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 811-4646 RIVERSOURCE CALIFORNIA TAX-EXEMPT TRUST (Exact name of registrant as specified in charter) 50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (Address of principal executive offices) (Zip code) Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474 (Name and address of agent for service) Registrant's telephone number, including area code: (612) 671-1947 Date of fiscal year end: 8/31 Date of reporting period: 8/31 Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE CALIFORNIA TAX-EXEMPT FUND RIVERSOURCE MINNESOTA TAX-EXEMPT FUND RIVERSOURCE NEW YORK TAX-EXEMPT FUND ANNUAL REPORT FOR THE PERIOD ENDED AUGUST 31, 2009 (Prospectus also enclosed) EACH FUND SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH LEVEL OF INCOME GENERALLY EXEMPT FROM FEDERAL INCOME TAX AS WELL AS FROM THE RESPECTIVE STATE AND LOCAL INCOME TAX. <Table> This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. (SINGLE STRATEGY FUNDS ICON) </Table> TABLE OF CONTENTS -------------------------------------------------------------- <Table> Your Fund at a Glance.............. 2 RiverSource California Tax-Exempt Fund.......................... 2 RiverSource Minnesota Tax-Exempt Fund.......................... 5 RiverSource New York Tax-Exempt Fund.......................... 8 Manager Commentary................. 11 The Funds' Long-term Performance... 20 Fund Expenses Examples............. 26 Portfolios of Investments.......... 30 Statements of Assets and Liabilities...................... 59 Statements of Operations........... 61 Statements of Changes in Net Assets........................... 62 Financial Highlights............... 65 Notes to Financial Statements...... 77 Report of Independent Registered Public Accounting Firm........... 94 Federal Income Tax Information..... 96 Board Members and Officers......... 98 Approval of Investment Management Services Agreement............... 102 Proxy Voting....................... 105 </Table> RiverSource California Tax-Exempt Fund, RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund are, singularly and collectively, where the context requires, referred to as either "the Fund," "each Fund" or "the Funds." - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- RiverSource California Tax-Exempt Fund FUND SUMMARY - -------------------------------------------------------------------------------- > RiverSource California Tax-Exempt Fund's Class A shares, excluding sales charge, rose 3.59% for the 12 months ended Aug. 31, 2009. The Fund underperformed the Barclays Capital Municipal Bond California 2 Plus Year Index which advanced 4.18%. The Fund outperformed the Lipper California Municipal Debt Funds Index, which gained 1.25% for the same period. > A broad barometer applicable to each of the Funds, the Barclays Capital Municipal Bond Index was up 5.67% for the same 12-month period. ANNUALIZED TOTAL RETURNS (for period ended Aug. 31, 2009) - -------------------------------------------------------------------------------- <Table> <Caption> 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------- RiverSource California Tax-Exempt Fund Class A (excluding sales charge) +3.59% +2.35% +3.10% +4.33% - --------------------------------------------------------------------- Barclays Capital Municipal Bond California 2 Plus Year Index (unmanaged) +4.18% +3.36% +3.98% +5.36% - --------------------------------------------------------------------- Barclays Capital Municipal Bond Index (unmanaged) +5.67% +4.14% +4.15% +5.40% - --------------------------------------------------------------------- Lipper California Municipal Debt Funds Index +1.25% +1.32% +2.65% +4.28% - --------------------------------------------------------------------- </Table> (See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 1(800) 221-2450. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's returns reflect the effect of fee waivers/expense reimbursements, if any. Without such waivers/reimbursements, the Fund's returns would be lower. See the Average Annual Total Returns table for performance of other share classes of the Fund. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. - -------------------------------------------------------------------------------- 2 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource California Tax-Exempt Fund AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- <Table> <Caption> AT AUG. 31, 2009 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 8/18/86) +3.59% +2.35% +3.10% +4.33% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) +2.81% +1.59% +2.33% +3.55% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) +2.60% +1.52% +2.32% N/A +3.59% - --------------------------------------------------------------------------- With sales charge Class A (inception 8/18/86) -1.33% +0.71% +2.10% +3.82% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) -2.14% +0.67% +1.99% +3.55% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) +1.62% +1.52% +2.32% N/A +3.59% - --------------------------------------------------------------------------- </Table> Class A share performance reflects the maximum initial sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second year 4%; third and fourth years 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. * For classes with less than 10 years performance. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- RiverSource California Tax-Exempt Fund STYLE MATRIX - -------------------------------------------------------------------------------- <Table> <Caption> DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW </Table> Shading within the style matrix approximates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS - -------------------------------------------------------------------------------- <Table> Weighted average life(1) 19.2 years - -------------------------------------- Effective duration(2) 8.6 years - -------------------------------------- Weighted average bond rating(3) A+ - -------------------------------------- </Table> (1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. There are risks associated with an investment in a municipal bond fund, including credit risk, interest rate risk, prepayment and extension risk, and geographic concentration risk. See the Fund's prospectus for information on these and other risks associated with the Fund. In general, bond prices rise when interest rates fall and vice versa. This effect is more pronounced for longer-term securities. Non-investment grade securities, commonly called "high- yield" or "junk" bonds, generally have more volatile prices and carry more risk to principal and income than investment grade securities. Because the Fund concentrates its investments in municipal securities issued by a single state and its municipalities, specific events or factors affecting a particular state can cause more volatility in the Fund than a fund that is more geographically diversified. Income from tax-exempt funds may be subject to state and local taxes and a portion of income may be subject to the federal and/or state alternative minimum tax for certain investors. Federal income tax rules will apply to any capital gains distribution. - -------------------------------------------------------------------------------- 4 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT YOUR FUND AT A GLANCE ---------------------------------------------------------- RiverSource Minnesota Tax-Exempt Fund FUND SUMMARY - -------------------------------------------------------------------------------- > RiverSource Minnesota Tax-Exempt Fund's Class A shares, excluding sales charge, gained 5.50% for the 12 months ended Aug. 31, 2009. The Fund underperformed the Barclays Capital Municipal Bond Minnesota 3 Plus Year Enhanced Index which rose 7.32%, but outperformed the Lipper Minnesota Municipal Debt Funds Index, which was up 4.65%, for the same period. > A broad barometer applicable to each of the Funds, the Barclays Capital Municipal Bond Index was up 5.67% for the same 12-month period. ANNUALIZED TOTAL RETURNS (for period ended Aug. 31, 2009) - -------------------------------------------------------------------------------- <Table> <Caption> 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------- RiverSource Minnesota Tax-Exempt Fund Class A (excluding sales charge) +5.50% +3.41% +3.32% +4.39% - --------------------------------------------------------------------- Barclays Capital Municipal Bond Minnesota 3 Plus Year Enhanced Index (unmanaged) +7.32% +4.99% +4.63% +5.65% - --------------------------------------------------------------------- Barclays Capital Municipal Bond Index (unmanaged) +5.67% +4.14% +4.15% +5.40% - --------------------------------------------------------------------- Lipper Minnesota Municipal Debt Funds Index +4.65% +3.10% +3.41% +4.53% - --------------------------------------------------------------------- </Table> (See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 1(800) 221-2450. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's returns reflect the effect of fee waivers/expense reimbursements, if any. Without such waivers/reimbursements, the Fund's returns would be lower. See the Average Annual Total Returns table for performance of other share classes of the Fund. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 5 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- RiverSource Minnesota Tax-Exempt Fund AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- <Table> <Caption> AT AUG. 31, 2009 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 8/18/86) +5.50% +3.41% +3.32% +4.39% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) +4.50% +2.63% +2.55% +3.61% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) +4.51% +2.63% +2.54% N/A +3.85% - --------------------------------------------------------------------------- With sales charge Class A (inception 8/18/86) +0.49% +1.74% +2.32% +3.89% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) -0.50% +1.69% +2.19% +3.61% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) +3.51% +2.63% +2.54% N/A +3.85% - --------------------------------------------------------------------------- </Table> Class A share performance reflects the maximum initial sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second year 4%; third and fourth years 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. * For classes with less than 10 years performance. - -------------------------------------------------------------------------------- 6 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource Minnesota Tax-Exempt Fund STYLE MATRIX - -------------------------------------------------------------------------------- <Table> <Caption> DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW </Table> Shading within the style matrix approximates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS - -------------------------------------------------------------------------------- <Table> Weighted average life(1) 15.7 years - -------------------------------------- Effective duration(2) 6.7 years - -------------------------------------- Weighted average bond rating(3) AA- - -------------------------------------- </Table> (1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 7 YOUR FUND AT A GLANCE ---------------------------------------------------------- RiverSource New York Tax-Exempt Fund FUND SUMMARY - -------------------------------------------------------------------------------- > RiverSource New York Tax-Exempt Fund's Class A shares, excluding sales charge, advanced 4.62% for the 12 months ended Aug. 31, 2009. The Fund underperformed the Barclays Capital Municipal Bond New York 4 Plus Year Index which rose 5.88%. However, the Fund outperformed the Lipper New York Municipal Debt Funds Index, which gained 3.49% for the same period. > A broad barometer applicable to each of the Funds, the Barclays Capital Municipal Bond Index was up 5.67% for the same 12-month period. ANNUALIZED TOTAL RETURNS (for period ended Aug. 31, 2009) - -------------------------------------------------------------------------------- <Table> <Caption> 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------ RiverSource New York Tax-Exempt Fund Class A (excluding sales charge) +4.62% +2.91% +3.11% +4.33% - ------------------------------------------------------------------------ Barclays Capital Municipal Bond New York 4 Plus Year Index (unmanaged) +5.88% +4.32% +4.38% +5.72% - ------------------------------------------------------------------------ Barclays Capital Municipal Bond Index (unmanaged) +5.67% +4.14% +4.15% +5.40% - ------------------------------------------------------------------------ Lipper New York Municipal Debt Funds Index +3.49% +2.50% +3.11% +4.49% - ------------------------------------------------------------------------ </Table> (See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 1(800) 221-2450. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's returns reflect the effect of fee waivers/expense reimbursements, if any. Without such waivers/reimbursements, the Fund's returns would be lower. See the Average Annual Total Returns table for performance of other share classes of the Fund. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. - -------------------------------------------------------------------------------- 8 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource New York Tax-Exempt Fund AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- <Table> <Caption> AT AUG. 31, 2009 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 8/18/86) +4.62% +2.91% +3.11% +4.33% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) +3.83% +2.13% +2.34% +3.55% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) +3.84% +2.13% +2.34% N/A +3.74% - --------------------------------------------------------------------------- With sales charge Class A (inception 8/18/86) -0.35% +1.25% +2.12% +3.82% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) -1.17% +1.20% +1.99% +3.55% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) +2.84% +2.13% +2.34% N/A +3.74% - --------------------------------------------------------------------------- </Table> Class A share performance reflects the maximum initial sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second year 4%; third and fourth years 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. * For classes with less than 10 years performance. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 9 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- RiverSource New York Tax-Exempt Fund STYLE MATRIX - -------------------------------------------------------------------------------- <Table> <Caption> DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW </Table> Shading within the style matrix approximates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS - -------------------------------------------------------------------------------- <Table> Weighted average life(1) 18 years - ------------------------------------- Effective duration(2) 7 years - ------------------------------------- Weighted average bond rating(3) AA- - ------------------------------------- </Table> (1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. - -------------------------------------------------------------------------------- 10 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT MANAGER COMMENTARY ------------------------------------------------------------- Dear Shareholder, Each of the RiverSource State Tax-Exempt Funds underperformed its respective Barclays Capital benchmark index, but each outperformed its respective Lipper peer group for the 12 months ended Aug. 31, 2009. All Fund returns are for Class A shares, excluding sales charge, and all returns are for the 12 months ended Aug. 31, 2009. All Lipper categories represent the respective Fund's peer group. > RIVERSOURCE CALIFORNIA TAX-EXEMPT FUND rose 3.59%. The Fund underperformed the Barclays Capital Municipal Bond California 2 Plus Year Index (formerly known as the Lehman Brothers California 2 Plus Year Municipal Bond Index), which advanced 4.18%. The Fund outperformed the Lipper California Municipal Debt Funds Index, which gained 1.25% for the same period. > RIVERSOURCE MINNESOTA TAX-EXEMPT FUND gained 5.50%. The Fund underperformed the Barclays Capital Municipal Bond Minnesota 3 Plus Year Enhanced Index (formerly known as the Lehman Brothers Minnesota 3 Plus Year Enhanced Municipal Bond Index), which rose 7.32%, but outperformed the Lipper Minnesota Municipal Debt Funds Index, which was up 4.65%, for the same period. > RIVERSOURCE NEW YORK TAX-EXEMPT FUND advanced 4.62%. The Fund underperformed the Barclays Capital Municipal Bond New York 4 Plus Year Index (formerly known as the Lehman Brothers New York 4 Plus Year Municipal Bond Index), which rose 5.88%. However, the Fund outperformed the Lipper New York Municipal Debt Funds Index, which gained 3.49% for the same period. A broad barometer applicable to each of the Funds, the Barclays Capital Municipal Bond Index was up 5.67% for the same 12-month period. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 11 MANAGER COMMENTARY (continued) ------------------------------------------------- RiverSource California Tax-Exempt Fund QUALITY BREAKDOWN (at Aug. 31, 2009; % of bond portfolio assets) - --------------------------------------------------------------------- <Table> <Caption> AAA bonds 8.2% - ------------------------------------------------ AA bonds 31.5% - ------------------------------------------------ A bonds 46.4% - ------------------------------------------------ BBB bonds 9.9% - ------------------------------------------------ Non-investment grade bonds 2.8% - ------------------------------------------------ Non-rated bonds 1.2% - ------------------------------------------------ </Table> Ratings for 5.8% of the bond portfolio assets were determined through internal analysis. RiverSource Minnesota Tax-Exempt Fund QUALITY BREAKDOWN (at Aug. 31, 2009; % of bond portfolio assets) - --------------------------------------------------------------------- <Table> <Caption> AAA bonds 27.3% - ------------------------------------------------ AA bonds 20.2% - ------------------------------------------------ A bonds 35.6% - ------------------------------------------------ BBB bonds 10.4% - ------------------------------------------------ Non-investment grade bonds 4.9% - ------------------------------------------------ Non-rated bonds 1.6% - ------------------------------------------------ </Table> Ratings for 0.9% of the bond portfolio assets were determined through internal analysis. RiverSource New York Tax-Exempt Fund QUALITY BREAKDOWN (at Aug. 31, 2009; % of bond portfolio assets) - --------------------------------------------------------------------- <Table> <Caption> AAA bonds 24.5% - ------------------------------------------------ AA bonds 45.4% - ------------------------------------------------ A bonds 15.8% - ------------------------------------------------ BBB bonds 8.0% - ------------------------------------------------ Non-investment grade bonds 6.3% - ------------------------------------------------ </Table> Ratings for 1.3% of the bond portfolio assets were determined through internal analysis. Bond ratings apply to the underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC, (the Investment Manager), rates a security using an internal rating system when Moody's doesn't provide a rating. SIGNIFICANT PERFORMANCE FACTORS Generating positive absolute returns, the tax-exempt fixed income market significantly outpaced the U.S. equity market but underperformed the - -------------------------------------------------------------------------------- 12 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- taxable fixed income market for the fiscal year. That said, the performance of the tax-exempt fixed income market can be divided into two distinct portions during the 12 months ended Aug. 31, 2009. From the start of the fiscal year in September 2008 through the end of the calendar year, the tax-exempt bond market faced significant challenges. The bankruptcy of Lehman Brothers in mid-September forced a number of financial institutions to go out of business, either by merging with other institutions or through takeover by the U.S. government. Liquidity dried up and demand for municipal bonds dramatically slowed as the institutional buyer base shrunk considerably due to consolidation within the industry and balance sheet pressures among the survivors. There was a great deal of deleveraging (forced selling) by hedge funds, and after-shocks from the unwinding of tender option bond programs.* Investors grew increasingly cautious. At the same time, supply was largely sidelined and/or postponed due to the lack of demand. Given these difficult conditions, by the end of December the ratio of 10-year municipal bond yields to 10-year Treasury yields had reached a new historical high of 186%. The slope of the tax-exempt bond yield curve steepened significantly during these months as longer-dated municipal bond yields rose and short-term tax-exempt yields, driven largely by the Federal Reserve System's (the Fed's) dramatic interest rate cuts, declined. In January 2009, demand for municipal securities began to increase, boosted by the entry (or re-entry) of several big name crossover, institutional and individual buyers into the tax-exempt market and by the introduction of several federal stimulus programs. For example, the American Recovery and Reinvestment Act (ARRA), signed into law in February 2009, created new demand for municipal bonds via provisions that altered the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 and the Tax Reform Act (TRA) of 1986. Among ARRA's provisions were those that increased the limits on Bank Qualified** bonds, provided relief in the Alternative Minimum Tax (AMT) rules, expanded tax-exempt financing opportunities for select manufacturing facilities and created new forms of tax- exempt bonds. ARRA also created a new Build America Bond program, which authorizes state and local governments to issue Build America Bonds as taxable bonds in 2009 and 2010 to finance any capital expenditures for which they otherwise could issue tax-exempt government bonds. State and local governments receive a direct federal subsidy payment for a portion of their borrowing costs on Build America - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 13 MANAGER COMMENTARY (continued) ------------------------------------------------- Bonds equal to 35% of the total coupon interest paid to investments. This new program was intended to assist state and local governments in financing capital projects at lower borrowing costs and to stimulate the economy and create jobs. It also would take supply out of the municipal bond market, especially at the longer end of the tax-exempt bond yield curve. The first Build America Bond deal came to market in April 2009. As the municipal bond market rallied, yields were driven lower and, from January through August 2009, the tax-exempt bond yield curve flattened significantly, meaning that the difference in yields between shorter-term and longer-term municipal securities narrowed. During these same months, flows into municipal bond mutual funds were very strong, as expectations of higher marginal personal income tax rates ahead and concerns regarding reduced municipal bond supply dominated. Lower-quality, higher-yielding municipal bonds outperformed their higher-quality, lower-yielding counterparts, and longer-dated municipal bonds outperformed shorter-maturity tax-exempt securities. The ratio of 10-year municipal bond yields to 10-year Treasury yields plummeted in 2009 (year-to-date through August 31) toward an historical average of approximately 80%. It is well worth noting that for the first eight months of 2009, the tax-exempt fixed income market significantly outperformed the U.S. Treasury market. For the fiscal year as a whole, yields declined across the tax-exempt bond yield curve, or spectrum of maturities, with the yield curve steepening, as yields fell more at the shorter-term end of the yield curve than at the longer-term end. Each of the RiverSource State Tax-Exempt Funds benefited from yield curve positioning. As long-term municipal bond yields rose and short-term municipal bond yields fell during the early portion of the annual period, the Funds benefited from the yield curve steepening bias we had implemented several months earlier. Early in 2009, we then took on a yield curve flattening bias in the Funds, with an emphasis on securities at the longer-term end of the yield curve. Such positioning proved prudent, as the tax-exempt bond yield curve, as mentioned, indeed did flatten year-to-date through Aug. 31, 2009. Another positive contributing factor to each of the three Funds' performance during this annual period was duration positioning. Early in 2009, we actively lengthened each Funds' duration, which were already modestly longer than each Fund's respective - -------------------------------------------------------------------------------- 14 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- Barclays Capital benchmark index. Lengthening the Funds' duration helped as tax- exempt bond rates subsequently declined. Duration is a measure of a fund's sensitivity to changes in interest rates. Further boosting the three Funds' results, relative to their respective Barclays Capital benchmark indices, was having a sizable allocation to utilities, which outperformed other areas of the Barclays Capital Municipal Bond Index during the fiscal year. Individual issue selection within the utility sector also was effective. An increased exposure to higher-quality higher education bonds further buoyed all three Funds' performance, as the education sector generated strong returns during the period. Having only modest exposure to high-yield and non-investment grade municipal bonds benefited the Funds' results as well, as lower-quality sectors of the market such as these underperformed higher-quality sectors during the fiscal period overall. RiverSource New York Tax-Exempt Fund and RiverSource California Tax-Exempt Fund both benefitted during the fiscal period from their sizable holdings in single- family housing bonds. Single-family housing was one of the best performing areas within the Barclays Capital Municipal Bond Index during the 12 months ended Aug. 31, 2009. Effective issue selection within the health care sector benefited RiverSource Minnesota Tax-Exempt Fund, more than offsetting the impact of its sizable exposure to this underperforming sector. However, such allocation positioning to the health care sector in RiverSource California Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund outweighed issue selection and thus detracted. In all three Funds, having only a modest position in general obligation bonds detracted most, as general obligation bonds outperformed revenue bonds during the fiscal year. Individual issue selection among general obligation bonds also weighed negatively on performance. Finally, a significant allocation to bonds rated A across a variety of sectors detracted from the performance of all three Funds. Similarly, RiverSource New York Tax-Exempt Fund's and RiverSource Minnesota Tax-Exempt Fund's sizable positions in bonds rated BBB across a variety of sectors negatively impacted the performance of these Funds. A-rated and BBB-rated credits materially underperformed higher-quality tax-exempt bonds for the fiscal year. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 15 MANAGER COMMENTARY (continued) ------------------------------------------------- CHANGES TO THE FUNDS' PORTFOLIOS As mentioned, we lengthened the duration of each of the Funds, relative to each Fund's respective Barclays Capital benchmark index early in 2009 and shifted from a yield-curve-steepening to a yield-curve-flattening bias. We also increased the Funds' exposure to the education sector in all three Funds, but most especially in RiverSource New York Tax-Exempt Fund. We focused on higher- quality higher education bonds, as we feel that these bonds may potentially enable the Funds to pick up incremental yield without taking on significant risk, as these bonds tend to be less economically sensitive. We eliminated the Funds' positions in tender option bond programs, as their cost structure became less attractive with the steepening of the yield curve during the first several months of the fiscal year. In RiverSource California Tax-Exempt Fund, we reduced exposure to prepaid natural gas municipal bonds and to pre-refunded bonds.*** Seeking to use market weakness as a buying opportunity, we increased this Fund's exposure to State of California general obligation bonds. As the state's economy as a whole, and its real estate market in particular, remained under pressure, spreads (the difference in yields between these securities and AAA-rated municipals) widened to what we considered to be attractive levels. Conversely, we reduced exposure to local general obligation bonds in RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund. We remained concerned that spreads on these bonds would widen further over the coming months, as budget imbalances and job losses continued to climb. Primarily based on individual issue analysis, we modestly increased exposure to the health care sector in RiverSource California Tax-Exempt Fund and RiverSource Minnesota Tax-Exempt Fund. For the same reason, we decreased positioning in health care bonds in RiverSource New York Tax-Exempt Fund. OUR FUTURE STRATEGY At the end of August, we viewed the prospects for the tax-exempt bond market to be quite attractive. We believed that the tax-exempt bond market would continue to outperform U.S. Treasury securities, due primarily to favorable supply/demand technical factors. Demand was anticipated to - -------------------------------------------------------------------------------- 16 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- remain strong, given widespread expectations for higher federal, and in many cases, state and local, income taxes. At the same time, new issuance of municipal bonds was down 15% year-to-date through Aug. 31, 2009, a trend that we believed was likely to continue for some time. Such declining supply was due in part to the effect of the Build America Bonds. Importantly, despite headlines regarding municipal and state budget gaps, the credit quality of the U.S. tax-exempt market generally remained in sound condition compared to other fixed income classes during the annual period and the default rate among issuers remained historically low. We believe the Fed is likely to keep the targeted federal funds rate in the near-zero range for an extended period of time, and so we expect to maintain the Funds' duration at longer than that of each Fund's respective Barclays Capital benchmark index. Given our view of market conditions, we also believe that the tax-exempt bond yield curve may well continue to flatten during the remaining months of 2009. Thus, we expect to maintain the Funds' yield curve flattening bias for the near term. As we expect credit quality spreads to continue tightening over the coming months, we intend to seek lower-rated investment grade bonds, i.e. those with ratings in the A and BBB categories, as we go forward in all three tax-exempt bond Funds. We expect to move the Funds' allocations to bonds in these credit categories to a moderately greater weighting than each Fund's respective Barclays Capital benchmark index. At the same time, we expect to steer away from high-yield and non-investment grade municipal bonds. We similarly intend to only opportunistically invest in city and Importantly, despite headlines regarding municipal and state budget gaps, the credit quality of the U.S. tax-exempt market generally remained in sound condition compared to other fixed income classes during the annual period and the default rate among issuers remained historically low. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 17 MANAGER COMMENTARY (continued) ------------------------------------------------- local municipal debt, as the pressures of lower property values are likely to heighten before they ease. We will, of course, continue to carefully monitor the fundamentals of the issuers and their budgets, seeking to avoid bonds issued by those under ratings pressure. As always, and ever more so in the current environment, deep research resources, a forward-looking investment process and truly actively managed portfolios are keys, in our view, to meeting the Funds' investment objectives over the long term. Each Fund's emphasis continues to be on generating a high level of income generally exempt from federal income tax as well as from the respective state and local taxes. Catherine Stienstra Portfolio Manager *Tender option bond programs are programs in which investors effectively earn the fixed rates on long term bonds whose purchase is financed by paying something close to the Bond Market Association Municipal Swap Index rate. This leveraged trade, where investors borrow at low short rates to earn significantly higher returns further out on the yield curve, is referred to as a "carry trade." **Bank Qualified bonds are issued by communities that qualify as "small issuers," i.e. issuers that issue no more than $10 million worth of tax- exempt bonds annually. ARRA increased the limit on the amount of Bank Qualified bonds that can be designated by a "small issuer" during calendar years 2009 and 2010 from $10 million per year to $30 million per year. ***Pre-refunded bonds, also known as advance refunding, is a procedure in which a bond issuer floats a second bond at a lower interest rate, and the proceeds from the sale of the second bond are invested, usually in Treasury securities, which in turn, are held in escrow collateralizing the first bond. Advance refunded bonds no longer represent the credit risk profile of the original borrower, and given the high credit quality of the escrow account they often increase in value -- sometimes significantly. Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a fund in the RiverSource Family of Funds are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any fund in the RiverSource Family of Funds. - -------------------------------------------------------------------------------- 18 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT THIS PAGE LEFT BLANK INTENTIONALLY THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- For RiverSource California Tax-Exempt Fund The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource California Tax-Exempt Fund Class A shares (from 9/1/99 to 8/31/09) as compared to the performance of three widely cited performance indices, the Barclays Capital Municipal Bond California 2 Plus Year Index, the Barclays Capital Municipal Bond Index and the Lipper California Municipal Debt Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS - -------------------------------------------------------------------------------- <Table> <Caption> Results at Aug. 31, 2009 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE CALIFORNIA TAX-EXEMPT FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $9,867 $10,214 $11,094 $14,556 - ------------------------------------------------------------------------------------------ Average annual total return -1.33% +0.71% +2.10% +3.82% - ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL MUNICIPAL BOND CALIFORNIA 2 PLUS YEAR INDEX(1) Cumulative value of $10,000 $10,418 $11,041 $12,153 $16,851 - ------------------------------------------------------------------------------------------ Average annual total return +4.18% +3.36% +3.98% +5.36% - ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL MUNICIPAL BOND INDEX(2) Cumulative value of $10,000 $10,567 $11,295 $12,255 $16,922 - ------------------------------------------------------------------------------------------ Average annual total return +5.67% +4.14% +4.15% +5.40% - ------------------------------------------------------------------------------------------ LIPPER CALIFORNIA MUNICIPAL DEBT FUNDS INDEX(3) Cumulative value of $10,000 $10,125 $10,402 $11,399 $15,199 - ------------------------------------------------------------------------------------------ Average annual total return +1.25% +1.32% +2.65% +4.28% - ------------------------------------------------------------------------------------------ </Table> Results for other share classes can be found on page 3. - -------------------------------------------------------------------------------- 20 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE CALIFORNIA TAX-EXEMPT FUND LINE GRAPH) <Table> <Caption> RIVERSOURCE CALIFORNIA BARCLAYS CAPITAL TAX-EXEMPT FUND CALIFORNIA 2 CLASS A PLUS YEAR BARCLAYS CAPITAL LIPPER CALIFORNIA (INCLUDES SALES MUNICIPAL BOND MUNICIPAL BOND MUNICIPAL DEBT CHARGE) INDEX(1) INDEX(2) FUNDS INDEX(3) ---------------------- ------------------ ------------------ ----------------- 8/99 $ 9,525 $10,000 $10,000 $10,000 11/99 9,421 9,986 10,001 9,919 2/00 9,452 9,998 9,998 9,904 5/00 9,558 10,125 10,103 10,016 8/00 10,193 10,802 10,677 10,698 11/00 10,298 10,916 10,819 10,808 2/01 10,578 11,305 11,232 11,169 5/01 10,601 11,329 11,330 11,157 8/01 10,993 11,877 11,766 11,706 11/01 10,968 11,878 11,766 11,651 2/02 11,114 12,074 12,000 11,807 5/02 11,160 12,106 12,067 11,828 8/02 11,574 12,548 12,500 12,225 11/02 11,439 12,536 12,510 12,181 2/03 11,779 12,903 12,920 12,523 5/03 12,180 13,319 13,318 12,929 8/03 11,689 12,800 12,892 12,418 11/03 12,086 13,300 13,342 12,898 2/04 12,446 13,725 13,733 13,295 5/04 12,047 13,290 13,313 12,844 8/04 12,496 13,866 13,809 13,333 11/04 12,564 13,986 13,886 13,431 2/05 12,830 14,293 14,140 13,718 5/05 13,031 14,545 14,373 13,963 8/05 13,226 14,766 14,542 14,158 11/05 13,093 14,648 14,425 14,025 2/06 13,343 14,939 14,687 14,316 5/06 13,289 14,884 14,645 14,282 8/06 13,576 15,262 14,983 14,612 11/06 13,889 15,616 15,308 14,934 2/07 13,971 15,732 15,415 15,029 5/07 13,920 15,665 15,355 14,966 8/07 13,759 15,571 15,327 14,767 11/07 13,984 15,942 15,723 15,050 2/08 13,377 15,331 15,234 14,311 5/08 14,052 16,128 15,949 15,053 8/08 14,052 16,175 16,014 15,011 11/08 12,878 15,025 15,155 13,539 2/09 13,643 15,921 16,023 14,220 5/09 14,151 16,338 16,519 14,801 8/09 14,556 16,851 16,922 15,199 </Table> (1) The Barclays Capital Municipal Bond California 2 Plus Year Index, an unmanaged index, is a market value-weighted index of California investment- grade fixed-rate municipal bonds with maturities of two years or more. (2) The Barclays Capital Municipal Bond Index, an unmanaged index, is made up of a representative list of general obligation, revenue, insured and pre- refunded bonds. The index is frequently used as a general measure of tax- exempt bond market performance. The Barclays Capital indices reflect reinvestment of all distributions and changes in market prices. (3) The Lipper California Municipal Debt Funds Index includes the 30 largest municipal debt funds in California tracked by Lipper Inc. The Lipper index's returns include net reinvested dividends. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 21 THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- For RiverSource Minnesota Tax-Exempt Fund The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Minnesota Tax-Exempt Fund Class A shares (from 9/1/99 to 8/31/09) as compared to the performance of three widely cited performance indices, the Barclays Capital Municipal Bond Minnesota 3 Plus Year Enhanced Index, the Barclays Capital Municipal Bond Index and the Lipper Minnesota Municipal Debt Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS - -------------------------------------------------------------------------------- <Table> <Caption> Results at Aug. 31, 2009 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE MINNESOTA TAX-EXEMPT FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,049 $10,531 $11,216 $14,644 - ------------------------------------------------------------------------------------------ Average annual total return +0.49% +1.74% +2.32% +3.89% - ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL MUNICIPAL BOND MINNESOTA 3 PLUS YEAR ENHANCED INDEX(1) Cumulative value of $10,000 $10,732 $11,574 $12,542 $17,332 - ------------------------------------------------------------------------------------------ Average annual total return +7.32% +4.99% +4.63% +5.65% - ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL MUNICIPAL BOND INDEX(2) Cumulative value of $10,000 $10,567 $11,295 $12,255 $16,922 - ------------------------------------------------------------------------------------------ Average annual total return +5.67% +4.14% +4.15% +5.40% - ------------------------------------------------------------------------------------------ LIPPER MINNESOTA MUNICIPAL DEBT FUNDS INDEX(3) Cumulative value of $10,000 $10,465 $10,961 $11,827 $15,579 - ------------------------------------------------------------------------------------------ Average annual total return +4.65% +3.10% +3.41% +4.53% - ------------------------------------------------------------------------------------------ </Table> Results for other share classes can be found on page 6. - -------------------------------------------------------------------------------- 22 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE MINNESOTA TAX-EXEMPT FUND LINE GRAPH) <Table> <Caption> RIVERSOURCE MINNESOTA BARCLAYS CAPITAL TAX-EXEMPT FUND MINNESOTA 3 CLASS A PLUS YEAR BARCLAYS CAPITAL LIPPER MINNESOTA (INCLUDES SALES ENHANCED MUNICIPAL MUNICIPAL BOND MUNICIPAL DEBT CHARGE) BOND INDEX(1) INDEX(2) FUNDS INDEX(3) --------------------- ------------------ ------------------ ---------------- 8/99 $ 9,525 $10,000 $10,000 $10,000 11/99 9,420 9,985 10,001 9,910 2/00 9,388 9,973 9,998 9,872 5/00 9,465 10,075 10,103 9,945 8/00 9,951 10,655 10,677 10,456 11/00 10,050 10,807 10,819 10,582 2/01 10,347 11,235 11,232 10,946 5/01 10,446 11,323 11,330 11,012 8/01 10,767 11,727 11,766 11,409 11/01 10,796 11,728 11,766 11,410 2/02 10,983 11,951 12,000 11,597 5/02 11,053 12,043 12,067 11,670 8/02 11,420 12,446 12,500 12,015 11/02 11,286 12,446 12,510 12,002 2/03 11,741 12,877 12,920 12,418 5/03 12,078 13,305 13,318 12,791 8/03 11,693 12,928 12,892 12,392 11/03 12,072 13,348 13,342 12,787 2/04 12,381 13,738 13,733 13,144 5/04 12,025 13,359 13,313 12,774 8/04 12,435 13,819 13,809 13,172 11/04 12,468 13,903 13,886 13,244 2/05 12,636 14,156 14,140 13,470 5/05 12,817 14,391 14,373 13,684 8/05 12,924 14,536 14,542 13,837 11/05 12,795 14,426 14,425 13,728 2/06 13,029 14,684 14,687 13,965 5/06 12,973 14,628 14,645 13,925 8/06 13,243 14,976 14,983 14,214 11/06 13,495 15,285 15,308 14,486 2/07 13,568 15,390 15,415 14,576 5/07 13,489 15,322 15,355 14,525 8/07 13,411 15,302 15,327 14,416 11/07 13,730 15,754 15,723 14,727 2/08 13,200 15,339 15,234 14,267 5/08 13,872 16,060 15,949 14,892 8/08 13,880 16,150 16,014 14,887 11/08 12,990 15,408 15,155 13,919 2/09 13,780 16,563 16,023 14,685 5/09 14,319 17,054 16,519 15,235 8/09 14,644 17,332 16,922 15,579 </Table> (1) The Barclays Capital Municipal Bond Minnesota 3 Plus Year Enhanced Index, an unmanaged index, is a market value-weighted index of Minnesota investment- grade fixed-rate municipal bonds with maturities of three years or more. (2) The Barclays Capital Municipal Bond Index, an unmanaged index, is made up of a representative list of general obligation, revenue, insured and pre- refunded bonds. The index is frequently used as a general measure of tax- exempt bond market performance. The Barclays Capital indices reflect reinvestment of all distributions and changes in market prices. (3) The Lipper Minnesota Municipal Debt Funds Index includes the 10 largest municipal debt funds in Minnesota tracked by Lipper Inc. The Lipper index's returns include net reinvested dividends. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 23 THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- For RiverSource New York Tax-Exempt Fund The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource New York Tax-Exempt Fund Class A shares (from 9/1/99 to 8/31/09) as compared to the performance of three widely cited performance indices, the Barclays Capital Municipal Bond New York 4 Plus Year Index, the Barclays Capital Municipal Bond Index and the Lipper New York Municipal Debt Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS - -------------------------------------------------------------------------------- <Table> <Caption> Results at Aug. 31, 2009 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE NEW YORK TAX-EXEMPT FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $9,965 $10,380 $11,103 $14,554 - ------------------------------------------------------------------------------------------ Average annual total return -0.35% +1.25% +2.12% +3.82% - ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL MUNICIPAL BOND NEW YORK 4 PLUS YEAR INDEX(1) Cumulative value of $10,000 $10,588 $11,354 $12,392 $17,450 - ------------------------------------------------------------------------------------------ Average annual total return +5.88% +4.32% +4.38% +5.72% - ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL MUNICIPAL BOND INDEX(2) Cumulative value of $10,000 $10,567 $11,295 $12,255 $16,922 - ------------------------------------------------------------------------------------------ Average annual total return +5.67% +4.14% +4.15% +5.40% - ------------------------------------------------------------------------------------------ LIPPER NEW YORK MUNICIPAL DEBT FUNDS INDEX(3) Cumulative value of $10,000 $10,349 $10,770 $11,653 $15,522 - ------------------------------------------------------------------------------------------ Average annual total return +3.49% +2.50% +3.11% +4.49% - ------------------------------------------------------------------------------------------ </Table> Results for other share classes can be found on page 9. - -------------------------------------------------------------------------------- 24 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE NEW YORK TAX-EXEMPT FUND LINE GRAPH) <Table> <Caption> RIVERSOURCE NEW BARCLAYS CAPITAL YORK TAX-EXEMPT NEW YORK LIPPER NEW FUND CLASS 4 PLUS BARCLAYS CAPITAL YORK MUNICIPAL A (INCLUDES YEAR MUNICIPAL MUNICIPAL BOND DEBT FUNDS SALES CHARGE) BOND INDEX(1) INDEX(2) INDEX(3) --------------- ---------------- ------------------ ------------------ 8/99 $ 9,525 $10,000 $10,000 $10,000 11/99 9,396 9,977 10,001 9,893 2/00 9,415 9,967 9,998 9,862 5/00 9,485 10,084 10,103 9,951 8/00 9,990 10,717 10,677 10,538 11/00 10,118 10,883 10,819 10,672 2/01 10,444 11,324 11,232 11,097 5/01 10,549 11,459 11,330 11,190 8/01 10,896 11,913 11,766 11,649 11/01 10,842 11,840 11,766 11,548 2/02 11,022 12,109 12,000 11,779 5/02 11,104 12,169 12,067 11,810 8/02 11,555 12,641 12,500 12,227 11/02 11,432 12,641 12,510 12,174 2/03 11,878 13,091 12,920 12,568 5/03 12,207 13,545 13,318 12,945 8/03 11,765 13,070 12,892 12,517 11/03 12,144 13,586 13,342 12,971 2/04 12,482 14,006 13,733 13,317 5/04 12,087 13,538 13,313 12,876 8/04 12,484 14,081 13,809 13,319 11/04 12,541 14,175 13,886 13,367 2/05 12,728 14,470 14,140 13,622 5/05 12,892 14,724 14,373 13,836 8/05 13,036 14,901 14,542 14,007 11/05 12,903 14,753 14,425 13,858 2/06 13,127 15,064 14,687 14,142 5/06 13,069 15,001 14,645 14,089 8/06 13,355 15,368 14,983 14,412 11/06 13,640 15,730 15,308 14,728 2/07 13,702 15,838 15,415 14,814 5/07 13,617 15,753 15,355 14,743 8/07 13,560 15,707 15,327 14,617 11/07 13,811 16,135 15,723 14,915 2/08 13,239 15,554 15,234 14,324 5/08 13,942 16,402 15,949 15,010 8/08 13,912 16,481 16,014 14,998 11/08 12,872 15,353 15,155 13,695 2/09 13,601 16,426 16,023 14,434 5/09 14,101 16,963 16,519 15,032 8/09 14,554 17,450 16,922 15,522 </Table> (1) The Barclays Capital Municipal Bond New York 4 Plus Year Index, an unmanaged index, is a market value-weighted index of New York investment-grade fixed- rate municipal bonds with maturities of four years or more. (2) The Barclays Capital Municipal Bond Index, an unmanaged index, is made up of a representative list of general obligation, revenue, insured and pre- refunded bonds. The index is frequently used as a general measure of tax- exempt bond market performance. The Barclays Capital indices reflect reinvestment of all distributions and changes in market prices. (3) The Lipper New York Municipal Debt Funds Index includes the 30 largest municipal debt funds in New York tracked by Lipper Inc. The Lipper index's returns include net reinvested dividends. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 25 FUND EXPENSES EXAMPLES --------------------------------------------------------- (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, which may include management fees; distribution and service (12b-1) fees; and other Fund fees and expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other mutual funds. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the ongoing expenses of any funds in which the Fund invests (also referred to as "acquired funds"), including affiliated and non- affiliated pooled investment vehicles (including mutual funds and exchange traded funds). The Fund's indirect expense from investing in the acquired funds is based on the Fund's pro rata portion of the ongoing expenses charged by acquired funds using the expense ratio of each of the acquired funds as of the acquired fund's most recent shareholder report. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Aug. 31, 2009. ACTUAL EXPENSES The first line of each table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of each table provides information about hypothetical account values and hypothetical expenses based on each Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in each table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of each table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - -------------------------------------------------------------------------------- 26 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource California Tax-Exempt Fund <Table> <Caption> BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2009 AUG. 31, 2009 THE PERIOD(a) EXPENSE RATIO(b) - --------------------------------------------------------------------------------------------- Class A - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,067.00 $4.40 .84% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.08 $4.30 .84% - --------------------------------------------------------------------------------------------- Class B - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,063.00 $8.31 1.59% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.28 $8.13 1.59% - --------------------------------------------------------------------------------------------- Class C - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,060.70 $8.30 1.59% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.28 $8.13 1.59% - --------------------------------------------------------------------------------------------- </Table> (a) Expenses are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 185/365 (to reflect the one-half year period). (b) Annualized expense ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. The ratios excluding interest and fee expense were 0.79% for Class A, 1.54% for Class B and 1.54% for Class C. (c) Based on the actual return for the six months ended Aug. 31, 2009: +6.70% for Class A, +6.30% for Class B and +6.07% for Class C. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 27 FUND EXPENSES EXAMPLES (continued) --------------------------------------------- RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2009 AUG. 31, 2009 THE PERIOD(a) EXPENSE RATIO(b) - --------------------------------------------------------------------------------------------- Class A - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,062.80 $4.65 .89% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.83 $4.56 .89% - --------------------------------------------------------------------------------------------- Class B - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,058.70 $8.61(d) 1.65% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.98 $8.43(d) 1.65% - --------------------------------------------------------------------------------------------- Class C - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,058.80 $8.56 1.64% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.03 $8.38 1.64% - --------------------------------------------------------------------------------------------- </Table> (a) Expenses are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 185/365 (to reflect the one-half year period). (b) Annualized expense ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. The ratios excluding interest and fee expense were 0.79% for Class A, 1.54% for Class B and 1.54% for Class C. (c) Based on the actual return for the six months ended Aug. 31, 2009: +6.28% for Class A, +5.87% for Class B and +5.88 for Class C. (d) RiverSource Investments, LLC (the Investment Manager) and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Oct. 31, 2010, unless sooner terminated at the discretion of the Fund's Board, such that net expenses (excluding interest and fee expenses related to the Fund's participation in certain inverse floater programs and fees and expenses of acquired funds) will not exceed 1.55% for Class B. Any amounts waived will not be reimbursed by the Fund. This change was effective Sept. 1, 2009. If this change had been in place for the entire six month period ended Aug. 31, 2009, the actual expenses paid would have been $8.66 for Class B; the hypothetical expenses paid would have been $8.48 for Class B. - -------------------------------------------------------------------------------- 28 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource New York Tax-Exempt Fund <Table> <Caption> BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2009 AUG. 31, 2009 THE PERIOD(a) EXPENSE RATIO(b) - --------------------------------------------------------------------------------------------- Class A - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,070.00 $4.35 .83% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.14 $4.25 .83% - --------------------------------------------------------------------------------------------- Class B - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,065.90 $8.27 1.58% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.33 $8.08 1.58% - --------------------------------------------------------------------------------------------- Class C - --------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,066.00 $8.27 1.58% - --------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.33 $8.08 1.58% - --------------------------------------------------------------------------------------------- </Table> (a) Expenses are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 185/365 (to reflect the one-half year period). (b) Annualized expense ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. The ratios excluding interest and fee expense were 0.79% for Class A, 1.54% for Class B and 1.54% for Class C. (c) Based on the actual return for the six months ended Aug. 31, 2009: +7.00% for Class A, +6.59% for Class B and +6.60 for Class C. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 29 PORTFOLIO OF INVESTMENTS ------------------------------------------------------- RiverSource California Tax-Exempt Fund AUG. 31, 2009 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES <Table> <Caption> MUNICIPAL BONDS (98.6%) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(e,f) RATE AMOUNT VALUE(a) ADVANCED REFUNDED (0.6%) Los Angeles Harbor Department Revenue Bonds Series 1988 Escrowed to Maturity 10-01-18 7.60% $780,000 $950,750 - ------------------------------------------------------------------------------------- AIRPORT (1.2%) County of Sacramento Revenue Bonds Series 2009B 07-01-39 5.75 2,000,000 2,003,240 - ------------------------------------------------------------------------------------- CERTIFICATE OF PARTICIPATION (0.9%) County of Riverside Certificate of Participation Series 1998 (National) 12-01-21 5.00 1,530,000 1,535,401 - ------------------------------------------------------------------------------------- CITY (1.0%) City of Martinez Unlimited General Obligation Bonds Election of 2008 Series 2009A 08-01-34 5.00 1,560,000 1,578,548 - ------------------------------------------------------------------------------------- COLLEGE (11.5%) California Municipal Finance Authority Revenue Bonds Biola University Series 2008 10-01-28 5.80 2,000,000 1,970,420 California Municipal Finance Authority Revenue Bonds Loma Linda University Series 2007 04-01-32 4.75 2,300,000 2,024,299 California State University Revenue Bonds Systemwide Series 2009A 11-01-29 5.25 3,000,000 3,086,850 Chabot-Las Positas Community College District Unlimited General Obligation Bonds Capital Appreciation Election of 2004 Zero Coupon Series 2006B (AMBAC) 08-01-19 4.75 1,000,000(b) 604,080 Los Angeles Community College District Unlimited General Obligation Bonds 2001 Election Series 2008E-1 08-01-28 5.00 2,000,000 2,057,900 Merced Community College District Refunding Revenue Bonds School Facilities Financing Authority Series 2006 (National) 08-01-21 5.00 700,000 763,385 San Bernardino Community College District Unlimited General Obligation Bonds Election of 2002 Series 2008A 08-01-33 6.25 1,000,000 1,117,750 San Diego Community College District Unlimited General Obligation Bonds Election of 2006 Series 2007 (FSA) 08-01-30 5.00 2,500,000 2,544,050 San Mateo County Community College District Unlimited General Obligation Bonds Election of 2001 Series 2002A (National/FGIC) 09-01-18 5.38 1,000,000 1,080,280 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 30 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(e,f) RATE AMOUNT VALUE(a) COLLEGE (CONT.) University of California Regents Medical Center Revenue Bonds Series 2008D 05-15-27 5.00% $1,500,000 $1,546,305 University of California Revenue Bonds Series 2009Q 05-15-34 5.00 1,750,000 1,780,783 --------------- Total 18,576,102 - ------------------------------------------------------------------------------------- COUNTY (0.6%) California Statewide Communities Development Authority Revenue Bonds Thomas Jefferson School of Law Series 2008A 10-01-38 7.25 1,000,000 901,810 - ------------------------------------------------------------------------------------- ELECTRIC (3.8%) California State Department of Water Resources Revenue Bonds Power Supply Series 2008H 05-01-22 5.00 2,000,000 2,113,620 City of Vernon Revenue Bonds Series 2009A 08-01-21 5.13 1,500,000 1,495,170 Walnut Energy Center Authority Revenue Bonds Series 2004A (AMBAC) 01-01-29 5.00 2,500,000 2,516,275 --------------- Total 6,125,065 - ------------------------------------------------------------------------------------- HEALTH CARE -- HOSPITAL (20.3%) Abag Finance Authority for Nonprofit Corporations Refunding Revenue Bonds Children's Hospital & Research Center Series 2007A 12-01-37 5.00 1,000,000 849,050 California Health Facilities Financing Authority Refunding Revenue Bonds Cedars-Sinai Medical Center Series 2005 11-15-18 5.00 1,500,000 1,535,220 11-15-34 5.00 1,525,000 1,360,605 California Health Facilities Financing Authority Revenue Bonds Adventist Health System West Series 2009A 09-01-39 5.75 3,000,000 2,928,810 California Health Facilities Financing Authority Revenue Bonds Catholic Healthcare West Series 2004G 07-01-23 5.25 3,500,000 3,452,364 California Health Facilities Financing Authority Revenue Bonds Providence Health & Services Series 2008C 10-01-28 6.25 500,000 547,835 10-01-38 6.50 1,500,000 1,627,230 California Health Facilities Financing Authority Revenue Bonds Providence Health & Services Series 2009B 10-01-39 5.50 3,200,000 3,176,544 California Health Facilities Financing Authority Revenue Bonds Scripps Health Series 2008A 10-01-22 5.00 3,250,000 3,212,983 California Health Facilities Financing Authority Revenue Bonds Sutter Health Series 2008A 08-15-30 5.00 2,500,000 2,322,075 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 31 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource California Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(e,f) RATE AMOUNT VALUE(a) HEALTH CARE -- HOSPITAL (CONT.) California Statewide Communities Development Authority Revenue Bonds Catholic Healthcare West Series 2008B 07-01-30 5.50% $1,975,000 $1,912,985 California Statewide Communities Development Authority Revenue Bonds Daughters of Charity Health Series 2005A 07-01-30 5.25 3,015,000 2,527,535 California Statewide Communities Development Authority Revenue Bonds Kaiser Permanente Series 2006B 03-01-45 5.25 1,000,000 919,030 City of Turlock Certificate of Participation Emanuel Medical Center Series 2007A 10-15-31 5.13 3,930,000 2,902,266 Sierra View Local Health Care District Revenue Bonds Series 2007 07-01-37 5.25 2,000,000 1,758,960 Tulare Local Health Care District Refunding Revenue Bonds Series 2007 11-01-32 5.20 2,180,000 1,718,472 --------------- Total 32,751,964 - ------------------------------------------------------------------------------------- HOUSING -- OTHER (0.8%) California Statewide Communities Development Authority Revenue Bonds CHF -- Irvine LLC -- UCI East Campus Series 2008 05-15-32 5.75 1,500,000 1,363,965 - ------------------------------------------------------------------------------------- HOUSING -- SINGLE FAMILY (3.8%) California Housing Finance Agency Revenue Bonds Home Mortgage Series 2006H (FGIC) A.M.T. 08-01-30 5.75 1,550,000 1,564,989 California Housing Finance Agency Revenue Bonds Home Mortgage Series 2006K A.M.T. 02-01-42 5.50 800,000 784,984 California Housing Finance Agency Revenue Bonds Home Mortgage Series 2007D (FGIC) A.M.T. 02-01-17 4.35 1,555,000 1,457,051 08-01-17 4.35 2,470,000 2,305,225 --------------- Total 6,112,249 - ------------------------------------------------------------------------------------- LEASE (4.5%) Eastern Municipal Water District Certificate of Participation Series 2008H 07-01-33 5.00 1,000,000 1,005,610 Golden State Tobacco Securitization Corporation Revenue Bonds Series 2003A-1 06-01-33 6.25 2,095,000 2,338,062 Los Angeles Municipal Improvement Corporation Revenue Bonds Series 2008B 09-01-38 5.00 3,000,000 2,863,170 San Mateo County Board of Education Refunding Certificate of Participation Series 2009 06-01-35 5.25 1,000,000 1,002,190 --------------- Total 7,209,032 - ------------------------------------------------------------------------------------- </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 32 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(e,f) RATE AMOUNT VALUE(a) MISCELLANEOUS REVENUE (5.3%) California Infrastructure & Economic Development Bank Revenue Bonds Walt Disney Family Museum Series 2008 02-01-33 5.25% $2,000,000 $1,921,800 Golden State Tobacco Securitization Corporation Asset-backed Revenue Bonds Series 2007A-1 06-01-47 5.13 3,500,000 2,443,945 Golden State Tobacco Securitization Corporation Prerefunded Revenue Bonds Series 2003A-1 06-01-40 6.63 750,000 879,645 Los Angeles County Public Works Financing Authority Refunding Revenue Bonds Master Project Series 2005A (National) 12-01-26 5.00 2,000,000 1,851,500 Oakley Redevelopment Agency Revenue Bonds Oakley Redevelopment Project Area Series 2008A (AMBAC) 09-01-38 5.00 1,750,000 1,419,005 --------------- Total 8,515,895 - ------------------------------------------------------------------------------------- PORT DISTRICT (0.6%) Port of Oakland Refunding Revenue Bonds Series 2000K (National/FGIC) A.M.T. 11-01-18 5.63 1,000,000 1,012,880 - ------------------------------------------------------------------------------------- SCHOOL (13.2%) Alhambra City Elementary School District Unlimited General Obligation Bonds Capital Appreciation Zero Coupon Series 1999A (FSA) 09-01-22 5.95 1,055,000(b) 520,906 Centinela Valley Union High School District Unlimited General Obligation Bonds Series 2002A (National) 08-01-31 5.25 2,000,000 1,864,420 Encinitas Union School District Unlimited General Obligation Bonds Capital Appreciation Zero Coupon Series 1996 (National) 08-01-15 5.85 2,500,000(b) 1,975,925 Fremont Union High School District/Santa Clara County Unlimited General Obligation Bonds Election of 2008 Series 2008 08-01-30 4.75 2,500,000 2,480,250 Grant Joint Union High School District Unlimited General Obligation Bonds Election of 2006 Series 2008 (FSA) 08-01-25 5.00 1,000,000 1,050,600 Lakeside Union School District/San Diego County Unlimited General Obligation Bonds Series 2009 08-01-33 5.00 1,750,000 1,762,180 Lammersville School District Community Facilities Special Tax Bonds Mountain House Series 2006 09-01-35 5.13 1,000,000 666,730 Los Angeles Unified School District Unlimited General Obligation Bonds Election of 2002 Series 2007B (AMBAC) 07-01-22 5.00 1,395,000 1,479,760 Menifee Union School District Unlimited General Obligation Bonds 2008 Election Series 2008A 08-01-33 5.50 3,125,000 3,224,813 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 33 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource California Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(e,f) RATE AMOUNT VALUE(a) SCHOOL (CONT.) Oxnard School District Unlimited General Obligation Refunding Bonds Series 2001A (National) 08-01-30 5.75% $2,575,000 $2,583,575 San Juan Unified School District Unlimited General Obligation Bonds Capital Appreciation Zero Coupon Series 1999 (FSA) 08-01-21 5.68 820,000(b) 434,313 08-01-24 5.70 1,810,000(b) 774,101 Simi Valley School Financing Authority Refunding Revenue Bonds University School District Series 2007 (FSA) 08-01-23 5.00 1,500,000 1,608,165 Western Placer Unified School District Certificate of Participation Series 2008 (Assured Guaranty) 08-01-32 4.75 1,000,000 940,110 --------------- Total 21,365,848 - ------------------------------------------------------------------------------------- SPECIAL DISTRICT -- ASSESSMENT (2.4%) City of Azusa Special Tax Bonds Escrow Community Facilities Series 2007 09-01-27 5.00 1,110,000 1,110,000 Palmdale Civic Authority Refunding Revenue Bonds Redevelopment Project #1 Series 2009A 07-01-27 6.00 2,780,000 2,814,722 --------------- Total 3,924,722 - ------------------------------------------------------------------------------------- SPECIAL DISTRICT -- SPECIAL TAX (3.8%) Anaheim Community Facilities District Special Tax Bonds Stadium Lofts Series 2007 09-01-37 5.00 1,000,000 643,960 Beaumont Financing Authority Prerefunded Revenue Bonds Series 2000A 09-01-32 7.38 1,955,000 2,123,404 Orange Unified School District Community Facilities Special Tax Bonds #2005-2 Del Rio School Facilities Series 2007 09-01-37 5.00 1,000,000 675,670 Pittsburg Redevelopment Agency Tax Allocation Bonds Los Medanos Community Development Project Zero Coupon Series 1999 (AMBAC) 08-01-24 6.05 2,100,000(b) 835,401 Rancho Cucamonga Redevelopment Agency Tax Allocation Bonds Housing Set Aside Series 2007A (National) 09-01-34 5.00 2,200,000 1,884,080 --------------- Total 6,162,515 - ------------------------------------------------------------------------------------- SPECIAL DISTRICT -- TAX ALLOCATION (2.4%) Bakersfield Redevelopment Agency Tax Allocation Bonds Old Town Kern Pioneer Series 2009A 08-01-29 7.50 1,650,000 1,606,687 Bakersfield Redevelopment Agency Tax Allocation Bonds Southeast Bakersfield Series 2009B 08-01-29 7.25 740,000 739,164 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 34 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(e,f) RATE AMOUNT VALUE(a) SPECIAL DISTRICT -- TAX ALLOCATION (CONT.) Inglewood Redevelopment Agency Refunding Tax Allocation Bonds Merged Redevelopment Project Series 1998A (AMBAC) 05-01-23 5.25% $1,100,000 $1,082,477 San Francisco City & County Redevelopment Financing Authority Tax Allocation Mission Bay South Redevelopment Agency Series 2009D 08-01-29 6.38 500,000(d) 501,970 --------------- Total 3,930,298 - ------------------------------------------------------------------------------------- SPECIAL DISTRICT -- TAX INCREMENT (1.5%) San Francisco City & County Redevelopment Financing Authority Revenue Bonds Mission Bay North Redevelopment Agency Series 2009C 08-01-29 6.00 500,000(d) 493,115 08-01-39 6.50 1,625,000(d) 1,630,769 San Francisco City & County Redevelopment Financing Authority Tax Allocation Bonds San Francisco Redevelopment Projects Series 2009B 08-01-28 6.13 310,000(d) 314,464 --------------- Total 2,438,348 - ------------------------------------------------------------------------------------- STATE (12.5%) State of California Unlimited General Obligation Bonds Series 2002 02-01-15 6.00 1,000,000 1,144,140 State of California Unlimited General Obligation Bonds Series 2003 02-01-21 5.00 3,000,000 3,078,540 State of California Unlimited General Obligation Bonds Series 2004 02-01-22 5.00 1,000,000 1,021,600 State of California Unlimited General Obligation Bonds Series 2008 08-01-34 5.00 1,800,000 1,731,240 State of California Unlimited General Obligation Bonds Various Purpose Series 2003 11-01-24 5.13 2,000,000 2,027,380 State of California Unlimited General Obligation Bonds Various Purpose Series 2008 03-01-32 5.00 1,000,000 967,220 State of California Unlimited General Obligation Bonds Various Purpose Series 2009 04-01-31 5.75 5,000,000 5,224,450 State of California Unlimited General Obligation Bonds Veterans Series 2000BJ-RMKT A.M.T. 12-01-12 4.95 1,000,000 1,024,770 12-01-13 5.05 1,435,000 1,459,682 12-01-14 5.15 2,535,000 2,573,988 State of California Unrefunded Unlimited General Obligation Bonds Series 2004 04-01-29 5.30 2,000 2,016 --------------- Total 20,255,026 - ------------------------------------------------------------------------------------- </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 35 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource California Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(e,f) RATE AMOUNT VALUE(a) WATER & SEWER (7.9%) Anaheim Public Financing Authority Revenue Bonds Series 2007 (National) 02-01-33 4.75% $3,500,000 $3,446,380 Eastern Municipal Water District Special Tax Bonds District #2004-27 Cottonwood Series 2006 09-01-27 5.00 200,000 152,836 09-01-36 5.00 500,000 348,755 Los Angeles Department of Water & Power Revenue Bonds Series 2009A 07-01-34 5.38 2,495,000 2,588,413 Rowland Water District Certificate of Participation Recycled Water Project Series 2008 12-01-39 6.25 2,235,000 2,368,653 Semitropic Improvement District Revenue Bonds Series 2004A (XLCA) 12-01-28 5.00 2,000,000 2,002,580 Turlock Public Financing Authority Revenue Bonds Series 2008 05-01-32 4.75 2,000,000 1,953,720 --------------- Total 12,861,337 - ------------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $161,327,974) $159,574,995 - ------------------------------------------------------------------------------------- <Caption> MUNICIPAL NOTES (2.0%) AMOUNT EFFECTIVE PAYABLE AT ISSUE(c,e,f) YIELD MATURITY VALUE(a) City of Santa Clara Subordinated Revenue Bonds V.R.D.N. Series 2008A (Bank of America) 07-01-34 0.12% $1,800,000 $1,800,000 City of Irvine Limited Obligation Special Assessment Bonds District #93-14 V.R.D.N. Series 2000 (Bank of America) 09-02-25 0.16 1,500,000 1,500,000 - ------------------------------------------------------------------------------------- TOTAL MUNICIPAL NOTES (Cost: $3,300,000) $3,300,000 - ------------------------------------------------------------------------------------- </Table> <Table> <Caption> MONEY MARKET FUND (--%) SHARES VALUE(a) JPMorgan Tax-Free Money Market Fund 30,445 $30,445 - ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $30,445) $30,445 - ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $164,658,419(g) $162,905,440 ===================================================================================== </Table> NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 2 to the financial statements. (b) For zero coupons, the interest rate disclosed represents the annualized effective yield on the date of acquisition. - -------------------------------------------------------------------------------- 36 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (c) The Fund is entitled to receive principal and interest from the party, if indicated in parentheses, after a day or a week's notice or upon maturity. The maturity date disclosed represents the final maturity. Interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2009. (d) At Aug. 31, 2009, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $2,908,340. See Note 2 to the financial statements. (e) The following abbreviations may be used in the portfolio security descriptions to identify the insurer of the issue: <Table> ACA -- ACA Financial Guaranty Corporation AMBAC -- Ambac Assurance Corporation BHAC -- Berkshire Hathaway Assurance Corporation BIG -- Bond Investors Guarantee BNY -- Bank of New York CGIC -- Capital Guaranty Insurance Company CIFG -- IXIS Financial Guaranty FGIC -- Financial Guaranty Insurance Company FHA -- Federal Housing Authority FHLMC -- Federal Home Loan Mortgage Corporation FNMA -- Federal National Mortgage Association FSA -- Financial Security Assurance GNMA -- Government National Mortgage Association MBIA -- MBIA Insurance Corporation TCRS -- Transferable Custodial Receipts XLCA -- XL Capital Assurance </Table> (f) The following abbreviations may be used in the portfolio descriptions: <Table> A.M.T. -- Alternative Minimum Tax -- At Aug. 31, 2009, the value of securities subject to alternative minimum tax represented 7.5% of net assets. B.A.N. -- Bond Anticipation Note C.P. -- Commercial Paper R.A.N. -- Revenue Anticipation Note T.A.N. -- Tax Anticipation Note T.R.A.N. -- Tax & Revenue Anticipation Note V.R. -- Variable Rate V.R.D.B. -- Variable Rate Demand Bond V.R.D.N. -- Variable Rate Demand Note </Table> (g) At Aug. 31, 2009, the cost of securities for federal income tax purposes was $165,011,382 and the aggregate gross unrealized appreciation and depreciation based on that cost was: <Table> Unrealized appreciation $4,336,173 Unrealized depreciation (6,442,115) ----------------------------------------------------------- Net unrealized depreciation $(2,105,942) ----------------------------------------------------------- </Table> - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 37 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource California Tax-Exempt Fund FAIR VALUE MEASUREMENTS Statement of Financial Accounting Standards No. 157 (SFAS 157) requires disclosure regarding the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, investments shall be disclosed by major category. SFAS 157 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by prioritizing that the most observable input be used when available. Observable inputs are those that market participants would use in pricing an investment based on market data obtained from sources independent of the reporting entity. Unobservable inputs are those that reflect the Fund's assumptions about the information market participants would use in pricing an investment. An investment's level within the fair value hierarchy is based on the lowest level of any input that is deemed significant to the asset or liability's fair value measurement. When a valuation uses multiple inputs from varying levels of the hierarchy, the hierarchy level is determined based on the lowest level input or inputs that are significant to the fair value measurement in its entirety. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. For example, certain U.S. government securities are generally high quality and liquid, however, they are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. Fair value inputs are summarized in the three broad levels listed below: - Level 1 -- Valuations based on quoted prices for investments in active markets that the Fund has the ability to access at the measurement date. Valuation adjustments are not applied to Level 1 investments. - Level 2 -- Valuations based on other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.). - Level 3 -- Valuations based on significant unobservable inputs (including the Fund's own assumptions and judgment in determining the fair value of investments). Inputs that are used in determining fair value of an investment may include price information, credit data, volatility statistics, and other factors. These inputs can be either observable or unobservable. The availability of observable inputs can vary between investments, and is affected by various factors such as the type of investment, and the volume and level of activity for that investment or similar investments in the marketplace. The inputs will be considered by the Fund Administrator, along with any other relevant factors in the calculation of an investment's fair value. The Fund uses prices and inputs that are current as of the measurement date, which may include periods of market dislocations. During these periods, the availability of prices and inputs may be reduced for many investments. This condition could cause an investment to be reclassified between the various levels within the hierarchy. Investments falling into the Level 3 category are primarily supported by quoted prices from brokers and dealers participating in the market for those investments. However, these may be classified as Level 3 investments due to lack of market transparency and corroboration to support these quoted - -------------------------------------------------------------------------------- 38 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) prices. Additionally, valuation models may be used as the pricing source for any remaining investments classified as Level 3. These models rely on one or more significant unobservable inputs and/or significant assumptions by the Fund Administrator. Inputs used in a valuation model may include, but are not limited to, financial statement analysis, discount rates and estimated cash flows, and comparable company data. The following table is a summary of the inputs used to value the Fund's investments as of Aug. 31, 2009: <Table> <Caption> FAIR VALUE AT AUG. 31, 2009 ---------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL - --------------------------------------------------------------------------------------------- Bonds Municipal Bonds $-- $159,574,995 $-- $159,574,995 - --------------------------------------------------------------------------------------------- Total Bonds -- 159,574,995 -- 159,574,995 - --------------------------------------------------------------------------------------------- Other Municipal Notes -- 3,300,000 -- 3,300,000 Money Market Fund(a) 30,445 -- -- 30,445 - --------------------------------------------------------------------------------------------- Total Other 30,445 3,300,000 -- 3,330,445 - --------------------------------------------------------------------------------------------- Total $30,445 $162,874,995 $-- $162,905,440 - --------------------------------------------------------------------------------------------- </Table> (a) Money market fund that is a sweep investment for cash balances in the Fund at Aug. 31, 2009. HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as filed on Form N-Q, can be obtained without charge, upon request, by calling the RiverSource Family of Funds at 1(800) 221-2450. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 39 PORTFOLIO OF INVESTMENTS ------------------------------------------------------- RiverSource Minnesota Tax-Exempt Fund AUG. 31, 2009 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES <Table> <Caption> MUNICIPAL BONDS (98.7%) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(d,e) RATE AMOUNT VALUE(a) AIRPORT (3.0%) Minneapolis-St. Paul Metropolitan Airports Commission Prerefunded Revenue Bonds Sub Series 2001C (FGIC) 01-01-18 5.50% $2,000,000 $2,125,500 01-01-32 5.25 7,000,000 7,416,080 --------------- Total 9,541,580 - ------------------------------------------------------------------------------------- COLLEGE (11.5%) Minnesota Higher Education Facilities Authority Revenue Bonds Bethel University 6th Series 2007R 05-01-37 5.50 6,000,000 5,226,720 Minnesota Higher Education Facilities Authority Revenue Bonds Carleton College 6th Series 2008T 01-01-28 5.00 3,000,000 3,143,460 Minnesota Higher Education Facilities Authority Revenue Bonds Macalester College 6th Series 2004B 03-01-17 5.00 2,395,000 2,597,449 Minnesota Higher Education Facilities Authority Revenue Bonds St. Benedict College Series 2008V 03-01-18 5.00 500,000 530,550 03-01-23 4.75 800,000 789,024 Minnesota Higher Education Facilities Authority Revenue Bonds St. John's University 6th Series 2005G 10-01-22 5.00 3,000,000 3,126,240 Minnesota Higher Education Facilities Authority Revenue Bonds St. John's University 6th Series 2008U 10-01-28 4.75 1,000,000 1,005,390 10-01-33 4.75 825,000 777,010 Minnesota Higher Education Facilities Authority Revenue Bonds University of St. Thomas 6th Series 2008W 10-01-30 6.00 3,625,000 3,814,551 Minnesota Higher Education Facilities Authority Revenue Bonds University of St. Thomas 6th Series 2009X 04-01-39 5.25 4,900,000 5,003,880 University of Minnesota Revenue Bonds Series 1996A Escrowed to Maturity 07-01-21 5.50 8,500,000 9,971,180 University of Minnesota Revenue Bonds Series 2009A 04-01-34 5.13 1,000,000 1,053,120 --------------- Total 37,038,574 - ------------------------------------------------------------------------------------- COUNTY (5.2%) County of Hennepin Unlimited General Obligation Bonds Series 2003 12-01-23 4.75 2,000,000 2,049,700 County of Hennepin Unlimited General Obligation Bonds Series 2008D 12-01-28 5.00 9,355,000 9,974,581 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 40 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(d,e) RATE AMOUNT VALUE(a) COUNTY (CONT.) County of Ramsey Unlimited General Obligation Bonds Capital Improvement Plan Series 2007A 02-01-21 5.00% $1,035,000 $1,162,357 02-01-22 5.00 1,080,000 1,202,591 02-01-23 5.00 1,125,000 1,244,621 02-01-24 5.00 1,170,000 1,285,994 --------------- Total 16,919,844 - ------------------------------------------------------------------------------------- ELECTRIC (19.1%) City of Chaska Refunding Revenue Bonds Generating Facilities Series 2005A 10-01-20 5.25 1,165,000 1,233,875 10-01-30 5.00 3,800,000 3,827,588 Minnesota State Municipal Power Agency Revenue Bonds Series 2004A 10-01-29 5.13 5,500,000 5,611,870 Minnesota State Municipal Power Agency Revenue Bonds Series 2005 10-01-30 5.00 3,000,000 3,058,140 Minnesota State Municipal Power Agency Revenue Bonds Series 2007 10-01-32 4.75 3,000,000 2,974,950 Northern Municipal Power Agency Refunding Revenue Bonds Series 1998B (AMBAC) 01-01-20 4.75 5,000,000 5,041,550 Northern Municipal Power Agency Revenue Bonds Series 2007A (AMBAC) 01-01-26 5.00 2,500,000 2,573,650 Northern Municipal Power Agency Revenue Bonds Series 2008A 01-01-21 5.00 2,500,000 2,673,725 Puerto Rico Electric Power Authority Prerefunded Revenue Bonds Series 2003NN (National) 07-01-32 5.00 2,820,000(b) 3,200,954 Southern Minnesota Municipal Power Agency Revenue Bonds Capital Appreciation Zero Coupon Series 1994A (National) 01-01-19 6.67 17,000,000(f) 11,703,650 01-01-26 5.19 12,500,000(f) 5,660,125 Southern Minnesota Municipal Power Agency Revenue Bonds Series 2002A (AMBAC) 01-01-17 5.25 6,000,000 6,673,680 Western Minnesota Municipal Power Agency Revenue Bonds Series 2003A (National) 01-01-26 5.00 7,250,000 7,331,490 --------------- Total 61,565,247 - ------------------------------------------------------------------------------------- HEALTH CARE -- HOSPITAL (21.0%) City of Breckenridge Revenue Bonds Catholic Health Initiatives Series 2004A 05-01-30 5.00 4,300,000 4,321,027 City of Maple Grove Revenue Bonds Maple Grove Hospital Corporation Series 2007 05-01-20 5.00 1,000,000 999,110 05-01-21 5.00 1,500,000 1,476,465 05-01-37 5.25 4,715,000 4,199,415 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 41 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(d,e) RATE AMOUNT VALUE(a) HEALTH CARE -- HOSPITAL (CONT.) City of Minneapolis Revenue Bonds Fairview Health Services Series 2002B (National) 05-15-15 5.50% $2,160,000 $2,257,783 05-15-16 5.50 2,200,000 2,288,088 City of Minneapolis Revenue Bonds Fairview Health Services Series 2008A 11-15-32 6.75 5,240,000 5,723,442 City of Shakopee Revenue Bonds St. Francis Regional Medical Center Series 2004 09-01-25 5.10 6,300,000 5,776,596 City of Winona Refunding Revenue Bonds Winona Health Obligation Group Series 2007 07-01-31 5.15 2,000,000 1,697,520 County of Chippewa Revenue Bonds Montevideo Hospital Project Series 2007 03-01-20 5.38 1,940,000 1,788,253 03-01-21 5.38 1,045,000 950,020 County of Meeker Revenue Bonds Memorial Hospital Project Series 2007 11-01-27 5.75 1,000,000 918,620 11-01-37 5.75 2,250,000 1,945,125 Minnesota Agricultural & Economic Development Board Prerefunded Revenue Bonds Benedictine Health System Series 1999A (National) 02-15-16 4.75 245,000 251,924 Minnesota Agricultural & Economic Development Board Prerefunded Revenue Bonds Health Care System Series 2000A 11-15-22 6.38 4,845,000 5,211,185 11-15-29 6.38 2,910,000 3,129,938 Minnesota Agricultural & Economic Development Board Unrefunded Revenue Bonds Benedictine Health System Series 1999A (National) 02-15-16 4.75 755,000 757,786 Northfield Revenue Bonds Series 2006 11-01-31 5.38 1,500,000 1,301,550 St. Louis Park Revenue Bonds Park Nicollet Health Services Series 2008C 07-01-26 5.63 6,145,000 6,240,616 St. Paul Housing & Redevelopment Authority Revenue Bonds Allina Health Systems Series 2007A (National) 11-15-22 5.00 3,000,000 3,007,800 St. Paul Housing & Redevelopment Authority Revenue Bonds Healtheast Project Series 2005 11-15-25 6.00 2,000,000 1,775,840 11-15-35 6.00 1,500,000 1,214,355 St. Paul Housing & Redevelopment Authority Revenue Bonds HealthPartners Obligation Group Project Series 2006 05-15-23 5.25 1,000,000 935,820 05-15-26 5.25 1,000,000 907,730 05-15-36 5.25 6,500,000 5,541,185 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 42 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(d,e) RATE AMOUNT VALUE(a) HEALTH CARE -- HOSPITAL (CONT.) Todd Morrison Cass & Wadena Counties United Hospital District Unlimited General Obligation Bonds Health Care Facilities -- Lakewood Series 2004 12-01-34 5.00% $3,525,000 $3,489,785 --------------- Total 68,106,978 - ------------------------------------------------------------------------------------- HEALTH CARE -- LIFE CARE CENTER (0.5%) City of Stillwater Revenue Bonds Health System Obligation Group Series 2005 06-01-25 5.00 1,750,000 1,660,225 - ------------------------------------------------------------------------------------- HEALTH CARE -- NURSING HOME (3.5%) Annandale Economic Development Authority Revenue Bonds Annandale Care Center Project Series 2007A 11-01-37 5.90 3,385,000 2,496,201 City of North Oaks Revenue Bonds Presbyterian Homes Series 2007 10-01-27 6.00 1,250,000 1,093,838 10-01-33 6.00 3,000,000 2,507,429 City of Stillwater Revenue Bonds Health System Obligation Group Series 2005 06-01-19 5.00 2,505,000 2,523,461 St. Paul Housing & Redevelopment Authority Revenue Bonds Lyngblomsten Care Center Housing Project Series 1993 11-01-17 7.13 1,250,000 1,170,238 St. Paul Housing & Redevelopment Authority Revenue Bonds Rental -- Lyngblomsten Housing Project Series 1993 11-01-24 7.00 1,545,000 1,326,970 --------------- Total 11,118,137 - ------------------------------------------------------------------------------------- HEALTH CARE -- OTHER (0.3%) Minneapolis & St. Paul Housing & Redevelopment Authority Revenue Bonds HealthPartners Obligation Group Project Series 2003 12-01-12 5.25 1,000,000 1,029,010 - ------------------------------------------------------------------------------------- HOUSING -- MULTI-FAMILY (2.0%) Austin Housing & Redevelopment Authority Revenue Bonds Courtyard Residence Project Series 2000A 01-01-32 7.25 2,000,000 1,926,040 City of Rochester Refunding Revenue Bonds Madonna Towers Incorporated Project Series 2007A 11-01-28 5.88 2,050,000 1,641,579 Duluth Housing & Redevelopment Authority Revenue Bonds Benedictine Health Center Project Series 2007 11-01-33 5.88 750,000 563,033 Steele County Revenue Bonds Elderly Housing Project Series 2000 06-01-30 6.88 2,205,000 2,297,234 --------------- Total 6,427,886 - ------------------------------------------------------------------------------------- </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 43 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(d,e) RATE AMOUNT VALUE(a) HOUSING -- SINGLE FAMILY (6.0%) Minneapolis/St. Paul Housing Finance Board Revenue Bonds Mortgage-backed City Living Series 2006A-5 (GNMA/FNMA/FHLMC) 04-01-27 5.45% $1,874,365 $1,916,238 Minneapolis/St. Paul Housing Finance Board Revenue Bonds Single Family Housing Series 2005A-4 (GNMA/FNMA/FHLMC) A.M.T. 12-01-37 4.70 91,737 85,598 Minnesota Housing Finance Agency Revenue Bonds Residential Housing Finance Series 2002B A.M.T. 07-01-33 5.65 2,515,000 2,523,023 Minnesota Housing Finance Agency Revenue Bonds Residential Housing Finance Series 2006B A.M.T. 07-01-26 4.75 1,890,000 1,777,054 07-01-31 4.85 2,555,000 2,374,643 Minnesota Housing Finance Agency Revenue Bonds Residential Housing Finance Series 2006I A.M.T. 07-01-26 5.05 3,510,000 3,423,127 Minnesota Housing Finance Agency Revenue Bonds Residential Housing Finance Series 2006M A.M.T. 01-01-37 5.75 2,900,000 2,929,551 Minnesota Housing Finance Agency Revenue Bonds Residential Housing Finance Series 2007D A.M.T. 01-01-38 5.50 3,690,000 3,735,054 Minnesota Housing Finance Agency Revenue Bonds Single Family Mortgage Series 1996J A.M.T. 07-01-21 5.60 35,000 35,079 Minnesota Housing Finance Agency Revenue Bonds Single Family Mortgage Series 1997K A.M.T. 01-01-26 5.75 590,000 590,183 --------------- Total 19,389,550 - ------------------------------------------------------------------------------------- LEASE (5.1%) St. Paul Port Authority Revenue Bonds Office Building at Cedar Street Series 2003-12 12-01-23 5.00 5,000,000 5,221,550 12-01-27 5.13 10,815,000 11,204,232 --------------- Total 16,425,782 - ------------------------------------------------------------------------------------- MISCELLANEOUS REVENUE (2.8%) City of Minneapolis Limited Tax Revenue Bonds Common Bond Fund Series 2007-2A A.M.T. 06-01-22 5.13 1,035,000 979,700 06-01-28 5.00 1,500,000 1,313,985 Minneapolis Community Development Agency Limited Tax Revenue Bonds Common Bond Fund Series 1996-1 06-01-11 6.00 590,000 595,629 Minneapolis Community Development Agency Prerefunded Limited Tax Revenue Bonds Common Bond Fund Series 2001-2A A.M.T. 06-01-19 5.88 1,000,000 1,088,110 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 44 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(d,e) RATE AMOUNT VALUE(a) MISCELLANEOUS REVENUE (CONT.) St. Cloud Housing & Redevelopment Authority Revenue Bonds State University Foundation Project Series 2002 05-01-18 5.13% $3,000,000 $3,146,280 St. Paul Port Authority Tax Allocation Bonds River Bend Project Lot 1 Series 2007-5 02-01-32 6.38 2,685,000 1,820,618 --------------- Total 8,944,322 - ------------------------------------------------------------------------------------- SALES OR USE TAX (2.9%) County of Hennepin Revenue Bonds 2nd Lien Ballpark Project Series 2008B 12-15-27 4.75 4,205,000 4,383,166 12-15-29 5.00 1,825,000 1,928,806 County of Hennepin Revenue Bonds Sales Tax Series 2007 12-15-33 4.75 3,000,000 3,051,210 --------------- Total 9,363,182 - ------------------------------------------------------------------------------------- SCHOOL (10.8%) Bloomington Independent School District #271 Unlimited General Obligation Bonds Series 2001A (FSA) (School District Credit Enhancement Program) 02-01-24 5.13 4,000,000 4,345,800 City of Maple Grove Revenue Bonds North Memorial Health Care Series 2005 09-01-35 5.00 2,500,000 2,146,600 Duluth Independent School District #709 Certificate of Participation Series 2008B (School District Credit Enhancement Program) 02-01-26 4.75 4,000,000 4,150,600 Edina Independent School District #273 Unlimited General Obligation Bonds Series 2004 02-01-24 4.50 3,400,000 3,477,452 Lake Superior Independent School District #381 Prerefunded Unlimited General Obligation Bonds Building Series 2002A (FSA) (School District Credit Enhancement Program) 04-01-13 5.00 65,000 73,077 Lake Superior Independent School District #381 Unrefunded Unlimited General Obligation Bonds Building Series 2002A (FSA) (School District Credit Enhancement Program) 04-01-13 5.00 1,730,000 1,943,672 Rocori Area Schools Independent School District #750 Unlimited General Obligation Bonds School Building Series 2009B (School District Credit Enhancement Program) 02-01-34 4.75 9,200,000 9,395,868 St. Paul Housing & Redevelopment Authority Prerefunded Revenue Bonds Community of Peace Academy Project Series 2001A 12-01-30 7.88 2,390,000 2,648,072 St. Paul Housing & Redevelopment Authority Refunding Revenue Bonds St. Paul Academy & Summit School Series 2007 10-01-24 5.00 5,000,000 5,140,350 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 45 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(d,e) RATE AMOUNT VALUE(a) SCHOOL (CONT.) White Bear Lake Independent School District #624 Unlimited General Obligation Refunding Bonds Series 2002B (National/FGIC) (School District Credit Enhancement Program) 02-01-14 5.00% $1,480,000 $1,591,370 --------------- Total 34,912,861 - ------------------------------------------------------------------------------------- SPECIAL DISTRICT -- SPECIAL TAX (1.2%) City of Lakeville Revenue Bonds Series 2007 02-01-22 5.00 175,000 147,427 02-01-27 5.00 225,000 182,178 Territory of Guam Revenue Bonds Section 30 Series 2009A 12-01-34 5.75 3,500,000(c) 3,521,175 --------------- Total 3,850,780 - ------------------------------------------------------------------------------------- SPECIAL PURPOSE CERTIFICATES -- GENERAL OBLIGATIONS (--%) Minneapolis Community Development Agency Limited Tax Revenue Bonds Common Bond Fund Series 1997-7A 06-01-12 5.50 160,000 161,074 - ------------------------------------------------------------------------------------- STATE (3.8%) State of Minnesota Unlimited General Obligation Bonds Series 2002 11-01-15 5.25 3,575,000 3,955,809 State of Minnesota Unlimited General Obligation Refunding Bonds Various Purpose Series 2009F 08-01-21 5.00 7,105,000 8,316,758 --------------- Total 12,272,567 - ------------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $313,655,944) $318,727,599 - ------------------------------------------------------------------------------------- <Caption> MUNICIPAL NOTES (0.4%) AMOUNT EFFECTIVE PAYABLE AT ISSUE(d,e,g) YIELD MATURITY VALUE(a) Minnesota Higher Education Facilities Authority Revenue Bonds St. Olaf College V.R.D.N. 5th Series 2002M2 (Harris) 10-01-20 0.20% $1,200,000 $1,200,000 - ------------------------------------------------------------------------------------- TOTAL MUNICIPAL NOTES (Cost: $1,200,000) $1,200,000 - ------------------------------------------------------------------------------------- </Table> <Table> <Caption> MONEY MARKET FUND (--%) SHARES VALUE(a) JPMorgan Tax-Free Money Market Fund 56,086 $56,086 - ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $56,086) $56,086 - ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $314,912,030)(h) $319,983,685 ===================================================================================== </Table> NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 2 to the financial statements. (b) Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States. The securities represented 1.0% of net assets at Aug. 31, 2009. - -------------------------------------------------------------------------------- 46 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At Aug. 31, 2009, the value of foreign securities represented 1.1% of net assets. (d) The following abbreviations may be used in the portfolio security descriptions to identify the insurer of the issue: <Table> ACA -- ACA Financial Guaranty Corporation AMBAC -- Ambac Assurance Corporation BHAC -- Berkshire Hathaway Assurance Corporation BIG -- Bond Investors Guarantee BNY -- Bank of New York CGIC -- Capital Guaranty Insurance Company CIFG -- IXIS Financial Guaranty FGIC -- Financial Guaranty Insurance Company FHA -- Federal Housing Authority FHLMC -- Federal Home Loan Mortgage Corporation FNMA -- Federal National Mortgage Association FSA -- Financial Security Assurance GNMA -- Government National Mortgage Association MBIA -- MBIA Insurance Corporation TCRS -- Transferable Custodial Receipts XLCA -- XL Capital Assurance </Table> (e) The following abbreviations may be used in the portfolio descriptions: <Table> A.M.T. -- Alternative Minimum Tax -- At Aug. 31, 2009, the value of securities subject to alternative minimum tax represented 6.5% of net assets. B.A.N. -- Bond Anticipation Note C.P. -- Commercial Paper R.A.N. -- Revenue Anticipation Note T.A.N. -- Tax Anticipation Note T.R.A.N. -- Tax & Revenue Anticipation Note V.R. -- Variable Rate V.R.D.B. -- Variable Rate Demand Bond V.R.D.N. -- Variable Rate Demand Note </Table> (f) For zero coupons, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (g) The Fund is entitled to receive principal and interest from the party, if indicated in parentheses, after a day or a week's notice or upon maturity. The maturity date disclosed represents the final maturity. Interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2009. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 47 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource Minnesota Tax-Exempt Fund NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (h) At Aug. 31, 2009, the cost of securities for federal income tax purposes was $315,582,344 and the aggregate gross unrealized appreciation and depreciation based on that cost was: <Table> Unrealized appreciation $11,431,965 Unrealized depreciation (7,030,624) ----------------------------------------------------------- Net unrealized appreciation $4,401,341 ----------------------------------------------------------- </Table> - -------------------------------------------------------------------------------- 48 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS Statement of Financial Accounting Standards No. 157 (SFAS 157) requires disclosure regarding the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, investments shall be disclosed by major category. SFAS 157 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by prioritizing that the most observable input be used when available. Observable inputs are those that market participants would use in pricing an investment based on market data obtained from sources independent of the reporting entity. Unobservable inputs are those that reflect the Fund's assumptions about the information market participants would use in pricing an investment. An investment's level within the fair value hierarchy is based on the lowest level of any input that is deemed significant to the asset or liability's fair value measurement. When a valuation uses multiple inputs from varying levels of the hierarchy, the hierarchy level is determined based on the lowest level input or inputs that are significant to the fair value measurement in its entirety. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. For example, certain U.S. government securities are generally high quality and liquid, however, they are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. Fair value inputs are summarized in the three broad levels listed below: - Level 1 -- Valuations based on quoted prices for investments in active markets that the Fund has the ability to access at the measurement date. Valuation adjustments are not applied to Level 1 investments. - Level 2 -- Valuations based on other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.). - Level 3 -- Valuations based on significant unobservable inputs (including the Fund's own assumptions and judgment in determining the fair value of investments). Inputs that are used in determining fair value of an investment may include price information, credit data, volatility statistics, and other factors. These inputs can be either observable or unobservable. The availability of observable inputs can vary between investments, and is affected by various factors such as the type of investment, and the volume and level of activity for that investment or similar investments in the marketplace. The inputs will be considered by the Fund Administrator, along with any other relevant factors in the calculation of an investment's fair value. The Fund uses prices and inputs that are current as of the measurement date, which may include periods of market dislocations. During these periods, the availability of prices and inputs may be reduced for many investments. This condition could cause an investment to be reclassified between the various levels within the hierarchy. Investments falling into the Level 3 category are primarily supported by quoted prices from brokers and dealers participating in the market for those investments. However, these may be classified as Level 3 investments due to lack of market transparency and corroboration to support these quoted - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 49 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource Minnesota Tax-Exempt Fund FAIR VALUE MEASUREMENTS (CONTINUED) prices. Additionally, valuation models may be used as the pricing source for any remaining investments classified as Level 3. These models rely on one or more significant unobservable inputs and/or significant assumptions by the Fund Administrator. Inputs used in a valuation model may include, but are not limited to, financial statement analysis, discount rates and estimated cash flows, and comparable company data. The following table is a summary of the inputs used to value the Fund's investments as of Aug. 31, 2009: <Table> <Caption> FAIR VALUE AT AUG. 31, 2009 ---------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL - --------------------------------------------------------------------------------------------- Bonds Municipal Bonds $-- $318,727,599 $-- $318,727,599 - --------------------------------------------------------------------------------------------- Total Bonds -- 318,727,599 -- 318,727,599 - --------------------------------------------------------------------------------------------- Other Municipal Notes -- 1,200,000 -- 1,200,000 Money Market Fund(a) 56,086 -- -- 56,086 - --------------------------------------------------------------------------------------------- Total Other 56,086 1,200,000 -- 1,256,086 - --------------------------------------------------------------------------------------------- Total $56,086 $319,927,599 $-- $319,983,685 - --------------------------------------------------------------------------------------------- </Table> (a) Money market fund that is a sweep investment for cash balances in the Fund at Aug. 31, 2009. HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as filed on Form N-Q, can be obtained without charge, upon request, by calling the RiverSource Family of Funds at 1(800) 221-2450. - -------------------------------------------------------------------------------- 50 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT PORTFOLIO OF INVESTMENTS ------------------------------------------------------- RiverSource New York Tax-Exempt Fund AUG. 31, 2009 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES <Table> <Caption> MUNICIPAL BONDS (98.5%) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(b,c) RATE AMOUNT VALUE(a) ADVANCED REFUNDED (2.5%) Metropolitan Transportation Authority Prerefunded Revenue Bonds Series 1998A (FGIC) 04-01-28 4.75% $1,000,000 $1,155,830 New York State Dormitory Authority Prerefunded Revenue Bonds Series 1990B 05-15-11 7.50 230,000 240,562 --------------- Total 1,396,392 - ------------------------------------------------------------------------------------- CITY (1.9%) City of New York Unrefunded Unlimited General Obligation Bonds Series 2002E 08-01-16 5.75 1,000,000 1,087,080 - ------------------------------------------------------------------------------------- COLLEGE (21.9%) Dutchess County Industrial Development Agency Refunding Revenue Bonds Bard College Civic Facilities Series 2007-A1 08-01-22 5.00 500,000 509,470 New York State Dormitory Authority Revenue Bonds Brooklyn Law School Series 2003B (XLCA) 07-01-30 5.13 1,000,000 934,950 New York State Dormitory Authority Revenue Bonds Columbia University Series 2007C 07-01-29 5.00 1,250,000 1,335,012 New York State Dormitory Authority Revenue Bonds Cornell University Series 2006A 07-01-26 5.00 1,000,000 1,068,470 07-01-31 5.00 1,000,000 1,040,410 New York State Dormitory Authority Revenue Bonds Education Series 2008B 03-15-38 5.25 1,000,000 1,041,870 New York State Dormitory Authority Revenue Bonds North Shore-Long Island Jewish Health System Series 2009A 05-01-37 5.50 750,000(f) 736,343 New York State Dormitory Authority Revenue Bonds Rochester Institute of Technology Series 2008A 07-01-33 6.00 1,000,000 1,066,950 New York State Dormitory Authority Revenue Bonds Rochester University Series 2009A 07-01-39 5.13 900,000 914,886 New York State Dormitory Authority Revenue Bonds Rockefeller University Series 2009C 07-01-40 5.00 1,000,000 1,039,320 New York State Dormitory Authority Revenue Bonds Teacher's College Series 2009 03-01-39 5.50 500,000 514,800 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 51 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource New York Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(b,c) RATE AMOUNT VALUE(a) COLLEGE (CONT.) New York State Dormitory Authority Revenue Bonds Yeshiva University Series 2009 09-01-38 5.00% $1,500,000 $1,516,469 Seneca County Industrial Development Agency Revenue Bonds New York Chiropractic College Series 2007 10-01-27 5.00 750,000 578,895 --------------- Total 12,297,845 - ------------------------------------------------------------------------------------- COUNTY (2.5%) County of Monroe Unlimited General Obligation Refunding & Public Improvement Bonds Series 1996 (National) 03-01-15 6.00 1,250,000 1,418,150 - ------------------------------------------------------------------------------------- ELECTRIC (1.4%) Long Island Power Authority Revenue Bonds Series 2009A 04-01-23 5.00 750,000 782,468 - ------------------------------------------------------------------------------------- HEALTH CARE -- HOSPITAL (9.1%) Albany Industrial Development Agency Revenue Bonds St. Peters Hospital Project Series 2008A 11-15-27 5.25 1,000,000 895,090 New York State Dormitory Authority Revenue Bonds Mental Health Services Facilities Improvement Series 2005E (National/FGIC) 02-15-22 5.00 750,000 786,173 New York State Dormitory Authority Revenue Bonds New York University Hospital Center Series 2007B 07-01-24 5.25 690,000 646,013 New York State Dormitory Authority Revenue Bonds Orange Regional Medical Center Series 2008 12-01-29 6.13 1,250,000 1,039,499 New York State Dormitory Authority Revenue Bonds Sloan-Kettering Memorial Center Series 2006-1 07-01-35 5.00 1,000,000 1,005,100 Ulster County Industrial Development Agency Revenue Bonds Series 2007A 09-15-42 6.00 1,000,000 697,910 --------------- Total 5,069,785 - ------------------------------------------------------------------------------------- HEALTH CARE -- LIFE CARE CENTER (0.5%) Suffolk County Industrial Development Agency Prerefunded Revenue Bonds 1st Mortgage Jeffersons Ferry Series 1999A 11-01-28 7.25 250,000 257,495 - ------------------------------------------------------------------------------------- HOUSING -- OTHER (1.8%) New York State Dormitory Authority Revenue Bonds Consolidated City University System 5th General Resolution Series 2008B 07-01-27 5.00 1,000,000 1,025,060 - ------------------------------------------------------------------------------------- HOUSING -- SINGLE FAMILY (4.2%) New York Mortgage Agency Revenue Bonds Series 2002-101 A.M.T. 04-01-32 5.40 1,240,000 1,225,591 New York Mortgage Agency Revenue Bonds Series 2007-140 A.M.T. 10-01-21 4.60 500,000 489,545 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 52 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(b,c) RATE AMOUNT VALUE(a) HOUSING -- SINGLE FAMILY (CONT.) New York Mortgage Agency Revenue Bonds Series 2007-143 A.M.T. 10-01-27 4.85% $675,000 $625,104 --------------- Total 2,340,240 - ------------------------------------------------------------------------------------- LEASE (8.7%) New York City Industrial Development Agency Revenue Bonds Terminal One Group Association Project Series 2005 A.M.T. 01-01-24 5.50 500,000 482,195 New York State Dormitory Authority Revenue Bonds Consolidated City University System Series 1993A 07-01-13 5.75 3,000,000 3,217,590 New York State Dormitory Authority Revenue Bonds New York University Hospital Center Series 2006A 07-01-20 5.00 500,000 473,120 New York State Dormitory Authority Unrefunded Revenue Bonds Series 1990B 05-15-11 7.50 645,000 710,158 --------------- Total 4,883,063 - ------------------------------------------------------------------------------------- MISCELLANEOUS (3.1%) New York City Trust for Cultural Resources Revenue Bonds Lincoln Center Series 2008C 12-01-18 5.25 750,000 816,158 New York State Dormitory Authority Revenue Bonds Mt. Sinai School of Medicine New York University Series 2007 (National) 07-01-37 4.50 1,000,000 898,930 --------------- Total 1,715,088 - ------------------------------------------------------------------------------------- MISCELLANEOUS REVENUE (11.7%) Metropolitan Transportation Authority Revenue Bonds Series 2006A 11-15-22 5.00 750,000 774,488 Metropolitan Transportation Authority Revenue Bonds Series 2009A 11-15-26 5.30 700,000 744,387 New York City Industrial Development Agency Revenue Bonds Queens Baseball Stadium Pilot Series 2006 (AMBAC) 01-01-23 5.00 500,000 492,795 01-01-24 5.00 500,000 490,940 New York City Industrial Development Agency Revenue Bonds Yankee Stadium Pilot Series 2009 (Assured Guaranty) 03-01-49 7.00 250,000 286,450 New York City Trust for Cultural Resources Revenue Bonds Julliard School Series 2009A 01-01-34 5.00 1,000,000 1,040,800 New York State Thruway Authority Revenue Bonds Transportation Series 2008A 03-15-28 5.00 1,000,000 1,052,720 Port Authority of New York & New Jersey Revenue Bonds Consolidated 138th Series 2004 (National/FGIC) A.M.T. 12-01-12 5.00 1,000,000 1,078,609 Seneca Nation Indians Capital Improvements Authority Revenue Bonds Series 2007A 12-01-16 5.25 500,000(d) 431,835 12-01-23 5.00 250,000(d) 187,745 --------------- Total 6,580,769 - ------------------------------------------------------------------------------------- </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 53 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource New York Tax-Exempt Fund <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(b,c) RATE AMOUNT VALUE(a) PORT DISTRICT (5.3%) Port Authority of New York & New Jersey Revenue Bonds Consolidated 143rd Series 2006 (FSA) A.M.T. 10-01-21 5.00% $1,000,000 $1,021,490 Port Authority of New York & New Jersey Revenue Bonds Consolidated 146th Series 2006 (FSA) A.M.T. 12-01-23 4.50 1,500,000 1,436,055 Port Authority of New York & New Jersey Revenue Bonds Consolidated 147th Series 2007 (National/FGIC) A.M.T. 10-15-26 5.00 500,000 507,250 --------------- Total 2,964,795 - ------------------------------------------------------------------------------------- SPECIAL DISTRICT -- SPECIAL TAX (7.8%) Metropolitan Transportation Authority Revenue Bonds Series 2009B 11-15-34 5.00 1,500,000 1,514,220 New York City Transitional Finance Authority Revenue Bonds Future Tax Secured Series 2003D 02-01-23 5.00 500,000 519,155 02-01-31 5.00 1,000,000 1,016,580 New York City Transitional Finance Authority Revenue Bonds Series 2009S-5 01-15-32 5.00 1,000,000 1,024,000 New York State Dormitory Authority Revenue Bonds Education Series 2005F 03-15-23 5.00 250,000 264,905 --------------- Total 4,338,860 - ------------------------------------------------------------------------------------- TOLL ROAD (6.0%) Metropolitan Transportation Authority Revenue Bonds Series 2005F 11-15-35 5.00 500,000 499,235 New York State Thruway Authority Revenue Bonds Series 2007H (National/FGIC) 01-01-23 5.00 500,000 533,285 New York State Thruway Authority Revenue Bonds Series 2009A-1 04-01-29 5.00 1,000,000 1,038,540 Triborough Bridge & Tunnel Authority Refunding Revenue Bonds Series 2002B 11-15-29 5.13 1,000,000 1,021,390 Triborough Bridge & Tunnel Authority Revenue Bonds Series 2008C 11-15-38 5.00 250,000 253,853 --------------- Total 3,346,303 - ------------------------------------------------------------------------------------- WATER & SEWER (10.1%) Erie County Water Authority Revenue Bonds 4th Resolution Series 2007 (National) 12-01-34 4.75 500,000 502,000 New York City Municipal Water Finance Authority Revenue Bonds Fiscal 2009 Series 2008A 06-15-40 5.75 1,000,000 1,090,980 New York City Municipal Water Finance Authority Revenue Bonds Series 2008CC 06-15-34 5.00 1,500,000 1,530,900 New York City Municipal Water Finance Authority Revenue Bonds Series 2008DD 06-15-38 4.50 500,000 472,965 </Table> See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 54 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> MUNICIPAL BONDS (CONTINUED) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE(b,c) RATE AMOUNT VALUE(a) WATER & SEWER (CONT.) New York State Environmental Facilities Corporation Revenue Bonds Revolving Funds New York City Municipal Water Project Series 2002B 06-15-31 5.00% $1,000,000 $1,017,360 New York State Environmental Facilities Corporation Revenue Bonds Revolving Funds New York City Municipal Water Project Series 2002K 06-15-28 5.00 1,000,000 1,022,900 --------------- Total 5,637,105 - ------------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $54,354,487) $55,140,498 - ------------------------------------------------------------------------------------- <Caption> MUNICIPAL NOTES (0.6%) AMOUNT EFFECTIVE PAYABLE AT ISSUER(B,C,E) YIELD MATURITY VALUE(a) City of New York Unlimited General Obligation Bonds V.R.D.N. Sub Series 2005E-2 (Bank of America) 08-01-34 0.12% $360,000 $360,000 - ------------------------------------------------------------------------------------- TOTAL MUNICIPAL NOTES (Cost: $360,000) $360,000 - ------------------------------------------------------------------------------------- </Table> <Table> <Caption> MONEY MARKET FUND (--%) SHARES VALUE(a) JPMorgan Tax-Free Money Market Fund 5,383 $5,383 - ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $5,383) $5,383 - ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $54,719,870)(g) $55,505,881 ===================================================================================== </Table> NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 2 to the financial statements. (b) The following abbreviations may be used in the portfolio security descriptions to identify the insurer of the issue: <Table> ACA -- ACA Financial Guaranty Corporation AMBAC -- Ambac Assurance Corporation BHAC -- Berkshire Hathaway Assurance Corporation BIG -- Bond Investors Guarantee BNY -- Bank of New York CGIC -- Capital Guaranty Insurance Company CIFG -- IXIS Financial Guaranty FGIC -- Financial Guaranty Insurance Company FHA -- Federal Housing Authority FHLMC -- Federal Home Loan Mortgage Corporation FNMA -- Federal National Mortgage Association FSA -- Financial Security Assurance GNMA -- Government National Mortgage Association MBIA -- MBIA Insurance Corporation TCRS -- Transferable Custodial Receipts XLCA -- XL Capital Assurance </Table> - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 55 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource New York Tax-Exempt Fund NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (c) The following abbreviations may be used in the portfolio descriptions: <Table> A.M.T. -- Alternative Minimum Tax -- At Aug. 31, 2009, the value of securities subject to alternative minimum tax represented 12.3% of net assets. B.A.N. -- Bond Anticipation Note C.P. -- Commercial Paper R.A.N. -- Revenue Anticipation Note T.A.N. -- Tax Anticipation Note T.R.A.N. -- Tax & Revenue Anticipation Note V.R. -- Variable Rate V.R.D.B. -- Variable Rate Demand Bond V.R.D.N. -- Variable Rate Demand Note </Table> (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security may be determined to be liquid under guidelines established by the Fund's Board of Trustees. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2009, the value of these securities amounted to $619,580 or 1.1% of net assets. (e) The Fund is entitled to receive principal and interest from the party, if indicated in parentheses, after a day or a week's notice or upon maturity. The maturity date disclosed represents the final maturity. (f) At Aug. 31, 2009, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $724,148. See Note 2 to the financial statements. (g) At Aug. 31, 2009, the cost of securities for federal income tax purposes was $54,889,069 and the aggregate gross unrealized appreciation and depreciation based on that cost was: <Table> Unrealized appreciation $1,964,265 Unrealized depreciation (1,347,453) ---------------------------------------------------------- Net unrealized appreciation $616,812 ---------------------------------------------------------- </Table> - -------------------------------------------------------------------------------- 56 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS Statement of Financial Accounting Standards No. 157 (SFAS 157) requires disclosure regarding the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, investments shall be disclosed by major category. SFAS 157 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by prioritizing that the most observable input be used when available. Observable inputs are those that market participants would use in pricing an investment based on market data obtained from sources independent of the reporting entity. Unobservable inputs are those that reflect the Fund's assumptions about the information market participants would use in pricing an investment. An investment's level within the fair value hierarchy is based on the lowest level of any input that is deemed significant to the asset or liability's fair value measurement. When a valuation uses multiple inputs from varying levels of the hierarchy, the hierarchy level is determined based on the lowest level input or inputs that are significant to the fair value measurement in its entirety. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. For example, certain U.S. government securities are generally high quality and liquid, however, they are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. Fair value inputs are summarized in the three broad levels listed below: - Level 1 -- Valuations based on quoted prices for investments in active markets that the Fund has the ability to access at the measurement date. Valuation adjustments are not applied to Level 1 investments. - Level 2 -- Valuations based on other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.). - Level 3 -- Valuations based on significant unobservable inputs (including the Fund's own assumptions and judgment in determining the fair value of investments). Inputs that are used in determining fair value of an investment may include price information, credit data, volatility statistics, and other factors. These inputs can be either observable or unobservable. The availability of observable inputs can vary between investments, and is affected by various factors such as the type of investment, and the volume and level of activity for that investment or similar investments in the marketplace. The inputs will be considered by the Fund Administrator, along with any other relevant factors in the calculation of an investment's fair value. The Fund uses prices and inputs that are current as of the measurement date, which may include periods of market dislocations. During these periods, the availability of prices and inputs may be reduced for many investments. This condition could cause an investment to be reclassified between the various levels within the hierarchy. Investments falling into the Level 3 category are primarily supported by quoted prices from brokers and dealers participating in the market for those investments. However, these may be classified as Level 3 investments due to lack of market transparency and corroboration to support these quoted - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 57 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- RiverSource New York Tax-Exempt Fund FAIR VALUE MEASUREMENTS (CONTINUED) prices. Additionally, valuation models may be used as the pricing source for any remaining investments classified as Level 3. These models rely on one or more significant unobservable inputs and/or significant assumptions by the Fund Administrator. Inputs used in a valuation model may include, but are not limited to, financial statement analysis, discount rates and estimated cash flows, and comparable company data. The following table is a summary of the inputs used to value the Fund's investments as of Aug. 31, 2009: <Table> <Caption> FAIR VALUE AT AUG. 31, 2009 -------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL - -------------------------------------------------------------------------------------------- Bonds Municipal Bonds $-- $55,140,498 $-- $55,140,498 - -------------------------------------------------------------------------------------------- Total Bonds -- 55,140,498 -- 55,140,498 - -------------------------------------------------------------------------------------------- Other Municipal Notes -- 360,000 -- 360,000 Money Market Fund(a) 5,383 -- -- 5,383 - -------------------------------------------------------------------------------------------- Total Other 5,383 360,000 -- 365,383 - -------------------------------------------------------------------------------------------- Total $5,383 $55,500,498 $-- $55,505,881 - -------------------------------------------------------------------------------------------- </Table> (a) Money market fund that is a sweep investment for cash balances in the Fund at Aug. 31, 2009. HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as filed on Form N-Q, can be obtained without charge, upon request, by calling the RiverSource Family of Funds at 1(800) 221-2450. - -------------------------------------------------------------------------------- 58 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT STATEMENTS OF ASSETS AND LIABILITIES ------------------------------------------- <Table> <Caption> RIVERSOURCE RIVERSOURCE RIVERSOURCE CALIFORNIA MINNESOTA NEW YORK TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT AUG. 31, 2009 FUND FUND FUND ASSETS Investments in securities, at value Unaffiliated issuers (identified cost $164,627,974, $314,855,944 and $54,714,487) $162,874,995 $319,927,599 $55,500,498 Money market fund (identified cost $30,445, $56,086 and $5,383) 30,445 56,086 5,383 - ----------------------------------------------------------------------------------------------------------- Total investments in securities (identified cost $164,658,419, $314,912,030 and $54,719,870) 162,905,440 319,983,685 55,505,881 Capital shares receivable 25,129 126,518 1,018 Accrued interest receivable 2,041,018 4,091,856 731,072 Receivable for investment securities sold 2,596,167 2,134,168 572,702 - ----------------------------------------------------------------------------------------------------------- Total assets 167,567,754 326,336,227 56,810,673 - ----------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders 134,482 252,328 44,078 Capital shares payable 86,709 245,499 2,200 Payable for investment securities purchased 5,333,931 2,594,868 724,148 Accrued investment management services fees 5,452 10,733 1,886 Accrued distribution fees 35,537 71,235 12,394 Accrued transfer agency fees 487 1,355 269 Accrued administrative services fees 931 1,858 322 Other accrued expenses 56,216 71,087 46,471 - ----------------------------------------------------------------------------------------------------------- Total liabilities 5,653,745 3,248,963 831,768 - ----------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding shares $161,914,009 $323,087,264 $55,978,905 - ----------------------------------------------------------------------------------------------------------- </Table> - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 59 STATEMENT OF ASSETS AND LIABILITIES (continued) -------------------------------- <Table> <Caption> RIVERSOURCE RIVERSOURCE RIVERSOURCE CALIFORNIA MINNESOTA NEW YORK TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT AUG. 31, 2009 FUND FUND FUND REPRESENTED BY Shares of beneficial interest -- $.01 par value $ 333,914 $ 626,350 $ 115,194 Additional paid-in capital 166,423,922 320,385,872 56,145,529 Undistributed net investment income 56,391 99,537 20,364 Accumulated net realized gain (loss) (3,147,239) (3,096,150) (1,088,193) Unrealized appreciation (depreciation) on investments (1,752,979) 5,071,655 786,011 - ----------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding shares $161,914,009 $323,087,264 $55,978,905 - ----------------------------------------------------------------------------------------------------------- </Table> <Table> Net assets applicable to outstanding shares: Class A $156,529,091 $301,420,555 $52,995,844 Class B $ 2,746,317 $ 9,061,802 $ 2,051,875 Class C $ 2,638,601 $ 12,604,907 $ 931,186 Outstanding shares of beneficial interest: Class A shares 32,281,411 58,435,558 10,905,515 Class B shares 566,512 1,755,984 422,258 Class C shares 543,497 2,443,475 191,649 Net asset value per share: Class A(1) $ 4.85 $ 5.16 $ 4.86 Class B $ 4.85 $ 5.16 $ 4.86 Class C $ 4.85 $ 5.16 $ 4.86 - ----------------------------------------------------------------------------------------------------------- </Table> (1) The maximum offering price per share for Class A for RiverSource California Tax-Exempt Fund, RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund is $5.09, $5.42 and $5.10, respectively. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. The accompanying Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- 60 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT STATEMENTS OF OPERATIONS ------------------------------------------------------- <Table> <Caption> RIVERSOURCE RIVERSOURCE RIVERSOURCE CALIFORNIA MINNESOTA NEW YORK TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT YEAR ENDED AUG. 31, 2009 FUND FUND FUND INVESTMENT INCOME Income: Interest $ 8,662,005 $15,645,814 $2,747,017 Income distributions from money market fund 7,028 5,045 1,434 - --------------------------------------------------------------------------------------------------- Total income 8,669,033 15,650,859 2,748,451 - --------------------------------------------------------------------------------------------------- Expenses: Investment management services fees 663,711 1,230,393 220,172 Distribution fees Class A 388,632 703,042 124,348 Class B 39,496 127,738 32,203 Class C 24,784 92,844 7,408 Transfer agency fees Class A 58,703 149,574 30,894 Class B 1,659 7,443 2,168 Class C 996 5,149 491 Administrative services fees 113,317 212,293 37,590 Interest and fee expense 38,551 164,141 10,496 Compensation of board members 5,090 9,555 1,690 Custodian fees 9,905 12,510 5,632 Printing and postage 7,935 27,333 20,390 Registration fees 39,120 50,020 48,054 Professional fees 34,746 36,582 33,084 Other 8,974 15,135 3,556 - --------------------------------------------------------------------------------------------------- Total expenses 1,435,619 2,843,752 578,176 Expenses waived/reimbursed by the Investment Manager and its affiliates (68,760) (116,020) (113,110) Earnings and bank fee credits on cash balances (2,507) (3,043) -- - --------------------------------------------------------------------------------------------------- Total net expenses 1,364,352 2,724,689 465,066 - --------------------------------------------------------------------------------------------------- Investment income (loss) -- net 7,304,681 12,926,170 2,283,385 - --------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on security transactions (934,821) 909,145 (739,903) Net change in unrealized appreciation (depreciation) on investments (1,875,989) 1,703,901 702,309 - --------------------------------------------------------------------------------------------------- Net gain (loss) on investments (2,810,810) 2,613,046 (37,594) - --------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 4,493,871 $15,539,216 $2,245,791 - --------------------------------------------------------------------------------------------------- </Table> The accompanying Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 61 STATEMENTS OF CHANGES IN NET ASSETS -------------------------------------------- <Table> <Caption> RIVERSOURCE CALIFORNIA TAX-EXEMPT FUND YEAR ENDED AUG. 31, 2009 2008 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 7,304,681 $ 6,941,429 Net realized gain (loss) on investments (934,821) (1,876,280) Net change in unrealized appreciation (depreciation) on investments (1,875,989) (1,439,312) - --------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 4,493,871 3,625,837 - --------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (7,049,353) (6,676,981) Class B (149,044) (186,183) Class C (93,719) (67,785) Net realized gain Class A -- (1,181,240) Class B -- (42,325) Class C -- (10,896) - --------------------------------------------------------------------------------------------- Total distributions (7,292,116) (8,165,410) - --------------------------------------------------------------------------------------------- Share transactions Proceeds from sales Class A shares 19,923,096 64,314,623 Class B shares 443,125 841,055 Class C shares 472,755 1,663,705 Reinvestment of distributions at net asset value Class A shares 4,800,389 5,715,149 Class B shares 124,705 208,722 Class C shares 77,165 69,070 Conversions from Class B to Class A Class A shares 1,139,538 1,234,174 Class B shares (1,139,538) (1,234,174) Payments for redemptions Class A shares (38,756,535) (59,067,436) Class B shares (1,267,870) (1,064,401) Class C shares (698,645) (741,437) - --------------------------------------------------------------------------------------------- Increase (decrease) in net assets from share transactions (14,881,815) 11,939,050 - --------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (17,680,060) 7,399,477 Net assets at beginning of year 179,594,069 172,194,592 - --------------------------------------------------------------------------------------------- Net assets at end of year $161,914,009 $179,594,069 - --------------------------------------------------------------------------------------------- Undistributed net investment income $ 56,391 $ 43,826 - --------------------------------------------------------------------------------------------- </Table> Certain line items from the prior year have been renamed to conform to the current year presentation. The accompanying Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- 62 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- <Table> <Caption> RIVERSOURCE MINNESOTA TAX-EXEMPT FUND YEAR ENDED AUG. 31, 2009 2008 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 12,926,170 $ 12,238,164 Net realized gain (loss) on investments 909,145 (1,301,693) Net change in unrealized appreciation (depreciation) on investments 1,703,901 (383,745) - --------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 15,539,216 10,552,726 - --------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (12,286,856) (11,396,501) Class B (461,961) (578,310) Class C (334,186) (248,552) Net realized gain Class A -- -- Class B -- -- Class C -- -- - --------------------------------------------------------------------------------------------- Total distributions (13,083,003) (12,223,363) - --------------------------------------------------------------------------------------------- Share transactions Proceeds from sales Class A shares 41,948,263 43,503,320 Class B shares 1,076,993 1,495,288 Class C shares 4,828,068 2,599,145 Reinvestment of distributions at net asset value Class A shares 10,050,436 9,552,532 Class B shares 407,559 516,735 Class C shares 292,939 222,405 Conversions from Class B to Class A Class A shares 3,807,793 3,540,727 Class B shares (3,807,793) (3,540,727) Payments for redemptions Class A shares (45,969,582) (53,551,129) Class B shares (2,591,129) (4,098,902) Class C shares (1,143,172) (1,341,812) - --------------------------------------------------------------------------------------------- Increase (decrease) in net assets from share transactions 8,900,375 (1,102,418) - --------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 11,356,588 (2,773,055) Net assets at beginning of year 311,730,676 314,503,731 - --------------------------------------------------------------------------------------------- Net assets at end of year $323,087,264 $311,730,676 - --------------------------------------------------------------------------------------------- Undistributed net investment income $ 99,537 $ 256,370 - --------------------------------------------------------------------------------------------- </Table> Certain line items from the prior year have been renamed to conform to the current year presentation. The accompanying Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 63 STATEMENTS OF CHANGES IN NET ASSETS (continued) -------------------------------- <Table> <Caption> RIVERSOURCE NEW YORK TAX-EXEMPT FUND YEAR ENDED AUG. 31, 2009 2008 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 2,283,385 $ 2,349,562 Net realized gain (loss) on investments (739,903) (245,291) Net change in unrealized appreciation (depreciation) on investments 702,309 (522,090) - -------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 2,245,791 1,582,181 - -------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (2,138,780) (2,189,003) Class B (113,911) (134,397) Class C (26,205) (23,906) Net realized gain Class A -- (98,846) Class B -- (7,550) Class C -- (1,363) - -------------------------------------------------------------------------------------------- Total distributions (2,278,896) (2,455,065) - -------------------------------------------------------------------------------------------- Share transactions Proceeds from sales Class A shares 6,574,142 3,812,133 Class B shares 259,408 277,150 Class C shares 322,075 115,478 Reinvestment of distributions at net asset value Class A shares 1,749,901 1,915,808 Class B shares 95,703 125,138 Class C shares 24,460 24,019 Conversions from Class B to Class A Class A shares 1,435,523 373,093 Class B shares (1,435,523) (373,093) Payments for redemptions Class A shares (9,315,791) (11,068,956) Class B shares (350,063) (1,021,545) Class C shares (140,906) (204,109) - -------------------------------------------------------------------------------------------- Increase (decrease) in net assets from share transactions (781,071) (6,024,884) - -------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (814,176) (6,897,768) Net assets at beginning of year 56,793,081 63,690,849 - -------------------------------------------------------------------------------------------- Net assets at end of year $55,978,905 $ 56,793,081 - -------------------------------------------------------------------------------------------- Undistributed net investment income $ 20,364 $ 15,877 - -------------------------------------------------------------------------------------------- </Table> Certain line items from the prior year have been renamed to conform to the current year presentation. The accompanying Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- 64 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT FINANCIAL HIGHLIGHTS ----------------------------------------------------------- The following tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single share of a class held for the periods shown. For periods ended 2007 and after, per share amounts are calculated based on average shares outstanding during the period. Total returns assume reinvestment of all dividends and distributions. Total returns do not reflect payment of sales charges, if any, and are not annualized for periods of less than one year. RiverSource California Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS A ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $4.90 $5.03 $5.16 $5.06 $5.27 $5.11 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21 .20 .20 .03 .19 .20 Net gains (losses) (both realized and unrealized) (.05) (.09) (.13) .10 (.15) .23 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .16 .11 .07 .13 .04 .43 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.20) (.20) (.03) (.19) (.20) Distributions from realized gains -- (.04) -- -- (.06) (.07) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.21) (.24) (.20) (.03) (.25) (.27) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.85 $4.90 $5.03 $5.16 $5.06 $5.27 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 3.59% 2.13% 1.35% 2.63% .81% 8.53% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) .86% .87% .88% N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) .82% .80%(e) .80% N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) .83% .86% .87% .87%(f) .88% .86% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) .79% .79%(e) .79% .79%(f) .81% .86% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.54% 4.01% 3.89% 3.81%(f) 3.69% 3.71% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $157 $172 $164 $170 $171 $190 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 49% 49% 62% 7% 20% 28% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 65 FINANCIAL HIGHLIGHTS (continued) ----------------------------------------------- RiverSource California Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS B ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $4.90 $5.03 $5.16 $5.06 $5.27 $5.11 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18 .16 .16 .03 .15 .16 Net gains (losses) (both realized and unrealized) (.06) (.09) (.13) .10 (.15) .23 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .12 .07 .03 .13 -- .39 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.16) (.16) (.03) (.15) (.16) Distributions from realized gains -- (.04) -- -- (.06) (.07) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.17) (.20) (.16) (.03) (.21) (.23) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.85 $4.90 $5.03 $5.16 $5.06 $5.27 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 2.81% 1.37% .59% 2.50% .05% 7.72% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) 1.61% 1.62% 1.63% N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) 1.57% 1.55%(e) 1.55% N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) 1.58% 1.61% 1.62% 1.62%(f) 1.63% 1.61% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) 1.54% 1.54%(e) 1.54% 1.55%(f) 1.57% 1.61% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.78% 3.27% 3.12% 3.01%(f) 2.92% 2.95% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $3 $5 $6 $9 $11 $16 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 49% 49% 62% 7% 20% 28% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- 66 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource California Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS C ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $4.91 $5.04 $5.17 $5.07 $5.28 $5.12 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18 .16 .16 .03 .15 .16 Net gains (losses) (both realized and unrealized) (.07) (.09) (.13) .10 (.15) .23 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .11 .07 .03 .13 -- .39 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.16) (.16) (.03) (.15) (.16) Distributions from realized gains -- (.04) -- -- (.06) (.07) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.17) (.20) (.16) (.03) (.21) (.23) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.85 $4.91 $5.04 $5.17 $5.07 $5.28 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 2.60% 1.38% .60% 2.50% .06% 7.71% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) 1.61% 1.62% 1.63% N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) 1.57% 1.55%(e) 1.55% N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) 1.58% 1.61% 1.62% 1.63%(f) 1.64% 1.62% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) 1.54% 1.54%(e) 1.54% 1.55%(f) 1.58% 1.62% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.78% 3.18% 3.13% 3.05%(f) 2.93% 2.94% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $3 $3 $2 $2 $2 $3 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 49% 49% 62% 7% 20% 28% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 67 FINANCIAL HIGHLIGHTS (continued) ----------------------------------------------- RiverSource California Tax-Exempt Fund NOTES TO FINANCIAL HIGHLIGHTS (a) For the period from July 1, 2006 to Aug. 31, 2006. (b) In addition to the fees and expenses the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (c) Ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. (d) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (e) Expense ratio is before the reduction for earnings/bank fee credits on cash balances. For the year ended Aug. 31, 2008, earnings/bank fee credits lowered the expense ratio by 0.01% of average daily net assets. (f) Annualized. The accompanying Notes to Financial Statements are an integral part of this statement. - -------------------------------------------------------------------------------- 68 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS A ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $5.11 $5.14 $5.27 $5.17 $5.35 $5.20 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21 .21 .19 .03 .18 .18 Net gains (losses) (both realized and unrealized) .05 (.03) (.13) .10 (.17) .17 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .26 .18 .06 .13 .01 .35 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.21) (.19) (.03) (.18) (.18) Distributions from realized gains -- -- -- -- (.01) (.02) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.21) (.21) (.19) (.03) (.19) (.20) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.16 $5.11 $5.14 $5.27 $5.17 $5.35 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 5.50% 3.50% 1.26% 2.56% .29% 6.73% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) .88% .99% 1.05% 1.06%(f) 1.01% .95% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) .84% .95%(e) .99% .98%(f) .96% .95% - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) .83% .83% .85% .87%(f) .86% .85% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) .79% .79%(e) .79% .79%(f) .81% .85% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.31% 4.05% 3.70% 3.60%(f) 3.52% 3.37% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $301 $289 $288 $309 $303 $341 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 33% 23% 26% 3% 13% 15% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 69 FINANCIAL HIGHLIGHTS (continued) ----------------------------------------------- RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS B ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $5.12 $5.15 $5.27 $5.17 $5.35 $5.20 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18 .17 .15 .03 .14 .14 Net gains (losses) (both realized and unrealized) .04 (.03) (.11) .10 (.17) .17 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .22 .14 .04 .13 (.03) .31 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.17) (.16) (.03) (.14) (.14) Distributions from realized gains -- -- -- -- (.01) (.02) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.18) (.17) (.16) (.03) (.15) (.16) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.16 $5.12 $5.15 $5.27 $5.17 $5.35 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 4.50% 2.72% .70% 2.42% (.47%) 5.94% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE DAILY NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) 1.63% 1.75% 1.80% 1.81%(f) 1.77% 1.70% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) 1.59% 1.70%(e) 1.75% 1.74%(f) 1.72% 1.70% - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) 1.58% 1.59% 1.60% 1.62%(f) 1.62% 1.60% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) 1.54% 1.54%(e) 1.55% 1.55%(f) 1.57% 1.60% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.56% 3.29% 2.93% 2.81%(f) 2.75% 2.62% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $9 $14 $20 $29 $34 $49 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 33% 23% 26% 3% 13% 15% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- 70 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS C ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $5.12 $5.15 $5.27 $5.17 $5.35 $5.20 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18 .17 .15 .03 .14 .14 Net gains (losses) (both realized and unrealized) .04 (.03) (.11) .10 (.17) .17 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .22 .14 .04 .13 (.03) .31 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.17) (.16) (.03) (.14) (.14) Distributions from realized gains -- -- -- -- (.01) (.02) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.18) (.17) (.16) (.03) (.15) (.16) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.16 $5.12 $5.15 $5.27 $5.17 $5.35 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 4.51% 2.72% .70% 2.42% (.47%) 5.94% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) 1.63% 1.75% 1.80% 1.82%(f) 1.77% 1.71% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) 1.59% 1.70%(e) 1.75% 1.74%(f) 1.72% 1.71% - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) 1.58% 1.59% 1.60% 1.63%(f) 1.62% 1.61% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) 1.54% 1.54%(e) 1.55% 1.55%(f) 1.57% 1.61% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.55% 3.29% 2.94% 2.84%(f) 2.76% 2.62% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $13 $8 $7 $8 $8 $9 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 33% 23% 26% 3% 13% 15% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 71 FINANCIAL HIGHLIGHTS (continued) ----------------------------------------------- RiverSource Minnesota Tax-Exempt Fund NOTES TO FINANCIAL HIGHLIGHTS (a) For the period from July 1, 2006 to Aug. 31, 2006. (b) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (c) Ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. (d) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (e) Expense ratio is before the reduction for earnings/bank fee credits on cash balances. For the year ended Aug. 31, 2008, earnings/bank fee credits lowered the expense ratio by 0.01% of average daily net assets. (f) Annualized. The accompanying Notes to Financial Statements are an integral part of this statement. - -------------------------------------------------------------------------------- 72 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource New York Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED JULY 31, JUNE 30, CLASS A ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $4.85 $4.93 $5.05 $4.95 $5.18 $5.07 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .20 .19 .03 .19 .18 Net gains (losses) (both realized and unrealized) .01 (.07) (.11) .10 (.18) .17 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .21 .13 .08 .13 .01 .35 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.20) (.19) (.03) (.19) (.18) Distributions from realized gains -- (.01) (.01) -- (.05) (.06) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.20) (.21) (.20) (.03) (.24) (.24) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.86 $4.85 $4.93 $5.05 $4.95 $5.18 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 4.62% 2.59% 1.53% 2.67% .20% 7.04% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) 1.02% 1.12% 1.18% 1.20%(f) 1.13% 1.02% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) .81% .93%(e) 1.00% .98%(f) .98% .98% - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) 1.00% .98% .97% 1.01%(f) .96% .92% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) .79% .79%(e) .79% .79%(f) .81% .88% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.30% 4.03% 3.81% 3.77%(f) 3.75% 3.47% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $53 $53 $58 $63 $63 $73 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 34% 31% 28% 7% 17% 30% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 73 FINANCIAL HIGHLIGHTS (continued) ----------------------------------------------- RiverSource New York Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS B ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $4.85 $4.93 $5.05 $4.95 $5.18 $5.07 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .16 .15 .03 .15 .14 Net gains (losses) (both realized and unrealized) -- (.07) (.11) .10 (.18) .17 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .17 .09 .04 .13 (.03) .31 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.16) (.15) (.03) (.15) (.14) Distributions from realized gains -- (.01) (.01) -- (.05) (.06) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.16) (.17) (.16) (.03) (.20) (.20) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.86 $4.85 $4.93 $5.05 $4.95 $5.18 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 3.83% 1.83% .76% 2.54% (.55%) 6.23% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) 1.77% 1.87% 1.93% 1.95%(f) 1.88% 1.77% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) 1.56% 1.68%(e) 1.76% 1.74%(f) 1.75% 1.74% - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) 1.75% 1.73% 1.72% 1.76%(f) 1.71% 1.67% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) 1.54% 1.54%(e) 1.55% 1.55%(f) 1.58% 1.64% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.54% 3.28% 3.05% 2.98%(f) 2.98% 2.70% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $2 $4 $5 $7 $8 $11 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 34% 31% 28% 7% 17% 30% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- 74 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource New York Tax-Exempt Fund <Table> <Caption> YEAR ENDED YEAR ENDED AUG. 31, JUNE 30, CLASS C ---------------------------------------- ---------------- PER SHARE DATA 2009 2008 2007 2006(a) 2006 2005 Net asset value, beginning of period $4.85 $4.92 $5.05 $4.95 $5.18 $5.07 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .16 .15 .03 .15 .14 Net gains (losses) (both realized and unrealized) -- (.06) (.12) .10 (.18) .17 - ----------------------------------------------------------------------------------------------------------------- Total from investment operations .17 .10 .03 .13 (.03) .31 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.16) (.15) (.03) (.15) (.14) Distributions from realized gains -- (.01) (.01) -- (.05) (.06) - ----------------------------------------------------------------------------------------------------------------- Total distributions (.16) (.17) (.16) (.03) (.20) (.20) - ----------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.86 $4.85 $4.92 $5.05 $4.95 $5.18 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN 3.84% 2.04% .56% 2.54% (.55%) 6.23% - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(b) Gross expenses prior to expense waiver/ reimbursement (including interest and fee expense)(c) 1.77% 1.87% 1.93% 1.97%(f) 1.89% 1.78% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (including interest and fee expense)(c),(d) 1.56% 1.68%(e) 1.76% 1.74%(f) 1.75% 1.74% - ----------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/ reimbursement (excluding interest and fee expense) 1.75% 1.73% 1.72% 1.78%(f) 1.72% 1.68% - ----------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement (excluding interest and fee expense)(d) 1.54% 1.54%(e) 1.55% 1.55%(f) 1.58% 1.64% - ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.55% 3.28% 3.05% 3.01%(f) 2.99% 2.70% - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $1 $1 $1 $1 $1 - ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 34% 31% 28% 7% 17% 30% - ----------------------------------------------------------------------------------------------------------------- </Table> See accompanying Notes to Financial Highlights. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 75 FINANCIAL HIGHLIGHTS (continued) ----------------------------------------------- RiverSource New York Tax-Exempt Fund NOTES TO FINANCIAL HIGHLIGHTS (a) For the period from July 1, 2006 to Aug. 31, 2006. (b) In addition to the fees and expenses the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (c) Ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. (d) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (e) Expense ratio is before reduction for earnings/bank fee credits on cash balances. For the year ended Aug. 31, 2008, earnings/bank fee credits lowered the expense ratio by 0.01%. (f) Annualized. The accompanying Notes to Financial Statements are an integral part of this statement. - -------------------------------------------------------------------------------- 76 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. ORGANIZATION RiverSource California Tax-Exempt Trust and RiverSource Special Tax-Exempt Series Trust are organized as Massachusetts business trusts. RiverSource California Tax-Exempt Trust includes only RiverSource California Tax-Exempt Fund. RiverSource Special Tax-Exempt Series Trust is a "series fund" that is currently composed of individual state tax-exempt funds, including RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund (together with RiverSource California Tax-Exempt Fund, herein after referred to as the Funds). The Funds are non-diversified, open-end management investment companies as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Each Fund has unlimited authorized shares of beneficial interest. Each Fund's goal is to provide a high level of income generally exempt from federal income tax as well as from the respective state and local income tax. A portion of each Fund's assets may be invested in bonds whose interest is subject to the alternative minimum tax computation. The Funds concentrate their investments in a single state and therefore may have more credit risk related to the economic conditions of the respective state than funds that have a broader geographical diversification. Each Fund offers Class A, Class B and Class C shares. - - Class A shares are offered with a front-end sales charge, which may be waived under certain circumstances. - - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares one month after the completion of the eighth year of ownership if originally purchased in a RiverSource fund on or after May 21, 2005 or originally purchased in a Seligman fund on or after June 13, 2009. Class B shares originally purchased in a RiverSource fund prior to May 21, 2005 will convert to Class A shares in the ninth calendar year of ownership. Class B shares originally purchased in a Seligman fund prior to June 13, 2009 will convert to Class A shares in the month prior to the ninth year of ownership. - - Class C shares may be subject to a CDSC. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution fees, transfer agency fees) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 77 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. VALUATION OF SECURITIES All securities are valued at the close of business of the New York Stock Exchange (NYSE). Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued by an independent pricing service using an evaluated bid. When market quotes are not readily available, the pricing service, in determining fair values of debt securities, takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. The procedures adopted by each Fund's Board of Trustees (the Board) generally contemplate the use of fair valuation in the event that price quotations or valuations are not readily available, price quotations or valuations from other sources are not reflective of market value and thus deemed unreliable, or a significant event has occurred in relation to a security or class of securities that is not reflected in price quotations or valuations from other sources. A fair value price is a good faith estimate of the value of a security at a given point in time. Swap transactions are valued through an authorized pricing service, broker, or an internal model. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates. Typically, those maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value. Investments in money market funds are valued at net asset value. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Funds on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect each Fund's net assets the same as owned securities. Each Fund designates cash or liquid securities at least equal to the amount of its forward- - -------------------------------------------------------------------------------- 78 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- commitments. At Aug. 31, 2009, the outstanding when-issued securities for the Funds are as follows: <Table> <Caption> WHEN-ISSUED FUND SECURITIES - ------------------------------------------------------------ RiverSource California Tax-Exempt Fund $2,908,340 RiverSource New York Tax-Exempt Fund 724,148 </Table> INVERSE FLOATER PROGRAM TRANSACTIONS Each Fund may enter into transactions in which it transfers to trusts fixed rate municipal bonds in exchange for cash and residual interests in the trusts' assets and cash flows, which are in the form of inverse floating rate securities. The trusts fund the purchases of the municipal bonds by issuing short-term floating rate notes to third parties. The residual interests held by each Fund (inverse floating rate securities) include the right of each Fund (1) to cause the holders of the short-term floating rate notes to tender their notes at par, and (2) to transfer the municipal bonds from the trusts to each Fund, thereby collapsing the trusts. The municipal bonds transferred to the trusts, if any, remain in each Fund's investments in securities and the related short-term floating rate notes are reflected as Fund liabilities under the caption "Short- term floating rate notes outstanding" in the Statements of Assets and Liabilities. The notes issued by the trusts have interest rates that are multi- modal, which means that they can be reset to a new or different mode at the reset date (e.g., mode can be daily, weekly, monthly, or a fixed specific date) at the discretion of the holder of the inverse floating rate security. The floating rate note holders have the option to tender their notes to the trusts for redemption at par at each reset date. The income received by the inverse floating rate security holder varies inversely with the short-term rate paid to the floating rate note holders, and in most circumstances the inverse floating rate security holder bears substantially all of the underlying bond's downside investment risk and also benefits disproportionately from any potential appreciation of the underlying bond's value. The inverse floating rate security holder will be subject to greater interest rate risk than if they were to hold the underlying bond because the interest rate is dependent on both the fixed coupon rate of the underlying bond and the short-term interest rate paid on the floating rate notes. The inverse floating rate security holder is also subject to the credit risk, liquidity risk and market risk associated with the underlying bond. The bonds held by the trusts serve as collateral for the short- term floating rate notes outstanding. The inclusion of interest and fee expense related to the short-term floating rate notes corresponds to an equal increase in interest income from the fixed rate municipal bonds held in trust. At Aug. 31, 2009, the Funds had no outstanding short-term floating rate notes held in trust. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 79 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- GUARANTEES AND INDEMNIFICATIONS Under each Fund's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to each Fund. In addition, certain of each Fund's contracts with its service providers contain general indemnification clauses. Each Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against each Fund cannot be determined and each Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES Each Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income (which includes net short-term capital gains) and tax- exempt ordinary income to shareholders. No provision for income or excise taxes is thus required. Each Fund is treated as a separate entity for federal income tax purposes. Management of each Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and paid monthly, are reinvested in additional shares of each Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions are accounted for on the date securities are purchased or sold. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 3. INVESTMENTS IN DERIVATIVES Each Fund may invest in certain derivative instruments, which are transactions whose values depend on or are derived from (in whole or in part) the value of one or more other assets, such as securities, currencies, commodities or indices. Such derivative instruments may be used to maintain cash reserves while maintaining exposure to certain other assets, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, and to pursue higher investment returns. Each Fund may also use derivative instruments to mitigate certain investment risks, such as foreign currency exchange rate risk, interest rate risk, and credit risk. - -------------------------------------------------------------------------------- 80 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- FUTURES TRANSACTIONS Each Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange to produce incremental earnings, hedge existing positions or protect against market changes in the value of equities, interest rates or foreign currencies. Each Fund may also buy and write put and call options on these futures contracts. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Futures and options on futures are valued daily based upon the last sale price at the close of the market on the principal exchange on which they are traded. Upon entering into a futures contract, each Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by each Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. Each Fund recognizes a realized gain or loss when the contract is closed or expires. Upon entering into futures contracts, each Fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, each Fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. Additional risks include counterparty credit risk, the possibility of an illiquid market, and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. At Aug. 31, 2009, and for the year then ended, the Funds had no outstanding futures contracts. INTEREST RATE SWAP TRANSACTIONS Each Fund may enter into interest rate swap transactions to produce incremental earnings, or to gain exposure to or protect itself from market rate changes, or to synthetically add or subtract principal exposure to a market. Interest rate swaps are agreements between two parties that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future, based on a predetermined, specified notional amount. Certain interest rate swaps are considered forward-starting, whereby the accrual for the exchange of cash flows does not begin until a specified date in the future (the "effective date"). The net cash flow for a standard interest rate swap transaction is generally the difference between a floating market interest rate versus a fixed interest rate. Interest rate swaps are valued daily and unrealized appreciation (depreciation) is recorded. Certain interest rate swaps may accrue periodic interest on a daily basis as a component of unrealized appreciation (depreciation); each Fund will realize - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 81 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- a gain or loss upon the payment or receipt of accrued interest. Each Fund will realize a gain or a loss when the interest rate swap is terminated. Risks of entering into interest rate swaps include a lack of correlation between the swaps and the portfolio of bonds the swaps are designed to hedge or replicate. A lack of correlation may cause the interest rate swaps to experience adverse changes in value relative to expectations. In addition, interest rate swaps are subject to the risk of default of a counterparty, and the risk of adverse movements in market interest rates relative to the interest rate swap positions taken. Each Fund's maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from/paid to the counterparty over the contract's remaining life to the extent that such amount is positive, plus the cost of entering into a similar transaction with another counterparty. This risk is mitigated by having a master netting arrangement between each Fund and the counterparty and by the posting of collateral by the counterparty to each Fund to cover each Fund's exposure to the counterparty. At Aug. 31, 2009, and for the year then ended, the Funds had no outstanding interest rate swap contracts. 4. EXPENSES AND SALES CHARGES INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, RiverSource Investments, LLC (the Investment Manager) determines which securities will be purchased, held or sold. The management fee is an annual fee that is equal to a percentage of each Fund's average daily net assets that declines from 0.41% to 0.25% as each Fund's net assets increase. The management fee for the year ended Aug. 31, 2009 was 0.41% of each Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES Under an Administrative Services Agreement, each Fund pays Ameriprise Financial, Inc., the parent company of the Investment Manager, an annual fee for administration and accounting services equal to a percentage of each Fund's average daily net assets that declines from 0.07% to 0.04% as each Fund's net assets increase. The fee for the year ended Aug. 31, 2009 was 0.07% of each Fund's average daily net assets. OTHER FEES Other expenses are for, among other things, certain expenses of the Funds or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited - -------------------------------------------------------------------------------- 82 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- administrative services to the Funds and the Board. For the year ended Aug. 31, 2009, other expenses paid to this company are as follows: <Table> <Caption> FUND AMOUNT - ---------------------------------------------------------- RiverSource California Tax-Exempt Fund $1,025 RiverSource Minnesota Tax-Exempt Fund 1,756 RiverSource New York Tax-Exempt Fund 351 </Table> COMPENSATION OF BOARD MEMBERS Under a Deferred Compensation Plan (the Plan), the board members who are not "interested persons" of each Fund under the 1940 Act may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of each Fund or other funds in the RiverSource Family of Funds. Each Fund's liability for these amounts is adjusted for market value changes and remains in the funds until distributed in accordance with the Plan. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains Fund shareholder accounts and records and provides Fund shareholder services. Each Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Transfer Agent also charges an annual fee of $3 per account serviced directly by each Fund or its designated agent for Class A, Class B and Class C shares. The Transfer Agent charges an annual fee of $5 per inactive account, charged on a pro rata basis for the 12 month period from the date the account becomes inactive. These fees are included in the transfer agency fees in the Statements of Operations. DISTRIBUTION FEES Each Fund has an agreement with RiverSource Fund Distributors, Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, each Fund pays a fee at an annual rate of up to 0.25% of each Fund's average daily net assets attributable to Class A shares and a fee at an annual rate of up to 1.00% of each Fund's average daily net assets attributable to Class B and Class C shares. For Class B and Class C shares, of the 1.00% fee, up to 0.75% is reimbursed for distribution expenses. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 83 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- The amount of distribution expenses incurred by the Distributor and not yet reimbursed (unreimbursed expense) for each Fund was approximately as follows: <Table> <Caption> FUND CLASS B CLASS C - --------------------------------------------------------------- RiverSource California Tax-Exempt Fund $ 88,000 $23,000 RiverSource Minnesota Tax-Exempt Fund 239,000 80,000 RiverSource New York Tax-Exempt Fund 64,000 8,000 </Table> These amounts are based on the most recent information available as of July 31, 2009, and may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed expense has been fully recovered, the distribution fee is reduced. SALES CHARGES Sales charges, including front-end and CDSCs, received by the Distributor for distributing the Funds' shares for the year ended Aug. 31, 2009 are as follows: <Table> <Caption> FUND CLASS A CLASS B CLASS C - ------------------------------------------------------------------- RiverSource California Tax-Exempt Fund $ 85,410 $6,569 $ 368 RiverSource Minnesota Tax-Exempt Fund 401,213 4,070 1,499 RiverSource New York Tax-Exempt Fund 19,110 1,807 75 </Table> EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended Aug. 31, 2009, the Investment Manager and its affiliates waived/reimbursed certain fees and expenses such that the Funds' net expenses (excluding interest and fee expenses related to each Fund's participation in certain inverse floater programs and fees and expenses of acquired funds*) are as follows: <Table> <Caption> FUND CLASS A CLASS B CLASS C - ------------------------------------------------------------------- RiverSource California Tax-Exempt Fund 0.79% 1.54% 1.54% RiverSource Minnesota Tax-Exempt Fund 0.79 1.54 1.54 RiverSource New York Tax-Exempt Fund 0.79 1.54 1.54 </Table> The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: <Table> <Caption> FUND CLASS A CLASS B CLASS C - ------------------------------------------------------------------- RiverSource California Tax-Exempt Fund $11,662 $ 434 $ 228 RiverSource Minnesota Tax-Exempt Fund 36,360 2,207 1,359 RiverSource New York Tax-Exempt Fund 10,869 848 188 </Table> - -------------------------------------------------------------------------------- 84 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- The management fees waived/reimbursed at the Fund level were as follows: <Table> <Caption> FUND AMOUNT - ----------------------------------------------------------- RiverSource California Tax-Exempt Fund $ 56,436 RiverSource Minnesota Tax-Exempt Fund 76,094 RiverSource New York Tax-Exempt Fund 101,205 </Table> Under an agreement which was effective until Aug. 31, 2009, the Investment Manager and its affiliates contractually agreed to waive certain fees and expenses such that net expenses (excluding interest and fee expenses related to each Fund's participation in certain inverse floater programs and fees and expenses of acquired funds*), would not exceed 0.79% for Class A, 1.54% for Class B and 1.54% for Class C of each class' average daily net assets. Effective Sept. 1, 2009, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until Oct. 31, 2010, unless sooner terminated at the discretion of the Board, such that net expenses (excluding interest and fee expenses related to each Fund's participation in certain inverse floater programs and fees and expenses of acquired funds*), will not exceed the following percentage of the class' average daily net assets: <Table> <Caption> FUND CLASS A CLASS B CLASS C - ------------------------------------------------------------------- RiverSource California Tax-Exempt Fund 0.79% 1.54% 1.54% RiverSource Minnesota Tax-Exempt Fund 0.79 1.55 1.54 RiverSource New York Tax-Exempt Fund 0.79 1.54 1.54 </Table> * In addition to the fees and expenses which each Fund bears directly, each Fund indirectly bears a pro rata share of the fees and expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). Because the acquired funds have varied expense and fee levels and each Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred indirectly by each Fund will vary. EARNINGS AND BANK FEE CREDITS During the year ended Aug. 31, 2009, the Funds' custodian and transfer agency fees were reduced as a result of earnings and bank fee credits from overnight cash balances as follows: <Table> <Caption> FUND AMOUNT - ---------------------------------------------------------- RiverSource California Tax-Exempt Fund $2,507 RiverSource Minnesota Tax-Exempt Fund 3,043 </Table> - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 85 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 5. SECURITIES TRANSACTIONS For the year ended Aug. 31, 2009, cost of purchases and proceeds from sales (other than short-term obligations) aggregated for each Fund are as follows: <Table> <Caption> FUND PURCHASES PROCEEDS - ------------------------------------------------------------------ RiverSource California Tax-Exempt Fund $ 76,367,361 $82,865,015 RiverSource Minnesota Tax-Exempt Fund 109,714,575 97,651,277 RiverSource New York Tax-Exempt Fund 17,785,310 17,562,597 </Table> Realized gains and losses are determined on an identified cost basis. 6. SHARE TRANSACTIONS Transactions in shares for each Fund for the periods indicated are as follows: <Table> <Caption> CALIFORNIA MINNESOTA NEW YORK TAX-EXEMPT FUND TAX-EXEMPT FUND TAX-EXEMPT FUND ----------------------- ----------------------- ---------------------- YEAR ENDED AUG. 31, 2009 2008 2009 2008 2009 2008 - --------------------------------------------------------------------------------------------- CLASS A Sold 4,355,164 12,923,570 8,539,717 8,434,666 1,430,554 775,122 Converted from Class B shares* 240,409 250,340 748,093 687,520 300,948 76,454 Reinvested distributions 1,037,102 1,151,547 2,034,376 1,854,907 377,970 390,445 Redeemed (8,449,034) (11,856,270) (9,451,083) (10,357,016) (2,046,046) (2,246,691) - --------------------------------------------------------------------------------------------- Net increase (decrease) (2,816,359) 2,469,187 1,871,103 620,077 63,426 (1,004,670) - --------------------------------------------------------------------------------------------- CLASS B Sold 96,134 170,107 218,554 291,180 56,152 56,763 Reinvested distributions 27,005 42,038 82,625 100,267 20,715 25,495 Converted to Class A shares* (240,917) (250,340) (748,093) (687,520) (300,948) (76,454) Redeemed (277,603) (212,640) (527,471) (792,624) (76,176) (207,588) - --------------------------------------------------------------------------------------------- Net increase (decrease) (395,381) (250,835) (974,385) (1,088,697) (300,257) (201,784) - --------------------------------------------------------------------------------------------- CLASS C Sold 100,253 337,281 964,981 503,745 68,512 23,555 Reinvested distributions 16,658 13,927 59,157 43,204 5,278 4,894 Redeemed (152,756) (147,407) (234,610) (259,716) (30,213) (41,259) - --------------------------------------------------------------------------------------------- Net increase (decrease) (35,845) 203,801 789,528 287,233 43,577 (12,810) - --------------------------------------------------------------------------------------------- </Table> * Automatic conversion of Class B shares to Class A shares based on the original purchase. 7. BANK BORROWINGS Each Fund has entered into a revolving credit facility with a syndicate of banks led by JPMorgan Chase Bank, N.A. (the Administrative Agent), whereby each Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility became effective on Oct. 16, 2008, replacing a prior credit facility. The credit facility agreement, - -------------------------------------------------------------------------------- 86 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- which is a collective agreement between each Fund and certain other funds in the RiverSource Family of Funds, severally and not jointly, permits collective borrowings up to $475 million. The borrowers shall have the right, upon written notice to the Administrative Agent to request an increase of up to $175 million in the aggregate amount of the credit facility from new or existing lenders, provided that the aggregate amount of the credit facility shall at no time exceed $650 million. Participation in such increase by any existing lender shall be at such lender's sole discretion. Interest is charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.75%. Each borrowing under the credit facility matures no later than 60 days after the date of borrowing. Each Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum, in addition to an upfront fee equal to its pro rata share of 0.02% of the amount of the credit facility. The Funds had no borrowings during the year ended Aug. 31, 2009. Under the prior credit facility which was effective until Oct. 15, 2008, each Fund had entered into a revolving credit facility with a syndicate of banks headed by JPMorgan Chase Bank, N.A., whereby each Fund was permitted to borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility agreement, which was a collective agreement between each Fund and certain other RiverSource funds, severally and not jointly, permitted collective borrowings up to $500 million. Interest was charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.30%. Each borrowing under the credit facility matured no later than 60 days after the date of borrowing. Each Fund also paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. 8. FEDERAL TAX INFORMATION Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures contracts, post-October losses and market discount. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Funds. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 87 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- In the Statements of Assets and Liabilities, as a result of permanent book-to- tax differences, undistributed net investment income and accumulated net realized gain (loss) have been increased (decreased), resulting in net reclassification adjustments to additional paid-in capital by the following: <Table> <Caption> RIVERSOURCE RIVERSOURCE RIVERSOURCE CALIFORNIA MINNESOTA NEW YORK TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT FUND FUND FUND - ------------------------------------------------------------------------- Undistributed net investment income $-- $-- $(2) Accumulated net realized gain (loss) -- -- 6 - ------------------------------------------------------------------------- Additional paid-in capital reduction (increase) $-- $-- $ 4 - ------------------------------------------------------------------------- </Table> The tax character of distributions paid for the years indicated is as follows: RiverSource California Tax-Exempt Fund <Table> <Caption> YEAR ENDED AUG. 31, 2009 2008 ------------------------ ------------------------ ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME(a) CAPITAL GAIN INCOME(a) CAPITAL GAIN - ------------------------------------------------------------------------------ Class A $7,049,353 $-- $6,677,475 $1,180,746 Class B 149,044 -- 186,201 42,307 Class C 93,719 -- 67,790 10,891 </Table> (a) Tax-exempt interest distributions were 100% and 99.93% of cash basis distributions paid for the years ended Aug. 31, 2009 and 2008, respectively. RiverSource Minnesota Tax-Exempt Fund <Table> <Caption> YEAR ENDED AUG. 31, 2009 2008 ------------------------- ------------------------- ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME(b) CAPITAL GAIN INCOME(b) CAPITAL GAIN - ------------------------------------------------------------------------------ Class A $12,286,856 $-- $11,396,501 $-- Class B 461,961 -- 578,310 -- Class C 334,186 -- 248,552 -- </Table> (b) Tax-exempt interest distributions were 99.98% and 98.75% of cash basis distributions paid for the years ended Aug. 31, 2009 and 2008, respectively. - -------------------------------------------------------------------------------- 88 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource New York Tax-Exempt Fund <Table> <Caption> YEAR ENDED AUG. 31, 2009 2008 ------------------------ ------------------------ ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME(c) CAPITAL GAIN INCOME(c) CAPITAL GAIN - ------------------------------------------------------------------------------ Class A $2,138,780 $-- $2,189,026 $98,823 Class B 113,911 -- 134,399 7,548 Class C 26,205 -- 23,906 1,363 </Table> (c) Tax-exempt interest distributions were 100% of cash basis distributions paid for the years ended Aug. 31, 2009 and 2008. At Aug. 31, 2009, the components of distributable earnings on a tax basis are as follows: <Table> <Caption> UNDISTRIBUTED UNDISTRIBUTED ACCUMULATED UNREALIZED TAX-EXEMPT ACCUMULATED REALIZED APPRECIATION FUND INCOME LONG-TERM GAIN LOSS (DEPRECIATION) - ---------------------------------------------------------------------------------- RiverSource California Tax-Exempt Fund $135,061 $-- $(2,622,059) $(2,222,347) RiverSource Minnesota Tax-Exempt Fund 254,063 -- (2,322,451) 4,395,758 RiverSource New York Tax-Exempt Fund 44,362 -- (897,923) 615,821 </Table> For federal income tax purposes, capital loss carry-overs at Aug. 31, 2009 were as follows: <Table> <Caption> FUND 2013 2014 2015 2016 2017 - -------------------------------------------------------------------------- RiverSource California Tax-Exempt Fund $ -- $ -- $ -- $359,905 $1,247,347 RiverSource Minnesota Tax-Exempt Fund 1,199,755 913,006 3,601 -- 206,089 RiverSource New York Tax-Exempt Fund -- -- -- 3,664 341,015 </Table> Because the measurement periods for a regulated investment company's income are different for excise tax purposes versus income tax purposes, special rules are in place to protect the amount of earnings and profits needed to support excise tax distributions. As a result, each Fund is permitted to treat net capital losses realized between Nov. 1, 2008, and its fiscal year end (post-October loss) as occurring on the first day of the following tax year. At Aug. 31, 2009, post-October losses that are treated as occurring on Sept. 1, 2009 were as follows: <Table> <Caption> FUND POST-OCTOBER LOSS - ---------------------------------------------------------------- RiverSource California Tax-Exempt Fund $1,014,807 RiverSource New York Tax-Exempt Fund 553,244 </Table> - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 89 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-overs have been offset or expire. There is no assurance that the Funds will be able to utilize all of its capital loss carry-overs before they expire. 9. RISKS RELATING TO CERTAIN INVESTMENTS DIVERSIFICATION RISK Each Fund is non-diversified. A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Each Fund may be more exposed to the risks of loss and volatility than a fund that invests more broadly. GEOGRAPHIC CONCENTRATION RISK Because state-specific tax-exempt funds invest primarily in the municipal securities issued by the state and political sub-divisions of the state, each Fund will be particularly affected by political and economic conditions and developments in the state in which it invests. This vulnerability to factors affecting the state fund's tax-exempt investments will be significantly greater than that of a more geographically diversified fund, which may result in greater losses and volatility. The value of municipal securities owned by a Fund also may be adversely affected by future changes in federal or state income tax laws. 10. SUBSEQUENT EVENTS Management has evaluated Fund related events and transactions that occurred during the period from the date of the Statements of Assets and Liabilities through Oct. 21, 2009, the date of issuance of each Fund's financial statements. There were no events or transactions that occurred during the period that materially impacted the amounts or disclosures in each Fund's financial statements. 11. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc. was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company (now known as RiverSource) mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution - -------------------------------------------------------------------------------- 90 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota (the District Court). In response to defendants' motion to dismiss the complaint, the District Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants' favor on July 9, 2007. The plaintiffs filed a notice of appeal with the Eighth Circuit Court of Appeals (the Eighth Circuit) on August 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary judgment and remanded to the District Court for further proceedings. On August 6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court, asking the U.S. Supreme Court to stay the District Court proceedings while the U.S. Supreme Court considers and rules in a case captioned Jones v. Harris Associates, which involves issues of law similar to those presented in the Gallus case. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc., acquired J. & W. Seligman & Co. Incorporated (Seligman). In late 2003, Seligman conducted an extensive internal review concerning mutual fund trading practices. Seligman's review, which covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain open-end registered investment companies managed by Seligman (the Seligman Funds); this arrangement was in the process of being closed down by Seligman before September 2003. Seligman identified three other arrangements that permitted frequent trading, all of which had been terminated by September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four arrangements to its clients and to shareholders of the - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 91 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- Seligman Funds. Seligman also provided information concerning mutual fund trading practices to the SEC and the Office of the Attorney General of the State of New York (NYAG). In September 2006, the NYAG commenced a civil action in New York State Supreme Court against Seligman, Seligman Advisors, Inc. (now known as RiverSource Fund Distributors, Inc.), Seligman Data Corp. and Brian T. Zino (collectively, the Seligman Parties), alleging, in substance, that the Seligman Parties permitted various persons to engage in frequent trading and, as a result, the prospectus disclosure used by the registered investment companies then managed by Seligman was and had been misleading. The NYAG included other related claims and also claimed that the fees charged by Seligman to the Seligman Funds were excessive. On March 13, 2009, without admitting or denying any violations of law or wrongdoing, the Seligman Parties entered into a stipulation of settlement with the NYAG and settled the claims made by the NYAG. Under the terms of the settlement, Seligman paid $11.3 million to four Seligman Funds. This settlement resolved all outstanding matters between the Seligman Parties and the NYAG. In addition to the foregoing matter, the New York staff of the SEC indicated in September 2005 that it was considering recommending to the Commissioners of the SEC the instituting of a formal action against Seligman and Seligman Advisors, Inc. relating to frequent trading in the Seligman Funds. Seligman responded to the staff in October 2005 that it believed that any action would be both inappropriate and unnecessary, especially in light of the fact that Seligman had previously resolved the underlying issue with the Independent Directors of the Seligman Funds and made recompense to the affected Seligman Funds. There have been no further developments with the SEC on this matter. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. - -------------------------------------------------------------------------------- 92 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 93 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF RIVERSOURCE CALIFORNIA TAX-EXEMPT TRUST AND RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST: We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of RiverSource California Tax-Exempt Fund of the RiverSource California Tax-Exempt Trust and of RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund (two of the portfolios constituting the RiverSource Special Tax-Exempt Series Trust) (collectively, the Funds) as of August 31, 2009, the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Funds for the periods presented through August 31, 2006, were audited by other auditors whose reports dated October 20, 2006, (for RiverSource California Tax-Exempt Fund, RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund) and February 20, 2007, (for RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax-Exempt Fund) expressed unqualified opinions on those financial highlights. - -------------------------------------------------------------------------------- 94 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds' internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2009, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights audited by us as referred to above present fairly, in all material respects, the financial position of each of the Funds listed above constituting portfolios within RiverSource California Tax-Exempt Trust and RiverSource Special Tax-Exempt Series Trust at August 31, 2009, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota October 21, 2009 - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 95 FEDERAL INCOME TAX INFORMATION ------------------------------------------------- (UNAUDITED) Each Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. Individual shareholders should refer to their Form 1099 or other tax information, which will be mailed in January 2010, to determine the calendar year amounts to be included on their 2009 tax returns. Tax-exempt distributions may be subject to state and local taxes. Each shareholder should consult a tax advisor about reporting this income for state and local tax purposes. RiverSource California Tax-Exempt Fund Fiscal year ended Aug. 31, 2009 <Table> <Caption> INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Exempt-Interest Dividends.................................... 100% </Table> Tax-exempt distributions are exempt from federal income taxes and should not be included in the shareholders' gross income. The income from this Fund is subject to the alternative minimum tax (AMT). The AMT percentage for Aug. 31, 2009 was 8.22%. The Fund designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. RiverSource Minnesota Tax-Exempt Fund Fiscal year ended Aug. 31, 2009 <Table> <Caption> INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Exempt-Interest Dividends.................................... 99.98% </Table> Tax-exempt distributions are exempt from federal income taxes and should not be included in the shareholders' gross income. The income from this Fund is subject to the alternative minimum tax (AMT). The AMT percentage for Aug. 31, 2009 was 7.12%. The Fund designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. - -------------------------------------------------------------------------------- 96 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- RiverSource New York Tax-Exempt Fund Fiscal year ended Aug. 31, 2009 <Table> <Caption> INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Exempt-Interest Dividends.................................... 100% </Table> Tax-exempt distributions are exempt from federal income taxes and should not be included in the shareholders' gross income. The income from this Fund is subject to the alternative minimum tax (AMT). The AMT percentage for Aug. 31, 2009 was 11.76%. The Fund designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 97 BOARD MEMBERS AND OFFICERS ----------------------------------------------------- Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. The RiverSource Family of Funds that each Board member oversees consists of 132 funds, which includes 100 RiverSource funds and 32 Seligman funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. INDEPENDENT BOARD MEMBERS <Table> <Caption> NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS - ------------------------------------------------------------------------------------------------------------------------------ Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None 901 S. Marquette Ave. 2006 Attorney Minneapolis, MN 55402 Age 55 - ------------------------------------------------------------------------------------------------------------------------------ Arne H. Carlson Board member since Chair, RiverSource Family of Funds, 1999-2006; former None 901 S. Marquette Ave. 1999 Governor of Minnesota Minneapolis, MN 55402 Age 75 - ------------------------------------------------------------------------------------------------------------------------------ Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None 901 S. Marquette Ave. 2007 Leadership (consulting company) Minneapolis, MN 55402 Age 55 - ------------------------------------------------------------------------------------------------------------------------------ Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None 901 S. Marquette Ave. 2004 College; former Dean, McCallum Graduate School of Minneapolis, MN 55402 Business, Bentley University Age 58 - ------------------------------------------------------------------------------------------------------------------------------ Anne P. Jones Board member since Attorney and Consultant None 901 S. Marquette Ave. 1985 Minneapolis, MN 55402 Age 74 - ------------------------------------------------------------------------------------------------------------------------------ Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive 901 S. Marquette Ave. 2005 Insurance Minneapolis, MN 55402 Age 74 - ------------------------------------------------------------------------------------------------------------------------------ Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries, 901 S. Marquette Ave. since 2007, College Inc. (manufactures Minneapolis, MN 55402 Board member since irrigation systems) Age 70 2002 - ------------------------------------------------------------------------------------------------------------------------------ </Table> - -------------------------------------------------------------------------------- 98 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- INDEPENDENT BOARD MEMBERS (CONTINUED) <Table> <Caption> NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS - ------------------------------------------------------------------------------------------------------------------------------ John F. Maher Board member since Retired President and Chief Executive Officer and None 901 S. Marquette Ave. 2008 former Director, Great Western Financial Corporation Minneapolis, MN 55402 (financial services), 1986-1997 Age 66 - ------------------------------------------------------------------------------------------------------------------------------ Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None 901 S. Marquette Ave. 2004 real estate and asset management company) Minneapolis, MN 55402 Age 57 - ------------------------------------------------------------------------------------------------------------------------------ Leroy C. Richie Board member since Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc. 901 S. Marquette Ave. 2008 President and General Counsel, Automotive Legal (digital imaging); Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil Age 68 and gas exploration and production); OGE Energy Corp. (energy and energy services) - ------------------------------------------------------------------------------------------------------------------------------ Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera 901 S. Marquette Ave. 2002 since 2003 (biotechnology); former President, Forester Pharmaceuticals, Minneapolis, MN 55402 Biotech Inc. Age 65 (biotechnology); Healthways, Inc. (health management programs) - ------------------------------------------------------------------------------------------------------------------------------ </Table> - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 99 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS* <Table> <Caption> NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS - ------------------------------------------------------------------------------------------------------------------------------ William F. Truscott Board member since President -- U.S. Asset Management and Chief Investment None 53600 Ameriprise 2001, Officer, Ameriprise Financial, Inc. since 2005; Financial Center Vice President since President, Chairman of the Board and Chief Investment Minneapolis, MN 55474 2002 Officer, RiverSource Investments, LLC since 2001; Age 49 Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc., 2001-2005 - ------------------------------------------------------------------------------------------------------------------------------ </Table> * Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments or Ameriprise Financial. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; or visiting riversource.com/funds. The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS <Table> <Caption> NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------------------------------- Patrick T. Bannigan President since 2006 Director and Senior Vice President -- Asset Management, 172 Ameriprise Financial Products and Marketing, RiverSource Investments, LLC Center and Director and Vice President -- Asset Management, Minneapolis, MN 55474 Products and Marketing, RiverSource Distributors, Inc. Age 43 since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Managing Director and Global Head of Product, Morgan Stanley Investment Management, 2004- 2006; President, Touchstone Investments, 2002-2004 - -------------------------------------------------------------------------------------------------------- </Table> - -------------------------------------------------------------------------------- 100 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- FUND OFFICERS (CONTINUED) <Table> <Caption> NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------------------------------- Michelle M. Keeley Vice President since Executive Vice President -- Equity and Fixed Income, 172 Ameriprise Financial 2004 Ameriprise Financial, Inc. and RiverSource Investments, Center LLC since 2006; Vice President -- Investments, Minneapolis, MN 55474 Ameriprise Certificate Company since 2003; Senior Vice Age 45 President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006 - -------------------------------------------------------------------------------------------------------- Amy K. Johnson Vice President since Chief Administrative Officer, RiverSource Investments, 5228 Ameriprise Financial 2006 LLC since 2009; Vice President -- Asset Management and Center Minneapolis, MN Trust Company Services, RiverSource Investments, LLC, 55474 2006-2009; Vice President -- Operations and Compliance, Age 44 RiverSource Investments, LLC, 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 - -------------------------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since 2002 Vice President -- Investment Accounting, Ameriprise 105 Ameriprise Financial Financial, Inc. since 2002; Chief Financial Officer, Center RiverSource Distributors, Inc. since 2006 and of Minneapolis, MN 55474 RiverSource Fund Distributors, Inc. since 2008 Age 54 - -------------------------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset Management, 5228 Ameriprise Financial General Counsel and Ameriprise Financial, Inc. since 2005; Chief Counsel, Center Secretary since 2006 RiverSource Distributors, Inc. and Chief Legal Officer Minneapolis, MN 55474 and Assistant Secretary, RiverSource Investments, LLC Age 50 since 2006; Chief Counsel, RiverSource Fund Distributors, Inc. since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 - -------------------------------------------------------------------------------------------------------- Eleanor T.M. Hoagland Chief Compliance Chief Compliance Officer, RiverSource Investments, LLC, 100 Park Avenue Officer since 2009 Kenwood Capital Management LLC, Ameriprise Certificate New York, NY 10010 Company and RiverSource Service Corporation since 2009; Age 58 Chief Compliance Officer for each of the Seligman funds since 2004; Anti-Money Laundering Prevention Officer and Identity Theft Prevention Officer for each of the Seligman funds since 2008; Managing Director, J. & W. Seligman & Co. Incorporated and Vice-President for each of the Seligman funds, 2004-2008 - -------------------------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial, 2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer, Center since 2004 Ameriprise Financial, Inc. since 2004; Compliance Minneapolis, MN 55474 Director, Ameriprise Financial, Inc., 2004-2008 Age 45 - -------------------------------------------------------------------------------------------------------- </Table> - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 101 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the RiverSource California Tax- Exempt Fund, RiverSource Minnesota Tax-Exempt Fund and RiverSource New York Tax- Exempt Fund (each a "Fund" and collectively, the "Funds"). Under an investment management services agreement (the "IMS Agreement"), RiverSource Investments provides investment advice and other services to the Funds and all funds in the RiverSource Family of Funds (collectively, the "RiverSource Funds"). On an annual basis, the Funds' Board of Trustees (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource Investments prepared detailed reports for the Board and its Contracts Committee in March and April 2009, including reports based on data provided by independent organizations to assist the Board in making this determination. In addition, throughout the year, the Board (or its committees) reviews information prepared by RiverSource Investments addressing the services RiverSource Investments provides and performance of the Funds. The Board accords particular weight to the work, deliberations and conclusions of the Contracts, Investment Review and Compliance Committees in determining whether to continue the IMS Agreement. At the April 7-8, 2009 in-person Board meeting, independent legal counsel to the Independent Directors reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by RiverSource Investments: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource Investments, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource Investments, including, in particular, the continued investment in, and resources dedicated to, the Funds' operations, most notably, the large investment made in the acquisition of J. & W. Seligman & Co. Incorporated, including its portfolio management operations, personnel and infrastructure (including the addition of two new offices in New York City and Palo Alto). Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource Investments, the Board considered the quality of the administrative and transfer agency services provided by RiverSource Investments' affiliates to the Funds. - -------------------------------------------------------------------------------- 102 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT - -------------------------------------------------------------------------------- The Board also reviewed the financial condition of RiverSource Investments (and its affiliates) and each entity's ability to carry out its responsibilities under the IMS Agreement. Further, the Board considered RiverSource Investments' ability to retain key personnel and its expectations in this regard. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by RiverSource Investments). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality, particularly in light of recent market conditions. Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board concluded that RiverSource Investments and its affiliates were in a position to continue to provide a high quality and level of services to the Funds. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of each Fund. In this regard, the Board considered: (i) detailed reports containing data prepared by an independent organization showing, for various periods, the performance of each Fund, the performance of each Fund's benchmark index, the percentage ranking of each Fund among its comparison group and the net assets of each Fund; and (ii) a report detailing each Fund's performance over various periods, recent inflows (and outflows) for each Fund and a comparison of each Fund's net assets from December 2007 to December 2008. The Board observed that each Fund's investment performance met expectations. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource Investments and its Affiliates from their Relationships with each Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of each Fund's expenses with median expenses paid by funds in its peer group, as well as data showing each Fund's contribution to RiverSource Investments' profitability. They also reviewed information in the report comparing the fees charged to each Fund by RiverSource Investments to fees charged to other client accounts (with similar investment strategies to those of each Fund). - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 103 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the RiverSource Funds' family, while assuring that the overall fees for each fund are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund (excluding the effect of a performance incentive adjustment, if applicable), with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that each Fund's total expense ratio (after considering proposed expense caps/waivers) was below its peer group's median expense ratio shown in the reports. The Board also considered the expected profitability of RiverSource Investments and its affiliates in connection with RiverSource Investments providing investment management services to each Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource Investments and Ameriprise Financial from managing and operating each Fund, including data showing comparative profitability over the past two years. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the RiverSource Funds on portfolio transactions. The Board noted that the fees paid by each Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by RiverSource Investments as each Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 8, 2009, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement for an additional annual period. - -------------------------------------------------------------------------------- 104 RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT PROXY VOTING ------------------------------------------------------------------- The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures as stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; visiting riversource.com/funds (for RiverSource or Threadneedle funds) or seligman.com (for Seligman funds); or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds (for RiverSource or Threadneedle funds) or seligman.com (for Seligman funds); or searching the website of the SEC at www.sec.gov. - -------------------------------------------------------------------------------- RIVERSOURCE STATE TAX-EXEMPT FUNDS -- 2009 ANNUAL REPORT 105 RIVERSOURCE STATE TAX-EXEMPT FUNDS 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS <Table> This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by RiverSource Fund Distributors, Inc., Member FINRA, and managed by RiverSource Investments, LLC. RiverSource is part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C)2009 RiverSource Investments, LLC. S-6328 AJ (10/09) </Table> Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Pamela G. Carlton, Jeffrey Laikind, John F. Maher and Anne P. Jones, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees (a) Audit Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for professional services rendered for the audit of the annual financial statements for RiverSource California Tax-Exempt Trust were as follows: 2009 - $26,431 2008 - $26,125 (b) Audit-Related Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for additional audit-related services rendered for RiverSource California Tax-Exempt Trust were as follows: 2009 - $375 2008 - $375 (c) Tax Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for tax compliance related services rendered for RiverSource California Tax-Exempt Trust were as follows: 2009 - $3,180 2008 - $3,180 (d) All Other Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for additional professional services rendered for RiverSource California Tax-Exempt Trust were as follows: 2009 - $0 2008 - $0 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by Ernst & Young LLP for the registrant and 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 must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2009 and 2008 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP by the registrant for non-audit fees and by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2009 - $826,041 2008 - $616,755 (h) 100% of the services performed in item (g) above during 2009 and 2008 were pre-approved by the Ameriprise Financial Audit Committee and/or the RiverSource Mutual Funds Audit Committee. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. Investments. (a) The complete schedule of investments is included in Item 1 of this Form N-CSR. (b) Not applicable. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. 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. (Registrant) RiverSource California Tax-Exempt Trust By /s/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date November 4, 2009 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/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date November 4, 2009 By /s/ Jeffrey P. Fox ---------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date November 4, 2009