revenue,
Parity, Water System Acquisition Project, Series A, Pre-Refunded, 7.50%, 9/01/28 .......... 3,095,000 3,275,779
Subordinated, Water System Acquisition Project, Series A, Pre-Refunded, 7.50%,
9/01/28 ................................................................................. 2,000,000 2,129,760
Alameda CFD No. 2 Special Tax, Refunding, 6.125%, 9/01/16 ..................................... 1,240,000 1,253,764
Alameda PFA Local Agency Revenue, Special Tax, CFD 1, Series A,
6.70%, 8/01/12 ............................................................................ 3,400,000 3,445,594
7.00%, 8/01/19 ............................................................................ 4,015,000 4,066,352
American Canyon Financing Authority Infrastructure Revenue Special Assessment,
American Canyon Road East,
5.00%, 9/02/25 ............................................................................ 1,305,000 1,311,616
5.00%, 9/02/30 ............................................................................ 2,020,000 2,014,344
5.10%, 9/02/35 ............................................................................ 1,695,000 1,701,068
Arcadia USD, GO, Capital Appreciation, Election of 2006, Series A, FSA Insured, zero cpn.,
8/01/42 ................................................................................... 12,735,000 2,228,498
8/01/44 ................................................................................... 25,080,000 3,960,132
Avenal PFAR,
Pre-Refunded, 7.00%, 9/02/10 .............................................................. 695,000 711,242
Pre-Refunded, 7.25%, 9/02/27 .............................................................. 3,665,000 3,769,233
Refunding, 5.00%, 9/01/30 ................................................................. 1,325,000 1,340,065
Refunding, 5.00%, 9/01/36 ................................................................. 710,000 714,232
Azusa Special Tax,
CFD 05-1, Improvement, Area 1, 5.00%, 9/01/27 ............................................. 2,640,000 2,648,184
Escrow, CFD 05-1, Area 1, 5.00%, 9/01/27 .................................................. 1,115,000 1,118,457
Escrow, CFD 05-1, Area 1, 5.00%, 9/01/37 .................................................. 2,845,000 2,844,772
Escrow, CFD 05-1, Improvement, Area 1, 5.00%, 9/01/37 ..................................... 10,250,000 10,249,180
Beaumont Financing Authority Local Agency Revenue,
Series B, 5.35%, 9/01/28 .................................................................. 1,000,000 1,020,460
Series B, 5.40%, 9/01/35 .................................................................. 1,490,000 1,519,234
Series C, 5.45%, 9/01/27 .................................................................. 6,435,000 6,569,363
Series C, 5.50%, 9/01/29 .................................................................. 855,000 880,513
Series C, 5.50%, 9/01/35 .................................................................. 1,035,000 1,060,740
Series C, 5.50%, 9/01/35 .................................................................. 4,000,000 4,076,120
Bell GO, Election of 2003, MBIA Insured, 5.00%, 8/01/34 ....................................... 5,195,000 5,416,671
Beverly Hills USD, GO, Election of 2002, Series B, 5.00%, 8/01/27 ............................. 3,940,000 4,141,649
Annual Report | 33
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Brentwood Infrastructure Financing Authority Infrastructure Revenue, CIFP, Series 1,
5.00%, 9/02/25 ............................................................................ $ 3,195,000 $ 3,208,611
5.125%, 9/02/30 ........................................................................... 4,400,000 4,436,740
5.15%, 9/02/35 ............................................................................ 3,450,000 3,477,496
Burbank Wastewater Treatment Revenue, Refunding, Series A, AMBAC Insured, 5.00%,
6/01/34 ..................................................................................... 1,430,000 1,489,874
Cabrillo Community College District GO, Capital Appreciation, Election of 2004, Series B,
MBIA Insured, zero cpn.,
8/01/31 ................................................................................... 8,870,000 2,722,469
8/01/33 ................................................................................... 9,475,000 2,630,450
8/01/37 ................................................................................... 11,850,000 2,680,589
Calexico Community RDA Water System Lease Revenue, Water Lease Revenue,
MBIA Insured, 5.00%, 11/01/26 ............................................................... 2,785,000 2,901,914
California City RDA Tax Allocation Revenue, Refunding, Series A-1, 7.75%, 9/01/34 ............. 9,575,000 10,377,864
California County Tobacco Securitization Agency Tobacco Settlement Revenue,
Asset-Backed, Los Angeles County Security, zero cpn. to 12/01/10, 5.70% thereafter,
6/01/46 ................................................................................. 5,000,000 4,375,100
Refunding, 5.25%, 6/01/46 ................................................................. 5,000,000 5,019,550
California Educational Facilities Authority Revenue,
California College of the Arts, Refunding, 5.00%, 6/01/30 ................................. 1,800,000 1,838,016
California College of the Arts, Refunding, 5.00%, 6/01/35 ................................. 4,405,000 4,492,131
College and University Financing Program, 5.00%, 2/01/30 .................................. 5,425,000 5,541,366
College and University Financing Program, 5.00%, 2/01/37 .................................. 1,150,000 1,170,206
Keck Graduate Institute, Pre-Refunded, 6.75%, 6/01/30 ..................................... 2,500,000 2,731,075
Occidental College, Refunding, Series A, MBIA Insured, 5.00%, 10/01/30 .................... 2,000,000 2,092,680
Occidental College, Refunding, Series A, MBIA Insured, 5.00%, 10/01/33 .................... 7,345,000 7,680,152
Pooled College and University, Series B, 6.625%, 6/01/20 .................................. 1,000,000 1,082,460
California Health Facilities Financing Authority Revenue,
California-Nevada Methodist, 5.00%, 7/01/26 ............................................... 1,750,000 1,815,853
California-Nevada Methodist, 5.00%, 7/01/36 ............................................... 2,075,000 2,142,147
Kaiser Permanente, Series A, 5.00%, 4/01/37 ............................................... 18,460,000 18,761,636
Kaiser Permanente, Series A, ETM, 5.40%, 5/01/28 .......................................... 2,500,000 2,540,775
Kaiser Permanente, Series B, ETM, 5.25%, 10/01/16 ......................................... 3,250,000 3,341,812
Sutter Health, Series A, 5.00%, 11/15/42 .................................................. 23,000,000 23,485,530
Sutter Health, Series A, 5.25%, 11/15/46 .................................................. 25,000,000 26,115,750
Thessalonika Family, Series A, California Mortgage Insured, 6.20%, 12/01/15 ............... 585,000 591,997
Verdugo Mental Health, Series A, California Mortgage Insured, 5.00%, 4/01/28 .............. 1,895,000 1,960,302
Verdugo Mental Health, Series A, California Mortgage Insured, 5.00%, 4/01/37 .............. 2,515,000 2,591,607
California HFAR, Home Mortgage, Series K, 4.80%, 8/01/41 ...................................... 10,000,000 9,883,400
California Infrastructure and Economic Development Bank Revenue, Performing Arts Center,
5.00%, 12/01/42 ............................................................................. 4,390,000 4,516,388
California Municipal Finance Authority COP, Community Hospitals of Central California,
5.25%, 2/01/27 .............................................................................. 15,655,000 16,095,688
California Municipal Finance Authority Revenue, University Students Cooperative Associates,
5.00%, 4/01/37 .............................................................................. 2,000,000 2,029,340
34 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
California State GO,
FGIC Insured, 6.00%, 8/01/19 .............................................................. $ 30,000 $ 30,108
Pre-Refunded, 5.00%, 2/01/33 .............................................................. 15,600,000 16,653,156
Refunding, AMBAC Insured, 5.00%, 3/01/34 .................................................. 10,000,000 10,399,300
Various Purpose, MBIA Insured, 5.00%, 3/01/33 ............................................. 2,025,000 2,111,933
California State Public Works Board Lease Revenue,
Department of Mental Health, Coalinga, Series A, 5.125%, 6/01/29 .......................... 5,000,000 5,188,650
University of California, Institute Project, Series C, AMBAC Insured, 5.00%, 4/01/30 ...... 5,000,000 5,220,000
California State University of Fresno Assn. Inc. Revenue, Senior Auxiliary Organization Event
Center, Pre-Refunded, 6.00%, 7/01/22 ........................................................ 3,500,000 3,877,580
California Statewide CDA, COP,
Catholic Healthcare West, 6.50%, 7/01/20 .................................................. 3,365,000 3,659,841
Catholic Healthcare West, Pre-Refunded, 6.50%, 7/01/20 .................................... 8,695,000 9,441,553
International School of the Peninsula Project, Pre-Refunded, 7.50%, 11/01/29 .............. 10,255,000 11,084,629
Windward School, 6.90%, 9/01/23 ........................................................... 990,000 1,003,533
California Statewide CDA Assisted Living Facilities Revenue, Hollenbeck Palms/Magnolia,
Series A, Radian Insured, 4.50%, 2/01/27 .................................................... 2,200,000 2,132,834
a California Statewide CDA Lease Revenue, Special Facilities, United Airlines, Series A,
5.70%, 10/01/33 ............................................................................. 3,320,000 1,160,606
California Statewide CDA Revenue,
Bentley School, Refunding, 6.75%, 7/01/32 ................................................. 8,250,000 8,883,682
California Mortgage Insured, 5.00%, 5/01/37 ............................................... 3,980,000 4,079,858
Elder Care Alliance, Series A, Pre-Refunded, 8.00%, 11/15/22 .............................. 3,000,000 3,639,840
Elder Care Alliance, Series A, Pre-Refunded, 8.25%, 11/15/32 .............................. 4,000,000 4,917,480
Eskaton Village Grass Valley, Pre-Refunded, 8.25%, 11/15/31 ............................... 9,865,000 11,252,611
John F. Kennedy University, 6.75%, 10/01/33 ............................................... 5,000,000 5,437,800
Kaiser Permanente, Series A, 5.00%, 4/01/31 ............................................... 10,000,000 10,185,900
Kaiser Permanente, Series B, 5.00%, 3/01/41 ............................................... 25,000,000 25,280,500
Monterey Institute International, 5.50%, 7/01/31 .......................................... 8,285,000 8,429,905
Presidio Hill School, 6.875%, 8/01/32 ..................................................... 6,195,000 6,565,027
Prospect Sierra School, Pre-Refunded, 6.75%, 9/01/32 ...................................... 5,000,000 5,516,550
Seven Hills School, 6.50%, 8/01/31 ........................................................ 5,510,000 5,728,361
Sonoma County Day School, 6.75%, 1/01/32 .................................................. 5,910,000 6,123,351
Sutter Health, Refunding, Series A, 5.00%, 11/15/43 ....................................... 21,500,000 21,959,670
Thomas Jefferson School of Law Project, Pre-Refunded, 7.75%, 10/01/31 ..................... 4,925,000 5,652,422
Turning Point, 6.50%, 11/01/31 ............................................................ 6,130,000 6,471,380
Valleycare Health System, Series A, 5.00%, 7/15/22 ........................................ 1,000,000 1,001,680
Valleycare Health System, Series A, 5.125%, 7/15/31 ....................................... 3,000,000 3,005,220
Camarillo PFA Wastewater Revenue, AMBAC Insured, 5.00%, 6/01/36 ............................... 2,960,000 3,088,434
Campbell RDA Tax Allocation, Central Campbell Redevelopment Project, Series A,
Pre-Refunded, 6.55%, 10/01/32 ............................................................... 5,300,000 5,737,621
Capistrano USD, CFD Special Tax, No. 05-1, Rancho Madrina, 5.25%, 9/01/34 ..................... 1,120,000 1,133,350
Castro Valley USD, GO, Election of 2005, FGIC Insured, 5.00%, 8/01/34 ......................... 5,310,000 5,536,578
Cathedral City 1915 Act Special Assessment, Limited Obligation, Cove ID 04-02,
5.00%, 9/02/30 ............................................................................ 1,200,000 1,200,672
5.05%, 9/02/35 ............................................................................ 1,335,000 1,337,443
Annual Report | 35
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Chabot-Las Positas Community College District GO, Capital Appreciation Bonds, Series C,
AMBAC Insured, zero cpn.,
8/01/44 ................................................................................... $ 32,750,000 $ 5,118,497
8/01/46 ................................................................................... 35,370,000 5,002,733
Chino CFD Special Tax,
No. 03-1, 5.875%, 9/01/33 ................................................................. 1,250,000 1,308,575
No. 03-3, Improvement Area 1, 5.70%, 9/01/29 .............................................. 1,215,000 1,261,607
No. 03-3, Improvement Area 1, 5.75%, 9/01/34 .............................................. 1,420,000 1,474,287
Chula Vista CFD Special Tax,
No. 01-1, Improvement Area, San Miguel, Series B, 5.45%, 9/01/36 .......................... 2,175,000 2,220,414
No. 12-I, Mcmillin Otay Ranch, 5.25%, 9/01/30 ............................................. 2,135,000 2,159,168
No. 12-I, Mcmillin Otay Ranch, 5.25%, 9/01/36 ............................................. 3,705,000 3,733,528
Chula Vista Special Tax, CFD No. 2000-1, Pre-Refunded, 6.60%, 9/01/30 ......................... 1,500,000 1,582,080
Clovis USD, GO, Capital Appreciation, Election of 2004, Series A, FGIC Insured, zero cpn.,
8/01/27 ................................................................................... 7,500,000 2,993,025
8/01/28 ................................................................................... 5,000,000 1,902,500
Corona CFD No. 2003-2 Special Tax, Highlands Collection, 5.20%, 9/01/34 ....................... 1,000,000 1,010,870
Corona CFD Special Tax,
No. 01-02, Improvement Nos. 1 and 2, 6.25%, 9/01/32 ....................................... 1,890,000 1,954,487
No. 03-2, Highlands, 5.15%, 9/01/34 ....................................................... 2,810,000 2,815,367
Corona-Norco USD, PFA Special Tax Revenue, Series B, 5.00%,
9/01/26 ................................................................................... 1,760,000 1,751,253
9/01/36 ................................................................................... 2,000,000 1,972,620
Corona-Norco USD Special Tax,
CFD No. 04-1, 5.00%, 9/01/24 .............................................................. 1,540,000 1,553,490
CFD No. 04-1, 5.20%, 9/01/36 .............................................................. 2,000,000 2,032,100
CFD No. 99-1, Pre-Refunded, 7.00%, 9/01/29 ................................................ 2,120,000 2,288,837
Series A, 5.35%, 9/01/26 .................................................................. 1,005,000 1,028,527
Series A, 5.40%, 9/01/36 .................................................................. 2,530,000 2,587,203
Cotati South Sonoma Business Park AD Special Assessment, Improvement, 6.50%,
9/02/33 ..................................................................................... 5,655,000 5,773,472
Del Mar Race Track Authority Revenue, 5.00%, 8/15/25 .......................................... 3,665,000 3,791,736
Duarte RDA Tax Allocation,
Capital Appreciation, Merged Redevelopment Project, zero cpn., 12/01/28 ................... 30,795,000 10,037,322
Davis Addition Project Area, Refunding, 6.70%, 9/01/14 .................................... 2,215,000 2,272,656
Davis Addition Project Area, Refunding, 6.90%, 9/01/18 .................................... 4,120,000 4,226,626
Rancho Duarte Phase I Project Area, Pre-Refunded, 6.80%, 9/01/16 .......................... 560,000 575,277
El Dorado County Special Tax,
CFD No. 1992-1, 6.125%, 9/01/16 ........................................................... 4,740,000 4,883,480
CFD No. 2001-1, 5.35%, 9/01/35 ............................................................ 1,900,000 1,925,099
CFD No. 2005-1, 5.00%, 9/01/21 ............................................................ 1,000,000 1,002,120
CFD No. 2005-1, 5.15%, 9/01/25 ............................................................ 2,075,000 2,093,053
CFD No. 2005-1, 5.25%, 9/01/35 ............................................................ 4,180,000 4,232,459
El Monte Water Authority Revenue, Refunding, AMBAC Insured, 5.00%,
9/01/31 ................................................................................... 4,300,000 4,517,193
9/01/36 ................................................................................... 3,855,000 4,040,734
36 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
El Rancho USD, GO, Capital Appreciation, Election of 2003, FGIC Insured, zero cpn.,
8/01/29 ..................................................................................... $ 2,400,000 $ 889,608
Elk Grove Special Tax, East Franklin Community No. 1-A, Pre-Refunded, 6.00%, 8/01/33 .......... 1,750,000 1,825,933
Elsinore Valley Municipal Water District Special Tax, CFD No. 99-1, 7.00%, 9/01/29 ............ 3,500,000 3,665,375
Escondido Revenue COP, Refunding, Series A, FGIC Insured, 6.00%, 9/01/31 ...................... 1,735,000 1,862,783
Escondido Special Tax, CFD No. 01, Eureka,
5.10%, 9/01/26 ............................................................................ 700,000 700,455
5.15%, 9/01/36 ............................................................................ 1,400,000 1,400,910
Fontana Special Tax,
CFD No. 12, Pre-Refunded, 6.60%, 9/01/19 .................................................. 3,295,000 3,529,340
CFD No. 12, Pre-Refunded, 6.625%, 9/01/30 ................................................. 7,675,000 8,224,990
CFD No. 37, 5.00%, 9/01/30 ................................................................ 1,000,000 998,560
Foothill/Eastern Corridor Agency Toll Road Revenue, Capital Appreciation, Refunding,
zero cpn.,
1/15/26 ................................................................................... 38,720,000 13,083,101
1/15/30 ................................................................................... 4,000,000 1,075,880
1/15/31 ................................................................................... 85,780,000 21,687,757
Fremont USD Alameda County GO, Election of 2002, Series B, FSA Insured, 5.00%,
8/01/27 ..................................................................................... 5,665,000 5,954,935
Fullerton Joint UHSD, COP, MBIA Insured, 5.00%, 9/01/36 ....................................... 5,975,000 6,262,517
Fullerton Water Revenue COP, AMBAC Insured, 5.00%,
9/01/28 ................................................................................... 2,650,000 2,762,492
9/01/34 ................................................................................... 2,795,000 2,906,604
Garden Grove Housing Authority MFHR, Set-Aside Tax Increment, Series C, 6.70%,
7/01/24 ..................................................................................... 6,375,000 6,447,547
Glendora USD, GO, Election of 2005, Series A, MBIA Insured,
5.00%, 8/01/27 ............................................................................ 1,350,000 1,426,059
5.25%, 8/01/30 ............................................................................ 2,725,000 2,934,035
Golden State Tobacco Securitization Corp. Tobacco Settlement Revenue,
Asset-Backed, Series A-2, Pre-Refunded, 7.90%, 6/01/42 .................................... 750,000 908,850
Asset-Backed, Series A-3, Pre-Refunded, 7.875%, 6/01/42 ................................... 6,400,000 7,747,072
Capital Appreciation, Asset-Backed, 2nd Sub-Series C, zero cpn., 6/01/47 .................. 50,000,000 4,808,000
Enhanced, Asset-Backed, Series B, Pre-Refunded, 5.625%, 6/01/38 ........................... 14,000,000 15,278,760
Golden Valley USD, GO, Election of 1999, Series C, FSA Insured, 5.00%,
8/01/36 ................................................................................... 745,000 780,626
8/01/45 ................................................................................... 1,660,000 1,731,098
Half Moon Bay COP, Sea Crest School, 6.75%, 7/01/30 ........................................... 3,645,000 3,774,142
Hercules RDA Tax Allocation, Hercules Merged Project, Pre-Refunded, 6.40%, 9/01/21 ............ 5,000,000 5,380,400
Huntington Beach CFD Special Tax Revenue, Grand Coast Resort, 6.45%, 9/01/31 .................. 5,000,000 5,346,150
b Imperial County Special Tax, CFD No. 98-1,
6.45%, 9/01/17 ............................................................................ 1,970,000 1,990,567
6.50%, 9/01/31 ............................................................................ 5,705,000 5,764,503
Indio 1915 Act GO,
AD No. 99-1, 7.125%, 9/02/20 .............................................................. 2,075,000 2,216,681
AD No. 2001-1, 6.50%, 9/02/26 ............................................................. 4,405,000 4,684,101
Annual Report | 37
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Indio CFD Special Tax,
5.00%, 9/01/25 ............................................................................ $ 4,000,000 $ 4,038,040
5.10%, 9/01/30 ............................................................................ 1,275,000 1,289,306
5.15%, 9/01/35 ............................................................................ 1,275,000 1,292,021
5.15%, 9/01/35 ............................................................................ 725,000 734,737
Irvine 1915 Act Special Assessment,
AD No. 00-18, Group Five, 5.00%, 9/02/26 .................................................. 1,295,000 1,303,599
AD No. 03-19, Group Three, 5.00%, 9/02/29 ................................................. 1,120,000 1,122,162
Limited Obligation Assessment 03-19, Group Four, 5.00%, 9/02/29 ........................... 1,500,000 1,504,290
Irvine Special Tax, CFD No. 2005-2, 5.25%, 9/01/36 ............................................ 2,000,000 2,040,920
Jurupa Community Services District Special Tax,
CFD No. 7, Series A, 5.10%, 9/01/28 ....................................................... 2,695,000 2,727,340
CFD No. 7, Series A, 5.15%, 9/01/35 ....................................................... 3,690,000 3,706,900
CFD No. 11, Series A, 5.00%, 9/01/25 ...................................................... 1,930,000 1,931,139
CFD No. 11, Series A, 5.05%, 9/01/30 ...................................................... 2,495,000 2,488,039
CFD No. 11, Series A, 5.10%, 9/01/35 ...................................................... 2,065,000 2,043,483
CFD No. 12, Series A, 5.10%, 9/01/29 ...................................................... 2,000,000 2,010,540
CFD No. 12, Series A, 5.15%, 9/01/35 ...................................................... 3,000,000 3,015,750
CFD No. 17, Series A, 5.125%, 9/01/25 ..................................................... 1,350,000 1,359,275
CFD No. 17, Series A, 5.20%, 9/01/36 ...................................................... 3,325,000 3,363,636
CFD No. 18, Eastvale, Series A, 5.00%, 9/01/26 ............................................ 1,295,000 1,294,896
CFD No. 18, Eastvale, Series A, 5.00%, 9/01/36 ............................................ 2,400,000 2,374,344
CFD No. 19, Eastvale, 5.00%, 9/01/27 ...................................................... 1,500,000 1,496,295
CFD No. 19, Eastvale, 5.00%, 9/01/36 ...................................................... 1,500,000 1,490,760
Kings Canyon Joint USD, GO, Series A, MBIA Insured, 5.00%, 8/01/26 ............................ 2,490,000 2,634,171
Lafayette RDA Tax Allocation, 5.75%, 8/01/32 .................................................. 1,000,000 1,068,480
Lake Elsinore 1915 Act Special Assessment, AD No. 93-1, Limited Obligation, Refunding,
7.00%, 9/02/30 .............................................................................. 8,445,000 9,074,575
Lake Elsinore CFD No. 2006-2 Special Tax, Viscaya, Series A, 5.40%, 9/01/36 ................... 2,020,000 2,057,471
Lake Elsinore Special Tax,
CFD No. 2, Area A, Series A, 5.45%, 9/01/36 ............................................... 5,695,000 5,782,931
CFD No. 3, Improvement Area 1, 5.10%, 9/01/22 ............................................. 750,000 767,370
CFD No. 3, Improvement Area 1, 5.15%, 9/01/25 ............................................. 635,000 651,212
CFD No. 3, Improvement Area 1, 5.25%, 9/01/30 ............................................. 1,195,000 1,225,365
CFD No. 3, Improvement Area 1, 5.25%, 9/01/35 ............................................. 1,225,000 1,251,668
CFD No. 2004-3, Series A, 5.20%, 9/01/26 .................................................. 915,000 918,212
CFD No. 2004-3, Series A, 5.25%, 9/01/37 .................................................. 2,800,000 2,813,832
Improvements, CFD No. 2-A, 5.85%, 9/01/24 ................................................. 1,035,000 1,088,727
Improvements, CFD No. 2-A, 5.95%, 9/01/34 ................................................. 2,200,000 2,313,740
Lake Elsinore USD, CFD Special Tax, No. 2001-1, Pre-Refunded, 6.30%, 9/01/33 .................. 4,470,000 4,981,457
Lancaster Financing Authority Tax Allocation Revenue,
Lancaster Residential Project 5 and 6, AMBAC Insured, 5.00%, 2/01/36 ...................... 4,180,000 4,371,987
Redevelopment Project Nos. 5 and 6, Refunding, 5.40%, 2/01/29 ............................. 500,000 519,195
Redevelopment Project Nos. 5 and 6, Refunding, 5.60%, 2/01/34 ............................. 1,250,000 1,313,575
38 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Lee Lake Water District CFD No. 1 Special Tax, Sycamore Creek,
6.50%, 9/01/24 ............................................................................ $ 1,000,000 $ 1,091,330
5.25%, 9/01/28 ............................................................................ 1,750,000 1,785,858
5.30%, 9/01/35 ............................................................................ 3,300,000 3,363,030
Lee Lake Water District CFD No. 3 Special Tax, Retreat, 5.875%, 9/01/27 ....................... 3,000,000 3,164,850
Lincoln PFA Special Tax Revenue, Sub Series B, 5.00%, 9/01/34 ................................. 3,460,000 3,424,189
Lincoln Special Tax, CFD No. 2003-1, Pre-Refunded,
5.90%, 9/01/24 ............................................................................ 1,815,000 2,048,100
5.95%, 9/01/28 ............................................................................ 4,535,000 5,129,901
6.00%, 9/01/34 ............................................................................ 3,610,000 4,093,487
Lodi USD, GO, Election of 2002, MBIA Insured, 5.00%, 8/01/29 .................................. 3,010,000 3,149,273
Loma Linda Hospital Revenue, Loma Linda University Medical Center, Series A, 5.00%,
12/01/21 .................................................................................... 7,500,000 7,682,325
Los Angeles County Public Works Financing Authority Lease Revenue, Master Refunding
Project, Refunding, Series A, FGIC Insured, 5.00%, 9/01/33 .................................. 13,170,000 13,773,844
b Los Angeles MFR, Refunding, Series J-2C, 8.50%, 1/01/24 ....................................... 620,000 610,750
Los Angeles USD, GO, Election of 2005, Series C, AMBAC Insured, 5.00%, 7/01/28 ................ 3,565,000 3,756,191
Los Gatos School District GO, Series D, FSA Insured, 5.00%, 8/01/32 ........................... 4,815,000 5,077,562
Lynwood PFA Lease Revenue,
6.25%, 9/01/22 ............................................................................ 1,080,000 1,136,117
6.30%, 9/01/29 ............................................................................ 2,680,000 2,819,146
Lynwood PFA Tax Allocation, Alameda Project Area, 6.30%, 9/01/24 .............................. 1,000,000 1,048,640
Lynwood PFAR, Water System Improvement Project, 6.50%, 6/01/21 ................................ 1,175,000 1,177,620
Magnolia School District GO, Refunding, FGIC Insured, 5.00%, 8/01/31 .......................... 2,555,000 2,680,374
Menifee USD Special Tax, CFD No. 2002-2,
6.05%, 9/01/26 ............................................................................ 1,000,000 1,055,320
6.10%, 9/01/34 ............................................................................ 3,715,000 3,920,217
Merced CFD No. 2005-1 Special Tax, Improvement Area No. 1, 5.30%, 9/01/36 ..................... 2,400,000 2,426,928
Moorpark CFD No. 2004-1 Special Tax, Moorpark Highlands,
5.25%, 9/01/26 ............................................................................ 1,900,000 1,943,111
5.30%, 9/01/38 ............................................................................ 4,250,000 4,339,930
Moreland School District GO, Election of 2002, Series D, FGIC Insured, zero cpn.,
8/01/30 ................................................................................... 3,400,000 987,836
8/01/31 ................................................................................... 2,000,000 547,980
8/01/32 ................................................................................... 4,405,000 1,141,908
8/01/34 ................................................................................... 4,405,000 1,055,526
8/01/37 ................................................................................... 5,700,000 1,152,882
Moreno Valley USD, CFD Special Tax,
No. 2004-6, 5.00%, 9/01/22 ................................................................ 2,105,000 2,117,546
No. 2004-6, 5.10%, 9/01/28 ................................................................ 2,000,000 2,022,640
No. 2004-6, 5.20%, 9/01/36 ................................................................ 5,000,000 5,067,800
No. 2005-2, 5.00%, 9/01/36 ................................................................ 815,000 806,288
Murrieta 1915 Act Special Tax, CFD No. 2000-1, 6.375%, 9/01/30 ................................ 4,100,000 4,377,775
Murrieta CFD Special Tax,
Blackmore Ranch, Series 2003-2, 6.10%, 9/01/34 ............................................ 2,000,000 2,103,360
No. 2, The Oaks Improvement Area A, 5.90%, 9/01/27 ........................................ 2,000,000 2,083,380
No. 2, The Oaks Improvement Area A, 6.00%, 9/01/34 ........................................ 3,570,000 3,718,298
No. 2, The Oaks Improvement Area B, 6.00%, 9/01/27 ........................................ 1,285,000 1,356,536
Annual Report | 39
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Murrieta CFD Special Tax, (continued)
No. 2, The Oaks Improvement Area B, 6.00%, 9/01/34 ........................................ $ 3,870,000 $ 4,073,485
No. 04-1, Bremerton, 5.625%, 9/01/34 ...................................................... 700,000 728,812
Murrieta CFD Special Tax Revenue, No. 1 Bluestone Improvement Area, Series A, 6.20%,
9/01/25 ..................................................................................... 2,105,000 2,197,620
Napa Valley USD, GO, Election of 2002, FGIC Insured, 5.00%,
8/01/26 ................................................................................... 1,000,000 1,051,890
8/01/29 ................................................................................... 4,100,000 4,304,057
Norco Special Tax,
CFD No. 97-1, Pre-Refunded, 7.10%, 10/01/30 ............................................... 2,640,000 2,958,542
CFD No. 2002-1, 6.50%, 3/01/33 ............................................................ 1,500,000 1,624,110
North Natomas CFD Special Tax, No. 4, Series B, 6.375%, 9/01/31 ............................... 4,300,000 4,443,448
Oakland GO, Measure G, AMBAC Insured, 5.00%, 1/15/31 .......................................... 4,585,000 4,803,659
Oakland RDA Tax Allocation, Broadway Project, Series C-TE, AMBAC Insured, 5.00%,
9/01/36 ..................................................................................... 4,945,000 5,126,086
Oakland USD Alameda County GO, Election of 2000, MBIA Insured, 5.00%, 8/01/27 ................. 2,000,000 2,095,340
Oceanside CFD Special Tax, No. 2001-1, Morro Hills Development, 5.50%, 9/01/34 ................ 3,450,000 3,536,560
Ontario COP, Water System Improvement Project, MBIA Insured, 5.00%, 7/01/34 ................... 8,000,000 8,288,720
Orange County 1915 Act Special Assessment, Limited Obligation, AD 01-1-GP1,
5.00%, 9/02/28 ............................................................................ 3,000,000 3,003,780
5.10%, 9/02/33 ............................................................................ 2,000,000 1,999,840
Oxnard Financing Authority Wastewater Revenue, Headworks Project, AMBAC Insured,
5.00%, 6/01/31 .............................................................................. 2,705,000 2,838,762
Oxnard Harbor District Revenue,
Series A, 5.75%, 8/01/20 .................................................................. 1,110,000 1,159,539
Series B, 6.00%, 8/01/24 .................................................................. 2,000,000 2,128,380
Oxnard Special Tax, CFD No. 3, Seabridge, 5.00%, 9/01/35 ...................................... 5,000,000 4,992,850
Palm Desert Financing Authority Tax Allocation Revenue, MBIA Insured, 5.00%, 4/01/41 4,470,000 4,640,888
Perris CFD Special Tax,
CFD No. 05-2, Series A, 5.00%, 9/01/21 .................................................... 1,130,000 1,145,673
CFD No. 05-2, Series A, 5.20%, 9/01/24 .................................................... 1,505,000 1,534,874
CFD No. 05-2, Series A, 5.25%, 9/01/29 .................................................... 3,585,000 3,656,019
CFD No. 05-2, Series A, 5.30%, 9/01/35 .................................................... 4,205,000 4,288,175
CFD No. 2001-1, Improvement Area No. 5, Series A, 5.00%, 9/01/26 .......................... 585,000 574,388
CFD No. 2001-1, Improvement Area No. 5, Series A, 5.00%, 9/01/37 .......................... 1,600,000 1,568,096
CFD No. 2001-1, May Farms, Series A, 5.00%, 9/01/25 ....................................... 1,415,000 1,429,589
CFD No. 2001-1, May Farms, Series A, 5.10%, 9/01/30 ....................................... 865,000 877,344
CFD No. 2001-1, May Farms, Series A, 5.15%, 9/01/35 ....................................... 1,075,000 1,089,437
CFD No. 2002-1, Series A, 6.375%, 9/01/23 ................................................. 1,475,000 1,601,776
CFD No. 2002-1, Series A, 6.50%, 9/01/29 .................................................. 2,045,000 2,231,770
CFD No. 2002-1, Series A, 6.50%, 9/01/33 .................................................. 2,120,000 2,307,662
CFD No. 2004-3, Improvement Area No. 2, Series A, 5.30%, 9/01/35 .......................... 1,390,000 1,430,852
Perris PFA Local Agency Revenue, Series A, 6.25%, 9/01/33 ..................................... 3,000,000 3,246,030
Perris PFAR Tax Allocation,
5.30%, 10/01/26 ........................................................................... 2,000,000 2,047,340
5.35%, 10/01/36 ........................................................................... 4,010,000 4,092,405
Pico Rivera Water Authority Revenue, Refunding, Series A, 6.25%, 12/01/32 ..................... 7,250,000 7,699,355
40 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Placentia-Yorba Linda USD, GO, Election of 2002, Series C, MBIA Insured, 5.00%,
8/01/29 ..................................................................................... $ 4,100,000 $ 4,304,057
Poway USD Special Tax,
CFD No. 6, 4 S Ranch, 5.125%, 9/01/35 ..................................................... 5,000,000 5,045,100
CFD No. 6, Improvement Area B, 5.125%, 9/01/36 ............................................ 5,035,000 5,094,665
CFD No. 14, Area A, 5.125%, 9/01/26 ....................................................... 1,770,000 1,795,223
CFD No. 14, Area A, 5.25%, 9/01/36 ........................................................ 5,225,000 5,335,822
CFD No. 14, Del Sur, 5.125%, 9/01/26 ...................................................... 2,200,000 2,219,976
Rancho Cordova CFD Special Tax, No. 2003-1, Sunridge Anatolia,
5.25%, 9/01/25 ............................................................................ 2,235,000 2,264,413
5.375%, 9/01/30 ........................................................................... 1,650,000 1,678,067
5.50%, 9/01/37 ............................................................................ 2,635,000 2,689,966
Rancho Santiago Community College District GO, FSA Insured, 5.125%,
9/01/28 ................................................................................... 5,295,000 5,970,430
9/01/29 ................................................................................... 6,745,000 7,619,624
Rancho Water District Special Tax, Community Facilities 99-1,
Area A, Series A, Pre-Refunded, 6.70%, 9/01/30 ............................................ 2,100,000 2,197,335
Area B, Series A, Pre-Refunded, 6.70%, 9/01/30 ............................................ 2,435,000 2,547,862
Redlands USD, GO, Election of 2002, FSA Insured, 5.00%, 7/01/25 ............................... 3,900,000 4,103,424
Richmond 1915 Act Special Assessment, Limited Obligation, ID No. 99-01, Pre-Refunded,
7.20%, 9/02/30 .............................................................................. 7,870,000 8,282,781
Richmond Joint Powers Financing Authority Revenue, Reassessment, Refunding, Series A,
AMBAC Insured, 5.00%, 9/02/30 ............................................................... 1,085,000 1,104,790
Rio Elementary School District CFD Special Tax, No. 1, 5.20%, 9/01/35 ......................... 5,000,000 5,041,600
Riverside County CFD Special Tax,
No. 87-5, senior lien, Refunding, Series A, 7.00%, 9/01/13 ................................ 6,620,000 6,955,899
No. 89-1, Mountain Cove, Pre-Refunded, 6.50%, 9/01/25 ..................................... 3,390,000 3,655,132
Riverside USD Special Tax,
CFD No. 13, Improvement Area 1, 5.375%, 9/01/34 ........................................... 2,320,000 2,351,390
CFD No. 14, Series A, 5.40%, 9/01/26 ...................................................... 1,010,000 1,034,866
CFD No. 14, Series A, 5.45%, 9/01/35 ...................................................... 2,060,000 2,110,614
CFD No. 15, Improvement Area 1, 5.45%, 9/01/25 ............................................ 2,970,000 3,041,042
CFD No. 15, Improvement Area 1, 5.55%, 9/01/30 ............................................ 2,390,000 2,446,954
CFD No. 15, Improvement Area 1, 5.60%, 9/01/34 ............................................ 2,000,000 2,047,580
CFD No. 15, Series A, 5.15%, 9/01/25 ...................................................... 1,730,000 1,764,773
CFD No. 15, Series A, 5.25%, 9/01/30 ...................................................... 1,230,000 1,256,285
CFD No. 15, Series A, 5.25%, 9/01/35 ...................................................... 1,500,000 1,528,395
CFD No. 17, Aldea, 5.125%, 9/01/35 ........................................................ 1,425,000 1,432,966
CFD No. 18, 5.00%, 9/01/25 ................................................................ 505,000 502,571
CFD No. 18, 5.00%, 9/01/34 ................................................................ 1,125,000 1,106,820
CFD No. 22, 5.25%, 9/01/35 ................................................................ 1,535,000 1,546,052
Romoland School District Special Tax, CFD 1,
Improvement Area 1, 5.45%, 9/01/38 ........................................................ 3,215,000 3,280,972
Improvement Area 2, 5.375%, 9/01/38 ....................................................... 3,085,000 3,137,075
Annual Report | 41
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Roseville Special Tax, CFD No. 1,
Fiddyment Ranch, 5.00%, 9/01/17 ........................................................... $ 1,520,000 $ 1,537,830
Fiddyment Ranch, 5.00%, 9/01/19 ........................................................... 1,000,000 1,002,120
Fiddyment Ranch, 5.125%, 9/01/21 .......................................................... 1,000,000 1,008,340
Fiddyment Ranch, 5.00%, 9/01/24 ........................................................... 1,010,000 1,011,273
Fiddyment Ranch, 5.00%, 9/01/25 ........................................................... 1,020,000 1,019,918
Fiddyment Ranch, 5.125%, 9/01/26 .......................................................... 5,000,000 5,023,350
Fiddyment Ranch, 5.25%, 9/01/36 ........................................................... 8,000,000 8,062,240
Highland, Pre-Refunded, 6.30%, 9/01/25 .................................................... 8,610,000 9,246,709
Longmeadow, 5.00%, 9/01/36 ................................................................ 2,370,000 2,358,980
Stone Point, 6.375%, 9/01/24 .............................................................. 1,750,000 1,884,575
Stone Point, 6.375%, 9/01/28 .............................................................. 2,500,000 2,690,850
Stoneridge, Pre-Refunded, 6.20%, 9/01/21 .................................................. 1,250,000 1,388,175
Stoneridge, Pre-Refunded, 6.30%, 9/01/31 .................................................. 1,500,000 1,671,630
WestPark, 5.15%, 9/01/30 .................................................................. 5,500,000 5,547,300
WestPark, 5.20%, 9/01/36 .................................................................. 4,500,000 4,541,670
Woodcreek West, Pre-Refunded, 6.70%, 9/01/25 .............................................. 3,000,000 3,247,410
Roseville Westpark CFD No. 1 Special Tax, Public Facilities,
5.20%, 9/01/26 ............................................................................ 1,000,000 1,013,840
5.25%, 9/01/37 ............................................................................ 1,600,000 1,620,912
Sacramento County Sanitation District Financing Authority Revenue, Sacramento Regional
County of Sanitation, Series A, AMBAC Insured, Pre-Refunded, 5.00%, 12/01/35 ................ 7,000,000 7,533,540
Sacramento County Special Tax, CFD No. 1, Refunding, 6.30%, 9/01/21 ........................... 1,575,000 1,611,162
Sacramento Special Tax, North Natomas Community Facilities 97-01, Refunding,
5.00%, 9/01/29 ............................................................................ 1,185,000 1,193,496
5.10%, 9/01/35 ............................................................................ 1,520,000 1,533,619
San Diego Port District Revenue, MBIA Insured, 5.00%, 9/01/29 ................................. 4,030,000 4,198,535
San Diego RDA Tax Allocation, Capital Appreciation, Series B, zero cpn.,
9/01/10 ................................................................................... 2,750,000 2,372,590
9/01/15 ................................................................................... 6,810,000 4,599,678
9/01/16 ................................................................................... 1,500,000 953,910
9/01/19 ................................................................................... 1,800,000 937,152
9/01/20 ................................................................................... 1,800,000 872,928
9/01/21 ................................................................................... 1,800,000 814,734
9/01/22 ................................................................................... 1,900,000 797,354
9/01/23 ................................................................................... 1,900,000 746,130
9/01/24 ................................................................................... 1,900,000 696,711
9/01/25 ................................................................................... 1,900,000 651,301
9/01/26 ................................................................................... 1,900,000 609,710
9/01/27 ................................................................................... 1,900,000 571,919
9/01/28 ................................................................................... 1,900,000 536,997
San Francisco BART District Sales Tax Revenue, Refunding, Series A, MBIA Insured, 5.00%,
7/01/34 ..................................................................................... 5,855,000 6,131,824
San Francisco City and County Airports Commission International Airport Revenue, Issue 32G,
Refunding, Second Series, FGIC Insured, 5.00%, 5/01/26 ...................................... 8,565,000 9,010,894
42 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding, Series A, 5.60%, 1/15/16 ................................. $ 4,500,000 $ 4,777,290
Capital Appreciation, Refunding, Series A, 5.70%, 1/15/19 ................................. 3,000,000 3,179,760
Capital Appreciation, Refunding, Series A, 5.75%, 1/15/21 ................................. 24,750,000 26,247,622
junior lien, ETM, zero cpn., 1/01/28 ...................................................... 19,150,000 7,513,502
Refunding, Series A, 5.50%, 1/15/28 ....................................................... 3,320,000 3,333,977
senior lien, 5.00%, 1/01/33 ............................................................... 12,500,000 12,500,250
San Marcos PFA Special Tax Revenue, Series A,
6.375%, 9/01/35 ........................................................................... 3,535,000 3,656,675
5.65%, 9/01/36 ............................................................................ 5,180,000 5,330,634
Pre-Refunded, 6.45%, 9/01/34 .............................................................. 3,180,000 3,263,761
San Marcos Public Facilities Authority Special Tax Revenue, Series A, 5.05%, 9/01/38 .......... 3,250,000 3,190,102
San Marcos RDA Tax Allocation, Affordable Housing Project, Series A, 5.65%, 10/01/28 .......... 2,000,000 2,035,020
San Mateo RDA Tax Allocation, Merged Area, Series A, Pre-Refunded, 5.50%, 8/01/22 ............. 1,000,000 1,022,820
San Mateo UHSD, COP, Phase I Projects, Series A, AMBAC Insured, 5.00%,
12/15/27 .................................................................................. 6,025,000 6,326,913
12/15/30 .................................................................................. 7,450,000 7,804,098
Santa Rosa RDA Tax Allocation, Southwest Redevelopment Project, Series A, AMBAC Insured,
5.00%, 8/01/25 .............................................................................. 1,250,000 1,302,600
Santee School District GO, Series A, FSA Insured, 5.00%,
8/01/26 ................................................................................... 1,305,000 1,380,560
8/01/27 ................................................................................... 1,470,000 1,553,864
8/01/31 ................................................................................... 6,845,000 7,218,258
Saugus USD Special Tax, CFD No. 2005-1, 5.30%, 9/01/36 ........................................ 2,000,000 2,038,600
Simi Valley 1915 Act Special Assessment, AD No. 98-1, Madera, 7.30%, 9/02/24 .................. 2,975,000 3,115,658
Southern California Public Power Authority Transmission Project Revenue,
Southern Transmission Project, 6.125%, 7/01/18 .............................................. 50,000 50,048
Stockton 1915 Act Revenue, Limited Obligation, Mosher AD 02, 6.20%, 9/02/23 ................... 2,955,000 3,051,156
Stockton 1915 Act Special Assessment, Limited Obligation, Mosher AD 02, 6.30%,
9/02/33 ..................................................................................... 3,390,000 3,511,091
Stockton CFD Special Tax, No. 2001-1, Spanos Park West, Pre-Refunded, 6.25%,
9/01/25 ..................................................................................... 3,500,000 3,957,520
Sunnyvale School District GO, Election of 2004, Series A, FSA Insured, 5.00%, 9/01/27 ......... 2,745,000 2,886,669
Temecula Valley USD, CFD Special Tax, No. 2005-1, 5.00%, 9/01/36 .............................. 1,000,000 999,920
Tobacco Securitization Authority Northern California Tobacco Settlement Revenue,
Capital Appreciation, Asset-Backed, Series A-2, zero cpn. to 5/31/08, 5.40% thereafter,
6/01/27 ................................................................................. 1,250,000 1,228,550
Series A-1, 5.375%, 6/01/38 ............................................................... 5,000,000 5,138,800
Series A-1, 5.50%, 6/01/45 ................................................................ 2,000,000 2,046,680
Tobacco Securitization Authority Southern California Tobacco Settlement Revenue,
Asset-Backed Bonds, Second Sub Series, zero cpn., 6/01/46 ................................... 25,000,000 2,237,500
Torrance COP, Refunding and Public Improvement Project, Series A, AMBAC Insured, 5.00%,
6/01/34 ..................................................................................... 3,720,000 3,853,027
Truckee-Donner PUD Special Tax, CFD No. 04-1,
5.75%, 9/01/29 ............................................................................ 2,975,000 3,067,493
5.80%, 9/01/35 ............................................................................ 4,630,000 4,773,900
Annual Report | 43
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Truckee-Donner PUD Special Tax Allocation, Special Tax Bonds,
5.20%, 9/01/25 ............................................................................ $ 3,000,000 $ 3,058,140
5.25%, 9/01/30 ............................................................................ 5,050,000 5,130,598
5.30%, 9/01/35 ............................................................................ 7,395,000 7,482,927
Tustin USD School Facilities Improvement District GO, No. 2002-1, Election of 2002,
Series B, AMBAC Insured, 5.00%, 6/01/31 ..................................................... 3,605,000 3,796,966
University of California Regents Medical Center Pooled Revenue, Series A, MBIA Insured,
4.50%, 5/15/47 .............................................................................. 15,000,000 14,539,950
Upland CFD Special Tax, 2003-2 San Antonio Improvement, Series 1-A,
5.90%, 9/01/24 ............................................................................ 2,380,000 2,502,499
6.00%, 9/01/34 ............................................................................ 2,000,000 2,102,600
Vacaville USD, GO, Election of 2001, MBIA Insured, 5.00%,
8/01/24 ................................................................................... 2,510,000 2,634,923
8/01/25 ................................................................................... 1,000,000 1,049,070
8/01/26 ................................................................................... 1,000,000 1,048,370
Vallejo COP, Marine World Foundation Project, Refunding, 7.40%, 2/01/28 ....................... 9,345,000 9,581,989
Vallejo RDA Tax Allocation, Housing Set-Aside, Refunding, Series A, 7.00%, 10/01/31 ........... 4,965,000 5,430,320
Valley Sanitary District 1915 Act Special Assessment, AD No. 04, Valley Sanitary District,
Limited Obligation,
5.00%, 9/02/25 ............................................................................ 1,060,000 1,053,651
5.20%, 9/02/30 ............................................................................ 1,370,000 1,378,001
Ventura USD, GO, Refunding, FSA Insured,
5.125%, 8/01/28 ........................................................................... 1,180,000 1,268,406
4.50%, 8/01/30 ............................................................................ 4,175,000 4,127,405
West Kern Community College District GO, Capital Appreciation, Election of 2004, Series B,
XLCA Insured, zero cpn.,
11/01/25 .................................................................................. 2,435,000 982,936
11/01/26 .................................................................................. 2,480,000 951,154
11/01/27 .................................................................................. 1,400,000 510,048
11/01/28 .................................................................................. 1,445,000 499,984
11/01/29 .................................................................................. 1,485,000 487,897
11/01/30 .................................................................................. 2,650,000 826,588
11/01/31 .................................................................................. 2,695,000 797,882
West Sacramento Special Tax,
CFD No. 10, Pre-Refunded, 6.75%, 9/01/26 .................................................. 3,235,000 3,505,220
CFD No. 16, Pre-Refunded, 5.90%, 9/01/23 .................................................. 1,000,000 1,098,900
CFD No. 20, 5.125%, 9/01/25 ............................................................... 500,000 507,515
CFD No. 20, 5.30%, 9/01/35 ................................................................ 1,740,000 1,774,748
Western Riverside County Water and Wastewater Finance Authority Revenue,
Eastern Municipal Water District Improvement, Series A, 5.00%,
9/01/30 ................................................................................... 1,925,000 1,973,183
9/01/35 ................................................................................... 2,000,000 2,047,320
Westside USD, CFD Special Tax, No. 2005-3, 5.00%,
9/01/26 ................................................................................... 700,000 687,218
9/01/36 ................................................................................... 2,080,000 2,017,662
William S. Hart UHSD Special Tax, CFD No. 2005-1, 5.30%, 9/01/36 .............................. 2,500,000 2,548,250
44 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Woodland Special Tax, CFD No. 1,
6.00%, 9/01/28 ............................................................................ $ 5,000,000 $ 5,385,050
6.25%, 9/01/34 ............................................................................ 6,750,000 7,346,700
c Yuba Community College District GO, Capital Appreciation, Election of 2006, Series B,
AMBAC Insured, zero cpn.,
8/01/42 ................................................................................... 10,090,000 1,741,635
8/01/43 ................................................................................... 10,540,000 1,718,442
8/01/44 ................................................................................... 11,010,000 1,707,211
---------------
1,530,167,976
---------------
U.S. TERRITORIES 3.4%
NORTHERN MARIANA ISLANDS 0.1%
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A,
6.60%, 3/15/28 .............................................................................. 1,750,000 1,949,570
---------------
PUERTO RICO 3.3%
Puerto Rico Commonwealth GO, Public Improvement, Refunding, Series B, 5.00%,
7/01/35 ..................................................................................... 10,000,000 10,331,100
Puerto Rico Convention Center District Authority Hotel Occupancy Tax Revenue, Series A,
FGIC Insured, 5.00%,
7/01/25 ................................................................................... 12,330,000 13,000,752
7/01/26 ................................................................................... 13,940,000 14,687,602
University of Puerto Rico Revenues, University System, Refunding,
Series P, 5.00%, 6/01/26 .................................................................. 5,000,000 5,190,600
Series Q, 5.00%, 6/01/25 .................................................................. 5,000,000 5,186,900
Series Q, 5.00%, 6/01/36 .................................................................. 6,000,000 6,175,020
---------------
54,571,974
---------------
TOTAL U.S. TERRITORIES ........................................................................ 56,521,544
---------------
TOTAL LONG TERM INVESTMENTS (COST $1,526,611,809) ............................................. 1,586,689,520
---------------
SHORT TERM INVESTMENTS 3.4%
MUNICIPAL BONDS 3.4%
CALIFORNIA 3.4%
d Bay Area Toll Authority Toll Bridge Revenue, San Francisco Bay Area, Series C,
AMBAC Insured, Weekly VRDN and Put, 3.67%, 4/01/37 .......................................... 4,200,000 4,200,000
d California PCFA, PCR, Exxon Mobil Project, Refunding, Series 2000, Daily VRDN and Put,
3.82%, 4/01/17 .............................................................................. 1,600,000 1,600,000
d California State Department of Water Resources Power Supply Revenue,
Refunding, Sub Series F-1, Daily VRDN and Put, 3.81%, 5/01/19 ............................. 2,300,000 2,300,000
Refunding, Sub Series G-3, FSA Insured, Weekly VRDN and Put, 3.81%, 5/01/16 ............... 2,000,000 2,000,000
Series B-3, Daily VRDN and Put, 3.80%, 5/01/22 ............................................ 1,700,000 1,700,000
Series B-5, Daily VRDN and Put, 3.86%, 5/01/22 ............................................ 4,700,000 4,700,000
Series C-7, FSA Insured, Weekly VRDN and Put, 3.74%, 5/01/22 .............................. 2,800,000 2,800,000
Series C-9, Weekly VRDN and Put, 3.75%, 5/01/22 ........................................... 3,900,000 3,900,000
d California State Economic Recovery Revenue,
Series C-3, Daily VRDN and Put, 3.86%, 7/01/23 ............................................ 1,100,000 1,100,000
Series C-8, Daily VRDN and Put, 3.80%, 7/01/23 ............................................ 4,125,000 4,125,000
Annual Report | 45
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
d California State GO,
Kindergarten-University, Refunding, Series B-2, Daily VRDN and Put, 3.80%, 5/01/34 ........ $ 1,100,000 $ 1,100,000
Kindergarten-University, Series B-3, Daily VRDN and Put, 3.81%, 5/01/34 ................... 4,100,000 4,100,000
Series A-1, Daily VRDN and Put, 3.76%, 5/01/33 ............................................ 2,000,000 2,000,000
Series A-3, Daily VRDN and Put, 3.86%, 5/01/33 ............................................ 3,900,000 3,900,000
d Daly City HFA, MFR, Refunding, Weekly VRDN and Put, 3.68%, 10/15/29 ........................... 3,100,000 3,100,000
d Los Angeles Department of Water and Power Waterworks Revenue, Sub Series B-2,
Daily VRDN and Put, 3.81%, 7/01/35 .......................................................... 1,500,000 1,500,000
d Metropolitan Water District Southern California Waterworks Revenue,
Refunding, Series B-1, Daily VRDN and Put, 3.81%, 7/01/35 ................................. 700,000 700,000
Refunding, Series B-3, Daily VRDN and Put, 3.87%, 7/01/35 ................................. 1,700,000 1,700,000
Series C-1, Daily VRDN and Put, 3.85%, 7/01/36 ............................................ 2,200,000 2,200,000
Series C-2, Daily VRDN and Put, 3.84%, 7/01/36 ............................................ 1,000,000 1,000,000
d Newport Beach Revenue, Hoag Memorial Presbyterian Hospital, Series A, Weekly VRDN
and Put, 3.84%, 10/01/26 .................................................................... 500,000 500,000
d Orange County Housing Authority Apartment Development Revenue, Oasis Martinique,
Refunding, Series I, FNMA Insured, Weekly VRDN and Put, 3.69%, 6/15/28 ...................... 6,100,000 6,100,000
d Orange County Sanitation District COP, Refunding, Series B, Daily VRDN and Put, 3.83%,
8/01/30 ..................................................................................... 300,000 300,000
---------------
TOTAL SHORT TERM INVESTMENTS (COST $56,625,000) ............................................... 56,625,000
---------------
TOTAL INVESTMENTS (COST $1,583,236,809) 99.0% ................................................. 1,643,314,520
OTHER ASSETS, LESS LIABILITIES 1.0% ........................................................... 16,752,797
---------------
NET ASSETS 100.0% ............................................................................. $ 1,660,067,317
===============
See Selected Portfolio Abbreviations on page 52.
a See Note 6 regarding defaulted securities.
b Security has been deemed illiquid because it may not be able to be sold within
seven days. At May 31, 2007, the aggregate value of these securities was
$8,365,820, representing 0.50% of net assets.
c See Note 1(b) regarding securities purchased on a when-issued or delayed
delivery basis.
d Variable 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.
46 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Municipal Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
----------------------------------------------------------
YEAR ENDED MAY 31,
CLASS A 2007 2006 2005 2004 2003
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 11.18 $ 11.48 $ 11.04 $ 11.59 $ 10.95
----------------------------------------------------------
Income from investment operations a:
Net investment income b ........................................... 0.46 0.47 0.48 0.49 0.50
Net realized and unrealized gains (losses) ........................ -- d (0.30) 0.44 (0.55) 0.65
----------------------------------------------------------
Total from investment operations ..................................... 0.46 0.17 0.92 (0.06) 1.15
----------------------------------------------------------
Less distributions from net investment income ........................ (0.46) (0.47) (0.48) (0.49) (0.51)
----------------------------------------------------------
Redemption fees ...................................................... -- d -- d -- d -- --
----------------------------------------------------------
Net asset value, end of year ......................................... $ 11.18 $ 11.18 $ 11.48 $ 11.04 $ 11.59
==========================================================
Total return c ....................................................... 4.15% 1.54% 8.50% (0.56)% 10.64%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .................... 0.75% 0.77% 0.79% 0.79% 0.80%
Expenses net of waiver and payments by affiliates .................... 0.70% 0.70% 0.70% 0.60% 0.60%
Net investment income ................................................ 4.06% 4.15% 4.24% 4.34% 4.49%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $ 167,215 $ 146,005 $ 121,645 $ 111,223 $ 115,514
Portfolio turnover rate .............................................. 10.25% 2.47% 8.36% 13.01% 8.24%
a The 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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable.
d Amount rounds to less than $0.01 per share.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 47
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.8%
MUNICIPAL BONDS 96.8%
TENNESSEE 87.3%
Bristol Electric Revenue, System, AMBAC Insured, 5.00%, 9/01/29 ............................... $ 1,075,000 $ 1,128,954
Chattanooga GO,
Pre-Refunded, 5.00%, 3/01/22 .............................................................. 2,215,000 2,282,956
Refunding, Series A-1, MBIA Insured, 5.00%, 3/01/23 ....................................... 2,000,000 2,118,480
Clarksville Electric System Revenue, XLCA Insured, 5.00%, 9/01/32 ............................. 4,000,000 4,195,880
Clarksville Water Sewer and Gas Revenue, Refunding and Improvement, FSA Insured, 5.00%,
2/01/22 ..................................................................................... 2,000,000 2,057,680
Cleveland Public Improvement GO, FGIC Insured, Pre-Refunded, 5.25%, 6/01/24 ................... 3,000,000 3,087,210
Fayetteville and Lincoln IDBR, Hospital Facility Lease, AMBAC Insured,
5.30%, 5/01/28 ............................................................................ 1,830,000 1,851,539
Pre-Refunded, 5.30%, 5/01/28 .............................................................. 1,170,000 1,186,895
Franklin County Health and Educational Facilities Board Revenue, University South Project,
AMBAC Insured, 5.00%, 9/01/24 ............................................................... 2,000,000 2,094,720
Franklin GO, Sewer and Water, Series B, Pre-Refunded, 5.00%, 4/01/19 .......................... 1,000,000 1,057,810
Franklin Special School District GO, 5.00%, 6/01/22 ........................................... 1,455,000 1,527,561
Greene County GO, Refunding, Series B, MBIA Insured, 5.00%, 6/01/24 ........................... 1,000,000 1,050,970
Hallsdale-Powell Utility District Knox County Water and Sewer Revenue,
FGIC Insured, 5.00%, 4/01/31 .............................................................. 1,000,000 1,056,360
Refunding and Improvement, Series A, FGIC Insured, 5.00%, 4/01/27 ......................... 2,500,000 2,596,975
Harpeth Valley Utilities District Davidson and Williamson Counties Revenue,
Utilities Improvement, MBIA Insured, 5.00%,
9/01/29 ................................................................................... 1,000,000 1,044,350
9/01/34 ................................................................................... 2,310,000 2,406,604
Johnson City GO, Solid Waste, AMBAC Insured, 5.80%, 5/01/09 ................................... 100,000 100,163
Johnson City Health and Educational Facilities Board Hospital Revenue,
first mortgage, Mountain States Health, Refunding, Series A, MBIA Insured, 6.00%,
7/01/21 ................................................................................. 2,970,000 3,161,892
Series 2000 A, MBIA Insured, Pre-Refunded, 5.125%, 7/01/25 ................................ 3,000,000 3,073,020
Johnson City Health and Educational Facilities Board Revenue, Pine Oaks Assisted Project,
Series A, GNMA Secured, 5.90%, 6/20/37 ...................................................... 1,390,000 1,432,339
Knox County First Utility District Water and Sewer Revenue,
MBIA Insured, 5.00%, 12/01/24 ............................................................. 1,790,000 1,892,495
MBIA Insured, 5.00%, 12/01/25 ............................................................. 1,000,000 1,057,260
Refunding and Improvement, Refunding, Series A, MBIA Insured, 5.625%, 12/01/19 ............ 555,000 565,112
Refunding and Improvement, Series A, MBIA Insured, Pre-Refunded, 5.625%, 12/01/19 ......... 445,000 453,655
Knox County Health Educational and Housing Facilities Board Hospital Facilities Revenue,
Covenant Health System, Refunding and Improvement, Series A, zero cpn., 1/01/36 ........... 5,000,000 1,134,250
Fort Sanders Alliance, Refunding, MBIA Insured, 5.75%, 1/01/14 ............................ 1,250,000 1,376,800
Knox County Health Educational and Housing Facilities Board Revenue, University Health
System Inc., Refunding, 5.25%, 4/01/27 ...................................................... 2,500,000 2,569,350
Knox County IDB, MFR, Waterford Apartments, Refunding, Series A, FHA Insured, 5.95%,
3/01/28 ..................................................................................... 250,000 252,653
Knoxville Electric Revenue, System, Series U, Pre-Refunded, 5.125%, 7/01/21 ................... 2,340,000 2,427,656
Knoxville Waste Water System Revenue, Improvement, Series A, MBIA Insured, 5.00%,
4/01/37 ..................................................................................... 3,620,000 3,781,706
Knoxville Water Revenue, System Improvement, Series R, FSA Insured, 5.00%, 3/01/30 ............ 2,370,000 2,481,248
48 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TENNESSEE (CONTINUED)
Lawrenceburg Electric Revenue, MBIA Insured, Pre-Refunded, 5.50%, 7/01/26 ..................... $ 1,000,000 $ 1,035,150
Lawrenceburg PBA, GO, Electric Systems, Public Works, AMBAC Insured, 5.00%, 7/01/22 ........... 2,500,000 2,690,150
Lenoir City Electric System Revenue, Refunding and Improvement, FSA Insured, 5.00%,
6/01/21 ..................................................................................... 2,000,000 2,064,120
Memphis GO, Pre-Refunded, 5.00%, 4/01/17 ...................................................... 2,000,000 2,040,500
Memphis-Shelby County Airport Authority Airport Revenue, Series D, AMBAC Insured, 6.00%,
3/01/24 ..................................................................................... 4,780,000 5,037,642
Memphis-Shelby County Sports Authority Inc. Revenue, Memphis Arena Project, Series A,
AMBAC Insured, Pre-Refunded, 5.25%, 11/01/23 ................................................ 7,145,000 7,628,717
Metropolitan Government of Nashville and Davidson County Electric Revenue, Series A,
5.20%, 5/15/23 ............................................................................ 800,000 824,808
AMBAC Insured, 5.00%, 5/15/25 ............................................................. 5,000,000 5,205,050
Metropolitan Government of Nashville and Davidson County GO,
Pre-Refunded, 5.125%, 5/15/25 ............................................................. 2,600,000 2,656,706
Refunding, Series B, 5.00%, 8/01/25 ....................................................... 5,000,000 5,270,050
Series C, 5.00%, 2/01/25 .................................................................. 3,000,000 3,145,560
Metropolitan Government of Nashville and Davidson County Health and Educational Facilities
Board Revenue,
Ascension Health Credit, Series A, AMBAC Insured, Pre-Refunded, 5.875%, 11/15/28 .......... 2,500,000 2,643,350
Mortgage, Dandridge Towers Section 8, Series A, ETM, 6.375%, 1/01/11 ...................... 500,000 505,960
Metropolitan Government of Nashville and Davidson County Water and Sewer Revenue,
Refunding, 5.50%, 1/01/16 ................................................................... 620,000 620,453
Montgomery County Health Educational and Housing Facility Board Hospital Revenue,
Clarksville Regional Health System, Improvement, Pre-Refunded, 5.375%,
1/01/18 ................................................................................... 175,000 178,323
1/01/28 ................................................................................... 4,270,000 4,351,087
Oak Ridge Utility District Gas System Revenue, AMBAC Insured, 5.50%, 4/01/25 .................. 750,000 779,490
Rutherford County Consolidated Utility District Waterworks Revenue,
FSA Insured, 5.00%, 2/01/36 ............................................................... 3,060,000 3,208,777
Refunding, MBIA Insured, 5.00%, 2/01/27 ................................................... 1,000,000 1,054,530
Shelby County GO, Public Improvement and School, Series B, Pre-Refunded, 5.00%,
6/01/24 ..................................................................................... 2,000,000 2,048,640
Shelby County Health Educational and Housing Facilities Board Revenue, Ave Maria Assisted
Living Project, Series A, 5.50%, 12/01/31 ................................................... 2,010,000 2,080,089
South Blount County Utility District Waterworks Revenue, FGIC Insured, 4.50%, 12/01/22 ........ 1,750,000 1,764,385
Sullivan County IDBR, Brandymill, Refunding, Series I-A, 6.35%, 7/20/27 ....................... 350,000 355,019
Tennessee HDA Revenue, Homeownership Program,
5.375%, 7/01/23 ........................................................................... 405,000 411,099
2006-3, 4.90%, 7/01/37 .................................................................... 5,000,000 4,999,800
Issue 4A, 6.375%, 7/01/22 ................................................................. 20,000 20,213
Series 3C, 6.00%, 1/01/20 ................................................................. 230,000 234,816
Tennessee State School Bond Authority Revenue, Higher Education Facilities, Second Program,
Refunding, Series A, MBIA Insured, 5.00%,
5/01/26 ................................................................................... 1,250,000 1,312,338
5/01/30 ................................................................................... 3,000,000 3,147,570
Annual Report | 49
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TENNESSEE (CONTINUED)
West Carroll Special School GO, MBIA Insured, Pre-Refunded, 5.375%, 6/01/29 ................... $ 1,055,000 $ 1,088,169
West Wilson Utility District Waterworks Revenue,
AMBAC Insured, Pre-Refunded, 5.25%, 6/01/23 ............................................... 3,780,000 3,978,223
Improvement, MBIA Insured, Pre-Refunded, 5.00%, 6/01/26 ................................... 1,805,000 1,924,293
Refunding, AMBAC Insured, 5.25%, 6/01/23 .................................................. 720,000 750,989
Refunding, MBIA Insured, 4.75%, 6/01/23 ................................................... 1,805,000 1,858,193
Refunding and Improvement, MBIA Insured, 4.75%, 6/01/28 ................................... 2,000,000 2,054,460
White House Utility District Robertson and Sumner Counties Water and Sewer Revenue,
FSA Insured, Pre-Refunded, 5.125%, 1/01/26 ................................................ 1,100,000 1,147,476
FSA Insured, Pre-Refunded, 6.00%, 1/01/26 ................................................. 1,000,000 1,053,390
Refunding, FSA Insured, 5.125%, 1/01/26 ................................................... 1,400,000 1,445,318
Williamson County GO, Public Improvement,
Pre-Refunded, 5.375%, 3/01/19 ............................................................. 1,480,000 1,539,215
Pre-Refunded, 5.00%, 4/01/20 .............................................................. 2,000,000 2,098,440
Refunding, 5.00%, 3/01/20 ................................................................. 2,000,000 2,138,740
Wilson County COP, FSA Insured, 5.25%, 3/30/18 ................................................ 1,000,000 1,031,260
---------------
145,927,101
---------------
U.S. TERRITORIES 9.5%
PUERTO RICO 8.9%
Puerto Rico Commonwealth GO, Public Improvement, Series A, FGIC Insured, Pre-Refunded,
5.00%, 7/01/32 .............................................................................. 1,500,000 1,580,880
Puerto Rico Electric Power Authority Power Revenue, Refunding, Series SS, MBIA Insured,
5.00%, 7/01/25 .............................................................................. 5,000,000 5,264,300
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Hospital Revenue, Hospital Auxilio Mutuo Obligation, Series A,
MBIA Insured, 6.25%, 7/01/24 ................................................................ 200,000 200,284
Puerto Rico Municipal Finance Agency Revenue, Series A, FSA Insured, 5.00%, 8/01/30 ........... 5,000,000 5,259,450
Puerto Rico PBA Guaranteed Revenue, Government Facilities,
Refunding, Series D, 5.375%, 7/01/33 ...................................................... 655,000 684,639
Series D, Pre-Refunded, 5.375%, 7/01/33 ................................................... 1,845,000 1,971,714
---------------
14,961,267
---------------
VIRGIN ISLANDS 0.6%
Virgin Islands PFAR, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ....... 1,000,000 1,026,210
---------------
TOTAL U.S. TERRITORIES ........................................................................ 15,987,477
---------------
TOTAL LONG TERM INVESTMENTS (COST $157,036,332) ............................................... 161,914,578
---------------
SHORT TERM INVESTMENTS 1.6%
MUNICIPAL BONDS 1.6%
TENNESSEE 1.6%
a Blount County PBA Revenue, Local Public Improvement, Series D-1-A, AMBAC Insured,
Daily VRDN and Put, 3.92%, 6/01/30 .......................................................... 200,000 200,000
50 | Annual Report
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MUNICIPAL BONDS (CONTINUED)
TENNESSEE (CONTINUED)
a Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN
and Put, 3.90%,
7/01/31 ................................................................................... $ 1,200,000 $ 1,200,000
1/01/33 ................................................................................... 700,000 700,000
7/01/34 ................................................................................... 200,000 200,000
a Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan Pool, Daily VRDN
and Put, 3.90%, 7/01/34 ..................................................................... 300,000 300,000
---------------
TOTAL SHORT TERM INVESTMENTS (COST $2,600,000) ................................................ 2,600,000
---------------
TOTAL INVESTMENTS (COST $159,636,332) 98.4% ................................................... 164,514,578
OTHER ASSETS, LESS LIABILITIES 1.6% ........................................................... 2,700,062
---------------
NET ASSETS 100.0% ............................................................................. $ 167,214,640
===============
See Selected Portfolio Abbreviations on page 52.
a Variable 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.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 51
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, MAY 31, 2007
SELECTED PORTFOLIO ABBREVIATIONS
1915 ACT - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
BART - Bay Area Rapid Transit
CDA - Community Development Authority/Agency
CFD - Community Facilities District
CIFP - Capital Improvement Financing Program
COP - Certificate of Participation
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance Inc.
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority Revenue
ID - Improvement District
IDB - Industrial Development Bond/Board
IDBR - Industrial Development Board Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MFHR - Multi-Family Housing Revenue
MFR - Multi-Family Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFA - Public Financing Authority
PFAR - Public Financing Authority Revenue
PUD - Public Utility District
RDA - Redevelopment Agency/Authority
UHSD - Unified/Union High School District
USD - Unified/Union School District
VRDN - Variable Rate Demand Note
XLCA - XL Capital Assurance
52 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Municipal Securities Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
May 31, 2007
-----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
-----------------------------------------
Assets:
Investments in securities:
Cost ............................................................................ $ 1,583,236,809 $ 159,636,332
=========================================
Value ........................................................................... $ 1,643,314,520 $ 164,514,578
Cash ............................................................................... 40,097 30,887
Receivables:
Capital shares sold ............................................................. 8,810,237 771,290
Interest ........................................................................ 20,979,906 2,443,231
-----------------------------------------
Total assets ................................................................. 1,673,144,760 167,759,986
-----------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................................. 5,199,068 --
Capital shares redeemed ......................................................... 4,729,990 203,044
Affiliates ...................................................................... 955,745 87,709
Distributions to shareholders ................................................... 2,005,236 223,241
Accrued expenses and other liabilities ............................................. 187,404 31,352
-----------------------------------------
Total liabilities ............................................................ 13,077,443 545,346
-----------------------------------------
Net assets, at value ...................................................... $ 1,660,067,317 $ 167,214,640
=========================================
Net assets consist of:
Paid-in capital .................................................................... $ 1,654,085,356 $ 166,638,664
Undistributed net investment income (distributions in excess of net investment
income) .......................................................................... 263,354 (130,416)
Net unrealized appreciation (depreciation) ......................................... 60,077,711 4,878,246
Accumulated net realized gain (loss) ............................................... (54,359,104) (4,171,854)
-----------------------------------------
Net assets, at value ...................................................... $ 1,660,067,317 $ 167,214,640
=========================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 53
Franklin Municipal Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES
May 31, 2007
----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
CLASS A:
Net assets, at value ............................................................... $ 1,329,255,105 $ 167,214,640
========================================
Shares outstanding ................................................................. 127,356,365 14,958,477
========================================
Net asset value per share a ........................................................ $ 10.44 $ 11.18
========================================
Maximum offering price per share (net asset value per share / 95.75%) .............. $ 10.90 $ 11.68
========================================
CLASS B:
Net assets, at value ............................................................... $ 27,246,213
===================
Shares outstanding ................................................................. 2,597,235
===================
Net asset value and maximum offering price per share a ............................. $ 10.49
===================
CLASS C:
Net assets, at value ............................................................... $ 285,410,391
===================
Shares outstanding ................................................................. 27,225,863
===================
Net asset value and maximum offering price per share a ............................. $ 10.48
===================
ADVISOR CLASS:
Net assets, at value ............................................................... $ 18,155,608
===================
Shares outstanding ................................................................. 1,738,187
===================
Net asset value and maximum offering price per share a ............................. $ 10.45
===================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
54 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Municipal Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended May 31, 2007
-------------------------------
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
-------------------------------
Investment income:
Interest ........................................................................... $ 76,675,634 $ 7,547,604
-------------------------------
Expenses:
Management fees (Note 3a) .......................................................... 6,881,480 917,584
Distribution fees: (Note 3c)
Class A ............................................................................ 1,207,446 158,557
Class B ............................................................................ 185,345 --
Class C ............................................................................ 1,527,084 --
Transfer agent fees (Note 3e) ...................................................... 477,515 49,528
Custodian fees ..................................................................... 21,840 2,377
Reports to shareholders ............................................................ 78,397 10,049
Registration and filing fees ....................................................... 62,446 7,172
Professional fees .................................................................. 54,330 25,357
Trustees' fees and expenses ........................................................ 31,014 3,534
Other .............................................................................. 112,987 23,026
-------------------------------
Total expenses ................................................................... 10,639,884 1,197,184
Expenses waived/paid by affiliates (Note 3f) ..................................... -- (90,400)
-------------------------------
Net expenses ................................................................... 10,639,884 1,106,784
-------------------------------
Net investment income ........................................................ 66,035,750 6,440,820
-------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .......................................... 317,314 (21,490)
Net change in unrealized appreciation (depreciation) on investments ................ 14,573,641 (169,451)
-------------------------------
Net realized and unrealized gain (loss) ............................................... 14,890,955 (190,941)
-------------------------------
Net increase (decrease) in net assets resulting from operations ....................... $ 80,926,705 $ 6,249,879
===============================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 55
Franklin Municipal Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
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,
2007 2006 2007 2006
-------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................. $ 66,035,750 $ 52,424,549 $ 6,440,820 $ 5,585,564
Net realized gain (loss) from investments ......... 317,314 (508,967) (21,490) 52,369
Net change in unrealized appreciation
(depreciation) on investments ................... 14,573,641 (8,004,566) (169,451) (3,555,574)
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ................................ 80,926,705 43,911,016 6,249,879 2,082,359
-------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ........................................ (55,564,834) (44,685,749) (6,458,042) (5,617,732)
Class B ........................................ (1,165,723) (1,322,154) -- --
Class C ........................................ (9,448,052) (6,510,001) -- --
Advisor Class .................................. (161,828) -- -- --
-------------------------------------------------------------------
Total distributions to shareholders ................ (66,340,437) (52,517,904) (6,458,042) (5,617,732)
-------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ........................................ 249,880,606 296,262,889 21,417,319 27,895,643
Class B ........................................ (3,101,066) (1,379,404) -- --
Class C ........................................ 92,719,254 71,311,943 -- --
Advisor Class .................................. 18,320,509 -- -- --
-------------------------------------------------------------------
Total capital share transactions ................... 357,819,303 366,195,428 21,417,319 27,895,643
-------------------------------------------------------------------
Redemption fees .................................... -- 3,816 118 6
-------------------------------------------------------------------
Net increase (decrease) in net assets ....... 372,405,571 357,592,356 21,209,274 24,360,276
Net assets:
Beginning of year .................................. 1,287,661,746 930,069,390 146,005,366 121,645,090
-------------------------------------------------------------------
End of year ........................................ $ 1,660,067,317 $ 1,287,661,746 $ 167,214,640 $ 146,005,366
===================================================================
Undistributed net investment income (distributions
in excess of net investment income) included in
net assets:
End of year .................................... $ 263,354 $ 574,648 $ (130,416) $ (113,411)
===================================================================
56 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940, as amended, (the 1940 Act) as a non-diversified,
open-end investment company, consisting of two funds (the Funds). The classes of
shares offered within each of the Funds are indicated below. Effective November
15, 2006, the Franklin California High Yield Municipal Fund began offering a new
class of shares, Advisor Class. Each class of shares differs by its initial
sales load, contingent deferred sales charges, distribution fees, voting rights
on matters affecting a single class and its exchange privilege.
- ------------------------------------------------------------------------------------------
CLASS A CLASS A, CLASS B, CLASS C & ADVISOR CLASS
- ------------------------------------------------------------------------------------------
Franklin Tennessee Municipal Bond Fund Franklin California High Yield Municipal Fund
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange. The Trust may utilize independent pricing services,
quotations from bond dealers, and information with respect to bond and note
transactions, to assist in determining a current market value for each security.
The Trust's pricing services use valuation models or matrix pricing, which
considers information with respect to comparable bond and note transactions,
quotations from bond dealers or by reference to other securities that are
considered comparable in such characteristics as rating, interest rate and
maturity date, to determine current value.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Trust's Board of
Trustees.
B. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued or delayed delivery 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.
Annual Report | 57
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its income and net
realized gains.
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 and
distributed 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 accounting principles generally accepted in the United States of
America. 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, other than
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. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
F. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
58 | Annual Report
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
2. SHARES OF BENEFICIAL INTEREST
At May 31, 2007, there were an unlimited number of shares authorized (no 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, 2007
Shares sold ............................................ 42,071,653 $ 440,621,071 3,477,884 $ 39,150,876
Shares issued in reinvestment of distributions ......... 2,664,718 27,905,573 343,340 3,866,577
Shares redeemed ........................................ (20,867,820) (218,646,038) (1,919,139) (21,600,134)
---------------------------------------------------------
Net increase (decrease) ................................ 23,868,551 $ 249,880,606 1,902,085 $ 21,417,319
=========================================================
Year ended May 31, 2006
Shares sold ............................................ 39,825,537 $ 412,530,271 3,747,670 $ 42,420,481
Shares issued in reinvestment of distributions ......... 2,024,541 20,970,629 270,571 3,061,825
Shares redeemed ........................................ (13,254,025) (137,238,011) (1,558,450) (17,586,663)
---------------------------------------------------------
Net increase (decrease) ................................ 28,596,053 $ 296,262,889 2,459,791 $ 27,895,643
=========================================================
CLASS B SHARES:
Year ended May 31, 2007
Shares sold ............................................ 98,410 $ 1,034,494
Shares issued in reinvestment of distributions ......... 57,377 603,444
Shares redeemed ........................................ (451,564) (4,739,004)
----------------------------
Net increase (decrease) ................................ (295,777) $ (3,101,066)
============================
Year ended May 31, 2006
Shares sold ............................................ 121,424 $ 1,265,577
Shares issued in reinvestment of distributions ......... 63,697 663,312
Shares redeemed ........................................ (317,819) (3,308,293)
----------------------------
Net increase (decrease) ................................ (132,698) $ (1,379,404)
============================
Annual Report | 59
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------
FRANKLIN CALIFORNIA
HIGH YIELD MUNICIPAL FUND
---------------------------
SHARES AMOUNT
---------------------------
CLASS C SHARES:
Year ended May 31, 2007
Shares sold ........................................... 11,769,160 $ 123,836,877
Shares issued in reinvestment of distributions ........ 478,252 5,029,277
Shares redeemed ....................................... (3,438,176) (36,146,900)
---------------------------
Net increase (decrease) ............................... 8,809,236 $ 92,719,254
===========================
Year ended May 31, 2006
Shares sold ........................................... 8,609,116 $ 89,498,866
Shares issued in reinvestment of distributions ........ 325,944 3,389,940
Shares redeemed ....................................... (2,076,150) (21,576,863)
---------------------------
Net increase (decrease) ............................... 6,858,910 $ 71,311,943
===========================
ADVISOR CLASS SHARES:
Period ended May 31, 2007 a
Shares sold ........................................... 1,822,041 $ 19,204,688
Shares issued in reinvestment of distributions ........ 1,665 17,511
Shares redeemed ....................................... (85,519) (901,690)
---------------------------
Net increase (decrease) ............................... 1,738,187 $ 18,320,509
===========================
a For the period November 15, 2006 (effective date) to May 31, 2007.
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 Trust 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
60 | Annual Report
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 $10 billion
0.440% 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
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees 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' compensation distribution plans, the Funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
Reimbursement Plans:
Class A ............................. 0.15% 0.15%
Distributors has agreed to limit the current rate to 0.10% per year for each of
the Funds.
Compensation Plans:
Class B ............................. 0.65% --
Class C ............................. 0.65% --
Annual Report | 61
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the year:
----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ............................ $685,194 $125,688
Contingent deferred sales charges retained ................ $154,732 $ 285
E. TRANSFER AGENT FEES
For the year ended May 31, 2007, the Funds paid transfer agent fees as noted in
the Statements of Operations of which the following amounts were retained by
Investor Services:
----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
Transfer agent fees ....................................... $237,541 $27,296
F. WAIVER AND EXPENSE REIMBURSEMENTS
For the Franklin Tennessee Municipal Bond Fund, Advisers agreed in advance to
voluntarily waive a portion of management fees. Total expenses waived by
Advisers are not subject to reimbursement by the Fund subsequent to the Fund's
fiscal year end. Advisers may discontinue this waiver at any time upon notice to
the Fund's Board of Trustees.
4. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At May 31, 2007, the capital loss carryforwards were as follows:
----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
Capital loss carryforwards expiring in:
2008 ................................................... $ 7,867,595 $ 491,071
2009 ................................................... 31,858,136 1,676,320
2010 ................................................... 4,003,471 480,932
2011 ................................................... -- 95,080
2012 ................................................... 7,294,061 984,101
2013 ................................................... 2,650,186 422,643
2015 ................................................... 684,955 11,310
----------------------------------------
$54,358,404 $4,161,457
========================================
62 | Annual Report
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
For tax purposes, realized capital losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At May 31, 2007, the Franklin Tennessee Municipal Bond Fund
deferred realized capital losses of $10,396.
The tax character of distributions paid during the years ended May 31, 2007 and
2006, was as follows:
----------------------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL FUND MUNICIPAL BOND FUND
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Distributions paid from tax exempt income ..... $66,340,437 $52,517,904 $6,458,042 $5,617,732
====================================================
At May 31, 2007, the cost of investments, net unrealized appreciation
(depreciation), and undistributed tax exempt income for income tax purposes were
as follows:
----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
Cost of investments ....................................... $1,581,679,354 $159,602,471
========================================
Unrealized appreciation ................................... $ 67,520,109 $ 68,660,338
Unrealized depreciation ................................... (5,884,943) (63,748,231)
----------------------------------------
Net unrealized appreciation (depreciation) ................ $ 61,635,166 $ 4,912,107
========================================
Distributable earnings - undistributed tax exempt income .. $ 710,435 $ 58,966
========================================
Net investment income and net realized gains (losses) differ for financial
statement and tax purposes primarily due to differing treatment of bond
discounts.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended May 31, 2007, were as follows:
----------------------------------------
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
Purchases ................................................. $425,461,549 $38,905,852
Sales ..................................................... $ 45,784,209 $15,892,601
Annual Report | 63
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin California High Yield Municipal Fund has 26.47% of its portfolio
invested in below investment grade and comparable quality unrated high yield
securities, which tend to be more sensitive to economic conditions than higher
rated securities. The risk of loss due to default by the issuer may be
significantly greater for the holders of high yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
The fund held a defaulted security for which the income has been deemed
uncollectible. At May 31, 2007, the value of this security was $1,160,606,
representing 0.07% of the fund's net assets. The Fund discontinues accruing
income on securities for which income has been deemed uncollectible and provides
an estimate for losses on interest receivable. The securities have been
identified on the accompanying Statement of Investments.
7. CONCENTRATION OF RISK
Each of the Funds invests a large percentage of its total assets in obligations
of issuers within its 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.
8. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006. The Trust did not participate in that
settlement.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Following the public comment
period, and once the SEC approves the final plan of distribution, disbursements
of settlement monies will be made promptly to individuals who were shareholders
of the designated funds during the relevant period, in accordance with the terms
and conditions of the settlement and plan.
64 | Annual Report
Franklin Municipal Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. REGULATORY AND LITIGATION MATTERS (CONTINUED)
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
9. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Trust
believes the adoption of FIN 48 will have no material impact on its financial
statements.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
Annual Report | 65
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 Fund (separate portfolios
of Franklin Municipal Securities Trust, hereafter referred to as the "Funds") at
May 31, 2007, 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 periods presented, 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 Funds' 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, 2007 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
July 18, 2007
66 | Annual Report
Franklin Municipal Securities Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds designate
100% of the distributions paid from net investment income as exempt-interest
dividends for the fiscal year ended May 31, 2007. A portion of the Fund's
exempt-interest dividends may be subject to the federal alternative minimum tax.
In January 2008, shareholders will be notified of amounts for use in preparing
their 2007 income tax returns.
Annual Report | 67
Franklin Municipal Securities Trust
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007 AND
MAY 11, 2007
A Special Meeting of Shareholders of the Trust was held at the Trust's offices,
One Franklin Parkway, San Mateo, California on March 21, 2007 and reconvened on
April 11, 2007 and May 11, 2007. The purpose of the meeting was to elect
Trustees of the Trust and to vote on the following Proposals and Sub-Proposals:
To approve an Amended and Restated Agreement and Declaration of Trust; to
approve amendments to certain of Franklin California High Yield Municipal Fund's
and Franklin Tennessee Municipal Bond Fund's (each, a "Fund") fundamental
investment restrictions (including several Sub-Proposals); and to approve the
elimination of certain of the Funds' fundamental investment restrictions. At the
meeting, the following persons were elected by the shareholders to serve as
Independent Trustees of the Trust: Harris J. Ashton, Robert F. Carlson, Sam L.
Ginn, Edith E. Holiday, Frank W. T. LaHaye, Frank A. Olson, Larry D. Thompson,
and John B. Wilson. Charles B. Johnson and Gregory E. Johnson were elected by
the shareholders to serve as Interested Trustees. Shareholders also approved the
Amended and Restated Agreement and Declaration of Trust amendments to certain of
the Funds' fundamental investment restrictions (including several
Sub-Proposals), and the elimination of certain of the Funds' fundamental
investment restrictions. No other business was transacted at the meeting.
The results of the voting at the meeting are as follows:
Proposal 1. The election of Trustees:
- -------------------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
OUTSTANDING VOTED OUTSTANDING VOTED
NAME FOR SHARES SHARES WITHHELD SHARES SHARES
- -------------------------------------------------------------------------------------------------------------------
Harris J. Ashton ........... 90,181,552.862 57.240% 98.467% 1,403,910.593 0.891% 1.533%
Robert F. Carlson .......... 90,207,704.754 57.257% 98.496% 1,377,758.701 0.874% 1.504%
Sam L. Ginn ................ 90,168,391.997 57.232% 98.453% 1,417,071.458 0.899% 1.547%
Edith E. Holiday ........... 90,223,254.614 57.266% 98.513% 1,362,208.841 0.865% 1.487%
Frank W. T. LaHaye ......... 90,160,083.525 57.226% 98.444% 1,425,379.930 0.905% 1.556%
Frank A. Olson ............. 90,173,530.529 57.235% 98.458% 1,411,932.926 0.896% 1.542%
Larry D. Thompson .......... 90,270,909.358 57.297% 98.565% 1,314,554.097 0.834% 1.435%
John B. Wilson ............. 90,244,326.682 57.280% 98.536% 1,341,136.773 0.851% 1.464%
Charles B. Johnson ......... 90,250,104.075 57.284% 98.542% 1,335,359.380 0.847% 1.458%
Gregory E. Johnson ......... 90,268,244.464 57.295% 98.562% 1,317,218.991 0.836% 1.438%
68 | Annual Report
Franklin Municipal Securities Trust
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007 AND
MAY 11, 2007 (CONTINUED)
Proposal 2. To approve an Amended and Restated Agreement and Declaration of
Trust:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 51,436,210.778 35.875% 62.959%
Against .......................... 1,230,930.520 0.859% 1.507%
Abstain .......................... 3,007,988.309 2.098% 3.681%
Broker Non-votes ................. 26,023,794.000 18.151% 31.853%
- ----------------------------------------------------------------------------
TOTAL ............................ 81,698,923.607 56.983% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 5,704,190.618 40.242% 57.696%
Against .......................... 198,716.691 1.402% 2.010%
Abstain .......................... 124,145.539 0.875% 1.256%
Broker Non-votes ................. 3,859,487.000 27.228% 39.038%
- ----------------------------------------------------------------------------
TOTAL ............................ 9,886,539.848 69.747% 100.000%
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals):
(a) To amend the Fund's fundamental investment restriction regarding borrowing:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,167,123.113 43.360% 67.543%
Against .......................... 2,208,990.940 1.541% 2.400%
Abstain .......................... 5,221,492.300 3.641% 5.673%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,661,450.207 54.051% 67.165%
Against .......................... 382,436.666 2.698% 3.353%
Abstain .......................... 337,626.667 2.381% 2.959%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
Annual Report | 69
Franklin Municipal Securities Trust
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007 AND
MAY 11, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(b) To amend the Fund's fundamental investment restriction regarding
underwriting:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,490,488.327 43.585% 67.894%
Against .......................... 1,835,298.426 1.280% 1.994%
Abstain .......................... 5,271,819.600 3.677% 5.728%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,660,495.031 54.044% 67.156%
Against .......................... 316,542.578 2.233% 2.775%
Abstain .......................... 404,475.931 2.853% 3.546%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
(c) To amend the Fund's fundamental investment restriction regarding lending:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,269,589.657 43.431% 67.654%
Against .......................... 1,973,901.682 1.377% 2.145%
Abstain .......................... 5,354,115.014 3.734% 5.817%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,660,673.536 54.045% 67.158%
Against .......................... 433,234.633 3.056% 3.798%
Abstain .......................... 287,605.371 2.029% 2.521%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
70 | Annual Report
Franklin Municipal Securities Trust
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007
AND MAY 11, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(d) To amend the Fund's fundamental investment restriction regarding investments
in real estate:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,569,092.516 43.640% 67.980%
Against .......................... 1,780,912.534 1.242% 1.935%
Abstain .......................... 5,247,601.303 3.660% 5.701%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,707,936.347 54.379% 67.572%
Against .......................... 327,343.099 2.309% 2.869%
Abstain .......................... 346,234.094 2.442% 3.036%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
(e) To amend the Fund's fundamental investment restriction regarding investments
in commodities:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,112,483.719 43.322% 67.484%
Against .......................... 2,292,080.415 1.598% 2.491%
Abstain .......................... 5,193,042.219 3.622% 5.641%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,679,674.899 54.179% 67.324%
Against .......................... 387,040.616 2.731% 3.393%
Abstain .......................... 314,798.025 2.220% 2.760%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
Annual Report | 71
Franklin Municipal Securities Trust
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007
AND MAY 11, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(f) To amend the Fund's fundamental investment restriction regarding issuing
senior securities:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,422,524.580 43.538% 67.820%
Against .......................... 1,930,491.691 1.346% 2.098%
Abstain .......................... 5,244,590.082 3.658% 5.698%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,726,334.687 54.508% 67.733%
Against .......................... 366,021.871 2.583% 3.209%
Abstain .......................... 289,156.982 2.039% 2.535%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
(g) To amend the Fund's fundamental investment restriction regarding industry
concentration:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,340,129.228 43.480% 67.731%
Against .......................... 1,974,558.294 1.378% 2.145%
Abstain .......................... 5,282,918.831 3.684% 5.740%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,724,602.801 54.496% 67.718%
Against .......................... 332,590.782 2.346% 2.915%
Abstain .......................... 324,319.957 2.288% 2.844%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
72 | Annual Report
Franklin Municipal Securities Trust
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007
AND MAY 11, 2007 (CONTINUED)
Proposal 5. To approve the elimination of certain of the Fund's fundamental
investment restrictions:
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN CALIFORNIA HIGH YIELD OUTSTANDING VOTED
MUNICIPAL FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 62,560,576.977 43.634% 67.970%
Against .......................... 2,075,674.481 1.448% 2.255%
Abstain .......................... 4,961,354.895 3.460% 5.391%
Broker Non-votes ................. 22,443,688.000 15.654% 24.384%
- ----------------------------------------------------------------------------
TOTAL ............................ 92,041,294.353 64.196% 100.000%
- ----------------------------------------------------------------------------
% OF % OF
FRANKLIN TENNESSEE OUTSTANDING VOTED
MUNICIPAL BOND FUND SHARES VOTED SHARES SHARES
- ----------------------------------------------------------------------------
For .............................. 7,638,462.182 53.888% 66.963%
Against .......................... 413,022.301 2.914% 3.620%
Abstain .......................... 330,029.057 2.328% 2.894%
Broker Non-votes ................. 3,025,547.000 21.344% 26.523%
- ----------------------------------------------------------------------------
TOTAL ............................ 11,407,060.540 80.474% 100.000%
Annual Report | 73
Franklin Municipal Securities Trust
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 the past five years and number of 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
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 140 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING 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).
- -----------------------------------------------------------------------------------------------------------------------------
ROBERT F. CARLSON (1928) Trustee Since April 2007 121 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, senior member and past President, Board of Administration, California Public Employees Retirement Systems
(CALPERS); and FORMERLY, member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield
of California; and Chief Counsel, California Department of Transportation.
- -----------------------------------------------------------------------------------------------------------------------------
SAM GINN (1937) Trustee Since April 2007 121 Director, Chevron Corporation
One Franklin Parkway (global energy company) and ICO
San Mateo, CA 94403-1906 Global Communications (Holdings)
Limited (satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC; Chairman of the Board and Chief Executive
Officer, AirTouch Communications (1993-1998) and Pacific Telesis Groups (1988-1994).
- -----------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 1998 140 Director, Hess Corporation
One Franklin Parkway (formerly, Amerada Hess
San Mateo, CA 94403-1906 Corporation) (exploration and
refining of oil and gas), H.J.
Heinz Company (processed foods and
allied products), RTI International
Metals, Inc. (manufacture and
distribution of titanium),
Canadian National Railway (rail-
road), and White Mountains
Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING 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).
- -----------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1991 121 Director, Center for Creative Land
One Franklin Parkway Recycling (redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture
capital).
- -----------------------------------------------------------------------------------------------------------------------------
74 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2005 140 Director, Hess Corporation
One Franklin Parkway (formerly, Amerada Hess
San Mateo, CA 94403-1906 Corporation) (exploration and
refining of oil and gas) and
Sentient Jet (private jet service);
and FORMERLY, Director, Becton
Dickinson and Company (medical
technology), Cooper Industries,
Inc. (electrical products and tools
and hardware), Health Net, Inc.
(formerly, Foundation Health)
(integrated managed care), The
Hertz Corporation (car rental),
Pacific Southwest Airlines, The RCA
Corporation, Unicom (formerly,
Commonwealth Edison), UAL
Corporation (airlines) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation.
- -----------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Trustee Since April 2007 140 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); 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) Trustee Since 2006 121 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
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. (office supplies) (1992-1996); Executive
Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain &
Company (1986-1990).
- -----------------------------------------------------------------------------------------------------------------------------
Annual Report | 75
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 140 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide,
Inc.; 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.
- -----------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since April 2007 91 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (1959) Vice Since 1999 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton
Investments.
- -----------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. Vice Since 1999 Not Applicable Not Applicable
(1965) President
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton
Investments.
- -----------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer and Officer since
Vice 2004 and Vice
President - President - AML
AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin
Resources, Inc. (1994-2001).
- -----------------------------------------------------------------------------------------------------------------------------
76 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 30 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant
Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin
Templeton Services, LLC (1997-2003).
- -----------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL Executive
33394-3091 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. President President since Not Applicable Not Applicable
(1940) and Chief 1993 and Chief
One Franklin Parkway Executive Executive
San Mateo, CA 94403-1906 Officer - Officer -
Investment Investment
Management Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 of the investment companies in
Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice Since 2006 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906 and
Secretary
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------
Annual Report | 77
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- -----------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL Chief
33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP
(1979-1987 and 1991-2004).
- -----------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (1961) Vice Since 1999 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight 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.
** Charles B. Johnson is considered to be an interested person of the Trust
under the federal securities laws due to his position as officer and director
and major shareholder of Franklin Resources, Inc. (Resources), which is the
parent company of the Fund's investment manager and distributor. Gregory E.
Johnson is considered to be an interested person of the Trust under the federal
securities laws due to his position as officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, 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.
Note 3: Prior to May 31, 2007, Harmon E. Burns, Rupert H. Johnson, Jr., S.
Joseph Fortunato and Gordon S. Macklin ceased to be a trustee of the Trust.
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 OF TRUSTEES 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 OF TRUSTEES 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 TRUSTEE
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 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
78| Annual Report
Franklin Municipal Securities Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, the Board of Trustees ("Board"), including
a majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the two separate tax-exempt funds
within the 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,
as well as periodic reports on shareholder services, legal, compliance, pricing,
and other services provided by the Investment Manager ("Manager") and its
affiliates. Information furnished specifically in connection with the renewal
process included a report for each Fund prepared by Lipper, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper reports 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 report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was 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 including management's
explanation of differences where relevant and a three-year expense analysis with
an explanation for any increase in expense ratios. Additional material
accompanying such report was a memorandum prepared by management describing
project initiatives and capital investments relating to the services provided to
the Funds by the Franklin Templeton Investments organization, as well as a
memorandum relating to economies of scale and a comparative analysis concerning
transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all 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 each 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 SERVICE. 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 them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin
Annual Report | 79
Franklin Municipal Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 Fund shareholders from being
part of the Franklin Templeton family of funds, including the right to exchange
investments between the same class of 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 continuous efforts and expenditures in establishing back-up
systems and recovery procedures to function in the event of a natural disaster,
it being noted that such systems and procedures had functioned smoothly during
the Florida hurricanes and blackouts experienced in recent years. 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 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 Fund shareholders. The
Board also took into account the quality of transfer agent and shareholder
services provided Fund shareholders by an affiliate of the Manager, noting
continuing expenditures by management to increase and improve the scope of such
services, periodic favorable reports on such service conducted by third parties,
the high industry ranking given to the Franklin Templeton website, and the
firsthand experience of individual Board members who deal with the shareholder
services department in their capacities as shareholders in one or more of the
various Franklin Templeton funds.
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 Lipper reports furnished for the agreement
renewals. The Lipper reports prepared for each individual Fund showed its
investment performance in comparison with a performance universe selected by
Lipper. The following summarizes the performance results for each of the Funds.
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND -- The Lipper report for this Fund
showed the investment performance of its Class A shares for the year ended
December 31, 2006, and the previous 10 years ended that date in comparison with
a performance universe consisting of all retail and institutional California
municipal debt funds as selected by Lipper. Such comparison showed that the
Fund's income return during 2006, as shown in the Lipper report, and for the
previous three-, five- and ten-year periods on an annualized basis was in the
highest quintile of its performance universe. The Lipper report also showed that
the Fund's total return during 2006 was in the highest quintile of its
performance universe and for the previous three-, five- and ten-year periods on
an annualized basis was also in the highest quintile of its performance
universe. The Board expressed its satisfaction with such performance.
80 | Annual Report
Franklin Municipal Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
FRANKLIN TENNESSEE MUNICIPAL BOND FUND -- The Lipper report for this Fund showed
the investment performance of its only share class for the year ended December
31, 2006, and the previous 10 years ended that date in comparison with a
performance universe consisting of all retail and institutional Tennessee
municipal debt funds as selected by Lipper. Such comparison showed that the
Fund's income return in 2006, as shown in the Lipper report, was in the
second-highest quintile of its performance universe, and during each of the
previous three-, five- and ten-year periods on an annualized basis was also in
the second-highest quintile of such universe. The Lipper report also showed that
the Fund's total return during 2006 was in the middle quintile of it Lipper
performance universe and for each of the previous three-, five- and ten-year
periods on an annualized basis was in either the highest or second-highest
quintile of such universe. The Board expressed its satisfaction with such
performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group
under the Lipper report. Prior to making such comparison, the Board relied upon
a survey showing that the scope of management advisory services covered under
the Fund's investment management agreement was similar to those provided by fund
managers to other mutual fund groups. In reviewing comparative costs, emphasis
was given to 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 expenses 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 in the case of Franklin California High Yield Municipal Fund. The
results of such expense comparisons showed the contractual investment management
fee rate of Franklin California High Yield Municipal Fund was in the second
least expensive quintile of its Lipper expense group and its total expenses were
in the least expensive quintile of such expense group. The contractual
investment management fee rate for Franklin Tennessee Municipal Bond Fund was
shown to be in the second most expensive quintile of its expense group, but
within five basis points of the group median, while its actual total expenses
were in the least expensive quintile of its Lipper expense group. The Board was
satisfied with the management fee and total expenses of these Funds in
comparison to their Lipper expense groups.
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. Specific attention was given to the methodology
followed in allocating costs to each Fund, it being recognized that allocation
methodologies are inherently
Annual Report | 81
Franklin Municipal Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
subjective and various allocation methodologies may each be reasonable while
producing different results. In this respect, the Board noted that, while being
continuously refined and reflecting changes in the Manager's own cost
accounting, the allocation methodology was consistent with that followed in
profitability report presentations for the Funds made in prior years and that
the Funds' independent registered public accounting firm had been engaged by the
Manager to perform certain procedures on a biennial basis, specified and
approved by the Manager and the Funds' Board solely for their purposes and use
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 meet additional regulatory and compliance
requirements resulting from the Sarbanes-Oxley Act and recent SEC requirements.
In addition, the Board considered a third-party study comparing the
profitability of the Manager's parent on an overall basis as compared 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 its interest in a joint venture entity that financed
up-front commissions paid to brokers/dealers who sold fund Class B shares prior
to February 2005, when the offering of such shares was discontinued. 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 a 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 investment management agreement
for each Fund provides an initial fee of 0.625% on the first $100 million of
assets; 0.5% on the next $150 million of assets; and 0.45% on assets in excess
of $250 million with additional breakpoints beginning at the $10 billion level.
At December 31, 2006, the net assets of Franklin California High Yield Municipal
Fund were approximately $1.5 billion and those of Franklin Tennessee Municipal
Bond Fund were approximately $161 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 agreements for both Funds
provided a sharing of benefits with each Fund and its shareholders.
82 | Annual Report
Franklin Municipal Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
PROXY VOTING POLICIES AND PROCEDURES
The Trust 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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, 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 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
1-800/SEC-0330.
Annual Report | 83
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is open only to existing shareholders and select retirement plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy remained the
same.
6. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN MUNICIPAL
SECURITIES TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
MUN A2007 07/07
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 $45,788 for the fiscal year ended May 31, 2007
and $37,016 for the fiscal year ended May 31, 2006.
(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.
The aggregate 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 were $46,000 for the
fiscal year ended May 31, 2007 and $0 for the fiscal year ended
May 31, 2006. The services for which these fees were paid
included tax compliance and advice.
(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 $0
for the fiscal year ended May 31, 2007 and $752 for the fiscal
year ended May 31, 2006. 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 not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended
May 31, 2007 and $175,109 for the fiscal year ended May 31,
2006. 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.
(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 $46,000 for the fiscal year ended May 31, 2007
and $175,861 for the fiscal year ended May 31, 2006.
(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 significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls 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 Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial 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/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date July 26, 2007
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/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date July 26, 2007
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date July 26, 2007