Exhibit 17(c)
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CHASE VISTA FUNDS
STATEMENT OF
ADDITIONAL INFORMATION
December 29, 1999
U.S. GOVERNMENT MONEY MARKET FUND
100% U.S. TREASURY SECURITIES MONEY MARKET FUND
CASH MANAGEMENT FUND
PRIME MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TREASURY PLUS MONEY MARKET FUND
TAX FREE MONEY MARKET FUND
CALIFORNIA TAX FREE MONEY MARKET FUND
NEW YORK TAX FREE MONEY MARKET FUND
TAX FREE INCOME FUND
NEW YORK TAX FREE INCOME FUND
CALIFORNIA INTERMEDIATE TAX FREE FUND
One Chase Manhattan Plaza, Third Floor, New York, New York 10081
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectuses offering shares
of Chase Vista Tax Free Income Fund, Chase Vista California Intermediate Tax
Free Fund and Chase Vista New York Tax Free Income Fund (collectively the
"Income Funds"), and Chase Vista U.S. Government Money Market Fund, Chase Vista
100% U.S. Treasury Securities Money Market Fund, Chase Vista Cash Management
Fund, Chase Vista Prime Money Market Fund, Chase Vista Federal Money Market
Fund, Chase Vista Treasury Plus Money Market, Chase Vista Tax Free Money Market
Fund, Chase Vista California Tax Free Money Market Fund and Chase Vista New
York Tax Free Money Market Fund (collectively the "Money Market Funds"). Any
reference to a "Prospectus" in this Statement of Additional Information is a
reference to one or more of the foregoing Prospectuses, as the context
requires. Copies of each Prospectus may be obtained by an investor without
charge by contacting Vista Fund Distributors, Inc. ("VFD"), the Funds'
distributor (the "Distributor"), at the above-listed address.
This Statement of Additional Information is NOT a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by an
effective prospectus.
For more information about your account, simply call or write the Chase Vista
Service Center at:
1-800-622-4273
Chase Vista Service Center
P.O. Box 419392
Kansas City, MO 64141
MFT-SAI
Table of Contents Page
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The Funds ................................................................................ 3
Investment Policies and Restrictions ..................................................... 4
Performance Information .................................................................. 23
Determination of Net Asset Value ......................................................... 29
Purchases, Redemptions and Exchanges ..................................................... 30
Distributions; Tax Matters ............................................................... 34
Management of the Trust and Funds ........................................................ 39
Independent Accountants .................................................................. 56
Certain Regulatory Matters ............................................................... 56
General Information ...................................................................... 57
Appendix A--Description of Certain Obligations Issued or Guaranteed by U.S. Government
Agencies or Instrumentalities ............................................................ A-1
Appendix B--Description of Ratings ....................................................... B-1
Appendix C--Special Investment Considerations Relating to New York Municipal Obligations . C-1
Appendix D--Special Investment Considerations Relating to California Municipal D-1
Obligations
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THE FUNDS
Mutual Fund Trust (the "Trust") is an open-end management investment
company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on February 4, 1994. The Trust presently consists
of 12 separate series (the "Funds"). Certain of the Funds are diversified and
other Funds are non-diversified, as such term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). The shares of the Funds are
collectively referred to in this Statement of Additional Information as the
"Shares." The Income Funds, Tax Free Money Market Fund, New York Tax Free Money
Market Fund and California Tax Free Money Market Fund are collectively referred
to herein as the "Tax Free Funds."
On August 25, 1994, the shareholders of each of the existing classes of
Shares of the Vista U.S. Government Money Market Fund, Vista Global Money
Market Fund, Vista Prime Money Market Fund, Vista Tax Free Money Market Fund,
Vista California Money Market Fund, Vista New York Tax Free Money Market Fund,
Vista Tax Free Income Fund, Vista New York Tax Free Income Fund and the Vista
California Intermediate Tax Free Fund approved the reorganization of each of
such Funds into newly-created series of Mutual Fund Trust, effective October
28, 1994. Prior to such approvals, each of such Funds were series of Mutual
Fund Group, an affiliated investment company.
On December 4, 1992, the shareholders of each of the existing classes of
Shares of Vista Global Money Market Fund and Vista U.S. Government Money Market
Fund approved the reorganization of each of such Funds into newly-created
series of Mutual Fund Group, effective January 1, 1993. Prior to such
approvals, on December 4, 1992, the shareholders of each of the five existing
series of Trinity Assets Trust (Trinity Money Market Fund, Trinity Government
Fund, Trinity Bond Fund, Trinity Short-Term Bond Fund and Trinity Equity Fund)
(collectively, the "Trinity Funds") approved the reorganization of each of the
Trinity Funds into newly-created series of the Trust, effective January 1,
1993. Vista Global Money Market Fund and Trinity Money Market Fund were
reorganized into classes of Shares of "Vista Worldwide Money Market Fund",
which changed its name to "Vista Global Money Market Fund" as of December 31,
1992. Vista U.S. Government Money Market Fund and Trinity Government Fund were
reorganized into classes of Shares of "Vista Government Cash Fund", which
changed its name to "Vista U.S. Government Money Market Fund" as of December
31, 1992.
On May 3, 1996, The U.S. Treasury Money Market Fund of The Hanover Funds,
Inc. ("Hanover") merged into the Vista Shares of Treasury Plus Money Market
Fund, The Government Money Market Fund of Hanover merged into the Vista Shares
of U.S. Government Money Market Fund, The Cash Management Fund of Hanover
merged into the Vista Shares of Vista Global Money Market Fund (The Cash
Management Fund of Hanover was the accounting survivor of this merger), The Tax
Free Money Market Fund of Hanover merged into the Vista Shares of Tax Free
Money Market Fund, The New York Tax Free Money Market Fund of Hanover merged
into the Vista Shares of New York Tax Free Money Market Fund, and The 100% U.S.
Treasury Securities Money Market Fund of Hanover merged into the Vista Shares
of The 100% U.S. Treasury Securities Money Market Fund. The foregoing mergers
are referred to herein as the "Hanover Reorganization."
Effective as of May 6, 1996, Vista Global Money Market Fund changed its
name to Vista Cash Management Fund.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust including the Funds. The Chase Manhattan Bank ("Chase") is
the investment adviser for the Funds. Chase also serves as the Trust's
administrator (the "Administrator") and supervises the overall administration
of the Trust, including the Funds. A majority of the Trustees of the Trust are
not affiliated with the investment adviser or sub-advisers.
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INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies
The Prospectuses set forth the various investment policies applicable to
each Fund. The following information supplements and should be read in
conjunction with the related sections of each Prospectus. As used in this
Statement of Additional Information, with respect to those Funds and policies
for which they apply, the terms "Municipal Obligations" and "tax-exempt
securities" have the meanings given to them in the relevant Fund's Prospectus.
For descriptions of the securities ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch Investors Service,
Inc. ("Fitch"), see Appendix B. For a general discussion of special investment
considerations relating to investing in (i) New York and (ii) California
Municipal Obligations, see Appendices C and D, respectively.
The Money Market Funds invest only in U.S. dollar-denominated high-quality
obligations which are determined to present minimal credit risks. This credit
determination must be made in accordance with procedures established by the
Board of Trustees.
The management style used for the Funds emphasizes several key factors.
Portfolio managers consider the security quality that is, the ability of the
debt issuer to make timely payments of principal and interest. Also important
in the analysis is the relationship of a bond's yield and its maturity, in
which the managers evaluate the risks of investing in long-term higher-yielding
securities. Managers also use a computer model to simulate possible
fluctuations in prices and yields if interest rates change. Another step in the
analysis is comparing yields on different types of securities to determine
relative risk/reward profiles.
U.S. Government Securities. Each Fund may invest in direct obligations of
the U.S. Treasury. Each Fund other than the 100% U.S. Treasury Securities Money
Market Fund and the Treasury Plus Money Market Fund may also invest in other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (collectively, "U.S. Government Securities.")
U.S. Government Securities include (1) U.S. Treasury obligations, which
generally differ only in their interest rates, maturities and times of
issuance, including U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years); and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Treasury, (b) the right of the issuer to borrow any amount listed to a specific
line of credit from the U.S. Treasury, (c) discretionary authority of the U.S.
Government to purchase certain obligations of the U.S. Government agency or
instrumentality or (d) the credit of the agency or instrumentality. Agencies
and instrumentalities of the U.S. Government include but are not limited to:
Federal Land Banks, Federal Financing Banks, Banks for Cooperatives, Federal
Intermediate Credit Banks, Farm Credit Banks, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association, Student
Loan Marketing Association, United States Postal Service, Chrysler Corporate
Loan Guarantee Board, Small Business Administration, Tennessee Valley Authority
and any other enterprise established or sponsored by the U.S. Government.
Certain U.S. Government Securities, including U.S. Treasury bills, notes and
bonds, Government National Mortgage Association certificates and Federal
Housing Administration debentures, are supported by the full faith and credit
of the United States. Other U.S. Government Securities are issued or guaranteed
by federal agencies or government sponsored enterprises and are not supported
by the full faith and credit of the United States. In the case of securities
not backed by the "full faith and credit" of the U.S. Government, the investor
must look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment and may not be able to assert a claim against the U.S.
Government itself in the event the agency or instrumentality does not meet its
commitment. These securities include obligations that are supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of the
Federal
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National Mortgage Association or Federal Home Loan Mortgage Corporation. Vista
Federal Money Market Fund generally limits its investments in agency and
instrumentality obligations to obligations the interest on which is generally
not subject to state and local income taxes by reason of federal law. Agencies
and instrumentalities issuing such obligations include the Farm Credit System
Financial Assistance Corporation, the Federal Financing Bank, The General
Services Administration, Federal Home Loan Banks, the Tennessee Valley
Authority and the Student Loan Marketing Association. For a description of
certain obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of government-
backed instruments. However, such specialized instruments may only be available
from a few sources, in limited amounts, or only in very large denominations;
they may also require specialized capability in portfolio servicing and in legal
matters related to government guarantees. While they may frequently offer
attractive yields, the limited-activity markets of many of these securities
means that, if a Fund were required to liquidate any of them, it might not be
able to do so advantageously; accordingly, each Fund investing in such
securities intends normally to hold such securities to maturity or pursuant to
repurchase agreements, and would treat such securities (including repurchase
agreements maturing in more than seven days) as illiquid for purposes of its
limitation on investment in illiquid securities.
Bank Obligations. The Cash Management Fund, the Prime Money Market Fund
and the Income Funds may invest in bank obligations, when consistent with their
overall objectives and policies. The Tax Free Money Market Fund, the New York
Tax Free Money Market Fund and the California Tax Free Money Market Fund may
invest without limitation in Municipal Obligations (as defined below) secured
by letters of credit or guarantees from U.S. banks (including their foreign
branches) and may also invest in Municipal Obligations backed by foreign
institutions. Each of the Income Funds may invest up to 25% of its total assets
in such Municipal Obligations. Investments in bank obligations are limited to
those of U.S. banks (including their foreign branches) which have total assets
at the time of purchase in excess of $1 billion and the deposits of which are
insured by either the Bank Insurance Fund or the Savings and Loan Insurance
Fund of the Federal Deposit Insurance Corporation, and foreign banks (including
their U.S. branches) having total assets in excess of $10 billion (or the
equivalent in other currencies), and such other U.S. and foreign commercial
banks which are judged by the advisers to meet comparable credit standing
criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of United States banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. Fixed time deposits subject to withdrawal penalties
and with respect to which a Fund cannot realize the proceeds thereon within
seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.
The dependence on the banking industry may involve certain credit risks,
such as defaults or downgrades, if at some future date adverse economic
conditions prevail in such industry. Banks are subject to
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extensive governmental regulations that may limit both the amounts and types of
loans and other financial commitments that may be made and the interest rates
and fees that may be charged. The profitability of this industry is largely
dependent upon the availability and cost of capital funds for the purpose of
financing lending operations under prevailing money market conditions. Also,
general economic conditions play an important part in the operations of this
industry and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations
or by government regulation.
Investors should also be aware that securities of foreign banks and
foreign branches of United States banks may involve foreign investment risks in
addition to those relating to domestic bank obligations. These investment risks
may involve, among other considerations, risks relating to future political and
economic developments, more limited liquidity of foreign obligations than
comparable domestic obligations, the possible imposition of withholding taxes
on interest income, the possible seizure or nationalization of foreign assets
and the possible establishment of exchange controls or other restrictions.
There may be less publicly available information concerning foreign issuers,
there may be difficulties in obtaining or enforcing a judgment against a
foreign issuer (including branches) and accounting, auditing and financial
reporting standards and practices may differ from those applicable to U.S.
issuers. In addition, foreign banks are not subject to regulations comparable
to U.S. banking regulations.
Changes in the credit quality of banks or other financial institutions
backing a Fund's securities could cause losses to these Funds and affect their
share price. Credit enhancements which are supplied by foreign or domestic
banks are not subject to federal deposit insurance.
Commercial Paper and Other Short-Term Obligations. The Income Funds may
invest in commercial paper of domestic and foreign issuers. The commercial
paper and other short-term obligations of U.S. and foreign corporations which
may be purchased by the Vista Prime Money Market Fund and the Vista Cash
Management Fund, other than those of bank holding companies, include
obligations which are (i) rated Prime-1 by Moody's, A-1 by S&P, or F-1 by
Fitch, or comparably rated by another NRO; or (ii) determined by the advisers
to be of comparable quality to those rated obligations which may be purchased
by the Vista Prime Money Market Fund and the Vista Cash Management Fund at the
date of purchase or which at the date of purchase have an outstanding debt
issue rated in the highest rating category by Moody's, S&P, Fitch or another
NRO. The commercial paper and other short-term obligations of U.S. banks
holding companies which may be purchased by the Vista Prime Money Market Fund
and the Vista Cash Management Fund include obligations issued or guaranteed by
bank holding companies with total assets exceeding $1 billion. For purposes of
the size standards with respect to banks and bank holding companies, "total
deposits" and "total assets" are determined on an annual basis by reference to
an institution's then most recent annual financial statements.
Repurchase Agreements. Each Fund other than the 100% U.S. Treasury
Securities Money Market Fund and the Federal Money Market Fund may enter into
agreements to purchase and resell securities at an agreed-upon price and time.
A Fund will enter into repurchase agreements only with member banks of the
Federal Reserve System and securities dealers believed creditworthy, and only
if fully collateralized by securities in which such Fund is permitted to
invest. Under the terms of a typical repurchase agreement, a Fund would acquire
an underlying debt instrument for a relatively short period (usually not more
than one week) subject to an obligation of the seller to repurchase the
instrument and the Fund to resell the instrument at a fixed price and time,
thereby determining the yield during the Fund's holding period. This procedure
results in a fixed rate of return insulated from market fluctuations during
such period. A repurchase agreement is subject to the risk that the seller may
fail to repurchase the security. Repurchase agreements are considered under the
1940 Act to be loans collateralized by the underlying securities. All
repurchase agreements entered into by a Fund will be fully collateralized at
all times during the period of the agreement in that the value of the
underlying security will be at least equal to
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100% of the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian or sub-custodian will have possession of the collateral,
which the Board of Trustees believes will give it a valid, perfected security
interest in the collateral. Whether a repurchase agreement is the purchase and
sale of a security or a collateralized loan has not been conclusively
established. This might become an issue in the event of the bankruptcy of the
other party to the transaction. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities would not be owned by a Fund, but would only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, a Fund may
suffer time delays and incur costs in connection with the disposition of the
collateral. The Board of Trustees believes that the collateral underlying
repurchase agreements may be more susceptible to claims of the seller's
creditors than would be the case with securities owned by a Fund. Repurchase
agreements will give rise to income which will not qualify as tax-exempt income
when distributed by a Tax Free Fund. Repurchase agreements maturing in more
than seven days are treated as illiquid for purposes of the Funds' restrictions
on purchases of illiquid securities. Repurchase agreements are also subject to
the risks described below with respect to stand-by commitments.
Borrowings and Reverse Repurchase Agreements. Each Fund may borrow money
from banks for temporary or short-term purposes, but will not borrow to buy
additional securities, known as "leveraging." Reverse repurchase agreements
involve sales of portfolio securities of a Fund to member banks of the Federal
Reserve System or securities dealers believed creditworthy, concurrently with
an agreement by such Fund to repurchase the same securities at a later date at
a fixed price which is generally equal to the original sales price plus
interest. A Fund retains record ownership and the right to receive interest and
principal payments on the portfolio security involved. A Fund may use this
practice to generate cash for shareholder redemptions without selling
securities during unfavorable market conditions. Whenever a Fund enters into a
reverse repurchase agreement, it will establish a segregated account in which
it will maintain liquid assets on a daily basis in an amount at least equal to
the repurchase price (including accrued interest.) A Fund would be required to
pay interest on amounts obtained through reverse repurchase agreements, which
are considered borrowings under federal securities laws.
Municipal Obligations. The Cash Management Fund, the Prime Money Market
Fund, the Tax Free Income Fund, the New York Tax Free Income Fund and the
California Intermediate Tax Free Fund may invest in Municipal Obligations. The
Cash Management Fund and the Prime Money Market Fund may invest in high-quality,
short-term municipal obligations that carry yields that are competitive with
those of other types of money market instruments in which they may invest.
Dividends paid by these Funds that are derived from interest on municipal
obligations will be taxable to shareholders for federal income tax purposes.
"Municipal Obligations" are obligations issued by or on behalf of states,
territories and possessions of the United States, and their authorities,
agencies, instrumentalities and political subdivisions, the interest on which,
in the opinion of the bond counsel, is excluded from gross income for federal
tax purposes (without regard to whether the interest thereon is exempt from the
personal income taxes of any state or whether the interest thereon constitutes
a preference item for purposes of the federal alternative minimum tax.)
"California Municipal Obligations" are obligations of the State of California,
its local governments and political subdivisions, the interest on which, in the
opinion of bond counsel, is exempt from federal income taxes and California
personal income taxes and is not subject to the alternative minimum tax for
noncorporate investors. "New York Municipal Obligations" are Municipal
Obligations of the State of New York and its political subdivisions and of
Puerto Rico, other U.S. territories and their political subdivisions, the
interest on which, in the opinion of bond counsel, is exempt from New York
State and New York City personal income taxes. Municipal Obligations are issued
to obtain funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses or the refunding of
outstanding debts. They may also be issued to finance various private
activities, including the lending of funds to public or private institutions
for the construction of housing, educational or medical facilities, and may
include certain types of industrial development bonds, private activity bonds
or notes issued by public authorities to finance privately owned or operated
facilities, or to fund short-term cash requirements. Short-term Municipal
Obligations may be issued as interim financing in anticipation of tax
collections, revenue receipts or bond sales to finance various public
7
purposes. The Municipal Obligations in which the Fund invests may consist of
municipal notes, municipal commercial paper and municipal bonds maturing or
deemed to mature in 397 days or less.
The two principal classifications of Municipal Obligations are general
obligation and revenue obligation securities. General obligation securities
involve a pledge of the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation securities
vary according to the law applicable to the particular issuer. Revenue
obligation securities are payable only from the revenues derived from a
particular facility or class of facilities, or a specific revenue source, and
generally are not payable from the unrestricted revenues of the issuer.
Industrial development bonds and private activity bonds are in most cases
revenue obligation securities, the credit quality of which is directly related
to the private user of the facilities.
The Tax Free Funds may also invest in industrial development bonds that
are backed only by the assets and revenues of the non-governmental issuers such
as hospitals or airports, provided, however, that the Funds may not invest more
than 25% of the value of their total assets in such bonds if the issuers are in
the same industry.
Interest on certain Municipal Obligations (including certain industrial
development bonds), while exempt from federal income tax, is a preference item
for the purpose of the alternative minimum tax. Where a mutual fund receives
such interest, a proportionate share of any exempt-interest dividend paid by
the mutual fund may be treated as such a preference item to shareholders.
Federal tax legislation enacted over the past few years has limited the types
and volume of bonds which are not AMT Items and the interest on which is not
subject to federal income tax. This legislation may affect the availability of
Municipal Obligations for investment by the Tax Free Funds. Investments by the
Tax Free Money Market Funds will be made in unrated Municipal Obligations only
if they are determined to be of comparable quality to permissable rated
investments on the basis of the advisers' credit evaluation of the obligor or
of the bank issuing a participation certificate, letter of credit or guaranty,
or insurance issued in support of the obligation. High Quality instruments may
produce a lower yield than would be available from less highly rated
instruments. The Board of Trustees has determined that Municipal Obligations
which are backed by the credit of the U.S. Government will be considered to
have a rating equivalent to Moody's Aaa.
If, subsequent to purchase by a Tax Free Money Market Fund, (a) an issue
of rated Municipal Obligations ceases to be rated in the highest short-term
rating category (the two highest categories in the case of the New York and
California Tax Free Money Market Funds) by at least two rating organizations
(or one rating organization if the instrument was rated by only one such
organization) or the Board of Trustees determines that it is no longer of
comparable quality or (b) a Money Market Fund's advisers become aware that any
portfolio security not so highly rated or any unrated security has been given a
rating by any rating organization below the rating organization's second
highest rating category, the Board of Trustees will reassess promptly whether
such security presents minimal credit risk and will cause such Money Market
Fund to take such action as it determines is in its best interest and that of
its shareholders; provided that the reassessment required by clause (b) is not
required if the portfolio security is disposed of or matures within five
business days of the advisers becoming aware of the new rating and the Fund's
Board is subsequently notified of the adviser's actions.
To the extent that a rating given by Moody's, S&P or Fitch for Municipal
Obligations may change as a result of changes in such organizations or their
rating systems, the Funds will attempt to use comparable ratings as standards
for their investments in accordance with the investment policies contained in
the Prospectuses and this Statement of Additional Information. The ratings of
Moody's, S&P and Fitch represent their opinions as to the quality of the
Municipal Obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although
8
these ratings may be an initial criterion for selection of portfolio
investments, the advisers also will evaluate these securities and the
creditworthiness of the issuers of such securities.
Municipal Lease Obligations. The Tax Free Funds may invest in municipal
lease obligations. These typically provide a premium interest rate. Municipal
lease obligations do not constitute general obligations of the municipality.
Certain municipal lease obligations in which the Tax Free Funds may invest
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment payments in future years unless money
is later appropriated for such purpose. The Funds will limit their investments
in non-appropriation leases to 10% of its assets. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. Certain investments
in municipal lease obligations may be illiquid.
Forward Commitments. Each Fund may purchase securities for delivery at a
future date, which may increase its overall investment exposure and involves a
risk of loss if the value of the securities declines prior to the settlement
date. In order to invest a Fund's assets immediately, while awaiting delivery
of securities purchased on a forward commitment basis, short-term obligations
that offer same-day settlement and earnings will normally be purchased.
Although, with respect to any Tax Free Fund, short-term investments will
normally be in tax-exempt securities or Municipal Obligations, short-term
taxable securities or obligations may be purchased if suitable short-term
tax-exempt securities or Municipal Obligations are not available. When a
commitment to purchase a security on a forward commitment basis is made,
procedures are established consistent with the General Statement of Policy of
the Securities and Exchange Commission concerning such purchases. Since that
policy currently recommends that an amount of the respective Fund's assets
equal to the amount of the purchase be held aside or segregated to be used to
pay for the commitment, a separate account of such Fund consisting of cash,
cash equivalents or high quality debt securities equal to the amount of such
Fund's commitments will be established at such Fund's custodian bank. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market value. If the market value of
such securities declines, additional cash, cash equivalents or highly liquid
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the respective Fund.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Fund's
portfolio are subject to changes in value based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Purchasing securities on a forward commitment basis
can involve the risk that the yields available in the market when the delivery
takes place may actually be higher or lower than those obtained in the
transaction itself. On the settlement date of the forward commitment
transaction, the respective Fund will meet its obligations from then available
cash flow, sale of securities held in the separate account, sale of other
securities or, although it would not normally expect to do so, from sale of the
forward commitment securities themselves (which may have a value greater or
lesser than such Fund's payment obligations). The sale of securities to meet
such obligations may result in the realization of capital gains or losses,
which, for consideration by investors in the Tax Free Funds, are not exempt
from federal, state or local taxation. Forward commitments involve some risk to
a Fund if the other party should default on its obligation and the Fund is
delayed or prevented from recovering the collateral in completing the
transaction.
To the extent a Fund engages in forward commitment transactions, it will
do so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.
Illiquid Securities. For purposes of its limitation on investments in
illiquid securities, each Fund may elect to treat as liquid, in accordance with
procedures established by the Board of Trustees, certain invest-
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ments in restricted securities for which there may be a secondary market of
qualified institutional buyers as contemplated by Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") and commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act ("Section 4(2)
paper"). Rule 144A provides an exemption from the registration requirements of
the Securities Act for the resale of certain restricted securities to qualified
institutional buyers. Section 4(2) paper is restricted as to disposition under
the federal securities laws, and generally is sold to institutional investors
such as a Fund who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale of Section 4(2) paper by the
purchaser must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A and
Section 4(2) paper are liquid or illiquid for purposes of the limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
the Trustees have delegated to the advisers the determination as to whether a
particular instrument is liquid or illiquid, requiring that consideration be
given to, among other things, the frequency of trades and quotes for the
security, the number of dealers willing to sell the security and the number of
potential purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The
Trustees will periodically review the Funds' purchases and sales of Rule 144A
securities and Section 4(2) paper.
Stand-by Commitments. When a Fund purchases securities it may also enter
into put transactions, including those referred to as stand-by commitments,
with respect to such securities. Under a stand-by commitment, a bank,
broker-dealer or other financial institution agrees to purchase at a Fund's
option a specified security at a specified price within a specified period
prior to its maturity date. A put transaction will increase the cost of the
underlying security and consequently reduce the available yield.
The amount payable to a Money Market Fund upon its exercise of a stand-by
commitment with respect to a Municipal Obligation normally would be (i) the
acquisition cost of the Municipal Obligation (excluding any accrued interest
paid by the Fund on the acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Fund
owned the security, plus (ii) all interest accrued on the security since the
last interest payment date during the period the security was owned by the
Fund. Absent unusual circumstances relating to a change in market value, a
Money Market Fund would value the underlying Municipal Obligation at amortized
cost. Accordingly, the amount payable by a bank or dealer during the time a
stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation. The Money Market Funds
value stand-by commitments at zero for purposes of computing their net asset
value per share.
The stand-by commitments that may be entered into by the Funds are subject
to certain risks, which include the ability of the issuer of the commitment to
pay for the securities at the time the commitment is exercised, the fact that
the commitment is not marketable by a Fund, and that the maturity of the
underlying security will generally be different from that of the commitment.
Not more than 10% of the total assets of a Money Market Fund will be invested
in Municipal Obligations that are subject to stand-by commitments from the same
bank or broker-dealer.
Floating and Variable Rate Securities; Participation Certificates. Each
Fund other than the 100% U.S. Treasury Securities Money Market Fund and the
Treasury Plus Money Market Fund may invest in floating and variable rate
securities. Floating and variable rate demand instruments permit the holder to
demand payment upon a specified number of days' notice of the unpaid principal
balance plus accrued interest either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect
10
to such instrument. Investments by the Income Funds in floating or variable
rate securities normally will involve industrial development or revenue bonds
that provide for a periodic adjustment in the interest rate paid on the
obligation and may, but need not, permit the holder to demand payment as
described above. While there is usually no established secondary market for
issues of these types of securities, the dealer that sells an issue of such
security frequently will also offer to repurchase the securities at any time at
a repurchase price which varies and may be more or less than the amount the
holder paid for them. The floating or variable rate demand instruments in which
the Money Market Funds may invest are payable on demand on not more than seven
calendar days' notice.
The terms of these types of securities provide that interest rates are
adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term rates,
such as Treasury Bills or LIBOR (London Interbank Offered Rate), as provided in
the respective instruments. The Funds will decide which floating or variable
rate securities to purchase in accordance with procedures prescribed by Board
of Trustees of the Trust in order to minimize credit risks.
In the case of a Money Market Fund, the Board of Trustees may determine
that an unrated floating or variable rate security meets the Fund's high
quality criteria if it is backed by a letter of credit or guarantee or is
insured by an insurer that meets such quality criteria, or on the basis of a
credit evaluation of the underlying obligor. If the credit of the obligor is of
"high quality", no credit support from a bank or other financial institution
will be necessary. The Board of Trustees will re-evaluate each unrated floating
or variable rate security on a quarterly basis to determine that it continues
to meet a Money Market Fund's high quality criteria. If an instrument is ever
deemed to fall below a Money Market Fund's high quality standards, either it
will be sold in the market or the demand feature will be exercised.
The securities in which the Tax Free Funds, the Cash Management Fund and
the Prime Money Market Fund may invest include participation certificates,
issued by a bank, insurance company or other financial institution, in
securities owned by such institutions or affiliated organizations
("Participation Certificates"), and, in the case of the Cash Management Fund
and the Prime Money Market Fund, certificates of indebtedness or safekeeping.
Participation Certificates are pro rata interests in securities held by others;
certificates of indebtedness or safekeeping are documentary receipts for such
original securities held in custody by others. A Participation Certificate
gives a Fund an undivided interest in the security in the proportion that the
Fund's participation interest bears to the total principal amount of the
security and generally provides the demand feature described below. Each
Participation Certificate is backed by an irrevocable letter of credit or
guaranty of a bank (which may be the bank issuing the Participation
Certificate, a bank issuing a confirming letter of credit to that of the
issuing bank, or a bank serving as agent of the issuing bank with respect to
the possible repurchase of the certificate of participation) or insurance
policy of an insurance company that the Board of Trustees of the Trust has
determined meets the prescribed quality standards for a particular Fund.
A Fund may have the right to sell the Participation Certificate back to
the institution and draw on the letter of credit or insurance on demand after
the prescribed notice period, for all or any part of the full principal amount
of the Fund's participation interest in the security, plus accrued interest.
The institutions issuing the Participation Certificates would retain a service
and letter of credit fee and a fee for providing the demand feature, in an
amount equal to the excess of the interest paid on the instruments over the
negotiated yield at which the Participation Certificates were purchased by a
Fund. The total fees would generally range from 5% to 15% of the applicable
prime rate or other short-term rate index. With respect to insurance, a Fund
will attempt to have the issuer of the Participation Certificate bear the cost
of any such insurance, although the Funds retain the option to purchase
insurance if deemed appropriate. Obligations that have a demand feature
permitting a Fund to tender the obligation to a foreign bank may involve
certain risks associated with foreign investment. A Fund's ability to receive
payment in such circumstances under the demand feature from such foreign banks
may involve certain risks such as future political and economic developments,
the pos-
11
sible establishments of laws or restrictions that might adversely affect the
payment of the bank's obligations under the demand feature and the difficulty
of obtaining or enforcing a judgment against the bank.
The advisers have been instructed by the Board of Trustees to monitor on
an ongoing basis the pricing, quality and liquidity of the floating and
variable rate securities held by the Funds, including Participation
Certificates, on the basis of published financial information and reports of
the rating agencies and other bank analytical services to which the Funds may
subscribe. Although these instruments may be sold by a Fund, it is intended
that they be held until maturity. The Internal Revenue Service has not ruled on
whether interest on participations in floating or variable rate Municipal
Obligations is tax exempt. Participation Certificates will only be purchased by
a Tax Free Fund if, in the opinion of counsel to the issuer, interest income on
such instruments will be tax-exempt when distributed as dividends to
shareholders of such Fund.
Past periods of high inflation, together with the fiscal measures adopted
to attempt to deal with it, have seen wide fluctuations in interest rates,
particularly "prime rates" charged by banks. While the value of the underlying
floating or variable rate securities may change with changes in interest rates
generally, the floating or variable rate nature of the underlying floating or
variable rate securities should minimize changes in value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed rate securities. A Fund's portfolio may
contain floating or variable rate securities on which stated minimum or maximum
rates, or maximum rates set by state law, limit the degree to which interest on
such floating or variable rate securities may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the floating
or variable rate securities is made in relation to movements of the applicable
banks' "prime rates" or other short-term rate adjustment indices, the floating
or variable rate securities are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the floating or variable rate
securities may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar maturities.
The maturity of variable rate securities is deemed to be the longer of (i)
the notice period required before a Fund is entitled to receive payment of the
principal amount of the security upon demand or (ii) the period remaining until
the security's next interest rate adjustment. With respect to a Money Market
Fund, the maturity of a variable rate demand instrument will be determined in
the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. With respect to the Income Funds, if variable rate
securities are not redeemed through the demand feature, they mature on a
specified date which may range up to thirty years from the date of issuance.
Tender Option Floating or Variable Rate Certificates. The Money Market
Funds may invest in tender option bonds. A tender option bond is a synthetic
floating or variable rate security issued when long term bonds are purchased in
the secondary market and are then deposited into a trust. Custodial receipts
are then issued to investors, such as the Funds, evidencing ownership interests
in the trust. The trust sets a floating or variable rate on a daily or weekly
basis which is established through a remarketing agent. These types of
instruments, to be money market eligible under Rule 2a-7, must have a liquidity
facility in place which provides additional comfort to the investors in case
the remarketing fails. The sponsor of the trust keeps the difference between
the rate on the long term bond and the rate on the short term floating or
variable rate security.
Securities of Foreign Governments and Supranational Agencies. The Cash
Management Fund and the Prime Money Market Fund may invest a portion of their
assets from time to time in securities of foreign governments and supranational
agencies. The Funds will limit their investments in foreign government
obligations to commercial paper and other short-term notes issued or guaranteed
by the governments of Western Europe, Australia, New Zealand, Japan and Canada.
Supranational agencies include organizations such as The World Bank, which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-
12
nation organization engaged in cooperative economic activities; the European
Coal and Steel Community, which is an economic union of various European
nations steel and coal industries; and the Asian Development Bank, which is an
international development bank established to lend funds, promote investment
and provide technical assistance to member nations of the Asian and Pacific
regions. Obligations of supranational agencies are supported by subscribed, but
unpaid, commitments of member countries. There is no assurance that these
commitments will be undertaken or complied with in the future, and foreign and
supranational securities are subject to certain risks associated with foreign
investing.
Securities Loans. Each Fund other than the Tax Free Funds is permitted to
lend its securities to broker-dealers and other institutional investors in
order to generate additional income. Such loans of portfolio securities may not
exceed 30% of the value of a Fund's total assets. In connection with such
loans, a Fund will receive collateral consisting of cash, cash equivalents,
U.S. Government securities or irrevocable letters of credit issued by financial
institutions. Such collateral will be maintained at all times in an amount
equal to at least 100% of the current market value plus accrued interest of the
securities loaned. A Fund can increase its income through the investment of
such collateral. A Fund continues to be entitled to the interest payable or any
dividend-equivalent payments received on a loaned security and, in addition, to
receive interest on the amount of the loan. However, the receipt of any
dividend-equivalent payments by a Fund on a loaned security from the borrower
will not qualify for the dividends-received deduction. Such loans will be
terminable at any time upon specified notice. A Fund might experience risk of
loss if the institutions with which it has engaged in portfolio loan
transactions breach their agreements with such Fund. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delays in receiving additional collateral or in the recovery of the
securities or the possible loss of rights in the collateral should the borrower
experience financial difficulty. Loans will be made only to firms deemed by the
advisers to be of good standing and will not be made unless, in the judgment of
the advisers, the consideration to be earned from such loans justifies the
risk.
Zero Coupon and Stripped Obligations. Each Fund, other than the 100% U.S.
Treasury Securities Money Market Fund, may invest up to 20% of its total assets
in such stripped obligations. The principal and interest components of United
States Treasury bonds with remaining maturities of longer than ten years are
eligible to be traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the principal and interest components are separately issued by the
United States Treasury at the request of depository financial institutions,
which then trade the component parts separately. The interest component of
STRIPS may be more volatile than that of United States Treasury bills with
comparable maturities.
The Cash Management Fund, Prime Money Market Fund and the Tax Free Funds
may also invest in zero coupon obligations. Zero coupon obligations are sold at
a substantial discount from their value at maturity and, when held to maturity,
their entire return, which consists of the amortization of discount, comes from
the difference between their purchase price and maturity value. Because
interest on a zero coupon obligation is not distributed on a current basis, the
obligation tends to be subject to greater price fluctuations in response to
changes in interest rates than are ordinary interest-paying securities with
similar maturities. As with STRIPS, the risk is greater when the period to
maturity is longer. The value of zero coupon obligations appreciates more than
such ordinary interest-paying securities during periods of declining interest
rates and depreciates more than such ordinary interest-paying securities during
periods of rising interest rates. Under the stripped bond rules of the Internal
Revenue Code of 1986, as amended, investments in zero coupon obligations will
result in the accrual of interest income on such investments in advance of the
receipt of the cash corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the coupon
payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Trea-
13
sury Investment Growth Receipts and generic Treasury Receipts, are examples of
stripped U.S. Treasury securities separated into their component parts through
such custodial arrangements.
Custodial Receipts. The Cash Management Fund and the Prime Money Market
Fund may acquire securities in the form of custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. These are not deemed U.S. Government securities. These notes
and bonds are held in custody by a bank on behalf of the owners of the
receipts.
Funding Agreements. Each Fund may invest in short-term funding agreements.
A funding agreement is a contract between an issuer and a purchaser that
obligates the issuer to pay a guaranteed rate of interest on a principal sum
deposited by a purchaser. Funding agreements generally will also guarantee the
return of principal and may guarantee a stream of payments over time. A funding
agreement has a fixed maturity date and may have either a fixed or variable
interest rate that is based on an index and guaranteed for a set time period.
Because there generally is no active secondary market for these investments, a
funding agreement may be deemed to be illiquid.
Temporary Defensive Positions. For temporary defensive purposes, each Tax
Free Fund may invest without limitation in high quality money market
instruments and repurchase agreements, the interest income from which may be
taxable to shareholders as ordinary income for federal income tax purposes.
Other Investment Companies. In lieu of investing directly, each Fund is
authorized to seek to achieve its objectives by investing all of its investable
assets in an investment company having substantially the same investment
objective and policies as the applicable Fund. Each Money Market Fund other
than 100% U.S. Treasury Securities Money Market Fund may invest up to 10% of
its total assets in shares of other money market funds when consistent with its
investment objective and policies, subject to applicable regulatory
limitations. Each Income Fund may invest up to 10% of their total assets in
shares of other investment companies, when consistent with its investment
objective and policies, subject to applicable regulatory limitations.
Additional fees may be charged by other investment companies, including other
money market funds.
Additional Policies Regarding Derivative and Related Transactions
Introduction. As explained more fully below, the Income Funds may employ
derivative and related instruments as tools in the management of portfolio
assets. Put briefly, a "derivative" instrument may be considered a security or
other instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts, structured
notes and various other over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways:
First, to reduce risk by hedging (offsetting) an investment position. Second,
to substitute for another security particularly where it is quicker, easier and
less expensive to invest in derivatives. Lastly, to speculate or enhance
portfolio performance. When used prudently, derivatives can offer several
benefits, including easier and more effective hedging, lower transaction costs,
quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for a Fund.
Each Income Fund may invest its assets in derivative and related
instruments subject only to the Fund's investment objective and policies and
the requirement that the Fund maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under
14
such instruments with respect to positions where there is no underlying
portfolio asset so as to avoid leveraging the Fund.
The value of some derivative or similar instruments in which the Income
Funds invest may be particularly sensitive to changes in prevailing interest
rates or other economic factors, and like other investments of the Funds the
ability of a Fund to successfully utilize these instruments may depend in part
upon the ability of the advisers to forecast interest rates and other economic
factors correctly. If the advisers accurately forecast such factors and has
taken positions in derivative or similar instruments contrary to prevailing
market trends, the Funds could be exposed to the risk of a loss. The Funds
might not employ any or all of the strategies described herein, and no
assurance can be given that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Funds may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Funds' current prospectuses as well as provide useful information to
prospective investors.
Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. An incorrect correlation could result
in a loss on both the hedged assets in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted.
The advisers may accurately forecast interest rates, market values or other
economic factors in utilizing a derivatives strategy. In such a case, the Fund
may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains. Strategies not involving hedging may
increase the risk to a Fund. Certain strategies, such as yield enhancement, can
have speculative characteristics, involve leverage and may result in losses
that exceed the original investment of the fund. There can be no assurance that
a liquid market will exist at a time when a Fund seeks to close out an option,
futures contract or other derivative or related position. Many exchanges and
boards of trade limit the amount of fluctuation permitted in option or futures
contract prices during a single day; once the daily limit has been reached on
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Finally, over-the-counter
instruments typically do not have a liquid market. Lack of a liquid market for
any reason may prevent a Fund from liquidating an unfavorable position.
Activities of large traders in the futures and securities markets involving
arbitrage, "program trading," and other investment strategies may cause price
distortions in these markets. In certain instances, particularly those
involving over-the-counter transactions on forward contracts, there is a
greater potential that a counterparty or broker may default or be unable to
perform on its commitments. In the event of such a default, a Fund may
experience a loss.
Specific Uses and Strategies. Set forth below are explanations various
strategies involving derivatives and related instruments which may be used by
the Income Funds.
Options on Securities and Securities Indexes. The Funds may PURCHASE, SELL
or EXERCISE call and put options on (i) securities, (ii) securities indexes,
and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the Funds
may also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party
contracts with price and other terms negotiated between buyer and seller. As
such, over-the-counter options generally have much less market liquidity and
carry the risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against
15
substantial increases in prices of securities a Fund intends to purchase
pending its ability to invest in such securities in an orderly manner. A Fund
may also use combinations of options to minimize costs, gain exposure to
markets or take advantage of price disparities or market movements. For
example, a Fund may sell put or call options it has previously purchased or
purchase put or call options it has previously sold. These transactions may
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. A Fund may write a call or put option in
order to earn the related premium from such transactions. Prior to exercise or
expiration, an option may be closed out by an offsetting purchase or sale of a
similar option.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
fund writing a covered call (i.e., where the underlying securities are held by
the fund) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. The
Funds will not write uncovered options.
If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, such Fund
will lose its entire investment in the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less
than the price of the related security. There can be no assurance that a liquid
market will exist when a Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.
Futures Contracts and Options on Futures Contracts. The Funds may purchase
or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Funds may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
a Fund may sell a futures contract or buy a futures option to protect against a
decline in value, or reduce the duration, of portfolio holdings. Likewise,
these instruments may be used where a Fund intends to acquire an instrument or
enter into a position. For example, a Fund may purchase a futures contract or
buy a futures option to gain immediate exposure in a market or otherwise offset
increases in the purchase price of securities or currencies to be acquired in
the future. Futures options may also be written to earn the related premiums.
When writing or purchasing options, the Funds may simultaneously enter
into other transactions involving futures contracts or futures options in order
to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. Funds may engage in cross-hedging by purchasing or selling
futures or options on a security different from the security position being
hedged to take advantage of relationships between the two securities.
Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Funds will
only enter into futures contracts or options on futures
16
contracts which are traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system.
Forward Contracts. A Fund may also use forward contracts to hedge against
changes in interest-rates, increase exposure to a market or otherwise take
advantage of such changes. An interest-rate forward contract involves the
obligation to purchase or sell a specific debt instrument at a fixed price at a
future date.
Interest Rate Transactions. The Income Funds may employ interest rate
management techniques, including transactions in options (including yield curve
options), futures, options on futures, forward exchange contracts, and interest
rate swaps.
An Income Fund will only enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Income Fund receiving or
paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets
or principal. Accordingly, the risk of loss with respect to interest rate swaps
is limited to the net amount of interest payments that an Income Fund is
contractually obligated to make. If the other party to and interest rate swap
defaults, an Income Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest
rate swaps are individually negotiated, each Income Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate swap position.
An Income Fund may enter into interest rate swaps to the maximum allowed
limits under applicable law. An Income Fund will typically use interest rate
swaps to shorten the effective duration of its portfolio. Interest rate swaps
involve the exchange by an Income Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments.
Asset-Backed Securities. The Cash Management Fund and the Prime Money
Market Fund may also invest in asset-backed securities. Asset-backed securities
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool of assets similar to
one another, such as motor vehicle receivables or credit card receivables.
Structured Products. The Income Funds may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the
issuance by that entity of one or more classes of securities ("structured
products") backed by, or representing interests in, the underlying instruments.
The cash flow on the underlying instruments may be apportioned among the newly
issued structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. A Fund may invest in structured products which represent derived
investment positions based on relationships among different markets or asset
classes.
The Income Funds may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the cost of
Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the
17
reference rate of an inverse floater causes an increase in the coupon rate. A
spread trade is an investment position relating to a difference in the prices
or interest rates of two securities where the value of the investment position
is determined by movements in the difference between the prices or interest
rates, as the case may be, of the respective securities. When an Income Fund
invests in notes linked to the price of an underlying instrument, the price of
the underlying security is determined by a multiple (based on a formula) of the
price of such underlying security. A structured product may be considered to be
leveraged to the extent its interest rate varies by a magnitude that exceeds
the magnitude of the change in the index rate of interest. Because they are
linked to their underlying markets or securities, investments in structured
products generally are subject to greater volatility than an investment
directly in the underlying market or security. Total return on the structured
product is derived by linking return to one or more characteristics of the
underlying instrument. Because certain structured products of the type in which
the Income Fund anticipates it will invest may involve no credit enhancement,
the credit risk of those structured products generally would be equivalent to
that of the underlying instruments. An Income Fund is permitted to invest in a
class of structured products that is either subordinated or unsubordinated to
the right of payment of another class. Subordinated structured products
typically have higher yields and present greater risks than unsubordinated
structured products. Although an Income Fund's purchase of subordinated
structured products would have similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of an Income Fund's fundamental investment limitation
related to borrowing and leverage.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, an Income Fund's
investments in these structured products may be limited by the restrictions
contained in the 1940 Act. Structured products are typically sold in private
placement transactions, and there currently is no active trading market for
structured products. As a result, certain structured products in which the
Income Funds invest may be deemed illiquid and subject to their limitation on
illiquid investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
Additional Restrictions on the Use of Futures and Option Contracts. None
of the Funds is a "commodity pool" (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC and futures contracts and futures options
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that a Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5%
of the liquidation value of the Fund's portfolio, provided, further, that, in
the case of an option that is in-the-money, the in-the-money amount may be
excluded in calculating the 5% limitation.
When an Income Fund purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with such Fund's custodian so that the amount so segregated,
plus the initial deposit and variation margin held in the account of its
broker, will at all times equal the value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
The Income Funds' ability to engage in the transactions described herein
may be limited by the current federal income tax requirement that a Fund derive
less than 30% of its gross income from the sale or other disposition of
securities held for less than three months.
In addition to the foregoing requirements, the Board of Trustees has
adopted an additional restriction on the use of futures contracts and options
thereon, requiring that the aggregate market value of the futures
18
contracts held by an Income Fund not exceed 50% of the market value of its
total assets. Neither this restriction nor any policy with respect to the
above-referenced restrictions, would be changed by the Board of Trustees
without considering the policies and concerns of the various federal and state
regulatory agencies.
Investment Restrictions
The Funds have adopted the following investment restrictions which may not
be changed without approval by a "majority of the outstanding shares" of a Fund
which, as used in this Statement of Additional Information, means the vote of
the lesser of (i) 67% or more of the shares of a Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of a Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of a
Fund.
Each Fund may not:
(1) borrow money, except that each Fund may borrow money for temporary
or emergency purposes, or by engaging in reverse repurchase transactions,
in an amount not exceeding 331/3% of the value of its total assets at the
time when the loan is made and may pledge, mortgage or hypothecate no more
than 1/3 of its net assets to secure such borrowings. Any borrowings
representing more than 5% of a Fund's total assets must be repaid before
the Fund may make additional investments;
(2) make loans, except that each Fund may: (i) purchase and hold debt
instruments (including without limitation, bonds, notes, debentures or
other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in the
securities of companies whose principal business activities are in the
same industry. Notwithstanding the foregoing, (i) with respect to a Fund's
permissible futures and options transactions in U.S. Government
securities, positions in options and futures shall not be subject to this
restriction; (ii) the Money Market Funds may invest more than 25% of their
total assets in obligations issued by banks, including U. S. banks; (iii)
New York Tax Free Money Market Fund, California Tax Free Money Market Fund
and Tax Free Money Market Fund may invest more than 25% of their
respective assets in municipal obligations secured by bank letters of
credit or guarantees, including participation certificates and (iv) more
than 25% of the assets of California Intermediate Tax Free Fund may be
invested in municipal obligations secured by bank letters of credit or
guarantees;
(4) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments but this shall not prevent a
Fund from (i) purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities or (ii) engaging in forward purchases or sales of foreign
currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by a Fund in securities backed by mortgages on real estate or
in marketable securities of companies engaged in such activities are not
hereby precluded;
(6) issue any senior security (as defined in the 1940 Act), except that
(a) a Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under appli-
19
cable regulations and interpretations of the 1940 Act or an exemptive
order; (b) a Fund may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted
under applicable regulations or interpretations of the 1940 Act; and (c)
subject to the restrictions set forth above, a Fund may borrow money as
authorized by the 1940 Act. For purposes of this restriction, collateral
arrangements with respect to a Fund's permissible options and futures
transactions, including deposits of initial and variation margin, are not
considered to be the issuance of a senior security; or
(7) underwrite securities issued by other persons except insofar as a
Fund may technically be deemed to be an underwriter under the Securities
Act of 1933 in selling a portfolio security.
The investment objective of each Money Market Fund and the Tax Free
Income Fund is fundamental.
In addition, as a matter of fundamental policy, notwithstanding any
other investment policy or restriction, a Fund may seek to achieve its
investment objective by investing all of its investable assets in another
investment company having substantially the same investment objective and
policies as the Fund. For purposes of investment restriction (5) above,
real estate includes Real Estate Limited Partnerships. For purposes of
investment restriction (3) above, industrial development bonds, where the
payment of principal and interest is the ultimate responsibility of
companies within the same industry, are grouped together as an "industry."
Investment restriction (3) above, however, is not applicable to
investments by a Fund in municipal obligations where the issuer is
regarded as a state, city, municipality or other public authority since
such entities are not members of any "industry." Supranational
organizations are collectively considered to be members of a single
"industry" for purposes of restriction (3) above.
In addition, each Fund is subject to the following nonfundamental
investment restrictions which may be changed without shareholder approval:
(1) Each Fund other than the Tax Free Funds may not, with respect to 75%
of its assets, hold more than 10% of the outstanding voting securities of
any issuer or invest more than 5% of its assets in the securities of any
one issuer (other than obligations of the U.S. Government, its agencies
and instrumentalities); each Tax Free Fund may not, with respect to 50% of
its assets, hold more than 10% of the outstanding voting securities of any
issuer.
(2) Each Fund may not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of a Fund. The Funds have no current intention of making short sales
against the box.
(3) Each Fund may not purchase or sell interests in oil, gas or mineral
leases.
(4) Each Income Fund may not invest more than 15% of its net assets in
illiquid securities; each Money Market Fund may not invest more than 10%
of its net assets in illiquid securities.
(5) Each Fund may not write, purchase or sell any put or call option or
any combination thereof, provided that this shall not prevent (i) the
writing, purchasing or selling of puts, calls or combinations thereof with
respect to portfolio securities or (ii) with respect to a Fund's
permissible futures and
20
options transactions, the writing, purchasing, ownership, holding or
selling of futures and options positions or of puts, calls or combinations
thereof with respect to futures.
(6) Each Fund may invest up to 5% of its total assets in the securities
of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its
total assets in the securities of other investment companies.
For purposes of investment restriction (4) above, illiquid securities
includes securities restricted as to resale unless they are determined to be
readily marketable in accordance with procedures established by the Board of
Trustees.
For purposes of the Funds' investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
As a nonfundamental operating policy, the Money Market Funds will not
invest more than 25% of their respective total assets in obligations issued by
foreign banks (other than foreign branches of U.S. banks).
As a nonfundamental operating policy, the Tax Free Money Market Funds will
not invest in obligations secured by letters of credit or guarantees from
foreign banks (other than foreign branches of U.S. banks) if, after giving
effect to such investment, the value attributable to such letters of credit or
guarantees, as determined by the respective Funds' advisers, would exceed 25%
of the respective Funds' total assets.
If a percentage or rating restriction on investment or use of assets set
forth herein or in a Prospectus is adhered to at the time, later changes in
percentage or ratings resulting from any cause other than actions by a Fund
will not be considered a violation. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
Portfolio Transactions and Brokerage Allocation
Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of the adviser or sub-adviser to such Fund
and who is appointed and supervised by senior officers of such adviser or
sub-adviser. Changes in the Funds' investments are reviewed by the Board of
Trustees. The Funds' portfolio managers may serve other clients of the advisers
in a similar capacity. Money market instruments are generally purchased in
principal transactions; thus, the Money Market Funds generally pay no brokerage
commissions.
The frequency of an Income Fund's portfolio transactions the portfolio
turnover rate will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the advisers will weigh the added costs of
short-term investment against anticipated gains. Each Income Fund will engage
in portfolio trading if its advisers believe a transaction, net of costs
(including custodian charges), will help it achieve its investment objective.
For the fiscal years ended August 31, 1997, 1998 and 1999, the annual
rates of portfolio turnover for the following Funds were as follows:
The Tax Free Income Fund: 147%, 172% and 102%, respectively; The New York
Tax Free Income Fund: 107%, 91% and 65%, respectively; The California
Intermediate Tax Free Fund: 66%, 44% and 111%, respectively.
21
Under the advisory agreement and the sub-advisory agreements, the adviser
and sub-advisers shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result in total costs or
proceeds being the most favorable to the Funds. In assessing the best overall
terms available for any transaction, the adviser and sub-advisers consider all
factors they deem relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, research services provided to the adviser
or sub-advisers, and the reasonableness of the commissions, if any, both for
the specific transaction and on a continuing basis. The adviser and sub-advisers
are not required to obtain the lowest commission or the best net price for any
Fund on any particular transaction, and are not required to execute any order
in a fashion either preferential to any Fund relative to other accounts they
manage or otherwise materially adverse to such other accounts.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the adviser or
sub-adviser to a Fund normally seeks to deal directly with the primary market
makers unless, in its opinion, best execution is available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the adviser or sub-adviser on the
tender of a Fund's portfolio securities in so-called tender or exchange offers.
Such soliciting dealer fees are in effect recaptured for the Funds by the
adviser and sub-advisers. At present, no other recapture arrangements are in
effect.
Under the advisory and sub-advisory agreements and as permitted by Section
28(e) of the Securities Exchange Act of 1934, the adviser or sub-advisers may
cause the Funds to pay a broker-dealer which provides brokerage and research
services to the adviser or sub-advisers, the Funds and/or other accounts for
which they exercise investment discretion an amount of commission for effecting
a securities transaction for the Funds in excess of the amount other
broker-dealers would have charged for the transaction if they determine in good
faith that the total commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer viewed
in terms of either that particular transaction or their overall
responsibilities to accounts over which they exercise investment discretion.
Not all of such services are useful or of value in advising the Funds. The
adviser and sub-advisers report to the Board of Trustees regarding overall
commissions paid by the Funds and their reasonableness in relation to the
benefits to the Funds. The term "brokerage and research services" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or of
purchasers or sellers of securities, furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts, and effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
The management fees that the Funds pay to the adviser will not be reduced
as a consequence of the adviser's or sub-advisers' receipt of brokerage and
research services. To the extent the Funds' portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Funds will exceed
those that might otherwise be paid by an amount which cannot be presently
determined. Such services would be useful and of value to the adviser or
sub-advisers in serving one or more of their other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the adviser and sub-advisers in carrying out their
obligations to the Funds. While such services are not expected to reduce the
expenses of the adviser or sub-advisers, they would, through use of the
services, avoid the additional expenses which would be incurred if they should
attempt to develop comparable information through their own staff.
In certain instances, there may be securities that are suitable for one or
more of the Funds as well as one or more of the adviser's or sub-advisers'
other clients. Investment decisions for the Funds and for other clients are
made with a view to achieving their respective investment objectives. It may
develop that the same
22
investment decision is made for more than one client or that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling that same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. In executing portfolio transactions for a Fund, the adviser or
sub-advisers may, to the extent permitted by applicable laws and regulations,
but shall not be obligated to, aggregate the securities to be sold or purchased
with those of other Funds or their other clients if, in the adviser's or
sub-advisers' reasonable judgment, such aggregation (i) will result in an
overall economic benefit to the Fund, taking into consideration the
advantageous selling or purchase price, brokerage commission and other
expenses, and trading requirements, and (ii) is not inconsistent with the
policies set forth in the Trust's registration statement and the Fund's
Prospectus and Statement of Additional Information. In such event, the adviser
or a sub- adviser will allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in an equitable manner, consistent with
its fiduciary obligations to the Fund and such other clients. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as a Fund is concerned. However, it is believed
that the ability of the Funds to participate in volume transactions will
generally produce better executions for the Funds.
PERFORMANCE INFORMATION
From time to time, a Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. Performance is calculated separately for each
class of shares. Because such performance information is based on past
investment results, it should not be considered as an indication or
representation of the performance of any classes of a Fund in the future. From
time to time, the performance and yield of classes of a Fund may be quoted and
compared to those of other mutual funds with similar investment objectives,
unmanaged investment accounts, including savings accounts, or other similar
products and to stock or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of a Fund or its
classes may be compared to data prepared by Lipper Analytical Services, Inc. or
Morningstar Mutual Funds on Disc, widely recognized independent services which
monitor the performance of mutual funds. Performance and yield data as reported
in national financial publications including, but not limited to, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in local or regional publications, may also be used in comparing the
performance and yield of a Fund or its classes. A Fund's performance may be
compared with indices such as the Lehman Brothers Government/Corporate Bond
Index, the Lehman Brothers Government Bond Index, the Lehman Government Bond
1-3 Year Index and the Lehman Aggregate Bond Index; the S&P 500 Index, the Dow
Jones Industrial Average or any other commonly quoted index of common stock
prices; and the Russell 2000 Index and the NASDAQ Composite Index.
Additionally, a Fund may, with proper authorization, reprint articles written
about such Fund and provide them to prospective shareholders.
A Fund may provide period and average annual "total rates of return." The
"total rate of return" refers to the change in the value of an investment in a
Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. For
Class A shares, the average annual total rate of return figures will assume
payment of the maximum initial sales load at the time of purchase. For Class B
and Class C shares, the average annual total rate of return figures will assume
deduction of the applicable contingent deferred sales charge imposed on a total
redemption of shares held for the period. One-, five-, and ten-year periods
will be shown, unless the class has been in existence for a shorter-period.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the yields and the net asset values (in the case of
the Income Funds) of the classes of shares of a Fund will vary
23
based on market conditions, the current market value of the securities held by
a Fund and changes in the Fund's expenses. The advisers, Shareholder Servicing
Agents, the Administrator, the Distributor and other service providers may
voluntarily waive a portion of their fees on a month-to-month basis. In
addition, the Distributor may assume a portion of a Fund's operating expenses
on a month-to-month basis. These actions would have the effect of increasing
the net income (and therefore the yield and total rate of return) of the
classes of shares of a Fund during the period such waivers are in effect. These
factors and possible differences in the methods used to calculate the yields
and total rates of return should be considered when comparing the yields or
total rates of return of the classes of shares of a Fund to yields and total
rates of return published for other investment companies and other investment
vehicles (including different classes of shares). The Trust is advised that
certain Shareholder Servicing Agents may credit to the accounts of their
customers from whom they are already receiving other fees amounts not exceeding
the Shareholder Servicing Agent fees received, which will have the effect of
increasing the net return on the investment of customers of those Shareholder
Servicing Agents. Such customers may be able to obtain through their
Shareholder Servicing Agents quotations reflecting such increased return.
In connection with the Hanover Reorganization, the Vista 100% U.S.
Treasury Securities Money Market Fund was established to receive the assets of
The 100% U.S. Treasury Securities Money Market Fund of Hanover, and the Vista
Cash Management Fund (formerly known as the Vista Global Money Market Fund),
which received the assets of The Cash Management Fund of Hanover, adopted the
financial history of The Cash Management Fund of Hanover. Performance results
presented for each class of the Vista 100% U.S. Treasury Securities Money
Market Fund and the Vista Cash Management Fund will be based upon the
performance of The 100% U.S. Treasury Securities Money Market Fund and The Cash
Management Fund of Hanover, respectively, for periods prior to the consummation
of the Hanover Reorganization.
Each Fund presents performance information for each class thereof since
the commencement of operations of that Fund, rather than the date such class
was introduced. Performance information for each class introduced after the
commencement of operations of the related Fund is therefore based on the
performance history of a predecessor class or classes. Performance information
is restated to reflect the current maximum front-end sales charge (in the case
of Class A Shares) or the maximum contingent deferred sales charge (in the case
of Class B Shares) when presented inclusive of sales charges. Additional
performance information may be presented which does not reflect the deduction
or sales charges. Historical expenses reflected in performance information are
based upon the distribution, shareholder servicing fees and other expenses
actually incurred during the period presented and have not been restated, for
periods during which the performance information for a particular class is
based upon the performance history of a predecessor class, to reflect the
ongoing expenses currently borne by the particular class.
Advertising or communications to shareholders may contain the views of the
advisers as to current market, economic, trade and interest rate trends, as
well as legislative, regulatory and monetary developments, and may include
investment strategies and related matters believed to be of relevance to a
Fund.
Advertisements for the Vista funds may include references to the asset
size of other financial products made available by Chase, such as the offshore
assets of other funds.
Total Rate of Return
A Fund's or class's total rate of return for any period will be calculated
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains declared during such period
with respect to a share held at the beginning of such period and with respect
to shares purchased with such dividends and capital gains distributions, by
(ii) the public offering price per share on the first day of such period, and
(b) subtracting 1 from the result. The average annual rate of return quotation
will be calculated by (x) adding 1 to the period total rate of return quotation
as calculated above, (y) raising such sum to a power which is equal to 365
divided by the number of days in such period, and (z) subtracting 1 from the
result.
24
Average Annual Total Returns*
(excluding sales charges)
The average annual total rate of return figures for the following Funds,
reflecting the initial investment and assuming the reinvestment of all
distributions (but excluding the effects of any applicable sales charges) for
the one, five and ten year periods ended August 31, 1999, and for the period
from commencement of business operations to August 31, 1999, were as follows:
Since Date of Date of
One Five Ten Fund Fund Class
Fund Year Years Years Inception Inception Introduction
- -------------- ----------- ---------- ---------- ----------- ----------- -------------
Tax Free 9/8/97
Income Fund
A Shares -1.33% 5.65% 7.59% N/A 9/8/87
B Shares+ -2.23% 4.79% 7.06% N/A 11/4/93
New York Tax 9/8/97
Free Income
Fund
A Shares -1.60% 5.38% 6.94% N/A 9/8/87
B Shares+ -2.47% 4.56% 6.46% N/A 11/4/93
California
Intermediate
Tax Free
Fund
A Shares 0.28% 5.58% N/A 4.79% 7/16/93 7/16/93
- ----------
* The ongoing fees and expenses borne by Class B Shares are greater than those
borne by Class A Shares. As indicated above, the performance information for
each class introduced after the commencement of operations of the related
Fund is based on the performance history of a predecessor class or classes
and historical expenses have not been restated, for periods during which the
performance information for a particular class is based upon the performance
history of a predecessor class, to reflect the ongoing expenses currently
borne by the particular class. Accordingly, the performance information
presented in the table above and in each table that follows may be used in
assessing each Fund's performance history but does note reflect how the
distinct classes would have performed on a relative basis prior to the
introduction of those classes which would require an adjustment to the
ongoing expenses.
The performance quoted reflects fee waivers that subsidize and reduce the
total operating expenses of certain Funds (or classes thereof). Returns on
these Funds (or classes) would have been lower if there were no such waivers.
With respect to certain Funds, Chase and/or other service providers are
obligated to waive certain fees and/or reimburse expenses. Each Fund's
Prospectus discloses the extent of any agreements to waive fees and/or
reimburse expenses.
+ Performance information presented in the table above and in each table that
follows for this class of the Funds prior to the date this class was
introduced does not reflect distribution fees and certain other expenses borne
by this class which, if reflected, would reduce the performance quoted.
25
Average Annual Total Returns*
(including sales charges)
With the current maximum sales charge for Class A shares (4.50%) reflected
and the currently applicable CDSC for Class B shares for each period length,
the average annual total rate of return figures for the same periods would be
as follows:
Since
One Five Ten Fund
Fund Year Years Years Inception
- -------------------------------------- ----------- ---------- ---------- ----------
Tax Free Income Fund
A Shares -5.77% 4.68% 7.10% N/A
B Shares+ -6.95% 4.46% 7.06% N/A
New York Tax Free Income Fund
A Shares -6.03% 4.42% 6.45% N/A
B Shares+ -7.14% 4.22% 6.46% N/A
California Intermediate Tax Free Fund
A Shares -4.23% 4.61% N/A 4.01%
- ----------
*See the notes to the preceding table.
The Funds may also from time to time include in advertisements or other
communications a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
a Fund with other measures of investment return.
Yield Quotations
Any current "yield" quotation for a class of shares of an Income Fund
shall consist of an annualized hypothetical yield, carried at least to the
nearest hundredth of one percent, based on a thirty calendar day period and
shall be calculated by (a) raising to the sixth power the sum of 1 plus the
quotient obtained by dividing the Fund's net investment income earned during
the period by the product of the average daily number of shares outstanding
during the period that were entitled to receive dividends and the maximum
offering price per share on the last day of the period, (b) subtracting 1 from
the result, and (c) multiplying the result by 2.
Any current "yield" for a class of shares of a Money Market Fund which is
used in such a manner as to be subject to the provisions of Rule 482(d) under
the Securities Act of 1933, as amended, shall consist of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a specific seven calendar day period and shall be calculated by
dividing the net change in the value of an account having a balance of one
Share at the beginning of the period by the value of the account at the
beginning of the period and multiplying the quotient by 365/7. For this
purpose, the net change in account value would reflect the value of additional
Shares purchased with dividends declared on the original Share and dividends
declared on both the original Share and any such additional Shares, but would
not reflect any realized gains or losses from the sale of securities or any
unrealized appreciation or depreciation on portfolio securities. In addition,
any effective yield quotation for a class of shares of a Money Market Fund so
used shall be calculated by compounding the current yield quotation for such
period by multiplying such quotation by 7/365, adding 1 to the product, raising
the sum to a power equal to 365/7, and subtracting 1 from the result. A portion
of a Tax Free Money Market Fund's income used in calculating such yields may be
taxable.
Any taxable equivalent yield quotation of a class of shares of a Tax Free
Fund, whether or not it is a Money Market Fund, shall be calculated as follows.
If the entire current yield quotation for such period is tax-exempt, the tax
equivalent yield will be the current yield quotation (as determined in
accordance with the appropriate calculation described above) divided by 1 minus
a stated income tax rate or rates. If a portion of
26
the current yield quotation is not tax-exempt, the tax equivalent yield will be
the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus
a stated income tax rate or rates and (b) the portion of the yield which is not
tax-exempt.
Current Effective Compound
Annualized Yield Annualized Yield
as of 8/31/99 as of 8/31/99
------------------ -------------------
U. S. Government Money Market Fund
Vista Shares 4.72% 4.83%
Premier Shares 4.86% 4.97%
Institutional Shares 5.05% 5.17%
Prime Money Market Fund
B Shares 4.17% 4.26%
C Shares 4.13% 4.22%
Vista Shares 4.83% 4.95%
Premier Shares 4.97% 5.10%
Institutional Shares 5.16% 5.30%
Federal Money Market Fund
Vista Shares 4.61% 4.72%
Premier Shares 4.81% 4.93%
Institutional Shares 5.05% 5.18%
Treasury Plus Money Market Fund
Vista Shares 4.57% 4.67%
Premier Shares 4.71% 4.82%
Institutional Shares 4.91% 5.03%
100% U.S. Treasury Securities
Money Market Fund
Vista Shares 4.21% 4.30%
Premier Shares 4.30% 4.39%
Institutional Shares 4.55% 4.65%
Cash Management Fund
Vista Shares 4.86% 4.98%
Premier Shares 5.00% 5.13%
Institutional Shares 5.19% 5.33%
Current Effective Annualized
Annualized Compound Tax Equivalent
Yield Annualized Yield Yield**
as of 8/31/99 as of 8/31/99 as of 8/31/99
--------------- ------------------ ---------------
Tax Free Money Market Fund
Vista Shares 2.71% 2.75% 4.49%
Premier Shares 2.75% 2.79% 4.55%
Institutional Shares 3.04% 3.09% 5.03%
California Tax Free
Money Market Fund 2.47% 2.51% 4.51%
New York Tax Free
Money Market Fund 2.65% 2.69% 4.95%
27
Thirty-Day Tax Equivalent
Yield Thirty-Day Yield**
as of 8/31/99 as of 8/31/99
--------------- -------------------
Tax Free Income Fund
Class A Shares 4.13% 6.84%
Class B Shares 3.44% 5.70%
New York Tax Free Income Fund
Class A Shares 4.31% 8.05%
Class B Shares 3.62% 6.76%
California Intermediate Tax Free Fund 3.91% 7.14%
- ----------
* The tax equivalent yields assume a federal income tax rate of 39.6% for the
Tax Free Money Market Fund and Tax Free Income Fund, a combined New York State,
New York City and federal income tax rate of 46.43% for the New York Tax Free
Money Market Fund and New York Tax Free Income Fund and a combined California
State and federal income tax rate of 45.22% for the California Tax Free Money
Market Fund and California Intermediate Tax Free Fund.
Non-Standardized Performance Results*
(excluding sales charges)
The table below reflects the net change in the value of an assumed initial
investment of $10,000 in the following Funds (excluding the effects of any
applicable sales charges) for the period from the commencement date of business
for each such Fund (i.e., either September 8, 1987 for the Tax Free Income and
New York Tax Free Income Funds or July 16, 1993 for the California Intermediate
Tax Free Fund.) The values reflect an assumption that capital gain
distributions and income dividends, if any, have been invested in additional
shares of the same class. From time to time, the Funds may provide these
performance results in addition to the total rate of return quotations required
by the Securities and Exchange Commission. As discussed more fully in the
Prospectuses, neither these performance results, nor total rate of return
quotations, should be considered as representative of the performance of the
Funds in the future. These factors and the possible differences in the methods
used to calculate performance results and total rates of return should be
considered when comparing such performance results and total rate of return
quotations of the Funds with those published for other investment companies and
other investment vehicles.
Fund
Period Ended Total Inception
August 31, 1999 Value Date
- ------------------------------------------- ---------- ----------
The Tax Free Income Fund:
A Shares $20,788 9/8/87
B Shares+ 19,788
The New York Tax Free Income Fund:
A Shares 19,569 9/8/87
B Shares+ 18,700
The California Intermediate Tax Free Fund 13,323 7/15/93
- ----------
* See the notes to the table captioned "Average Annual Total Return (excluding
sales charges)" above. The table above assumes an initial investment of $10,000
in a particular class of a Fund for the period from the Fund's commencement of
operations, although the particular class may have been introduced at a
subsequent date. As indicated above, performance information for each class
introduced after the commencement of operations of the related Fund is based on
the performance history of a predecessor class or classes, and historical
expenses have not been restated, for periods during which the performance
information for a particular class is based upon the performance history of a
predecessor class, to reflect the ongoing expenses currently borne by the
particular class.
28
Non-Standardized Performance Results*
(includes sales charges)
With the current maximum sales charge of 4.50% for Class A shares, and the
currently applicable CDSC for Class B shares for each period length, reflected,
the figures for the same periods would be as follows:
Period Ended Total
August 31, 1999 Value
- ------------------------------------------- ----------
The Tax Free Income Fund:
A Shares $19,853
B Shares+ 19,788
The New York Tax Free Income Fund:
A Shares 18,688
B Shares+ 18,700
The California Intermediate Tax Free Fund 12,723
- ----------
* See the notes to the table captioned "Average Annual Total Return (excluding
sales charges)" above. The table above assumes an initial investment of $10,000
in a particular class of a Fund for the period from the Fund's commencement of
operations, although the particular class may have been introduced at a
subsequent date. As indicated above, performance information for each class
introduced after the commencement of operations of the related Fund is based on
the performance history of a predecessor class or classes, and historical
expenses have not been restated, for periods during which the performance
information for a particular class is based upon the performance history of a
predecessor class, to reflect the ongoing expenses currently borne by the
particular class.
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,to
the days listed above (other than Good Friday), the Funds are closed for
business on the following holidays: Martin Luther King Day, Columbus Day, and
Veteran's Day.
The Money Market Funds' portfolio securities are valued at their amortized
cost. Amortized cost valuation involves valuing an instrument at its cost and
thereafter accrediting discounts and amortizing premiums at a constant rate to
maturity. This method increases stability in valuation, but may result in
periods during which the stated value of a portfolio security is higher or
lower than the price a Fund would receive if the instrument were sold. Pursuant
to the rules of the Securities and Exchange Commission, the Board of Trustees
has established procedures to stabilize the net asset value of each Money
Market Fund at $1.00 per share. However, no assurance can be given that the
Money Market Funds will be able to do so on a continuous basis. These
procedures include a review of the extent of any deviation of net asset value
per share, based on available market rates (and appropriate substitutes which
reflect current market conditions), from the $1.00 amortized cost price per
share. If fluctuating interest rates cause the market value of a Money Market
Fund's portfolio to approach a deviation of more than 1/2 of 1% from the value
determined on the basis of amortized cost, the Board of Trustees will consider
what action, if any, should be initiated. Such action may include redemption of
shares in kind (as described in greater detail below), selling portfolio
securities prior to maturity, reducing or withholding dividends and utilizing a
net asset value per share as determined by using available market quotations.
The Money Market Funds have established procedures designed to ensure that
their portfolio securities meet their high quality criteria.
Bonds and other fixed income securities (other than short-term
obligations) in a Fund's portfolio are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the
29
Board of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Short-
term obligations which mature in 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Board of Trustees. Futures
and option contracts that are traded on commodities or securities exchanges are
normally valued at the settlement price on the exchange on which they are
traded. Portfolio securities (other than short-term obligations) for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in an Income Fund's portfolio is
determined on the basis of coupon interest accrued plus amortization of
discount (the difference between acquisition price and stated redemption price
at maturity) and premiums (the excess of purchase price over stated redemption
price at maturity). Interest income on short-term obligations is determined on
the basis of interest and discount accrued less amortization of premium.
PURCHASES, REDEMPTIONS AND EXCHANGES
The Fund has established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in the Prospectuses are not
available until a completed and signed account application has been received by
the Transfer Agent. Telephone transaction privileges are made available to
shareholders automatically upon opening an account unless the privilege is
declined in Section 6 of the Account Application. The Telephone Exchange
Privilege is not available if you were issued certificates for shares that
remain outstanding.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, a Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service
options chosen by the shareholder or joint shareholders in his or their latest
account application or other written request for services, including
purchasing, exchanging, or redeeming shares of such Fund and depositing and
withdrawing monies from the bank account specified in the Bank Account
Registration section of the shareholder's latest account application or as
otherwise properly specified to such Fund in writing.
Subject to compliance with applicable regulations, each Fund has reserved
the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
Investors in Class A shares may qualify for reduced initial sales charges
by signing a statement of intention (the "Statement"). This enables the
investor to aggregate purchases of Class A shares in the Fund with purchases of
Class A shares of any other Fund in the Trust (or if a Fund has only one class,
shares of such Fund), excluding shares of any Vista money market fund, during a
13-month period. The sales charge is based on the total amount to be invested
in Class A shares during the 13-month period. All Class A or other qualifying
shares of these funds currently owned by the investor will be credited as
purchases (at their current offering prices on the date the Statement is
signed) toward completion of the Statement. A 90-day back-dating period can be
used to include earlier purchases at the investor's cost. The 13-month period
would then begin on the date of the first purchase during the 90-day period. No
retroactive adjustment will be made if
30
purchases exceed the amount indicated in the Statement. A shareholder must
notify the Transfer Agent or Distributor whenever a purchase is being made
pursuant to a Statement.
The Statement is not a binding obligation on the investor to purchase the
full amount indicated; however, on the initial purchase, if required (or
subsequent purchases if necessary), 5% of the dollar amount specified in the
Statement will be held in escrow by the Transfer Agent in Class A shares (or if
a Fund has only one class and is subject to an initial sales charge, shares of
such Fund) registered in the shareholder's name in order to assure payment of
the proper sales charge. If total purchases pursuant to the Statement (less any
dispositions and exclusive of any distributions on such shares automatically
reinvested) are less than the amount specified, the investor will be requested
to remit to the Transfer Agent an amount equal to the difference between the
sales charge paid and the sales charge applicable to the aggregate purchases
actually made. If not remitted within 20 days after written request, an
appropriate number of escrowed shares will be redeemed in order to realize the
difference. This privilege is subject to modification or discontinuance at any
time with respect to all shares purchased thereunder. Reinvested dividend and
capital gain distributions are not counted toward satisfying the Statement.
Class A shares of a Fund may also be purchased by any person at a reduced
initial sales charge which is determined by (a) aggregating the dollar amount
of the new purchase and the greater of the purchaser's total (i) net asset
value or (ii) cost of any shares acquired and still held in the Fund, or any
other Vista fund excluding any Vista money market fund, and (b) applying the
initial sales charge applicable to such aggregate dollar value (the "Cumulative
Quantity Discount"). The privilege of the Cumulative Quality Discount is
subject to modification or discontinuance at any time with respect to all Class
A shares (or if a Fund has only one class and is subject to an initial sales
charge, shares of such Fund) purchased thereafter.
An individual who is a member of a qualified group (as hereinafter
defined) may also purchase Class A shares of a Fund (or if a Fund has only one
class and is subject to an initial sales charge, shares of such Fund) at the
reduced sales charge applicable to the group taken as a whole. The reduced
initial sales charge is based upon the aggregate dollar value of Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) previously purchased and still owned by the group plus the
securities currently being purchased and is determined as stated in the
preceding paragraph. In order to obtain such discount, the purchaser or
investment dealer must provide the Transfer Agent with sufficient information,
including the purchaser's total cost, at the time of purchase to permit
verification that the purchaser qualifies for a cumulative quantity discount,
and confirmation of the order is subject to such verification. Information
concerning the current initial sales charge applicable to a group may be
obtained by contacting the Transfer Agent.
A "qualified group" is one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Class A shares (or if a
Fund has only one class and is subject to an initial sales charge, shares of
such Fund) at a discount and (iii) satisfies uniform criteria which enables the
Distributor to realize economies of scale in its costs of distributing Class A
shares (or if a Fund has only one class and is subject to an initial sales
charge, shares of such Fund). A qualified group must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Fund and the members, must agree to include sales and other materials related
to the Fund in its publications and mailings to members at reduced or no cost
to the Distributor, and must seek to arrange for payroll deduction or other
bulk transmission of investments in the Fund. This privilege is subject to
modification or discontinuance at any time with respect to all Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) purchased thereafter.
Investors may be eligible to buy Class A shares at reduced sales charges.
One's investment representative or the Chase Vista Funds Service Center should
be consulted for details about Chase Vista's combined purchase privilege,
cumulative quantity discount, statement of intention, group sales plan,
employee benefit plans and other plans. Sales charges are waived if an investor
is using redemption proceeds received within the prior ninety days from
non-Chase Vista mutual funds to buy the shares, and on which he or she paid a
front-end or contingent deferred sales charge.
Some participant-directed employee benefit plans participate in a
"multi-fund" program which offers both Chase Vista and non-Chase Vista mutual
funds. The money that is invested in Chase Vista Funds may
31
be combined with the other mutual funds in the same program when determining
the plan's eligibility to buy Class A shares for purposes of the discount
privileges and programs described above.
No initial sales charge will apply to the purchase of a Fund's Class A
shares if (i) one is investing proceeds from a qualified retirement plan where
a portion of the plan was invested in the Chase Vista Funds, (ii) one is
investing through any qualified retirement plan with 50 or more participants or
(iii) the investor is a participant in certain qualified retirement plans and
is investing (or reinvesting) the proceeds from the repayment of a plan loan
made to him or her.
Purchases of a Fund's Class A shares may be made with no initial sales
charge through an investment adviser or financial planner that charges a fee
for its services.
Purchases of a Fund's Class A shares may be made with no initial sales
charge (i) by an investment adviser, broker or financial planner, provided
arrangements are preapproved and purchases are placed through an omnibus
account with the Fund or (ii) by clients of such investment adviser or
financial planner who place trades for their own accounts, if such accounts are
linked to a master account of such investment adviser or financial planner on
the books and records of the broker or agent. Such purchases may also be made
for retirement and deferred compensation plans and trusts used to fund those
plans.
Purchases of a Fund's Class A shares may be made with no initial sales
charge in accounts opened by a bank, trust company or thrift institution which
is acting as a fiduciary exercising investment discretion, provided that
appropriate notification of such fiduciary relationship is reported at the time
of the investment to the Fund, the Fund's distributor or the Chase Vista Funds
Service Center.
A Fund may sell Class A shares without an initial sales charge to the
current and retired Trustees (and their immediate families), current and
retired employees (and their immediate families) of Chase, the Fund's
distributor and transfer agent or any affiliates or subsidiaries thereof,
registered representatives and other employees (and their immediate families)
of broker-dealers having selected dealer agreements with the Fund's
distributor, employees (and their immediate families) of financial institutions
having selected dealer agreements with the Fund's distributor (or otherwise
having an arrangement with a broker-dealer or financial institution with
respect to sales of Chase Vista Fund shares) and financial institution trust
departments investing an aggregate of $1 million or more in the Chase Vista
Funds.
Shareholders of record of any Chase Vista fund as of November 30, 1990 and
certain immediate family members may purchase a Fund's Class A shares with no
initial sales charge for as long as they continue to own Class A shares of any
Chase Vista fund, provided there is no change in account registration.
Shareholders of other Chase Vista Funds may be entitled to exchange their
shares for, or reinvest distributions from their funds in, shares of the Fund
at net asset value.
The Funds reserve the right to change any of these policies at any time
and may reject any request to purchase shares at a reduced sales charge.
Investors may incur a fee if they effect transactions through a broker or
agent.
Reinstatement Privilege. Upon written request, Class A shareholders of the
Tax Free Income Fund, the New York Tax Free Income Fund, as well as all
shareholders of the California Intermediate Tax Free Fund, have a one time
privilege of reinstating their investment in the Fund at net asset value next
determined subject to written request within 90 calendar days of the
redemption. The reinstatement request must be accompanied by payment for the
shares (not in excess of the redemption), and shares will be purchased at the
next determined net asset value. Class B shareholders of the Prime Money Market
Fund, Tax Free Income Fund and the New York Tax Free Income Fund who have
redeemed their shares and paid a CDSC with such redemption may purchase Class A
shares with no initial sales charge (in an amount not in excess of their
redemption proceeds) if the purchase occurs within 90 days of the redemption of
the Class B (or C) shares.
32
Under the Exchange Privilege, shares may be exchanged for shares of
another fund only if shares of the fund exchanged into are registered in the
state where the exchange is to be made. Shares of a Fund may only be exchanged
into another fund if the account registrations are identical. With respect to
exchanges from any Vista money market fund, shareholders must have acquired
their shares in such money market fund by exchange from one of the Vista
non-money market funds or the exchange will be done at relative net asset value
plus the appropriate sales charge. Any such exchange may create a gain or loss
to be recognized for federal income tax purposes. Normally, shares of the fund
to be acquired are purchased on the redemption date, but such purchase may be
delayed by either fund for up to five business days if a fund determines that
it would be disadvantaged by an immediate transfer of the proceeds.
The contingent deferred sales charge for Class B shares will be waived for
certain exchanges and for redemptions in connection with a Fund's systematic
withdrawal plan, subject to the conditions described in the Prospectuses. In
addition, subject to confirmation of a shareholder's status, the contingent
deferred sales charge will be waived for: (i) a total or partial redemption
made within one year of the shareholder's death or initial qualification for
Social Security disability payments; (ii) a redemption in connection with a
Minimum Required Distribution form an IRA, Keogh or custodial account under
section 403(b) of the Internal Revenue Code or a mandatory distribution from a
qualified plan; (iii) redemptions made from an IRA, Keogh or custodial account
under section 403(b) of the Internal Revenue Code through an established
Systematic Redemption Plan; (iv) a redemption resulting from an
over-contribution to an IRA; (v) distributions from a qualified plan upon
retirement; and (vi) an involuntary redemption of an account balance under
$500. Up to 12% of the value of Class B shares subject to a systematic
withdrawal plan may also be redeemed each year without a CDSC, provided that
the Class B account had a minimum balance of $20,000 at the time the systematic
withdrawal plan was established.
Class B shares automatically convert to Class A shares (and thus are then
subject to the lower expenses borne by Class A shares) after a period of time
specified below has elapsed since the date of purchase (the "CDSC Period"),
together with the pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares attributable to the
Class B shares then converting. The conversion of Class B shares purchased on
or after May 1, 1996, will be effected at the relative net asset values per
share of the two classes on the first business day of the month following the
eighth anniversary of the original purchase. The conversion of Class B shares
purchased prior to May 1, 1996, will be effected at the relative net asset
values per share of the two classes on the first business day of the month
following the seventh anniversary of the original purchase. If any exchanges of
Class B shares during the CDSC Period occurred, the holding period for the
shares exchanged will be counted toward the CDSC Period. At the time of the
conversion the net asset value per share of the Class A shares may be higher or
lower than the net asset value per share of the Class B shares; as a result,
depending on the relative net asset values per share, a shareholder may receive
fewer or more Class A shares than the number of Class B shares converted.
A Fund may require signature guarantees for changes that shareholders
request be made in Fund records with respect to their accounts, including but
not limited to, changes in bank accounts, for any written requests for
additional account services made after a shareholder has submitted an initial
account application to the Fund, and in certain other circumstances described
in the Prospectuses. A Fund may also refuse to accept or carry out any
transaction that does not satisfy any restrictions then in effect. A signature
guarantee may be obtained from a bank, trust company, broker-dealer or other
member of a national securities exchange. Please note that a notary public
cannot provide a signature guarantee.
33
DISTRIBUTIONS; TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the respective Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussions here and in each Fund's Prospectus are not intended as substitutes
for careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") and
to meet all other requirements that are necessary for it to be relieved of
federal taxes on income and gains it distributes to shareholders. Net
investment income for each Fund consists of all interest accrued and discounts
earned, less amortization of any market premium on the portfolio assets of the
Fund and the accrued expenses of the Fund. As a regulated investment company,
each Fund is not subject to federal income tax on the portion of its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, without regard to the deduction for dividends paid) and
net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss) that it distributes to shareholders, provided that it
distributes at least 90% of its net investment income and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Because certain Funds invest all of their assets
in Portfolios which will be classified as partnerships for federal income tax
purposes, such Funds will be deemed to own a proportionate share of the income
of the Portfolio into which each contributes all of its assets for purposes of
determining whether such Funds satisfy the Distribution Requirement and the
other requirements necessary to qualify as a regulated investment company
(e.g., Income Requirement (hereinafter defined), etc.).
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies (to the
extent such currency gains are directly related to the regulated investment
company's principal business of investing in stock or securities) and other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement").
In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the
value of its total assets may be invested in the securities of any one issuer
(other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses.
Each non-Money Market Fund may engage in hedging or derivatives
transactions involving foreign currencies, forward contracts, options and
futures contracts (including options, futures and forward contracts on foreign
currencies) and short sales. See "Additional Policies Regarding Derivative and
Related Transactions." Such transactions will be subject to special provisions
of the Code that, among other things, may affect the character of gains and
losses realized by the Fund (that is, may affect whether gains or losses are
ordinary or capital), accelerate recognition of income of the Fund and defer
recognition of certain of the Fund's losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. In addition,
these provisions (1) will require a Fund to "mark-to-market" certain types of
positions in its portfolio (that is, treat them as if they were closed out) and
(2) may cause a Fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
Distribution Requirement and avoid the 4%
34
excise tax (described below). Each Fund intends to monitor its transactions,
will make the appropriate tax elections and will make the appropriate entries
in its books and records when it acquires any option, futures contract, forward
contract or hedged investment in order to mitigage the effect of these rules.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98%
of ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year
election"))(Tax-exempt interest on municipal obligations is not subject to the
excise tax). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its net investment
income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they will not qualify for the 70% dividends-received deduction
for corporations only to the extent described below. Dividends paid on Class A,
Class B and Class C shares are calculated at the same time. In general,
dividends on Class B and Class C shares are expected to be lower than those on
Class A shares due to the higher distribution expenses borne by the Class B and
Class C shares. Dividends may also differ between classes as a result of
differences in other class specific expenses.
If a check representing a Fund distribution is not cashed by a shareholder
within a specified period, the Chase Vista Service Center will notify the
shareholder that he or she has the option of requesting another check or
reinvesting the distribution in the Fund or in an established account of
another Chase Vista Fund. If the Chase Vista Service Center does not receive
the shareholder's election, the distribution will be reinvested in the Fund.
Similarly, if the Fund or the Chase Vista Service Center sends the shareholder
correspondence returned as "undeliverable," distributions will automatically be
reinvested in the Fund.
A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
Under recently enacted legislation, the maximum rate of tax on long-term
capital gains of individuals will generally be reduced from 28% to 20% (10% for
gains otherwise taxed at 15%) for long-term capital gains realized after July
28, 1997 with respect to capital assets held for more than 18 months.
Additionally, begin-
35
ning after December 31, 2000, the maximum tax rate for capital assets with a
holding period beginning after that date and held for more than five years will
be 18%. Under a literal reading of the legislation, capital gain dividends paid
by a regulated investment company would not appear eligible for the reduced
capital gain rates. However, the legislation authorizes the Treasury Department
to promulgate regulations that would apply the new rates to capital gain
dividends paid by a regulated investment company.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Ordinary income dividends paid by a Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations to the extent of the amount of qualifying dividends received by a
Fund from domestic corporations for the taxable year. A dividend received by a
Fund will not be treated as a qualifying dividend (1) if it has been received
with respect to any share of stock that the Fund has held for less than 46 days
(91 days in the case of certain preferred stock) during the 90 day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend (during the 180 day period
beginning 90 days before such date in the case of certain preferred stock)
under the Rules of the Code section 246(c)(3) and (4); (2) to the extent that a
fund is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of a Fund. In the case where a Fund
invests all of its assets in a Portfolio and the Fund satisfies the holding
period rules pursuant to Code Section 256(C) as to its interest in the
Portfolio, a corporate shareholder which satisfies the foregoing requirements
with respect to its shares of the Fund should receive the dividends-received
deduction.
For purposes of the Corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is otherwise disallowed in determining a corporation's AMT.
However, corporate shareholders will generally be required to take the full
amount of any dividend received from a Fund into account (without a
dividends-received deduction) in determining its adjusted current earnings.
Each Tax Free Fund intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax Free
Fund's taxable year at least 50% of the its total assets consists of tax-exempt
municipal obligations. Distributions from a Tax Free Fund will constitute
exempt-interest dividends to the extent of its tax-exempt interest income (net
of expenses and amortized bond premium). Exempt-interest dividends distributed
to shareholders of a Tax Free Fund are excluded from gross income for federal
income tax purposes. However, shareholders required to file a federal income
tax return will be required to report the receipt of exempt-interest dividends
on their returns. Moreover, while exempt-interest dividends are excluded from
gross income for federal income tax purposes, they may be subject to
alternative minimum tax ("AMT") in certain circumstances and may have other
collateral tax consequences as discussed below. Distributions by a Tax Free
Fund of any investment company taxable income or of any net capital gain will
be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount. In
addition, under the Superfund Amendments and Reauthorization Act of 1986, a tax
is imposed for taxable years beginning
36
after 1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and
the AMT net operating loss deduction) over $2 million. Exempt-interest
dividends derived from certain "private activity" municipal obligations issued
after August 7, 1986 will generally constitute an item of tax preference
includable in AMTI for both corporate and noncorporate taxpayers. In addition,
exempt-interest dividends derived from all municipal obligations, regardless of
the date of issue, must be included in adjusted current earnings, which are
used in computing an additional corporate preference item (i.e., 75% of the
excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must
be included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of a Tax Free Fund is denied a deduction for
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund. Moreover, a shareholder who is (or is related to) a "substantial
user" of a facility financed by industrial development bonds held by a Tax Free
Fund will likely be subject to tax on dividends paid by the Tax Free Fund which
are derived from interest on such bonds. Receipt of exempt-interest dividends
may result in other collateral federal income tax consequences to certain
taxpayers, including financial institutions, property and casualty insurance
companies and foreign corporations engaged in a trade or business in the United
States. Prospective investors should consult their own tax advisers as to such
consequences.
Net investment income that may be received by certain of the Funds from
sources within foreign countries may be subject to foreign taxes withheld at
the source. The United States has entered into tax treaties with many foreign
countries which entitle any such Fund to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of any such Fund's assets to be
invested in various countries is not known.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis
in his shares; any excess will be treated as gain from the sale of his shares,
as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date. In addition, if the net asset
value at the time a shareholder purchases shares of a Fund reflects
undistributed net investment income or recognized capital gain net income, or
unrealized appreciation in the value of the assets of the Fund, distributions
of such amounts will be taxable to the shareholder in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation
or other "exempt recipient."
37
Sale or Redemption of Shares
Each Money Market Fund seeks to maintain a stable net asset value of $1.00
per share; however, there can be no assurance that a Money Market Fund will do
this. In such a case and any case involving the Income Funds, a shareholder
will recognize gain or loss on the sale or redemption of shares of a Fund in an
amount equal to the difference between the proceeds of the sale or redemption
and the shareholder's adjusted tax basis in the shares. All or a portion of any
loss so recognized may be disallowed if the shareholder purchases other shares
of the Fund within 30 days before or after the sale or redemption. In general,
any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. However, any capital loss arising from the sale or redemption of shares
held for six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, paid to a foreign shareholder
from net investment income will be subject to U.S. withholding tax at the rate
of 30% (or lower treaty rate) upon the gross amount of the dividend. Such a
foreign shareholder would generally be exempt from U.S. federal income tax on
gains realized on the sale of shares of the Fund and capital gain dividends and
amounts retained by the Fund that are designated as undistributed capital
gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
State and Local Tax Matters
Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding
taxes. Most states provide that a RIC may pass through (without restriction) to
its shareholders state and local income tax exemptions available to direct
owners of certain types of U.S. government securities (such as U.S. Treasury
obligations). Thus, for residents of these states, distributions derived from a
Fund's investment in certain types of U.S. government securities should be free
from state and local income taxes to the extent that the interest income from
such investments would have been exempt from state and local income taxes if
such securities had been held directly by the respective shareholders
themselves. Certain states, however, do not allow a RIC to pass through to its
shareholders the state and local income tax exemptions available to direct
owners of certain types of U.S. government securities unless the RIC holds at
least a required amount of U.S. government securities. Accordingly, for
residents of these states, distributions derived from a
38
Fund's investment in certain types of U.S. government securities may not be
entitled to the exemptions from state and local income taxes that would be
available if the shareholders had purchased U.S. government securities
directly. Shareholders' dividends attributable to a Fund's income from
repurchase agreements generally are subject to state and local income taxes,
although states and regulations vary in their treatment of such income. The
exemption from state and local income taxes does not preclude states from
asserting other taxes on the ownership of U.S. government securities. To the
extent that a Fund invests to a substantial degree in U.S. government
securities which are subject to favorable state and local tax treatment,
shareholders of such Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
Rules of state and local taxation of ordinary income dividends and capital gain
dividends from RICs may differ from the rules for U.S. federal income taxation
in other respects. Shareholders are urged to consult their tax advisers as to
the consequences of these and other state and local tax rules affecting
investment in a Fund.
Effect of Future Legislation
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in
effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
MANAGEMENT OF THE TRUST AND THE FUNDS
Trustees and Officers
The Trustees and of the Trust officers and their principal occupations for
at least the past five years are set forth below. Their titles may have varied
during that period.
Fergus Reid, III--Chairman of the Trust. Chairman and Chief Executive
Officer, Lumelite Corporation, since September 1985; Trustee, Morgan Stanley
Funds. Age: 67. Address: 202 June Road, Stamford, CT 06903.
*H. Richard Vartabedian--Trustee and President of the Trust. Investment
Management Consultant; formerly, Senior Investment Officer, Division Executive
of the Investment Management Division of The Chase Manhattan Bank, N.A.,
1980-1991. Age: 63. Address: P.O. Box 296, Beach Road, Hendrick's Head,
Southport, ME 04576.
William J. Armstrong--Trustee. Vice President and Treasurer,
Ingersoll-Rand Company. Age: 58. Address: 49 Aspen Way, Upper Saddle River, NJ
07458.
John R.H. Blum--Trustee. Attorney in private practice; formerly a Partner
in the law firm of Richards, O'Neil & Allegaert; Commissioner of Agriculture
State of Connecticut, 1992-1995. Age: 70. Address: 322 Main Street,
Lakeville,CT 06039.
Stuart W. Cragin, Jr.--Trustee. Retired; formerly President, Fairfield
Testing Laboratory, Inc. He has previously served in a variety of marketing,
manufacturing and general management positions with Union Camp Corp., Trinity
Paper & Plastics Corp., and Conover Industries. Age: 66. Address: 108 Valley
Road, Cos Cob, CT 06807.
Roland R. Eppley, Jr.--Trustee. Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.; formerly Director of The Hanover Funds, Inc.
Age: 67. Address: 105 Coventry Place, Palm Beach Gardens, FL 33418.
39
Joseph J. Harkins--Trustee. Retired; Commercial Sector Executive and
Executive Vice President of The Chase Manhattan Bank, N.A. from 1985 through
1989. He has been employed by Chase in numerous capacities and offices from
1954 through 1989. Director of Blessings Corporation, Jefferson Insurance
Company of New York, Monticello Insurance Company and National. Age: 68.
Address: 257 Plantation Circle South, Ponte Vedra Beach, FL 32082.
*Sarah E. Jones--Trustee. President and Chief Operating Officer of Chase
Mutual Funds Corp.; formerly Managing Director for the Global Asset Management
and Private Banking Division of the Chase Manhattan Bank. Age: 47. Address: One
Chase Manhattan Plaza, Third Floor, New York, New York 10081.
W.D. MacCallan--Trustee. Director of The Adams Express Co. and Petroleum &
Resources Corp.; formerly Chairman of the Board and Chief Executive Officer of
The Adams Express Co. and Petroleum & Resources Corp.; Director of The Hanover
Funds, Inc. and The Hanover Investment Funds, Inc. Age: 72. Address: 624 East
45th Street, Savannah, GA 31405.
W. Perry Neff--Trustee. Independent Financial Consultant; Director of
North America Life Assurance Co., Petroleum & Resources Corp. and The Adams
Express Co.; formerly Director and Chairman of The Hanover Funds, Inc.;
formerly Director, Chairman and President of The Hanover Investment Funds, Inc.
Age: 72. Address: RR 1 Box 102, Weston, VT 05181.
*Leonard M. Spalding, Jr.--Trustee. Chief Executive Officer of Chase
Mutual Funds Corp.; formerly President and Chief Executive Officer of Vista
Capital Management; and formerly Chief Investment Executive of the Chase
Manhattan Private Bank. Age: 64. Address: One Chase Manhattan Plaza, Third
Floor, New York, New York 10081.
Richard E. Ten Haken--Trustee; Chairman of the Audit Committee. Formerly
District Superintendent of Schools, Monroe No. 2 and Orleans Counties, New
York; Chairman of the Board and President, New York State Teachers' Retirement
System. Age: 65. Address: 4 Barnfield Road, Pittsford, NY 14534.
Irving L. Thode--Trustee. Retired; formerly Vice President of Quotron
Systems. He has previously served in a number of executive positions with
Control Data Corp., including President of its Latin American Operations, and
General Manager of its Data Services business. Age: 68. Address: 80 Perkins
Road, Greenwich, CT 06830.
Martin R. Dean--Treasurer. Associate Director, Accounting Services, BISYS
Fund Services; formerly Senior Manager, KPMG Peat Marwick (1987-1994). Age: 34.
Address: 3435 Stelzer Road, Columbus, OH 43219.
Lisa Hurley--Secretary. Senior Vice President and General Counsel, BISYS
Fund Services; formerly Counsel to Moore Capital Management and General Counsel
to Global Asset Management and Northstar Investments Management. Age: 44.
Address: 90 Park Avenue, New York, NY 10016.
Vicky M. Hayes--Assistant Secretary. Vice President and Global Marketing
Manager, Vista Fund Distributors, Inc.; formerly Assistant Vice President,
Alliance Capital Management and held various positions with J. & W. Seligman &
Co. Age: 37. Address: One Chase Manhattan Plaza, 3rd Fl., New York, NY 10081.
Alaina Metz--Assistant Secretary. Chief Administrative Officer, BISYS Fund
Services; formerly Supervisor, Blue Sky Department, Alliance Capital Management
L.P. Age: 31. Address: 3435 Stelzer Road, Columbus, OH 43219.
40
- ----------
*Asterisks indicate those Trustees that are "interested persons" (as defined in
the 1940 Act). Mr. Reid is not an interested person of the Trust's investment
advisers or principal underwriter, but may be deemed an interested person of
the Trust solely by reason of being chairman of the Trust.
The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Armstrong,
Eppley, MacCallan and Thode. The function of the Audit Committee is to
recommend independent auditors and monitor accounting and financial matters.
The Audit Committee met two times during the fiscal period ended August 31,
1999.
The Board of Trustees of the Trust has established an Investment
Committee. The members of the Investment Committee are Messrs. Vartabedian
(Chairman), Reid and Spalding. The function of the Investment Committee is to
review the investment management process of the Trust.
The Trustees and officers of the Trust appearing in the table above also
serve in the same capacities with respect to Mutual Fund Group, Mutual Fund
Variable Annuity Trust, Mutual Fund Select Group, Mutual Fund Select Trust,
Capital Growth Portfolio, Growth and Income Portfolio, and International Equity
Portfolio (these entities, together with the Trust, are referred to below as
the "Vista Funds").
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisers is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the advisers. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended August 31, 1999 for each Trustee of the Trust:
U.S. New York California
Government Cash Tax Free Prime Tax Free Tax Free
Money Management Money Money Money Money
Market Fund Fund Market Fund Market Fund Market Fund Market Fund
--------------- --------------- ------------- --------------- ------------- ------------
Fergus Reid, III, Trustee $24,618.96 $21,752.43 $4,440.35 $24,526.38 $4,810.42 $153.42
H. Richard Vartabedian, Trustee 18,468.53 16,311.64 3,332.05 18,399.28 3,609.71 115.76
William J. Armstrong, Trustee 12,312.35 10,874.42 2,221.37 12,266.19 2,406.47 77.17
John R.H. Blum, Trustee 13,184.05 11,803.65 2,388.94 13,342.51 2,582.09 79.87
Stuart W. Cragin, Jr., Trustee 12,694.66 11,281.96 2,294.86 12,738.21 2,483.49 78.97
Roland R. Eppley, Jr., Trustee 12,312.35 10,874.42 2,221.37 12,266.19 2,406.47 77.17
Joseph J. Harkins, Trustee 12,694.66 11,281.96 2,294.86 12,738.21 2,483.49 78.97
Sarah E. Jones, Trustee -- -- -- -- -- --
W.D. MacCallan, Trustee 12,312.35 10,874.43 2,221.36 12,266.24 2,406.47 77.17
W. Perry Neff, Trustee 12,329.23 10,850.55 2,219.50 12,261.73 2,404.79 76.88
Leonard M. Spalding, Jr., Trustee 12,312.35 10,874.42 2,221.37 12,266.19 2,406.47 77.17
Richard E. Ten Haken, Trustee 12,610.55 11,192.49 2,278.70 12,634.58 2,466.54 77.17
Irving L. Thode, Trustee 12,312.35 10,874.42 2,221.37 12,266.19 2,406.47 77.17
41
100% U.S.
Treasury California Treasury
Federal Plus New York Tax Intermediate Securities
Money Money Tax Free Free Tax Free Money Market
Market Fund Market Fund Income Fund Income Fund Fund Fund
------------- ------------- ------------- ------------- -------------- ---------------
Fergus Reid, III, Trustee $3,383.50 $9,305.45 $422.70 $253.65 $81.89 $15,369.70
H. Richard Vartabedian, Trustee 2,538.89 6,981.47 317.27 190.34 61.78 11,531.38
William J. Armstrong, Trustee 1,692.59 4,654.31 211.52 126.89 41.19 7,687.59
John R.H. Blum, Trustee 1,826.86 5,002.88 221.08 132.69 43.07 8,250.93
Stuart W. Cragin, Jr. Trustee 1,751.48 4,807.18 217.90 130.76 42.45 7,934.66
Roland R. Eppley, Jr. Trustee 1,692.59 4,654.31 211.52 126.89 41.19 7,687.59
Joseph J. Harkins, Trustee 1,751.48 4,807.18 217.90 130.76 42.45 7,934.66
Sarah E. Jones, Trustee -- -- -- -- -- --
W.D. MacCallan, Trustee 1,692.59 4,654.31 211.51 126.90 41.19 7,687.59
W. Perry Neff, Trustee 1,691.62 4,645.90 212.11 127.02 41.27 7,708.01
Leonard M. Spalding, Jr., Trustee 1,692.59 4,654.31 211.52 126.89 41.19 7,687.59
Richard E. Ten Haken, Trustee 1,738.57 4,773.63 211.50 126.95 41.19 7,880.32
Irving L. Thode, Trustee 1,692.59 4,654.31 211.52 126.89 41.19 7,687.59
Pension or Total
Retirement Compensation
Benefits Accrued From
as Fund Expenses (1) "Fund Complex" (2)
---------------------- -------------------
Fergus Reid, III, Trustee $108,490 $160,000
H. Richard Vartabedian, Trustee 69,858 120,000
William J. Armstrong, Trustee 35,695 80,000
John R.H. Blum, Trustee 70,084 87,500
Stuart W. Cragin, Jr., Trustee 42,785 82,500
Roland R. Eppley, Jr., Trustee 52,102 80,000
Joseph J. Harkins, Trustee 60,009 82,500
Sarah E. Jones, Trustee -- --
W.D. MacCallan, Trustee 73,291 80,000
W. Perry Neff, Trustee 70,365 80,000
Leonard M. Spalding, Jr., Trustee 25,509 80,000
Richard E. Ten Haken, Trustee 55,162 83,750
Irving L. Thode, Trustee 50,414 80,000
- ----------
(1) Data reflects total benefits accrued by Mutual Fund Group, Mutual Fund
Select Group, Capital Growth Portfolio, Growth and Income Portfolio and
International Equity Portfolio for the fiscal year ended October 31, 1999
and by the Trust, Mutual Fund Select Trust, and Mutual Fund Variable
Annuity Trust for the fiscal year ended August 31, 1999.
(2) Data reflects total estimated compensation earned during the period January
1, 1999 to December 31, 1999 for service as a Trustee to the Trust, Mutual
Fund Group, Mutual Fund Variable Annuity Trust, Mutual Select Group, Mutual
Fund Select Trust, Capital Growth Portfolio, Growth and Income Portfolio
and International Equity Portfolio.
As of October 31, 1999, the Trustees and officers as a group owned less
than 1% of each Fund's outstanding shares, all of which were acquired for
investment purposes. For the fiscal year ended August 31, 1999, the Trust paid
its disinterested Trustees fees and expenses for all the meetings of the Board
and any committees attended in the aggregate amount of approximately $801,520
which amount was then apportioned among the Funds comprising the Trust.
42
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not
an employee of any of the Funds, the advisers, administrator or distributor or
any of their affiliates) may be entitled to certain benefits upon retirement
from the Board of Trustees. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Trustee has attained age 65 and has completed at
least five years of continuous service with one or more of the investment
companies advised by the adviser (collectively, the "Covered Funds"). Each
Eligible Trustee is entitled to receive from the Covered Funds an annual
benefit commencing on the first day of the calendar quarter coincident with or
following his date of retirement equal to the sum of (i) 8% of the highest
annual compensation received from the Covered Funds multiplied by the number of
such Trustee's years of service (not in excess of 10 years) completed with
respect to any of the Covered Funds and (ii) 4% of the highest annual
compensation received from the Covered Funds for each year of Service in excess
of 10 years, provided that no Trustee's annual benefit will exceed the highest
annual compensation received by that Trustee from the Covered Funds. Such
benefit is payable to each eligible Trustee in monthly installments for the
life of the Trustee.
Set forth below in the table are the estimated annual benefits payable to
an eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of October 31, 1999, the estimated credited years
of service for Messrs.Reid, Vartabedian, Armstrong, Blum, Cragin, Eppley,
Harkins, Neff, MacCallan, Spalding, TenHaken, Thode and Ms. Jones are 15, 7,
12, 15, 6, 10, 9, 9, 15, 1, 14, 6 and 0, respectively.
Highest Annual Compensation Paid by All Vista Funds
---------------------------------------------------------------------
$80,000 $100,000 $120,000 $140,000 $160,000
Years of
Service Estimated Annual Benefits Upon Retirement
------- ---------------------------------------------------------------------
16 $80,000 $100,000 $120,000 $140,000 $160,000
14 76,800 96,000 115,200 134,400 153,600
12 70,400 88,000 105,600 123,200 140,800
10 64,000 80,000 96,000 112,000 128,000
8 51,200 64,000 76,800 89,600 102,400
6 38,400 48,000 57,600 67,200 76,800
4 25,600 32,000 38,400 44,800 51,200
Effective August 21, 1995, the Trustees instituted a Deferred Compensation
Plan for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which
each Trustee (who is not an employee of any of the Funds, the advisers,
administrator or distributor or any of their affiliates) may enter into
agreements with the Funds whereby payment of the Trustee's fees are deferred
until the payment date elected by the Trustee (or the Trustee's termination of
service). The deferred amounts are invested in shares of Vista funds selected
by the Trustee. The deferred amounts are paid out in a lump sum or over a
period of several years as elected by the Trustee at the time of deferral. If a
deferring Trustee dies prior to the distribution of amounts held in the
deferral account, the balance of the deferral account will be distributed to
the Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death.
Messrs. Eppley, Ten Haken, Thode and Vartabedian have each executed a
deferred compensation agreement for the 1999 calendar year and as of October
31, 1999 they had contributed $52,400, $27,700, $58,950, and $98,250,
respectively.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or
with respect to any matter unless it is finally adjudicated that they did not
act in good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such
43
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a reasonable
determination based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent
counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Adviser and Sub-Advisers
Chase acts as investment adviser to the Funds pursuant to an Investment
Advisory Agreement, dated as of May 6, 1996 (the "Advisory Agreement"). Subject
to such policies as the Board of Trustees may determine, Chase is responsible
for investment decisions for the Funds. Pursuant to the terms of the Advisory
Agreement, Chase provides the Funds with such investment advice and supervision
as it deems necessary for the proper supervision of the Funds' investments. The
advisers continuously provide investment programs and determine from time to
time what securities shall be purchased, sold or exchanged and what portion of
the Funds' assets shall be held uninvested. The advisers to the Funds furnish,
at their own expense, all services, facilities and personnel necessary in
connection with managing the investments and effecting portfolio transactions
for the Funds. The Advisory Agreement for the Funds will continue in effect
from year to year only if such continuance is specifically approved at least
annually by the Board of Trustees or by vote of a majority of a Fund's
outstanding voting securities and by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on such Advisory Agreement.
Under the Advisory Agreement, the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Funds
with greater opportunities and flexibility in accessing investment
expertise.
Pursuant to the terms of the Advisory Agreement and the sub-advisers'
agreements with the adviser, the adviser and sub-advisers are permitted to
render services to others. Each advisory agreement is terminable without
penalty by the Trust on behalf of the Funds on not more than 60 days', nor less
than 30 days', written notice when authorized either by a majority vote of a
Fund's shareholders or by a vote of a majority of the Board of Trustees of the
Trust, or by the adviser or sub-adviser on not more than 60 days', nor less
than 30 days', written notice, and will automatically terminate in the event of
its "assignment" (as defined in the 1940 Act). The advisory agreements provide
that the adviser or sub-adviser under such agreement shall not be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio
transactions for the respective Fund, except for wilful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder.
In the event the operating expenses of the Funds, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to the Funds imposed by the securities laws or regulations
thereunder of any state in which the shares of the Funds are qualified for
sale, as such limitations may be raised or lowered from time to time, the
adviser shall reduce its advisory fee (which fee is described below) to the
extent of its share of such excess expenses. The amount of any such reduction
to be borne by the adviser shall be deducted from the monthly advisory fee
otherwise payable with respect to the Funds during such fiscal year; and if
such amounts should exceed the monthly fee, the adviser shall pay to a Fund its
share of such excess expenses no later than the last day of the first month of
the next succeeding fiscal year.
Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that Chase may render services through its own employees or
44
the employees of one or more affiliated companies that are qualified to act as
an investment adviser of the Fund and are under the common control of Chase as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Chase.
Chase, on behalf of the Funds (other than the Cash Management Fund and the
Tax Free Money Market Fund), has entered into an investment sub-advisory
agreement dated as of May 6, 1996 with Chase Asset Management, Inc. ("CAM").
Chase Bank of Texas, National Association ("Chase Texas") is the sub-investment
adviser to the Cash Management Fund and the Tax Free Money Market Fund pursuant
to a separate sub-investment advisory agreement between Chase and TCB dated as
of May 6, 1996. With respect to the day- to-day management of the Funds, under
the sub-advisory agreements, the sub-advisers make decisions concerning, and
place all orders for, purchases and sales of securities and help maintain the
records relating to such purchases and sales. The sub-advisers may, in their
discretion, provide such services through their own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of Chase; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the sub-adviser. This arrangement will not result in the
payment of additional fees by the Funds.
Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range of
banking and investment services to customers throughout the United States and
around the world. Also included among the Chase accounts are commingled trust
funds and a broad spectrum of individual trust and investment management
portfolios. These accounts have varying investment objectives. Chase is located
at 270 Park Avenue, New York, New York 10017.
CAM is a wholly-owned operating subsidiary of the Adviser. CAM is
registered with the Securities and Exchange Commission as an investment adviser
and provides discretionary investment advisory services to institutional
clients, and the same individuals who serve as portfolio managers for CAM also
serve as portfolio managers for Chase. CAM is located at 1211 Avenue of the
Americas, New York, New York 10036.
Chase Texas has been in the investment counselling business since 1987 and
is ultimately controlled and owned by Chase Manhattan Corporation. Chase Texas
renders investment advice to a wide variety of corporations, pension plans,
foundations, trusts and individuals. Chase Texas is located at 600 Travis,
Houston, Texas 77002.
In consideration of the services provided by the adviser pursuant to the
Advisory Agreement, the adviser is entitled to receive from each Fund an
investment advisory fee computed daily and paid monthly based on a rate equal
to a percentage of such Fund's average daily net assets specified in the
relevant Prospectuses. However, the adviser may voluntarily agree to waive a
portion of the fees payable to it on a month-to-month basis. For its services
under its sub-advisory agreement, CAM (or Chase Texas in the case of the Cash
Management Fund and the Tax Free Money Market Fund) will be entitled to receive
with respect to each such Fund, such compensation, payable by the adviser out
of its advisory fee, as is described in the relevent Prospectuses.
The contractual Advisory and Sub-Advisory fees for the Funds are as
follows:
Fund Advisory Fee Sub-Advisory Fee
- -------------------- -------------- -----------------
Money Market Funds 0.10% 0.03%
Income Funds 0.30% 0.15%
45
For the fiscal years ended August 31, 1997, 1998 and 1999, respectively,
Chase was paid or accrued the following investment advisory fees with respect
to the following Funds, and voluntarily waived the amounts in parentheses
following such fees with respect to each such period:
Fiscal Year- Fiscal Year- Fiscal Year-
ended ended ended
Fund 8/31/97 8/31/98 8/31/99
- -------------------------------- ------------------- -------------- -------------
Tax Free Money Market Fund
Paid or Accrued $ 898,976 $1,120,701 $1,317,375
Waived none none --
New York Tax Free Money
Market Fund
Paid or Accrued 895,216 1,106,906 1,445,267
Waived -- -- --
Tax Free Income Fund
Paid or Accrued 248,543 225,980 219,766
Waived (124,746) (128,813) (167,402)
New York Tax Free Income Fund
Paid or Accrued 320,945 322,126 364,260
Waived (40,479) (79,555) (69,793)
Federal Money Market Fund
Paid or Accrued 782,294 793,764 1,034,981
Waived -- -- --
Treasury Plus Money Market Fund
Paid or Accrued 1,983,716 2,384,985 2,850,010
Waived -- -- --
Prime Money Market Fund
Paid or Accrued 1,595,402 3,711,416 7,769,214
Waived -- -- --
California Intermediate
Tax Fee Fund
Paid or Accrued 79,332 72,053 71,188
Waived (66,295) (69,045) (71,188)
California Tax Free
Money Market Fund
Paid or Accrued 44,776 49,823 46,278
Waived (31,249) (47,823) (46,278)
U.S. Government
Money Market Fund
Paid or Accrued 5,173,975 6,498,006 7,265,199
Waived -- -- --
100% Treasury Securities
Money Market Fund
Paid or Accrued 2,010,632 3,534,288 4,439,996
Waived -- -- --
Cash Management Fund
Paid or Accrued 3,165,847 4,595,098 6,766,578
Waived -- -- --
46
Administrator
Pursuant to an Administration Agreement (the "Administration Agreement"),
Chase serves as administrator of the Funds. Chase provides certain
administrative services to the Funds, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Funds' independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust with applicable laws and regulations
excluding those of the securities laws of various states; arranging for the
computation of performance data, including net asset value and yield;
responding to shareholder inquiries; and arranging for the maintenance of books
and records of the Funds and providing, at its own expense, office facilities,
equipment and personnel necessary to carry out its duties. Chase in its
capacity as administrator does not have any responsibility or authority for the
management of the Funds, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares.
Under the Administration Agreement Chase is permitted to render
administrative services to others. The Administration Agreement will continue
in effect from year to year with respect to each Fund only if such continuance
is specifically approved at least annually by the Board of Trustees or by vote
of a majority of such Fund's outstanding voting securities and, in either case,
by a majority of the Trustees who are not parties to the Administration
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Administration Agreement is terminable without penalty by the Trust
on behalf of each Fund on 60 days' written notice when authorized either by a
majority vote of such Fund's shareholders or by vote of a majority of the Board
of Trustees, including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, or by Chase on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Funds, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Administration Agreement.
In addition, the Administration Agreement provides that, in the event the
operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for
any fiscal year exceed the most restrictive expense limitation applicable to
that Fund imposed by the securities laws or regulations thereunder of any state
in which the shares of such Fund are qualified for sale, as such limitations
may be raised or lowered from time to time, Chase shall reduce its
administration fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by Chase
shall be deducted from the monthly administration fee otherwise payable to
Chase during such fiscal years; and if such amounts should exceed the monthly
fee, Chase shall pay to such Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Fund a fee computed daily
and paid monthly at an annual rate equal to 0.05% of each Money Market Fund's
average daily net assets, and 0.10% of each Income Fund's average daily net
assets, on an annualized basis for the Fund's then-current fiscal year. Chase
may voluntarily waive a portion of the fees payable to it with respect to each
Fund on a month-to-month basis.
47
For the years ended August 31, 1997, 1998 and 1999, respectively, Chase
was paid or accrued administration fees, and voluntarily waived the amounts in
parentheses for the following Funds:
Fiscal Year- Fiscal Year- Fiscal Year-
ended ended ended
8/31/97 8/31/98 8/31/99
-------------- -------------- -------------
Federal Money Market Fund
Paid or Accrued $ 391,147 $ 396,882 $ 517,491
Waived -- -- --
Treasury Plus Money Market Fund
Paid or Accrued 991,858 1,192,493 1,425,005
Waived -- -- --
Prime Money Market Fund
Paid or Accrued 797,701 1,855,708 3,884,607
Waived -- -- --
California Intermediate
Tax Fee Fund
Paid or Accrued 26,444 24,018 23,729
Waived (19,912) (8,043) (3,642)
California Tax Free
Money Market Fund
Paid or Accrued 22,388 24,911 23,139
Waived -- -- --
U.S. Government
Money Market Fund
Paid or Accrued 2,586,987 3,249,003 3,632,599
Waived -- -- --
100% U.S. Treasury Securities
Money Market Fund
Paid or Accrued 1,005,316 1,767,144 2,219,998
Waived -- -- --
Tax Free Money Market Fund
Paid or Accrued 449,487 560,350 658,688
Waived -- -- --
New York Tax Free Money
Market Fund
Paid or Accrued 447,608 552,144 722,634
Waived -- -- --
Tax Free Income Fund
Paid or Accrued 82,848 75,327 73,255
Waived -- -- --
New York Tax Free Income Fund
Paid or Accrued 106,982 107,375 121,420
Waived -- -- --
Cash Management Fund
Paid or Accrued 1,582,924 2,297,549 3,383,289
Waived -- -- --
48
Distribution Plans
The Trust has adopted separate plans of distribution pursuant to Rule
12b-1 under the 1940 Act (a "Distribution Plan") including Distribution Plans
on behalf of the Class A and Class B shares of the Tax Free Income Fund and the
New York Tax Free Income Fund, the Class B and Class C shares of the Prime
Money Market Fund, the shares of the California Intermediate Tax Free Fund, the
Vista Shares of the Money Market Funds (except the Cash Management Fund and
Prime Money Market Fund), and the Premier Shares of the U.S. Government Money
Market Fund, which provides that each of such classes of such Funds shall pay
for distribution services a distribution fee (the "Distribution Fee"),
including payments to the Distributor, at annual rates not to exceed the
amounts set forth in their respective Prospectuses. There is no distribution
plan for the Cash Management Fund. The Distributor may use all or any portion
of such Distribution Fee to pay for Fund expenses of printing prospectuses and
reports used for sales purposes, expenses of the preparation and printing of
sales literature and other such distribution-related expenses. Promotional
activities for the sale of each class of shares of each Fund will be conducted
generally by the Chase Vista Funds, and activities intended to promote one
class of shares of a Fund may also benefit the Fund's other shares and other
Chase Vista Funds.
Class B and Class C shares pay a Distribution Fee of up to 0.75% of
average daily net assets. The Distributor currently expects to pay sales
commissions to a dealer at the time of sale of Class B shares of the Income
Funds of up to 4.00% of the purchase price of the shares sold by such dealer.
The Distributor will use its own funds (which may be borrowed or otherwise
financed) to pay such amounts. Because the Distributor will receive a maximum
Distribution Fee of 0.75% of average daily net assets with respect to Class B
and Class C shares, it will take the Distributor several years to recoup the
sales commissions paid to dealers and other sales expenses.
No class of shares of a Fund will make payments or be liable for any
distribution expenses incurred by other classes of shares of such Fund.
The Institutional Shares of the Money Market Funds have no distribution
plan. There is no distribution plan for Premier Shares for any Money Market
Fund other than the U.S. Government Money Market Fund.
Some payments under the Distribution Plans may be used to compensate
broker-dealers with trail or maintenance commissions in an amount not to exceed
0.25% annualized of the average net asset value of Class A shares, 0.25%
annualized of the average net asset value of the Class B shares, 0.75%
annualized of the average net asset value of Class C shares or 0.25% annualized
of the average daily net asset value of the shares of the California
Intermediate Tax Free Fund maintained in a Fund by such broker-dealers'
customers. Trail or maintenance commissions will be paid to broker-dealers
beginning the 13th month following the purchase of such shares. Since the
distribution fees are not directly tied to expenses, the amount of distribution
fees paid by a class of a Fund during any year may be more or less than actual
expenses incurred pursuant to the Distribution Plans. For this reason, this
type of distribution fee arrangement is characterized by the staff of the
Securities and Exchange Commission as being of the "compensation variety" (in
contrast to "reimbursement" arrangements by which a distributor's payments are
directly linked to its expenses). With respect to Class B shares of the Income
Funds, because of the 0.75% annual limitation on the compensation paid to the
Distributor during a fiscal year, compensation relating to a large portion of
the commissions attributable to sales of Class B shares in any one year will be
accrued and paid by a Fund to the Distributor in fiscal years subsequent
thereto. However, the Shares are not liable for any distribution expenses
incurred in excess of the Distribution Fee paid. In determining whether to
purchase Class B shares of the Income Funds, investors should consider that
compensation payments could continue until the Distributor has been fully
reimbursed for the commissions paid on sales of Class B shares.
Each class of shares is entitled to exclusive voting rights with respect
to matters concerning its Distribution Plan.
49
Each Distribution Plan provides that it will continue in effect
indefinitely if such continuance is specifically approved at least annually by
a vote of both a majority of the Trustees and a majority of the Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust and who
have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Trustees"). The continuance of each Distribution Plan was most recently
approved on October 13, 1995.
Each Distribution Plan requires that the Trust shall provide to the Board
of Trustees, and the Board of Trustees shall review, at least quarterly, a
written report of the amounts expended (and the purposes therefor) under the
Distribution Plan. Each Distribution Plan further provides that the selection
and nomination of Qualified Trustees shall be committed to the discretion of
the disinterested Trustees (as defined in the 1940 Act) then in office. Each
Distribution Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or, with respect to a particular Fund, by vote of a majority
of the outstanding voting Shares of the class of such Fund to which it applies
(as defined in the 1940 Act). Each Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without
a vote of the majority of both the Trustees and the Qualified Trustees. Each of
the Funds will preserve copies of any plan, agreement or report made pursuant
to a Distribution Plan for a period of not less than six years from the date of
the Distribution Plan, and for the first two years such copies will be
preserved in an easily accessible place.
For the fiscal year ended August 31, 1999, the Distributor was paid or
accrued the following Distribution Fees and voluntarily waived the amounts in
parenthesis following such fees with respect to the Shares of each Fund:
9/1/98 9/1/98
through through
8/31/99 8/31/99
Paid/Accrued Waived
-------------- ------------
Federal Money Market Fund
Vista Shares $ 474,586 $ --
Treasury Plus Money Market Fund
Vista Shares 1,535,196 --
Prime Money Market Fund
B Shares 176,547 --
C Shares 1,414 --
California Intermediate Tax Free Fund 59,323 59,323
California Tax Free Money Market Fund 46,278 23,139
U.S. Government Money Market Fund
Vista Shares 3,305,827 --
Premier Shares 1,069,247 427,699
100% Treasury Securities Money Market Fund
Vista Shares 3,471,883 1,041,565
Tax Free Money Market Fund
Vista Shares 784,763 --
New York Tax Free Money Market Fund
Vista Shares 1,445,267 1,011,687
Tax Free Income Fund
A Shares 146,243 146,124
B Shares 110,686 --
New York Tax Free Income Fund
A Shares 265,753 265,478
B Shares 113,394 --
50
Expenses paid by the Distributor related to the distribution of Trust
shares during the year ended August 31, 1999 were as follows:
Advertising and sales literature $1,396,534
Printing, production and mailing of prospectuses
and shareholder reports to other than current
shareholders 585,276
Compensation to dealers 825,666
Compensation to sales personnel 1,822,900
B share financing charges 354,313
Equipment, supplies and other indirect
distribution-related expenses 531,967
With respect to the Class B shares of the Funds, the Distribution Fee was
paid to FEP Capital L.P. for acting as finance agent.
Distribution and Sub-Administration Agreement
The Trust has entered into a Distribution and Sub-Administration Agreement
dated August 24, 1995 (prior to such date, the Distributor served the Trust
pursuant to a contract dated August 23, 1994 (April 15, 1994 with respect to
the Treasury Plus Money Market Fund and Federal Money Market Fund)) (the
"Distribution Agreement") with the Distributor, pursuant to which the
Distributor acts as the Funds' exclusive underwriter, provides certain
administration services and promotes and arranges for the sale of each class of
Shares. The Fund's distributor is Vista Fund Distributors, Inc. ("VFD"). VFD is
a subsidiary of The BISYS Group, Inc. and is unaffiliated with Chase. The
Distribution Agreement provides that the Distributor will bear the expenses of
printing, distributing and filing prospectuses and statements of additional
information and reports used for sales purposes, and of preparing and printing
sales literature and advertisements not paid for by the Distribution Plans. The
Trust pays for all of the expenses for qualification of the shares of each Fund
for sale in connection with the public offering of such shares, and all legal
expenses in connection therewith. In addition, pursuant to the Distribution
Agreement, the Distributor provides certain sub-administration services to the
Trust, including providing officers, clerical staff and office space. Payments
may also be used to compensate broker-dealers with trail or maintenance
commissions at an annual rate of up to 0.25% of the average daily net asset
value of Class A or Class B shares invested in the Fund by customers of these
broker-dealers. Trail or maintenance commissions are paid to broker-dealers
beginning the 13th month following the purchase of shares by their customers.
Promotional activities for the sale of Class A and Class B shares will be
conducted generally by the Chase Vista Funds, and activities intended to
promote the Fund's Class A or Class B shares may also benefit the Fund's other
shares and other Chase Vista Funds.
51
VFD may provide promotional incentives to broker-dealers that meet
specified sales targets for one or more Vista Funds. These incentives may
include gifts of up to $100 per person annually; an occasional meal, ticket to
a sponsoring event or theater for entertainment for broker-dealers and their
guests; and, payment or reimbursement for travel expenses, including lodging
and meals, in connection with attendance at training and educational meetings
within and outside the U.S.
VFD may from time to time, pursuant to objective criteria established by
it, pay additional compensation to qualifying authorized broker-dealers for
certain services or activities which are primarily intended to result in the
sale of shares of the Fund. In some instances, such compensation may be offered
only to certain broker-dealers who employ registered representatives who have
sold or may sell significant amounts of shares of the Fund and/or other Chase
Vista Funds during a specified period of time. Such compensation does not
represent an additional expense to the Fund or its shareholders, since it will
be paid by VFD out of compensation retained by it from the Fund or other
sources available to it.
The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
such Fund's outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Distribution
Agreement is terminable without penalty by the Trust on behalf of each Fund on
60 days' written notice when authorized either by a majority vote of such
Fund's shareholders or by vote of a majority of the Board of Trustees of the
Trust, including a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust, or by the Distributor on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Distribution Agreement also
provides that neither the Distributor nor its personnel shall be liable for any
act or omission in the course of, or connected with, rendering services under
the Distribution Agreement, except for willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties.
In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to that Fund imposed by the securities laws or regulations
thereunder of any state in which the shares of such Fund are qualified for
sale, as such limitations may be raised or lowered from time to time, the
Distributor shall reduce its sub-administration fee with respect to such Fund
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by the Distributor shall
be deducted from the monthly sub-administration fee otherwise payable with
respect to such Fund during such fiscal year; and if such amounts should exceed
the monthly fee, the Distributor shall pay to such Fund its share of such
excess expenses no later than the last day of the first month of the next
succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of 0.05% of the net assets of each Fund. The
Distributor may voluntarily agree to from time to time waive a portion of the
fees payable to it under the Distribution Agreement with respect to each Fund
on a month-to-month basis. For the fiscal years ended August 31, 1997, 1998 and
1999, respectively, the Distributor was paid or accrued the following sub-
administration fees under the Distribution Agreement, and voluntarily waived
the amounts in parentheses following such fees:
52
Fiscal Year- Fiscal Year- Fiscal Year-
Ended Ended Ended
8/31/97 8/31/98 8/31/99
------------- -------------- --------------
Federal Money Market Fund
Paid or Accrued $ 391,147 $ 396,882 $ 517,491
Waived -- -- --
Treasury Plus Money Market Fund
Paid or Accrued 991,858 1,192,493 1,425,005
Waived -- 771,344 (883,470)
Prime Money Market Fund
Paid or Accrued 797,701 1,855,708 3,884,607
Waived -- -- --
California Intermediate
Tax Fee Fund
Paid or Accrued 13,222 12,009 11,865
Waived -- 9,979 (11,865)
California Tax Free
Money Market Fund
Paid or Accrued 22,388 24,911 23,139
Waived -- -- --
U.S. Government
Money Market Fund
Paid or Accrued 2,586,987 3,249,003 3,632,599
Waived -- -- --
100% Treasury Securities
Money Market Fund
Paid or Accrued 1,005,316 1,767,144 2,219,998
Waived -- 375,973 (1,775,598)
Cash Management Fund
Paid or Accrued 1,582,924 2,297,549 3,383,289
Waived -- -- --
Tax Free Money Market Fund
Paid or Accrued 449,488 560,350 658,688
Waived -- -- (93,598)
New York Tax Free Money
Market Fund
Paid or Accrued 447,608 554,762 722,634
Waived -- (554,762) (722,634)
Tax Free Income Fund
Paid or Accrued 41,424 37,663 36,628
Waived -- -- --
New York Tax Free Income Fund
Paid or Accrued 53,491 53,688 60,710
Waived -- -- --
53
Shareholder Servicing Agents, Transfer Agent and Custodian
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent to provide certain services
including but not limited to the following: answer customer inquiries regarding
account status and history, the manner in which purchases and redemptions of
shares may be effected for the Fund as to which the Shareholder Servicing Agent
is so acting and certain other matters pertaining to the Fund; assist
shareholders in designating and changing dividend options, account designations
and addresses; provide necessary personnel and facilities to establish and
maintain shareholder accounts and records; assist in processing purchase and
redemption transactions; arrange for the wiring of funds; transmit and receive
funds in connection with customer orders to purchase or redeem shares; verify
and guarantee shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnish (either
separately or on an integrated basis with other reports sent to a shareholder
by a Shareholder Servicing Agent) quarterly and year-end statements and
confirmations of purchases and redemptions; transmit, on behalf of the Fund,
proxy statements, annual reports, updated prospectuses and other communications
to shareholders of the Fund; receive, tabulate and transmit to the Fund proxies
executed by shareholders with respect to meetings of shareholders of the Fund;
and provide such other related services as the Fund or a shareholder may
request. Shareholder servicing agents may be required to register pursuant to
state securities law. Shareholder Servicing Agents may subcontract with other
parties for the provision of shareholder support services.
Each Shareholder Servicing Agent may voluntarily agree from time to time
to waive a portion of the fees payable to it under its Servicing Agreement with
respect to each Fund on a month-to-month basis. Fees payable to the Shareholder
Servicing Agents (all of which currently are related parties) and the amounts
voluntarily waived for the following periods were as follows:
9/1/98
9/1/96 9/1/97 through
through through 8/31/99
8/31/97 8/31/98 ----------------------------
Fund payable waived paid/accrued waived paid/accrued waived
- ----------------------- ------------- ------------- -------------- ------------- -------------- -------------
U.S. Government
Money Market Fund
Vista Shares $7,190,397 $ -- $ 9,506,976 $3,059,131 $11,570,394 $3,300,442
Premier Shares 2,262,869 -- 2,442,154 820,776 2,673,117 1,009,497
Institutional Shares -- -- -- -- 2,421,472 1,636,525
100% Treasury
Securities Money
Market Fund
Vista Shares 6,668,735 $2,256,995 9,271,804 3,178,487 12,151,590 1,735,341
Premier Shares 7,214 7,214 27,550 25,671 78,128 5,658
Institutional Shares -- -- -- -- 766,951 384,468
Cash Management
Fund
Vista Shares 6,991,098 613,426 10,706,072 610,876 17,300,790 1,381,862
Premier Shares 997,708 46,586 1,110,928 234,424 1,040,482 205,708
Institutional Shares -- -- -- -- 1,213,107 863,084
Treasury Plus
Money Market Fund
Vista Shares 5,261,249 1,664,171 5,711,537 1,344,998 5,373,186 1,078,231
Premier Shares 308,459 -- 490,819 -- 620,423 30,514
Institutional Shares -- -- -- -- 898,550 437,527
54
9/1/98
9/1/96 9/1/97 through
through through 8/31/99
8/31/97 8/31/98 ---------------------------
Fund payable waived paid/accrued waived paid/accrued waived
- ----------------------- ------------- ------------ -------------- ----------- -------------- ------------
Federal Money
Market Fund
Vista Shares $1,182,562 $ 396,234 $1,037,279 $417,602 $1,661,050 $ 363,304
Premier Shares 803,743 61,730 786,613 26,504 713,973 --
Institutional Shares -- -- -- -- 234,161 206,517
Prime Money
Market Fund
Vista Shares -- -- -- -- 380,370 138,642
Premier Shares 1,148,882 339,705 1,790,841 437,878 2,457,774 408,608
Institutional Shares -- -- -- -- 5,798,758 4,615,353
B Shares 26,977 17,624 33,276 33,276 58,849 47,684
C Shares -- -- -- -- 471 --
Tax Free Money
Market Fund
Vista Shares 1,989,537 768,241 2,400,200 873,791 2,746,672 1,000,326
Premier Shares 323,826 -- 287,238 -- 298,470 10,480
Institutional Shares -- -- -- -- 345,784 343,502
N.Y. Tax Free
Money Market Fund 3,133,258 1,253,304 3,874,170 922,612 5,058,436 --
California Tax Free
Money Market Fund 156,716 102,864 174,380 117,795 161,973 112,997
Tax Free Income
Fund
A Shares 171,088 163,770 152,484 106,509 146,243 82,155
B Shares 36,031 -- 35,833 -- 36,895 --
N.Y. Tax Free
Income Fund
A Shares 234,149 226,909 233,063 159,478 265,752 148,164
B Shares 33,305 -- 35,376 -- 37,798 --
California
Intermediate
Tax Free Fund 66,110 66,110 60,045 60,045 59,323 59,323
Shareholder servicing agents may offer additional services to their
customers, including specialized procedures and payment for the purchase and
redemption of Fund shares, such as pre-authorized or systematic purchase and
redemption programs, "sweep" programs, cash advances and redemption checks.
Each Shareholder Servicing Agent may establish its own terms and conditions,
including limitations on the amounts of subsequent transactions, with respect
to such services. Certain Shareholder Servicing Agents may (although they are
not required by the Trust to do so) credit to the accounts of their customers
from whom they are already receiving other fees amounts not exceeding such
other fees or the fees for their services as Shareholder Servicing Agents.
For shareholders that bank with Chase, Chase may aggregate investments in
the Chase Vista Funds with balances held in Chase bank accounts for purposes of
determining eligibility for certain bank privileges that are based on specified
minimum balance requirements, such as reduced or no fees for certain banking
services or preferred rates on loans and deposits. Chase and certain
broker-dealers and other Shareholder Servicing Agents may, at their own
expense, provide gifts, such as computer software packages, guides and
55
books related to investment or additional Fund shares valued up to $250 to
their customers that invest in the Chase Vista Funds.
Chase and/or the Distributor may from time to time, at their own expense
out of compensation retained by them from the Fund or other sources available
to them, make additional payments to certain selected dealers or other
Shareholder Servicing Agents for performing administrative services for their
customers. These services include maintaining account records, processing
orders to purchase, redeem and exchange Fund shares and responding to certain
customer inquiries. The amount of such compensation may be up to an additional
0.10% annually of the average net assets of the Fund attributable to shares if
the Fund held by customers of such Shareholder Servicing Agents. Such
compensation does not represent an additional expense to the Fund or its
shareholders, since it will be paid by Chase and/or the Distributor.
The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of each Fund for which Chase receives such compensation as is from time
to time agreed upon by the Trust and Chase. As custodian, Chase provides
oversight and record keeping for the assets held in the portfolios of each
Fund. Chase also provides fund accounting services for the income, expenses and
shares outstanding for the Funds. Chase is located at 3 Metrotech Center,
Brooklyn, NY 11245. For additional information, see the Prospectuses.
INDEPENDENT ACCOUNTANTS
The financial statements incorporated herein by reference from the Trust's
Annual Reports to Shareholders for the fiscal year ended August 31, 1999, and
the related financial highlights which appear in the Prospectuses, have been
incorporated herein and included in the Prospectuses in reliance on the reports
of PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, independent accountants of the Funds, given on the authority of said
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP provides
the Funds with audit services, tax return preparation and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission.
CERTAIN REGULATORY MATTERS
Banking laws, including the Glass-Steagall Act as currently interpreted,
prohibit bank holding companies and their affiliates from sponsoring,
organizing, controlling, or distributing shares of, mutual funds, and generally
prohibit banks from issuing, underwriting, selling or distributing securities.
These laws do not prohibit banks or their affiliates from acting as investment
adviser, administrator or custodian to mutual funds or from purchasing mutual
fund shares as agent for a customer. Chase and the Trust believe that Chase
(including its affiliates) may perform the services to be performed by it as
described in the Prospectus and this Statement of Additional Information
without violating such laws. If future changes in these laws or interpretations
required Chase to alter or discontinue any of these services, it is expected
that the Board of Trustees would recommend alternative arrangements and that
investors would not suffer adverse financial consequences. State securities
laws may differ from the interpretations of banking law described above and
banks may be required to register as dealers pursuant to state law.
Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of any
of the Funds, including outstanding loans to such issuers which may be repaid
in whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. Government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types of U.S. Government obligations and municipal
obligations. Chase and its affiliates may sell U.S. Government obligations and
municipal obligations to, and purchase them from, other investment companies
sponsored by the Funds' distributor or affiliates of the distributor. Chase
will not
56
invest any Fund assets in any U.S. Government obligations, municipal
obligations or commercial paper purchased from itself or any affiliate,
although under certain circumstances such securities may be purchased from
other members of an underwriting syndicate in which Chase or an affiliate is a
non-principal member. This restriction my limit the amount or type of U.S.
Government obligations, municipal obligations or commercial paper available to
be purchased by any Fund. Chase has informed the Funds that in making its
investment decision, it does not obtain or use material inside information in
the possession of any other division or department of Chase, including the
division that performs services for the Trust as custodian, or in the
possession of any affiliate of Chase. Shareholders of the Funds should be aware
that, subject to applicable legal or regulatory restrictions, Chase and its
affiliates may exchange among themselves certain information about the
shareholder and his account. Transactions with affiliated broker-dealers will
only be executed on an agency basis in accordance with applicable federal
regulations.
GENERAL INFORMATION
Expenses
Each Fund pays the expenses incurred in its operations, including its pro
rata share of expenses of the Trust. These expenses include investment advisory
and administrative fees; the compensation of the Trustees; registration fees;
interest charges; taxes; expenses connected with the execution, recording and
settlement of security transactions; fees and expenses of the Funds' custodian
for all services to the funds, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to government offices and commissions; expenses of
meetings of investors; fees and expenses of independent accountants, of legal
counsel and of any transfer agent, registrar or dividend disbursing agent of
the Trust; insurance premiums; and expenses of calculating the net asset value
of, and the net income on, shares of the Funds. Shareholder servicing and
distribution fees are all allocated to specific classes of the Funds. In
addition, the Funds may allocate transfer agency and certain other expenses by
class. Service providers to a Fund may, from time to time, voluntarily waive
all or a portion of any fees to which they are entitled.
Description of Shares, Voting Rights and Liabilities
Mutual Fund Trust is an open-end, management investment company organized
as Massachusetts business trust under the laws of the Commonwealth of
Massachusetts on February 4, 1994. Because certain of the Funds comprising the
Trust are "non-diversified", more than 5% of any of the assets of any such Fund
may be invested in the obligations of any single issuer, which may make the
value of the shares in such a Fund more susceptible to certain risks than
shares of a diversified mutual fund. The fiscal year-end of the Funds in the
Trust is August 31.
The Trust currently consists of 12 series of shares of beneficial
interest, par value $.001 per share. With respect to the Money Market Funds and
certain of the Income Funds, the Trust may offer more than one class of shares.
The Trust has reserved the right to create and issue additional series or
classes. Each share of a series or class represents an equal proportionate
interest in that series or class with each other share of that series or class.
The shares of each series or class participate equally in the earnings,
dividends and assets of the particular series or class. Expenses of the Trust
which are not attributable to a specific series or class are allocated amount
all the series in a manner believed by management of the Trust to be fair and
equitable. Shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each whole share held, and each fractional share shall
be entitled to a proportionate fractional vote, except that Trust shares held
in the treasury of the Trust shall not be voted. Shares of each series or class
generally vote together, except when required under federal securities laws to
vote separately on matters that may affect a particular class, such as the
approval of distribution plans for a particular class. With respect to shares
purchased through a Shareholder Servicing Agent and, in the event written proxy
instructions are not received by a Fund or its
57
designated agent prior to a shareholder meeting at which a proxy is to be voted
and the shareholder does not attend the meeting in person, the Shareholder
Servicing Agent for such shareholder will be authorized pursuant to an
applicable agreement with the shareholder to vote the shareholder's outstanding
shares in the same proportion as the votes cast by other Fund shareholders
represented at the meeting in person or by proxy.
The categories of investors that are eligible to purchase shares and
minimum investment requirements may differ for each class of the Funds' shares.
In addition, other classes of Fund shares may be subject to differences in
sales charge arrangements, ongoing distribution and service fee levels, and
levels of certain other expenses, which will affect the relative performance of
the different classes. Investors may call 1-800-622-4273 to obtain additional
information about other classes of shares of the Funds that are offered. Any
person entitled to receive compensation for selling or servicing shares of a
Fund may receive different levels of compensation with respect to one class of
shares over another.
Shareholders of the Vista Shares, Premier Shares and Institutional Shares
of the Money Market Funds bear the fees and expenses described herein and in
the Prospectuses. The fees paid by the Vista Shares to the Distributor and
Shareholder Servicing Agent under the distribution plans and shareholder
servicing arrangements for distribution expenses and shareholder services
provided to investors by the Distributor and Shareholder Servicing Agents,
absent waivers, generally are more than the respective fees paid under
distribution plans and shareholder servicing arrangements adopted for the
Premier Shares. The Institutional Shares pay no distribution or Shareholder
Servicing fee. As a result, absent waivers, at any given time, the net yield on
the Vista Shares will be lower than the yield on the Premier Shares and the
yield on the Premier Shares will be lower than the yield on Institutional
Shares. Standardized yield quotations will be computed separately for each
class of shares of a Fund.
The Vista Tax Free Income Fund and Vista New York Tax Free Income Fund
offer both Class A and Class B shares. The classes of shares have several
different attributes relating to sales charges and expenses, as described
herein and in the Prospectuses. In addition to such differences, expenses borne
by each class of a Fund may differ slightly because of the allocation of other
class-specific expenses. For example, a higher transfer agency fee may be
imposed on Class B shares than on Class A shares. The relative impact of
initial sales charges, contingent deferred sales charges, and ongoing annual
expenses will depend on the length of time a share is held.
The Vista Prime Money Market Fund offers both Class B and Class C shares.
The classes of shares have different attributes relating to sales charges and
expenses as described in the Prospectus. The relative impact of contingent
deferred sales charges will depend upon the length of time a share is held.
Selected dealers and financial consultants may receive different levels of
compensation for selling one particular class of shares rather than another.
The business and affairs of the Trust are managed under the general
direction and supervision of the Trust's Board of Trustees. The Trust is not
required to hold annual meetings of shareholders but will hold special meetings
of shareholders of a series or class when, in the judgment of the Trustees, it
is necessary or desirable to submit matters for a shareholder vote.
Shareholders have, under certain circumstances, the right to communicate with
other shareholders in connection with requesting a meeting of shareholders for
the purpose of removing one or more Trustees. Shareholders also have, in
certain circumstances, the right to remove one or more Trustees without a
meeting. No material amendment may be made to the Trust's Declaration of Trust
without the affirmative vote of the holders of a majority of the outstanding
shares of each portfolio affected by the amendment. The Trust's Declaration of
Trust provides that, at any meeting of shareholders of the Trust or of any
series or class, a Shareholder Servicing Agent may vote any shares as to which
such Shareholder Servicing Agent is the agent of record and which are not
represented in person or by proxy
58
at the meeting, proportionately in accordance with the votes cast by holders of
all shares of that portfolio otherwise represented at the meeting in person or
by proxy as to which such Shareholder Servicing Agent is the agent of record.
Any shares so voted by a Shareholder Servicing Agent will be deemed represented
at the meeting for purposes of quorum requirements. Shares have no preemptive
or conversion rights. Shares, when issued, are fully paid and non-assessable,
except as set forth below. Any series or class may be terminated (i) upon the
merger or consolidation with, or the sale or disposition of all or
substantially all of its assets to, another entity, if approved by the vote of
the holders of two-thirds of its outstanding shares, except that if the Board
of Trustees recommends such merger, consolidation or sale or disposition of
assets, the approval by vote of the holders of a majority of the series' or
class' outstanding shares will be sufficient, or (ii) by the vote of the
holders of a majority of its outstanding shares, or (iii) by the Board of
Trustees by written notice to the series' or class' shareholders. Unless each
series and class is so terminated, the Trust will continue indefinitely.
Certificates are issued only upon the written request of a shareholder,
subject to the policies of the investor's Shareholder Servicing Agent, but the
Trust will not issue a stock certificate with respect to shares that may be
redeemed through expedited or automated procedures established by a Shareholder
Servicing Agent. No certificates are issued for shares of the Money Market
Funds or Class B shares of the Income Funds.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts of
interest that can arise in connection with personal trading activities of such
persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions,
pre-clearance requirements and blackout periods.
59
Principal Holders
As of December 13, 1999, the following persons owned of record, directly
or indirectly, 5% or more of the outstanding shares of the following classes of
the following Funds:
U.S. Government Money Market Fund--Vista
Chase Manhattan Bank ........................... 20.43%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Obie & Co. ..................................... 14.55%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
U.S. Government Money Market Fund--Institutional
Chase Manhattan Bank N/A ....................... 17.46%
Global Investor Services Omnibus AC
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Chase Manhattan Bank ........................... 13.02%
Client Services Bank
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Chase Manhattan Bank NA ........................ 10.32%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
Chase Manhattan Bank N/A ....................... 8.76%
Global SEC Services Omnibus
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
60
Obie & Co. ................................................... 7.00%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
U.S. Government Money Market Fund--Premier
Penlin & Co. ................................................. 24.06%
Chase Lincoln First Bank
Attn: P. Whalen
PO Box 1412
Rochester, NY 14603-1412
Chase Manhattan Bank NA ...................................... 14.52%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
Syracuse Ida/Syracuse University ............................. 7.78%
1999 Ser A&B Construction Fund
Chase Manhattan Trust Co. NA
Attn: Christopher Inman
73 Tremont St.
Boston, MA 02108-3916
National Financial Serv. Corp. ............................... 7.29%
For the Excl Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
100% U.S. Treasury Securities Money Market Fund--Vista
Chase Manhattan Bank ......................................... 12.46%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
100% U.S. Treasury Securities Money Market Fund--Institutional
Chase Manhattan Bank ......................................... 24.77%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
61
Obie & Co. ............................................. 16.18%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
Missionaries of Charity ................................ 9.05%
335 East 145th Street
Bronx, NY 10451-5899
100% U.S. Treasury Securities Money Market Fund--Premier
Warner Asset Management AS Advisory .................... 19.91%
FBO Belle Vernon Area School District
20206 Route 19, Ste 300
Cranberry Township, PA 16066-6106
Column Financial Inc. AS Secured ....................... 15.97%
Party FBO Clift Holdings LLC
Renovation Reserve
CMB Global TR Attn: Bruce Vecchio
450 West 33rd Street
10th Floor
New York, NY 10001-2603
E/A Exelon Shareholders ................................ 8.42%
Chase Manhattan Trust Co. NA
Attn: Joseph Progar
One Liberty Place, 52nd Floor
1650 Market St., Ste 5210
Philadelphia, PA 19103-7301
The Breast Cancer ...................................... 7.76%
Research Foundation
Attn: J. Krupskas
767 5th Avenue
40th Floor
New York, NY 10153-0023
Peter J. Durwood TTEE .................................. 5.84%
Peter J. Durwood Family TR
DTD 4/8/98
Attn: Howard Grossman
10960 Wilshire Blvd., Ste. 2150
Los Angeles, CA 90024-3803
62
Cash Management Money Market Fund--Vista
Client Services ................................ 9.38%
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th floor
New York, NY 10005-1401
National Financial Serv. Corp. ................. 5.57%
For the Excl Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Cash Management Money Market Fund--Institutional
Chase Manhattan Bank N/A ....................... 47.61%
Global Sec Services Omnibus
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Obie & Co. ..................................... 5.53%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
Cash Management Money Market Fund--Premier
National Financial Serv. Corp. ................. 15.22%
For the Excl Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Chase Manhattan Bank ........................... 8.69%
FBO IMA Customers
Attn: Barbara Licata
1985 Marcus Avenue
2nd Floor
New Hyde Park, NY 11042-1053
Chase Manhattan Bank N/A ....................... 7.00%
Global Sec Services Omnibus
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
63
Starwood Capital Group LLC ............................... 5.60%
591 W. Putnam Ave.
Greenwich, CT 06830-6005
Prime Money Market Fund--Vista
Obie & Co. ............................................... 22.48%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
Prime Money Market Fund--C Shares
Raymond James Assoc., Inc. CSDN .......................... 26.03%
Buel A. Dyer IRA
105 Heron Drive
Kathleen, GA 31047-2534
J. Timothy Wesley ........................................ 17.29%
102 Ash Run Road
Louisville, KY 40245-6114
Raymond James & Assoc. Inc. Cust. ........................ 9.24%
FBO Gary L. Barber S/D IRA
220 Westwood Dr.
Warner Robins, GA 31088-5855
Grace B. Wyman ........................................... 8.81%
7623 S. Ivanhoe Way
Englewood, CO 80112-6524
Ned Alexander & Marianne Jurkowicz-Alexander ............. 8.61%
JT/WROS
654 Hartford St.
Worthington, OH 43085-4122
Walter L. Weaver ......................................... 7.35%
PO Box 128
Allenwood, NJ 08720-0128
Donaldson Lufkin Jenrette Securities Corp., Inc. ......... 5.75%
PO Box 2052
Jersey City, NJ 07303-2052
Donaldson Lufkin Jenrette Securities Corp., Inc. ......... 5.13%
PO Box 2052
Jersey City, NJ 07303-2052
64
Prime Money Market Fund--Institutional
Chase Manhattan Bank N/A ................... 32.30%
Global Investor Services Omnibus AC
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Chase Manhattan Bank ....................... 5.85%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Prime Money Market Fund--Premier
Chase Manhattan Bank NA .................... 19.64%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
Obie & Co. ................................. 17.55%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
Chase Manhattan Bank N/A ................... 5.73%
Global Investor Services Omnibus AC
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Associates MH Mortgage Pass Thru
Certs Series 99-1 Prefunding Acct. ......... 13.06%
The Chase Manhattan Bank
Attn: Karen Dobres
450 West 33rd St.
New York, NY 10001-2603
65
Federal Money Market Fund--Vista
Client Services ........................ 8.62%
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th floor
New York, NY 10005-1401
Federal Money Market Fund--Institutional
Chase Manhattan Bank ................... 61.55%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Chase Manhattan Bank N/A ............... 8.94%
Global Investor Services Omnibus AC
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
National City Bank Custodian For
Customers of Mid Atlantic .............. 6.35%
Capital Corporation
Attn: Trust Operations MNY MKT #5312
PO Box 94777
Cleveland, OH 44101-4777
Federal Money Market Fund--Premier
National Financial Serv. Corp. ......... 44.71%
For the Excl Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Chase Manhattan Bank ................... 26.64%
FBO IMA Customers
Attn: Barbara Licata
1985 Marcus Ave.
2nd Floor
New Hyde Park, NY 11042-1053
66
Treasury Plus Money Market Fund--Vista
Prime Credit Card Receivables Master Trust ......... 22.56%
Attn: Darren Liss
Chase Manhattan Bank Global Trust
450 West 33rd St.
14th Floor
New York, NY 10001-2603
Obie & Co. ......................................... 11.38%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
Client Services .................................... 6.32%
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th floor
New York, NY 10005-1401
Treasury Plus Money Market Fund--Institutional
Chase Manhattan Bank N/A ........................... 34.27%
Global Investor Services Omnibus AC
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Chase Manhattan Bank N/A ........................... 12.65%
Global SEC Services Omnibus
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Obie & Co. ......................................... 7.23%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
Chase Manhattan Bank NA ............................ 7.11%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
67
Treasury Plus Money Market Fund--Premier
Obie & Co. ............................. 50.82%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
Chase Manhattan Bank NA ................ 21.36%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
Chase Manhattan Bank ................... 5.60%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Chase Manhattan Bank N/A ............... 5.52%
Global Investor Services Omnibus AC
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Tax Free Money Market Fund--Vista
Chase Manhattan Bank ................... 44.50%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Obie & Co. ............................. 11.39%
Chase Bank of Texas
Attn: STIF Unit 18 HCB 340
PO Box 2558
Houston, TX 77252-2558
68
Tax Free Money Market Fund--Institutional
Chase Manhattan Bank .............................. 47.43%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
John M. Utley ..................................... 8.73
Katherine J. Utley
5601 Willow Bend Ct.
Plano, TX 75093-4206
Chase Manhattan Bank N/A .......................... 8.06%
Global SEC Services Omnibus
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
Kelley & Ryan, A Professional Corporation ......... 5.91%
Attn: Joe Ryan
10000 Memorial Drive, Ste. 210
Houston, TX 77024-3409
Parfums De Coeur, LTD ............................. 5.17%
Attn: Edward J. Kaminski
85 Old Kings Highway North
Darien, CT 06820-4724
Tax Free Money Market Fund--Premier
Chase Manhattan Bank .............................. 33.06%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Andrew Stone ...................................... 18.25%
740 Park Ave.
New York, NY 10021-4251
Joel E. Smilow .................................... 10.63%
Joan L. Smilow JTWROS
100 Beachside Ave.
Greens Farm, CT 06436
69
Ivans ...................................... 6.19%
777 West Putnam Ave.
Attn: R. Payne
Greenwich, CT 06830-5091
National Financial Serv. Corp. ............. 5.32%
For the Excl Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Chase Manhattan Bank ....................... 5.25%
FBO IMA Customers
Attn: Barbara Licata
1985 Marcus Ave.
2nd Floor
New Hyde Park, NY 11042-1053
California Tax Free Money Market Fund--Vista
Chase Manhattan Bank ....................... 53.69%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
National Financial Serv. Corp. ............. 15.66%
For the Excl Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Gilbert Meyer TTEE ......................... 10.76%
Carol Meyer TTEE
U/A DTD Jan 7, 97
FBO The Meyer Family Trust
135 S. State College Blvd.
Brea, CA 92821-5823
Chase Manhattan Bank N/A ................... 6.52%
Global SEC Services Omnibus
Attn: Barrington A. Miller
3 Chase Metro Tech Center
7th Floor
Brooklyn, NY 11245-0001
70
New York Tax Free Money Market Fund--Vista
Chase Manhattan Bank ................................. 27.34%
Client Services Department
Attn: Sevan Marinos
1 Chase Manhattan Plaza
16th Floor
New York, NY 10005-1401
Chase Manhattan Bank ................................. 8.49%
FBO IMA Customers
Attn: Barbara Licata
1985 Marcus Avenue
2nd Floor
New Hyde Park, NY 11042-1053
National Financial Serv. Corp. ....................... 7.03%
For the Excl Ben of our Cust
Church Street Station
2375 Catob Road
Harbor Springs, MI 49740-9380
New York Tax Free Income Fund--A Shares
Balsa & Co. .......................................... 9.04%
PO Box 1768
Grand Central Station
New York, NY 10163-1768
Balsa & Co. .......................................... 8.59%
PO Box 1768
Grand Central Station
New York, NY 10163-1768
Tax Free Income Fund--A Shares
NFSC FEBO # C1B-286109 ............................... 7.10%
JGL Partners L P
JGL Partners L P
23 Cornell Way
Montclair, NJ 07043-2505
Tax Free Income Fund--B Shares
MLPF&S for the sole benefit of ITS Customers ......... 5.11%
Attn: Fund Administration
SEC# 97FC2
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
71
Financial Statements
The 1999 Annual Report to Shareholders of each Fund including the reports
of independent accountants, financial highlights and financial statements for
the fiscal year ended August 31, 1999 contained therein, are incorporated
herein by reference.
Specimen Computations of Offering Prices Per Share
New York Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1999 ....................................................... $ 11.36
Maximum Offering Price per Share ($11.36 divided by .955) (reduced on
purchases of $100,000 or more)......................................... $ 11.90
New York Tax Free Income Fund B Shares (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1999 ....................................................... $ 11.34
Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1999 ....................................................... $ 12.17
Maximum Offering Price per Share ($12.17 divided by .955) (reduced on
purchases of $100,000 or more) ........................................ $ 12.74
Tax Free Income Fund B Shares (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1999 ....................................................... $ 12.10
California Intermediate Tax Free Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1999 ....................................................... $ 9.79
Maximum Offering Price per Share ($9.79 divided by .955) (reduced on
purchases of $100,000 or more) ........................................ $ 10.25
The Shares of the Money Market Funds are offered for sale at Net Asset
Value.
72
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
Maritime Administration Bonds--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA Bonds--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA Debentures--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
FHA Insured Notes--are bonds issued by the Farmers Home Administration of
the U.S. Government and are guaranteed by the U.S. Government.
GNMA Certificates--are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA
and the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates. The average life of a GNMA
Certificate is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures may result in the return of the greater
part of principal invested far in advance of the maturity of the mortgages in
the pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee. As the prepayment rate of individual mortgage pools will vary
widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates. The yield which will be earned on GNMA
Certificates may vary form their coupon rates for the following reasons: (i)
Certificates may be issued at a premium or discount, rather than at par; (ii)
Certificates may trade in the secondary market at a premium or discount after
issuance; (iii) interest is earned and compounded monthly which has the effect
of raising the effective yield earned on the Certificates; and (iv) the actual
yield of each Certificate is affected by the prepayment of mortgages included
in the mortgage pool underlying the Certificates. Principal which is so prepaid
will be reinvested, although possibly at a lower rate. In addition, prepayment
of mortgages included in the mortgage pool underlying a GNMA Certificate
purchased at a premium could result in a loss to a Fund. Due to the large
amount of GNMA Certificates outstanding and active participation in the
secondary market by securities dealers and investors, GNMA Certificates are
highly liquid instruments. Prices of GNMA Certificates are readily available
from securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the pool
of mortgages backing each Certificate. If agency securities are purchased at a
premium above principal, the premium is not guaranteed by the issuing agency
and a decline in the market value to par may result in a loss of the premium,
which may be particularly likely in the event of a prepayment. When and if
available, U.S. Government obligations may be purchased at a discount from face
value.
FHLMC Certificates and FNMA Certificates--are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.
GSA Participation Certificates--are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed
by the U.S. Government.
A-1
New Communities Debentures--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
Public Housing Bonds--are bonds issued by public housing and urban renewal
agencies in connection with programs administered by the Department of Housing
and Urban Development of the U.S. Government, the payment of which is secured
by the U.S. Government.
Penn Central Transportation Certificates--are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.
SBA Debentures--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
Washington Metropolitan Area Transit Authority Bonds--are bonds issued by
the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.
FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes and Bonds--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. Armory Board Bonds--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
Export-Import Bank Certificates--are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
A-2
APPENDIX B
DESCRIPTION OF RATINGS*
The ratings of Moody's and Standard & Poor's represent their opinions as
to the quality of various Municipal Obligations. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields while Municipal Obligations of the same maturity and coupon
with different ratings may have the same yield.
Description of Moody's four highest municipal bond ratings
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Description of Moody's three highest ratings of state and municipal notes
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the
short run. A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation or commercial paper programs; such
ratings will be designated as "VMIG." Short-term ratings on issues with demand
features are differentiated by the use of the VMIG symbol to reflect such
characteristics as payment upon periodic demand rather than fixed maturity
dates and payment relying on external liquidity. Symbols used are as follows:
MIG-1/VMIG-1--Notes bearing this designation are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2/VMIG-2--Notes bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
- ----------
* As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time
to time revise such ratings, they undertake no obligation to do so.
B-1
MIG-3/VMIG-3--Notes bearing this designation are of favorable quality, where
all security elements are accounted for but there is lacking the undeniable
strength of the preceding grade, liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
Description of Standard & Poor's four highest municipal bond ratings
AAA--Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus ( ): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Standard & Poor's ratings of municipal notes and tax-exempt
demand bonds
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
--Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for
B-2
example, "AAA/B-1+"). For the newer "demand notes," S&P's note rating symbols,
combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+").
Description of Standard & Poor's two highest commercial paper ratings
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
B-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Description of Moody's two highest commercial paper ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2 and Prime-3.
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Description of Fitch's ratings of municipal notes and tax-exempt demand bonds
Municipal Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issuer, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's financial strength and
credit quality.
AAA--Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated
B-3
AAA. Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1.
A--Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstance than bonds with higher ratings.
BBB--Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position
of credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
F-3--Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
although near-term adverse changes could cause these securities to be rated
below investment grade.
B-4
APPENDIX C
SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New York Municipal Money Market Fund in New York municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New York municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.
New York State
New York State Financing Activities. There are a number of methods by
which New York State (the "State") may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation borrowing (i.e., borrowing for more than
one year) unless the borrowing is authorized in a specific amount for a single
work or purpose by the New York State Legislature (the "Legislature") and
approved by the voters. There is no limitation on the amount of long-term
general obligation debt that may be so authorized and subsequently incurred by
the State. With the exception of general obligation housing bonds (which must
be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes ("TRANs"), and (ii) in anticipation of the receipt
of proceeds from the sale of duly authorized but unissued bonds, by issuing
bond anticipation notes ("BANs"). TRANs must mature within one year from their
dates of issuance and may not be refunded or refinanced beyond such period.
BANS may only be issued for the purposes and within the amounts for which bonds
may be issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job
Development Authority and the Port Authority of New York and New Jersey. The
State has never been called upon to make any direct payments pursuant to such
guarantees. The State-guaranteed bonds of the Port Authority of New York and
New Jersey were fully retired on December 31, 1996. State-guaranteed bonds
issued by the Thruway Authority were fully retired on July 1, 1995.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates
that it will transact additional refinancings in 1999, 2000 and 2003 to
complete its long-term plan of finance and further alleviate cash flow
imbalances which are likely to occur in future years. JDA recently resumed its
lending activities under a revised set of lending programs and underwriting
guidelines.
C-1
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financing, which involve obligations
of public authorities or municipalities that are State-supported but not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ("LGAC") to restructure the way the State makes certain
local aid payments.
The State participates in the issuance of Certificates of Participation
("COPs") in a pool of leases entered into by the State's Office of General
Services on behalf of several State departments and agencies interested in
acquiring operational equipment, or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and centralized State
control, through the Comptroller and the Director of the Budget, over the
issuance of COPs representing the State's contractual obligation, subject to
annual appropriation by the Legislature and availability of money, to make
installment or lease-purchase payments for the State's acquisition of such
equipment or real property.
The State also employs moral obligation financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. There has never been a default on
any moral obligation debt of any public authority although there can be no
assurance that such a default will not occur in the future.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State. The State has
never defaulted on any of its general obligation indebtedness or its
obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments
pursuant to its guarantees although there can be no assurance that such a
default or call will not occur in the future.
The proposed 1997-98 through 2002-2003 Capital Program and Financing Plan
was released with the 1998-99 Executive Budget on January 20, 1998. As part of
the Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: delay of the issuance of COPs to finance welfare information systems
through 1998-99 to permit a thorough assessment of needs; and the elimination
of issuances for the CEFAP to reflect the proposed conversion of that
bond-financed program pay-as-you-go financing.
In addition to the arrangements described above, State law provides for
the creation of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities. The Municipal
Assistance Corporation for The City of New York ("MAC") was created to provide
financing assistance to New York City (the "City"). To enable MAC to pay debt
service on its obligations, MAC receives, subject to annual appropriation by
the Legislature, receipts from the 4% New York State Sales Tax for the benefit
of New York City, the State-imposed stock transfer tax and, subject to certain
prior liens, certain local assistance payments otherwise payable to the City.
The legislation creating MAC also includes a moral obligation provision. Under
its enabling legislation, MAC's authority to issue bonds and notes (other than
refunding bonds and notes) expired on December 31, 1984. In 1995, the State
created the Municipal Assistance Corporation for the City of Troy ("Troy MAC").
The bonds issued by Troy MAC, however, do not include moral obligation
provisions.
The 1999-2000 State Financial Plan. The State's 1999-2000 fiscal year
commenced on April 1, 1999 and ends on March 31, 2000. On March 31, 1999, the
State adopted the debt service portion of the State budget for the 1999-2000
fiscal year; four months later, on August 4, 1999, it enacted the remainder of
the
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budget. The Governor approved the budget as passed by the Legislature. Prior to
passing the budget in its entirety for the current fiscal year, the State
enacted appropriations that permitted the State to continue its operations.
Following enactment of the budget, the State prepared a Financial Plan for
the 1999-2000 fiscal year, dated August 24, 1999 (the "1999-2000 Financial
Plan"), that sets forth projected receipts and disbursements based on the
actions taken by the Legislature. The State is required to issue quarterly
modifications to the cash-basis State Financial Plan in July, October, and
January. These modifications reflect analysis of actual receipts and
disbursements on a cash basis for each reporting period, and contain revised
estimates of receipts and disbursements for the then current fiscal year. As a
result of the delay in adopting the budget for 1999-2000, the State
incorporated the First Quarterly Update (the "August Financial Plan") into the
Annual Information Statement dated August 24, 1999. The State issued its Second
Quarterly Update to the cash-basis 1999-2000 State Financial Plan (the
"Mid-Year Update") on October 29, 1999.
The State Financial Plan is projected to be balanced on a cash basis.
However, there can be no assurance that the State Financial Plan will continue
to be in balance. On October 29, 1999, the State issued its Mid-Year Update to
the 1999-2000 Financial Plan. In the Mid-Year Update, the State continues to
project that the State Financial Plan for 1999-2000 will remain in balance. The
State now projects total receipts and transfers from other funds of $39.32
billion in 1999-2000, an increase of $15 million over the amount projected in
the August Financial Plan. The State has also lowered its disbursement
projections by $10 million, with total disbursements of $37.35 billion now
expected for the current fiscal year. The additional receipts and lower
disbursements increase the State's projected cash-basis surplus by $25 million
over the August Financial Plan. The State has earmarked the additional
resources for the Contingency Reserve Fund.
The State now projects a closing General Fund balance of $2.87 billion in
1999-2000. The balance is comprised of $1.82 billion reserved to finance
already-enacted tax cuts, $473 million in the Tax Stabilization Reserve Fund,
$250 million in the Debt Reduction Reserve Fund (DRRF), $132 million in the
Contingency Reserve Fund (after the proposed deposit of $25 million) and $200
million in the Community Projects Fund.
The State ended the first six months of the 1999-2000 fiscal year with a
General Fund cash balance of $5.42 billion, roughly $295 million lower than
projected in the cash flow accompanying the August Financial Plan. Total
receipts, including transfers from other funds, were approximately $11 million
less than expected, with the decrease comprised of lower tax revenues ($25
million) and transfers from other funds ($8 million) offset in part by $22
million in higher miscellaneous receipts. Total disbursements through the first
six months of the fiscal year were $16.88 billion, or $284 million higher than
projected in August. The Division of the Budget expects that most of these
variances are timing-related and not likely to affect total disbursements for
the fiscal year.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan.
These forces may affect the State unpredictably from fiscal year to fiscal year
and are influenced by governments, institutions and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic
forecasts, however, have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies.
Despite recent budgetary surpluses recorded by the State, State actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, actions of the federal government and other factors
have created structural budget gaps for the State. These gaps resulted from a
significant disparity between recurring revenues and the costs of maintaining
or increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State is required to take actions to
increase receipts and/or reduce disbursements as it enacts the budget for that
year, and under the State Constitution, the Governor is required to propose a
balanced budget each year. There can be no assurance, however, that the
Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disburse-
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ments in future fiscal years. For example, the fiscal effects of tax reductions
adopted in the last several fiscal years (including 1998-99) are projected to
grow more substantially beyond the 1999-2000 fiscal year, with the incremental
annual cost of all currently enacted tax reductions estimated at over $4
billion by the time they are fully effective in State fiscal year 2002-03.
These actions will place pressure on future budget balance in New York State.
Projected Budget Gaps for 2000-01 and 2001-02. The revised Financial Plan
projects a budget gap of $1.9 billion in 2000-01, $300 million higher than the
Executive Budget estimate (after adjusting for the projected costs of
collective bargaining). This estimate includes an assumption for the projected
costs of new collective bargaining agreements, $500 million in assumed
operating efficiencies, as well as the planned application of approximately
$615 million of the $1.82 billion tax reduction reserve. DOB will formally
update its projections of receipts and disbursements for future years as part
of the Governor's 2000-01 Executive Budget submission. The revised expectations
for these years will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 2000-01
Executive Budget recommendations.
Special Considerations. Many complex political, social and economic forces
influence the State's economy and finances, which may in turn affect the State
Financial Plan. These forces may affect the State unpredictably from fiscal
year to fiscal year and are influenced by governments, institutions, and
organizations that are not subject to the State's control. The State Financial
Plan is also necessarily based upon forecasts of national and State economic
activity. Economic forecasts have frequently failed to predict accurately the
timing and magnitude of changes in the national and State economies. The
Division of Budget believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Actual results, however, could differ materially and
adversely from the projections set forth, and those projections may be changed
materially and adversely from time to time. See the section entitled "State
Financial Plan Considerations" below for a discussion of risks and
uncertainties faced by the State.
Effective January 1, 1997, the Health Care Reform Act (HCRA) moved the
hospital industry into a competitive market system by allowing most
non-governmental payers to negotiate reimbursement directly with hospitals.
HCRA continued the New York Prospective Hospital Reimbursement Methodology
(NYPHRM) rate setting system for Medicaid. HCRA legislation is scheduled to
expire on December 31, 1999. It is anticipated that the State Legislature will
convene a special session prior to that date to enact successor HCRA
legislation. Since successor legislation has yet to be adopted, its impact on
the Financial Plan, if any, is unknown at this time.
Outyear Projections of Receipts and Disbursements. In recent years, the
State has closed projected budget gaps of $5.0 billion (1995-96), $3.9 billion
(1996-97), $2.3 billion (1997-98) and less than $1 billion (1998-99). The
State, as a part of the 1998-99 Executive Budget projections submitted to the
Legislature in February 1998, projected a 1999-2000 General Fund budget gap of
approximately $1.7 billion and a 2000-01 gap of $3.7 billion. The State
projects budget gaps of $1.1 billion in 2000-01 and $2.08 billion in 2001-02.
The State and the United University Professionals (UUP) union have reached
a tentative agreement on a new four-year labor contract. The State is
continuing negotiations with other unions representing State employees, the
largest of which is the Civil Service Employees Association (CSEA). CSEA
previously failed to ratify a tentative agreement on a new four-year contract
earlier in 1999. The 1999-2000 Financial Plan has reserved $100 million for
possible collective bargaining agreements, and reserves are contained in the
preliminary outyear projection for 2000-01 to cover the recurring costs of any
new agreements. To the extent these reserves are inadequate to finance such
agreements, the costs of new labor contracts could increase the size of future
budget gaps.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitle-
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ment spending. The State assumes that the 2000-01 Financial Plan will achieve
$500 million in savings from initiatives by State agencies to deliver services
more efficiently, workforce management efforts, maximization of federal and
non-General Fund spending offsets, and other actions necessary to help bring
projected disbursements and receipts into balance. The projections do not
assume any gap-closing benefit from the potential settlement of State claims
against the tobacco industry.
Uncertainties with regard to the economy, as well as the outcome of
certain litigation now pending against the State, could produce adverse effects
on the State's projections of receipts and disbursements. For example, changes
to current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
2000-2001 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
In recent years, including this year, the State has failed to adopt a
budget prior to the beginning of its fiscal year. A delay in the adoption of
the State's budget beyond the statutory April 1 deadline could delay the
projected receipt by the City of State aid, and there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline.
Year 2000 Compliance. New York State is currently addressing Year 2000
("Y2K") data processing compliance issues. Since its inception, the computer
industry has used a two-digit date convention to represent the year. In the
year 2000, the date field will contain "00" and, as a result, many computer
systems and equipment may not be able to process dates properly or may fail
since they may not be able to distinguish between the years 1900 and 2000. The
Year 2000 issue not only affects computer programs, but also the hardware,
software and networks on which they operate. In addition, any system or
equipment that is dependent on an embedded chip, such as telecommunication
equipment and security systems, may also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Year
2000 compliance. The audit, which reviewed the State's Y2K compliance
activities through October 1998, found that the State had made progress in
achieving Y2K compliance, but needed to improve its activities in several
areas, including data interchanges and contingency planning.
In 1996, the State created the Office for Technology ("OFT") to help
address statewide technology issues, including the Year 2000 issue. The Office
for Technology (OFT) will continue to monitor compliance progress for the
State's mission-critical and high-priority systems. OFT submitted a final
quarterly compliance progress report to the Governor's Office for the quarter
ending September 30, 1999. Monthly exception reporting for the remainder of the
year will replace the quarterly reports. The 1999-2000 enacted budget allocates
$19 million for priority embedded systems and $20 million for unanticipated
expenses related to bringing technology into Y2K compliance. OFT reports that
as of September 1999, the State's mission-critical systems are 100% compliant;
93% of the overall compliance effort on the high-priority systems has been
completed with 269 systems now Year 2000 compliant. The State also procured
independent validation and verification services (IV&V) from a qualified vendor
to perform an automated review of code for all mission-critical systems which
was completed in October 1999. Overall, the vendor noted that New York State
agencies had followed and implemented several best practices and therefore the
vendor made very few process recommendations and only a few significant code
check issues (.01% of the code) were remaining after agency reviews of the IV&V
results. These results compare very favorably with results from IV&V of major
systems from other states that the vendor has done.
The State is also addressing a number of issues related to Y2K compliance,
including: testing all data exchange interfaces with federal, state, local and
private data partners for critical systems (as of September 1999, 98% of data
exchanges are done); completing compliance work of priority equipment and
systems that may depend on embedded chips (as of September 1999, 82% of these
systems are compliant); and contacting critical vendors and supply partners to
obtain and monitor Year 2000 compliance status information and
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assurances. The State is also preparing contingency plans. All agencies were
required to complete contingency plans for priority systems and business
processes by the first quarter of calendar year 1999. These plans have been
completed and tested as of June 1999 and are being integrated into the State
Emergency Response Plan under the direction of the State Emergency Management
Office. As of September 1999, 46 agencies have filed their contingency plans
with the State Emergency Management Office. In addition, State agencies that
regulate industries, such as the Public Service Commission, the Banking
Department and others are closely monitoring the few regulated companies that
are not yet compliant. The Public Service Commission reports that as of
September 1999, all State-regulated utilities, with the exception of a few
small water and cable companies, are ready for the Year 2000, including the
existence of comprehensive contingency plans.
The State has also been working with local governments since December 1996
to raise awareness, promote action and provide assistance with Year 2000
compliance. This has included assisting local governments in addressing their
local Y2K issues, guiding local governments in holding Citizen Forums to inform
citizens of compliance and contingency activities in their community, and
guiding citizens in their individual preparations for Year 2000. Presentations,
teleconferences, written guidance materials, videotapes, a comprehensive web
site and brochures have been made available and widely distributed.
While the State is taking what it believes to be appropriate action to
address Year 2000 compliance, there can be no guarantee that all of the State's
systems and equipment will be Year 2000 compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Year 2000
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Year 2000 compliance could have an
adverse impact on State operations or finances as well.
Government Funds Comprising the State Financial Plan. Four governmental
fund types comprise the State Financial Plan: the General fund, the Special
Revenue Funds, the Capital Projects funds and the Debt Service funds.
General Fund. The General Fund is the principal operating fund of the
State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund
and receives almost all State taxes and other resources not dedicated to
particular purposes. General Fund moneys are also transferred to other funds,
primarily to support certain capital projects and debt service payments in
other fund types. In the State's 1999-2000 fiscal year, the General Fund is
expected by the State to account for approximately 47.1 percent of all
governmental funds disbursements and 69.3 percent of total State Funds
disbursements.
Total General Fund receipts and transfers in 1999-2000 are now projected
to be $39.31 billion, an increase of $2.58 billion from the $36.74 billion
recorded in 1998-99. This total includes $35.94 billion in tax receipts, $1.36
billion in miscellaneous receipts, and $2.02 billion in transfers from other
funds. The transfer of the $1.82 billion surplus recorded in 1998-99 to the
1999-2000 fiscal period has the effect of exaggerating the growth in State
receipts from year to year by depressing reported 1998-99 figures and inflating
1999-2000 projections.
General Fund disbursements, including transfers to support capital
projects, debt service and other funds, are estimated at $37.35 billion in
1999-2000, an increase of $867 million.
Following the pattern of the last two fiscal years, education programs
receive the largest share of new funding contained in the 1999-2000 Financial
Plan. School aid is expected to grow by $831 million or 8.58 percent over
1998-99 levels (on a State fiscal year basis). Outside of education, the
largest growth in spending is for State Operations ($181 million, including
$100 million reserved for possible collective bargaining costs); Debt Service
($183 million), and mental hygiene programs, including funding for a cost of
living increase for care providers ($114 million). These increases were offset,
in part, by spending reductions or actions in health and social welfare ($280
million), and in general State charges ($222 million).
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to
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individuals. The largest areas of spending in this category are for aid to
elementary and secondary schools (41 percent) and for the State's share of
Medicaid payments to providers (22 percent). Grants to Local Governments are
projected at $25.62 billion in 1999-2000, an increase of $926 million over
1998-99.
Under the 1999-2000 enacted budget, General Fund spending on school aid is
projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Spending for Medicaid in 1999-2000 is projected to total $5.54 billion,
essentially unchanged from 1998-99, due in part to the use of $145 million in
other available funds that lowers disbursements in this area. Disbursements for
all other health and social welfare programs are projected to total $2.70
billion, a decrease of $252 million. Lower welfare spending, driven by State
and federal reforms and a robust economy, accounts for most of the decline.
The remaining disbursements primarily support community-based mental
hygiene programs, local transportation programs, and revenue sharing payments
to local governments. Revenue sharing and other general purpose aid to local
governments is projected at $825 million.
State operations pays for the costs of operating the Executive,
Legislative, and Judicial branches of government, including the prison system,
mental hygiene institutions, and the State University system (SUNY). Personal
Service costs account for approximately 73 percent of spending in this
category.
Spending in State operations in 1999-2000 will total $6.85 billion, an
increase by $181 million over the prior year. The growth reflects $100 million
in projected spending for new collective bargaining agreements that the State
expects to be ratified in the current year. The year-to-year growth reflects
$100 million reserved to fund new collective bargining agreements, including
the recent contract ratified by the United University Professionals. Costs for
the State's Year 2000 compliance programs and growth in the Legislative and
Judiciary budgets also contribute to the increase.
General State charges account for the costs of providing fringe benefits
to State employees and retirees of the Executive, Legislature, and Judiciary.
Disbursements in this category are estimated at $2.04 billion, a decrease of
$222 million from the prior year. The change primarily reflects projected
growth of $27 million in a variety of programs offset by the use of proceeds
from the privatization of the Medical Malpractice Insurance Association, which
is expected to offset certain General Fund fringe benefit costs over the next
two fiscal years by approximately $250 million annually.
Debt Service. This category accounts for debt service on short-term
obligations of the State, i.e., the interest costs of the State's commercial
paper program. The commercial paper program is expected to have an average of
approximately $185 million outstanding during 1999-2000. The majority of the
State's debt service is for long-term bonds, and is shown in the Financial Plan
as a transfer to the General Debt Service Fund.
Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources. Long-term
debt service transfers are projected at $2.27 billion in 1999-2000, an increase
of $183 million from 1998-99. The increase reflects debt service costs from
prior-year bond sales (net of refunding savings), and certain sales planned to
occur during the 1999-2000 fiscal year.
Transfers for capital projects provide General Fund support for projects
that are not financed with bond proceeds, dedicated taxes, other revenues, or
federal grants. Transfers in this category are projected to total $168 million
in 1999-2000.The decline of $78 million from the prior year is primarily due
the delay of the receipt of payment of certain reimbursements in 1998-99.
Receipts of $50 million transferred to DRRF in 1998-99 will be used in the
Capital Projects Fund in 1999-2000 to provide pay-as-you-go funding for five
capital programs that were previously funded with bond proceeds. The 1999-2000
enacted budget also reserves $250 million in new resources for DRRF.
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All other transfers (excluding DRRF), which reflect the remaining
transfers from the General Fund to other funds, are estimated to total $385
million in 1999-2000, a decline of $84 million from 1998-99, primarily because
of certain non-recurring transfers that occurred last year.
The DOB estimates that the 1999-2000 State Financial Plan contains actions
that provide non-recurring resources or savings totaling approximately $500
million, or 1.3 percent of General Fund resources, the largest of which is the
first phase of the privatization of MMIA. To the greatest extent possible,
one-time resources are expected to be utilized to finance one-time costs,
including Year 2000 compliance costs and certain capital spending.
Special Revenue Funds. Special Revenue Funds are used to account for the
proceeds of specific revenue sources such as federal grants that are legally
restricted, either by the Legislature or outside parties, to expenditures for
specified purposes. Special Revenue Funds spending is projected at $30.94
billion, an increase of $1.29 billion or 4.35 percent over the prior year.
Special Revenue Funds include Federal grants and State special revenue funds.
Federal grants are projected to comprise 72 percent of all Special Revenue
spending in 1999-2000, comparable to prior years. Disbursements from federal
funds are estimated at $22.17 billion, an increase of $741 million or 3.46
percent. Medicaid is the largest program within federal funds, accounting for
56 percent of total spending in this category. In 1999-2000, Medicaid spending
is projected at $14.32 billion, an increase of $711 million over 1998-99. The
remaining growth in federal funds is primarily for the Child Health Plus
program, which is estimated at $117 million in 1999-2000. This growth is offset
by decreased spending in certain social services programs resulting from more
recent spending reestimates.
State special revenue spending is projected to be $8.77 billion, an
increase of $550 million or 6.69 percent from last year. The spending growth is
primarily due to $661 million for the next phase of the STAR program and $250
million in additional general State charges funded by proceeds from the MMIA
transaction, offset by a decrease of $185 million in projected educational
spending as a result of lower projected Lottery proceeds and a decline of $112
million in transportation disbursements. The remainder reflects the net impact
of spending reestimates.
Capital Projects Funds. Capital Projects Funds account for the financial
resources used in the acquisition, construction or rehabilitation of major
State capital facilities and for capital assistance grants to certain local
governments or public authorities. This fund type consists of the Capital
Projects Fund, which is supported by tax dollars transferred from the General
Fund and various other capital funds established to distinguish specific
capital construction purposes supported by other revenues.
Capital Projects Funds spending in fiscal year 1999-2000 is projected at
$4.18 billion, an increase of $114 million or 2.80 percent from last year.
Transportation, environmental, education and mental hygiene programs are the
major sources of year-to-year spending growth in this category.
Debt Service Funds. Debt Service Funds are used to account for the payment
of principal of, and interest on, long-term debt of the State and to meet
commitments under lease-purchase and other contractual-obligation financing
arrangements. Receipts in these Funds in excess of debt service requirements
are transferred to the General Fund and Special Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General Fund,
and other funds established to accumulate moneys for the payment of debt
service. Total disbursements from the Debt Service Fund type are estimated at
$3.64 billion in 1999-2000, up $370 million or 11.31 percent from 1998-99.
Transportation purposes, including debt service on bonds issued for State and
local highway and bridge programs financed through the New York State Thruway
Authority and supported by the Dedicated Highway and Bridge Trust Fund, account
for $124 million of the year-to-year growth. Debt service for educational
purposes, including State and City University programs financed through the
Dormitory Authority, will increase by $80 million. The remaining growth is for
a variety of programs in mental health and corrections, and for general
obligation financings.
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General Fund: Prior Fiscal Years. New York State's financial operations
have improved during recent fiscal years. During the period 1989-90 through
1991-92, the State incurred General Fund operating deficits that were closed
with receipts from the issuance of TRANs. A national recession, followed by the
lingering economic slowdown in the New York and regional economy, resulted in
repeated shortfalls in receipts and three budget deficits during those years.
During its last six fiscal years, however, the State has recorded balanced
budgets on a cash basis, with positive fund balances as described below. There
can be no assurance, however, that such trends will continue.
Fiscal Year 1998-99. The State ended its 1998-99 fiscal year on March 31,
1999 in balance on a cash basis, with a General Fund cash surplus as reported
by the DOB of $1.82 billion. The cash surplus was derived primarily from
higher-than-projected tax collections as a result of continued economic growth,
particularly in the financial markets and the securities industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 million from the prior fiscal year. The balance is held in
three accounts within the General Fund: the Tax Stabilization Reserve Fund
(TSRF), the Contingency Reserve Fund (CRF) and the Community Projects Fund
(CPF). The TSRF closing balance was $473 million, following an additional
deposit of $73 million in 1998-99. The CRF closing balance was $107 million,
following a deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $312 million.
The closing fund balance excludes $2.31 billion that the State deposited
into the tax refund reserve account at the close of 1998-99 to pay for tax
refunds in 1999-2000 of which $521 million was made available as a result of
the Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 1999. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1998-99, while increasing reported receipts in 1999-2000.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1998-99 fiscal year totaled $36.74 billion,
an increase of 6.34 percent from 1997-98 levels. General Fund disbursements and
transfers to other funds totaled $36.49 billion for the 1998-99 fiscal year, an
increase of 6.23 percent from 1997-98 levels.
Fiscal Year 1997-98. The State ended its 1997-98 fiscal year on March 31,
1998 in balance on a cash basis, with a General Fund cash surplus as reported
by DOB of approximately $2.04 billion. The cash surplus was derived primarily
from higher-than-anticipated receipts and lower spending on welfare, Medicaid
and other entitlement programs.
The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The balance was held in three accounts
within the General Fund: the TSRF, the CRF and the CPF. The TSRF closing
balance was $400 million, following a required deposit of $15 million (repaying
a transfer made in 1991-92) and an extraordinary deposit of $68 million made
from the 1997-98 surplus. The CRF closing balance was $68 million, following a
$27 million deposit from the surplus. The CPF, which finances legislative
initiatives, closed the fiscal year with a balance of $170 million, an increase
of $95 million. The General Fund closing balance did not include $2.39 billion
in the tax refund reserve account, of which $521 million was made available as
a result of the LGAC financing program and was required to be on deposit on
March 31, 1998.
General Fund receipts and transfers from other funds for the 1997-98
fiscal year (including net tax refund reserve account activity) totaled $34.55
billion, an annual increase of $1.51 billion, or 4.57 percent over 1996-97.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.
Fiscal year 1996-97. The State ended its 1996-97 fiscal year on March 31,
1997 in balance on a cash basis, with a General Fund cash surplus as reported
by DOB of approximately $1.42 billion. The cash
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surplus was derived primarily from higher-than-expected revenues and
lower-than-expected spending for social services programs.
The General Fund closing fund balance was $433 million, an increase of
$146 million from the 1995-96 fiscal year. Of that amount, $317 million was in
the TSRF, after a required deposit of $15 million and an additional deposit of
$65 million in 1996-97. In addition, $41 million was deposited in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing fund balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the
previous fiscal year (including net tax refund reserve account activity).
General Fund disbursements and transfers to other funds totaled $32.90 billion
for the 1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal
year.
Cash-Basis Results for the Non-General Funds Over the Last 3
Years. Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most significant change
in the structure of these funds has been the redirection of a portion of
transportation-related revenues from the General Fund to two new dedicated
funds in the Special Revenue and Capital Projects fund types. These revenues
are used to support the capital programs of the Department of Transportation,
the Metropolitan Transportation Authority (MTA) and other transit entities.
In the Special Revenue Funds, disbursements increased from $26.02 billion
to $29.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid and the STAR program. Other activity
reflected dedication of taxes to a new fund for mass transportation, new
lottery games, and new fees for criminal justice programs.
Disbursements in the Capital Projects Funds increased over the three-year
period from $3.54 billion to $4.06 billion, primarily for education,
environment, public protection and transportation programs. The composition of
this fund type's receipts has also changed as dedicated taxes, federal grants
and reimbursements from public authority bonds increased, while general
obligation bond proceeds declined.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and
the ongoing costs of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. Disbursements in this fund
type increased from $2.53 billion to $3.27 billion over the three-year period.
GAAP-Basis Results. State law requires the State to update its projected
financial results on a GAAP-basis on or before September first of each year.
Projected GAAP-Basis Results for Fiscal Year 1999-2000. The State based
its GAAP projections on the cash estimates in the Financial Plan. As of
January, 1999, the General Fund GAAP Financial Plan for 1999-2000 projects
total revenues of $37.47 billion, total expenditures of $37.59 billion and net
other financing uses of $27 million. At the end of 1999-2000, the accumulated
General Fund GAAP surplus is projected to be $1.55 billion.
GAAP-Basis Results for Fiscal Year 1998-99. The State completed its
1998-99 fiscal year with a combined governmental funds operating surplus of
$1.32 billion, which included operating surpluses in the General Fund ($1.078
billion), in Debt Service Funds ($209 million) and in Capital Projects Funds
($154 million) offset, in part, by an operating deficit in Special Revenue
Funds ($117 million).
General Fund. The State reported a General Fund operating surplus of
$1.078 billion for the 1998-99 fiscal year, as compared to an operating surplus
of $1.562 billion for the 1997-98 fiscal year. As a result, the State reported
an accumulated fund balance of $1.645 billion in the General Fund. The 1998-99
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fiscal year operating surplus resulted, in part, from an increase in taxes
receivable of $516 million, a decrease in payables to local government of $262
million, a decrease in accrued liabilities of $129 million and a decrease in
deferred revenues of $69 million. These gains were partially offset by a
decrease in other assets of $117 million and an increase in tax refunds payable
of $102 million.
Revenues increased $1.969 billion (5.7 percent) over the prior fiscal year
with increases in personal income, consumption and use and other taxes, and
miscellaneous revenues. Business tax revenues fell from the prior fiscal year.
Personal income taxes grew $1.733 billion, an increase of nearly 9.3 percent.
The increase in personal income taxes was caused by strong employment and wage
growth and the continued strong performance by the financial markets during
1998. Consumption and use taxes increased $269 million, or 3.8 percent, due to
increased consumer confidence. Other taxes increased $73 million, or 6.9
percent. Miscellaneous revenues increased $145 million, a 5.6 percent increase,
primarily because of an increase in reimbursements from regulated industries
(e.g., banking and insurance) to fund the State's administrative costs.
Business taxes decreased nearly $252 million, or 4.9 percent, because of prior
year refunds and carry forwards which were applied against the current year
(1998) liabilities.
Expenditures increased $1.826 billion (5.5 percent) from the prior fiscal
year, with the largest increases occurring in State aid for education and
general purpose aid spending. Education expenditures grew $1.014 billion (9.1
percent) due mainly to an increase in spending for support for public schools,
handicapped pupil education and municipal and community colleges. General
purpose aid increased nearly $329 million (56.5 percent) due to statutory
changes in the payment schedule. Personal service and fringe benefit costs
increased due to increases in wages and continuing fringe benefits required by
collective bargaining agreements.
Net other financing sources decreased $626 million (159.3 percent)
primarily because appropriated transfers from the Special Revenue Funds
declined by over $230 million with increases of $265 million in appropriated
transfers to Special Revenue, Debt Service and College and University Funds. In
addition, transfers to public benefit corporations increased over $170 million
primarily because of a change in reporting for Roswell Park Cancer Institute.
Special Revenue, Debt Service and Capital Projects Fund Types. An
operating deficit of $117 million was reported for the Special Revenue Funds
for the 1998-99 fiscal year which decreased the accumulated fund balance to
$464 million. Revenues increased $1.108 billion over the prior fiscal year (4.0
percent) as a result of increases in tax and federal grants revenues.
Expenditures increased $1.308 billion (5.3 percent) as a result of increased
costs for local assistance grants. Net other financing uses increased $34
million (1.0 percent).
Debt Service Funds ended the 1998-99 fiscal year with an operating surplus
of $209 million and, as a result, the accumulated fund balance increased to
$2.07 billion. Revenues increased $160 million (6.3 percent) primarily because
of increases in dedicated taxes. Debt service expenditures increased $162
million (6.0 percent). Net other financing sources increased $253 million
(227.4 percent) due primarily to increases in transfers from the General Fund,
patient revenue transfers and the establishment of the Debt Reduction Reserve
Fund.
An operating surplus of $154 million was reported in the Capital Projects
Funds for the State's 1998-99 fiscal year and, as a result, the accumulated
deficit fund balance decreased to $228 million. Revenues increased $242 million
(10.6 percent) primarily because tax revenues increased $101 million and
federal grant revenues increased $94 million for transportation projects.
Expenditures increased $355 million (10.5 percent) primarily because of
increases capital construction spending for transportation and correctional
services projects. Net other financing sources increased by $35 million.
GAAP-Basis Results for Fiscal Year 1997-98. The State completed its
1997-98 fiscal year with a combined Governmental Funds operating surplus of
$1.80 billion, which included an operating surplus in the General Fund of $1.56
billion, in Capital Projects Funds of $232 million and in Special Revenue Funds
of $49 million, offset in part by an operating deficit of $43 million in Debt
Service Funds.
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General Fund. The State reported a General Fund operating surplus of $1.56
billion for the 1997-98 fiscal year, as compared to an operating surplus of
$1.93 billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time
since it began reporting its operations on a GAAP-basis. The 1997-98 fiscal
year operating surplus reflects several major factors, including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income
tax receipts, an increase in taxes receivable of $681 million, an increase in
other assets of $195 million and a decrease in pension liabilities of $144
million. This was partially offset by an increase in payables to local
governments of $270 million and tax refunds payable of $147 million.
Revenues increased $617 million (1.8 percent) over the prior fiscal year,
with increases in personal income, consumption and use and business taxes.
Decreases were reported for other taxes, federal grants and miscellaneous
revenues. Personal income taxes grew $746 million, an increase of nearly 4.2
percent. The increase in personal income taxes resulted from strong employment
and wage growth and the strong performance by the financial markets during
1997. Consumption and use taxes increased $334 million or 5.0 percent as a
result of increased consumer confidence. Business taxes grew $28 million, an
increase of 0.5 percent. Other taxes fell primarily because revenue for estate
and gift taxes decreased. Miscellaneous revenues decreased $380 million, or 12.
7 percent, due to a decline in receipts from the Medical Malpractice Insurance
Association and medical provider assessments.
Expenditures increased $137 million (0.4 percent) from the prior fiscal
year, with the largest increases occurring in State aid for education and
social services spending. education expenditures grew $391 million (3.6
percent) due mainly to an increase in spending for municipal and community
colleges. Social services expenditures increased $233 million (2.6 percent) due
mainly to program growth. Increases in other State aid spending were offset by
a decline in general purpose aid of $235 million (27.8 percent) due to
statutory changes in the payment schedule. Increases in personal and
non-personal service costs were offset by a decrease in pension contribution of
$660 million, a result of the refinancing of the State's pension amortization
that occurred in 1997.
Net other financing sources decreased $841 million (68.2 percent) due to
the nonrecurring use of bond proceeds ($769 million) provided by DASNY to pay
the outstanding pension amortization liability incurred in 1997.
Special Revenue, Debt Service and Capital Projects Funds. An operating
surplus of $49 million was reported for the Special Revenue Funds for the
1997-98 fiscal year, which increased the accumulated fund balance to $581
million. Revenues rose by $884 million over the prior fiscal year (3.3 percent)
as a result of increases in tax and federal grant revenues. Expenditures
increased by $795 million (3.3 percent) as a result of increased costs for
local assistance grants. Net other financing uses decreased $105 million (3.3
percent).
Debt Service Funds ended the 1997-98 fiscal year with an operating deficit
of $43 million and, as a result, the accumulated fund balance declined to $1.86
billion. Revenues increased $246 million (10.6 percent) as a result of
increases in dedicated taxes. Debt service expenditures increased $341 million
(14.4 percent). Net other financing sources increased $89 million (401.3
percent) due primarily to savings achieved through advance refundings of
outstanding bonds.
An operating surplus of $232 million was reported in the Capital Projects
Funds for the State's 1997-98 fiscal year and, as a result, the accumulated
deficit in this fund type decreased to $381 million. Revenues increased $180
million (8.6 percent) primarily as a result of a $54 million increase in
dedicated tax revenues and an increase of $101 million in federal grants for
transportation and local waste water treatment projects. Net other financing
sources increased by $100 million primarily as a result of a decrease in
transfers to certain public benefit corporations engaged in housing programs.
GAAP-Basis Results for Fiscal Year 1996-97. The State completed its
1996-97 fiscal year with a combined governmental funds operating surplus of
$2.1 billion, which included an operating surplus in the
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General Fund of $1.9 billion, in the Capital Projects Funds of $98 million and
in the Special Revenue Funds of $65 million, offset in part by an operating
deficit of $37 million in the Debt Service Funds.
General Fund. The State reported a General Fund operating surplus of $1.93
billion for the 1996-97 fiscal year, as compared to an operating surplus of
$380 million for the prior fiscal year. The 1996-97 fiscal year GAAP operating
surplus reflects several major factors, including the cash basis operating
surplus, the benefit of bond proceeds which reduced the State's pension
liability, an increase in taxes receivable of $493 million, and a reduction in
tax refund liabilities of $196 million. This was offset by an increased payable
to local governments of $244 million.
Revenues increased $1.91 billion (nearly 6.0 percent) over the prior
fiscal year with increases in all revenue categories. Personal income taxes
grew $620 million, an increase of nearly 3.6 percent, despite the
implementation of scheduled tax cuts. The increase in personal income taxes was
caused by moderate employment and wage growth and the strong financial markets
during 1996. Consumption and use taxes increased $179 million or 2.7 percent as
a result of increased consumer confidence. Business taxes grew $268 million, an
increase of 5.6 percent, primarily as a result of the strong financial markets
during 1996. Other taxes increased primarily because revenues from estate and
gift taxes increased. Miscellaneous revenues increased $743 million, a 33.1
percent increase, because of legislated increases in receipts from the Medical
Local Practice Insurance Association and from medical provider assessments.
Expenditures increased $830 million (2.6 percent) from the prior fiscal
with the largest increase occurring in pension contributions and State aid for
education spending. Pension contribution expenditures increased $514 million
(198.2 percent), primarily because the State paid off its 1984-85 and 1985-86
pension amortization liability. Education expenditures grew $351 million (3.4
percent), due mainly to an increase in spending for support for public schools
and physically handicapped children, offset by a reduction in spending for
municipal and community colleges. Modest increases in other State aid spending
was offset by a decline in social services expenditures of $157 million (1.7
percent). Social services spending continues to decline because of cost
containment strategies and declining caseloads.
Net other financing sources increased $475 million (62.6 percent), due
mainly to bond proceeds provided by the Documentary Authority of the State of
New York (DASNY) to pay the outstanding pension amortization, offset by
elimination of prior year LGAC proceeds.
Special Revenue, Debt Service and Capital Projects Funds. An operating
surplus of $65 million was reported for the Special Revenue Funds for the
1996-97 fiscal year, increasing the accumulated fund balance to $532 million.
Revenues increased $583 million over the prior fiscal year (2.2 percent) as a
result of increases in tax and lottery revenues. Expenditures increased $384
million (1.6 percent) as a result of increased costs for departmental
operations. Net other financing sources decreased $275 million (8.0 percent),
primarily because of declines in amounts transferred to other funds.
Debt Service Funds ended the 1996-97 fiscal year with an operating deficit
of $37 million and, as a result, the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6 percent) because of increases in
both dedicated taxes and mental hygiene patient fees. Debt service expenditures
increased $47 million (2.0 percent). Net other financing sources decreased $277
million 92.6 percent) due primarily to an increase in payments on advance
refundings.
An operating surplus of $98 million was reported in the Capital Projects
Funds for the State's 1996-97 fiscal year, and, as a result, the accumulated
fund deficit decreased to $614 million. Revenues increased $100 million (5.0
percent) primarily because a larger share of the real estate transfer tax was
shifted to the Environmental Protection Fund and federal grant revenues
increased for transportation and local waste water treatment projects.
Expenditures decreased $359 million (10.0 percent) because of declines in
capital grants for education, housing and regional development programs and
capital construction spending. Net other financing sources decreased by $637
million as a result of a decrease in proceeds from financing arrangements.
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Due to changing economic conditions and information, public statements or
reports regarding the State Financial Plan and its constituent funds may be
released by the Governor, members of the Legislature, and their respective
staffs, as well as others involved in the budget process from time to time.
Those statements or reports may contain predictions, projections or other items
of information relating to the State's financial condition, including potential
operating results for the current fiscal year and projected baseline gaps for
future fiscal years, that may vary materially and adversely from the
information provided herein.
State Financial Plan Considerations. Many complex political, social and
economic forces influence the State's economy and finances, which may in turn
affect the State's Financial Plan. These forces may affect the State
unpredictably from fiscal year to fiscal year and are influenced by
governments, institutions, and events that are not subject to the State's
control. The Financial Plan is also necessarily based upon forecasts of
national and State economic activity. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
State economies.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent
of corporate and governmental restructuring, federal fiscal and monetary
policies, the level of interest rates, and the condition of the world economy,
which could have an adverse effect on the State. There can be no assurance that
the State economy will not experience results in the current fiscal year that
are worse than predicted, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or
revenue sources is generally made by estimating the change in yield of such tax
or revenue source caused by economic and other factors, rather than by
estimating the total yield of such tax or revenue source from its estimated tax
base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such
as the business and personal income taxes, are consistent with estimates of
total liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the
federal government, and changes in the demand for and use of State services.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
Additional risks to the Financial Plan arise out of potential actions at
the federal level. Potential changes to federal tax law currently under
discussion as part of the federal government's efforts to enact a multi-year
tax reduction package could alter the federal definitions of income on which
certain State taxes rely. Certain proposals, if enacted, could have a
significant impact on State revenues in the future.
The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 created a new Temporary Assistance to Needy Families program (TANF)
partially funded with a fixed federal block grant to states.
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This law also imposes (with certain exceptions) a five-year durational limit on
TANF recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload and conform with certain other federal standards or face potential
sanctions in the form of a reduced federal block grant and increased State/
local funding requirements. Any future reduction could have an adverse impact
on the State's Financial Plan. However, the State has been able to demonstrate
compliance with TANF work requirements to date and does not now expect to be
subject to associated federal fiscal penalties.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this AIS. In the
past, the State has taken management actions to address potential Financial
Plan shortfalls, and DOB believes it could take similar actions should adverse
variances occur in its projections for the current fiscal year.
Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions by the federal government could impact
projected budget gaps for the State. These gaps would result from a disparity
between recurring revenues and the costs of increasing the level of support for
State programs. For example, the fiscal effects of tax reductions adopted in
the last several fiscal years are projected to grow more substantially in the
forecast period, continuing to restrain receipts levels and placing pressure on
future spending levels. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and, under the
State Constitution, the Governor is required to propose a balanced budget each
year. There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years. To help guard against these risks, the
State has projected reserves of $2.4 billion in 1999-2000.
National and State Economic Outlooks. The information below summarizes the
national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1999-2000 Financial Plan.
However, many uncertainties exist in any forecast of the national and State
economies, particularly in light of the recent volatility in the international
economy and domestic financial markets. The timing and impact of changes in
economic conditions are difficult to estimate with a high degree of accuracy.
Unforeseeable events may occur. The actual rate of change in any, or all, of
the concepts that are forecasted may differ substantially and adversely from
the outlook described herein.
U.S. Economy. Economic growth during both 1999 and 2000 is expected to be
slower than it was during 1998. Growth in domestic consumption, which has been
a major driving force behind the nation's strong economic performance recent
years, is expected to slow in 2000 as consumer confidence retreats from
historic highs and the stock market ceases to provide large amounts of extra
discretionary income. The revised forecast projects real GDP growth of 3.8
percent in 1999, slightly below the 1998 growth rate. In 2000 the rate of
growth in real GDP growth is expected to fall further, to 3.1 percent. The
growth of nominal GDP is projected to increase from 4.9 percent in 1998 to 5.2
percent in 1999 and fall to 4.7 percent in 2000. The inflation rate as measured
by the Consumer Price Index is expected to increase to 2.3 percent in 1999 and
rise to 2.8 percent in 2000. The annual rate of job growth is expected to be
2.2 percent in 1999, lower than the strong growth rate experienced in 1998. In
2000, employment growth is forecast to slow further, to 2.0 percent. Growth in
personal income and wages is expected to remain fairly strong in 1999 and again
in 2000.
There are uncertainties inherent in any economic forecast. Consumer or
business spending could be weaker than expected, due, perhaps to further
significant declines in corporate profits or equity values. Additionally, the
international economic and financial disruptions currently being felt around
the globe could worsen or take longer than anticipated to subside. The result
could be a sharp, additional reduction in domestic economic growth. Indeed,
several private sector forecasters have indicated a heightened risk of a
national
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recession beginning in 1999. Under that scenario, the FRB would be likely to
lower short-term interest rates faster and further than expected in an effort
to reignite the nation's economic engines. Alternatively, but less likely, the
pace of US economic growth could be faster if productivity or consumer spending
becomes stronger than anticipated, or if the economies of many of the countries
of Asia and Latin America recover more quickly than expected. If such growth,
or a rapid rise in labor, health or energy costs, awakens long-dormant
inflationary pressures, the FRB may reverse its current position and raise
interest rates.
New York Economy. Continued growth is projected in 1999 and 2000 for
employment, wages, and personal income, although, for 2000, a slowdown in the
growth rate of employment is expected. The growth of personal income is
projected to decrease from 5.2 percent in 1998 to 4.8 percent in 1999, and then
grow 4.9 percent in 2000. The growth in average wages is expected to outpace
the inflation rate in both 1999 and 2000. Overall employment growth is expected
to be 2.0 percent in 1999, almost the same as in 1998, but is expected to drop
to 1.7 percent in 2000, reflecting the slowing growth of the national economy,
continued spending restraint in government, constraints in labor supply, and
continued restructuring in the manufacturing, health care, and banking sectors.
The forecast of the State's economy shows continued expansion during the
1999 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing sector is expected to post a
modest decline. On an average annual basis, the employment growth rate in the
State is expected to be somewhat lower than in 1998 and the unemployment rate
is expected to drop further to 5.1 percent. Personal income is expected to
record moderate gains in 1999. Wage growth in 1999 is expected to be slower
than in the previous year as the recent robust growth in bonus payments
moderates.
The forecast for continued growth, and any resultant impact on the State's
1999-2000 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment and wages or in stock market prices could lead to
unanticipated strong growth in consumer spending. Inventory investment due to
Y2K may be significantly stronger than expected towards the end of this year
possibly followed by significant weakness early next year. Also, improvements
in foreign economies may be weaker than expected and therefore, may have
unanticipated effects on the domestic economy. The inflation rate may differ
significantly from expectations due to the conflicting impacts of a tight labor
market and improved productivity growth as well as to the future direction and
magnitude of fluctuations of oil prices. In addition, the State economic
forecast could over- or underestimate the level of future bonus payments,
financial sector profits or inflation growth, resulting in unexpected economic
impacts. Similarly, the State forecast could fail to correctly estimate the
amount of employment change in the banking, financial and other business
service sectors as well as the direction of employment change that is likely to
accompany telecommunications and energy deregulation.
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of
its work force engaged in manufacturing and an increasing proportion engaged in
service industries. The following paragraphs summarize the state of major
sectors of the New York economy:
Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related
services, such as information processing, law and accounting, is the
State's leading economic sector. The services sector accounts for more
than three of every ten nonagricultural jobs in New York and has a
noticeably higher proportion of total jobs than does the rest of the
nation.
Manufacturing: Manufacturing employment continues to decline in
importance in New York, as in most other states, and New York's economy is
less reliant on this sector than is the nation. The
C-16
principal manufacturing industries in recent years produced printing and
publishing materials, instruments and related products, machinery, apparel
and finished fabric products, electronic and other electric equipment,
food and related products, chemicals and allied products, and fabricated
metal products.
Trade: Wholesale and retail trade is the second largest sector in terms
of nonagricultural jobs in New York but is considerably smaller when
measured by income share. Trade consists of wholesale businesses and
retail businesses, such as department stores and eating and drinking
establishments.
Finance, Insurance and Real Estate: New York City is the nation's
leading center of banking and finance and, as a result, this is a far more
important sector in the State than in the nation as a whole. Although this
sector accounts for under one-tenth of all nonagricultural jobs in the
State, it contributes over one-sixth of all non-farm labor and
proprietors' income.
Agriculture: Farming is an important part of the economy of large
regions of the State, although it constitutes a very minor part of total
State output. Principal agricultural products of the State include milk
and dairy products, greenhouse and nursery products, apples and other
fruits, and fresh vegetables. New York ranks among the nation's leaders in
the production of these commodities.
Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the
employment accounted for by local governments. Public education is the
source of nearly one-half of total state and local government employment.
Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.
In the calendar years 1987 through 1996, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover. The total employment growth rate in
the State has been below the national average since 1987. The unemployment rate
in the State dipped below the national rate in the second half of 1981 and
remained lower until 1991; since then, it has been higher. According to data
published by the US Bureau of Economic Analysis, personal income in the State
has risen more slowly since 1988 than personal income for the nation as a
whole, although preliminary data suggests that, in 1998, the State personal
income rose more rapidly. Total State nonagricultural employment has declined
as a share of national nonagricultural employment.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because the City is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.
Relevant News. On August 22, 1996, the President signed the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 (the "1996
Welfare Act"). This new law made significant changes to welfare and other
benefit programs. Major changes included conversion of AFDC into the TANF block
grant to states, new work requirements and durational limits on recipients of
TANF and limits on assistance provided to immigrants. City expenditures as a
result of welfare reform are estimated in the Financial Plan at $49 million in
fiscal year 1998, $45 million in fiscal year 1999, $38 million in fiscal year
2000 and $44 million in fiscal year 2001. In addition, the City's
naturalization initiative, CITIZENSHIP NYC, will assist immigrants made
ineligible under Federal law to regain eligibility for benefits, by helping
them through the application process for citizenship. The Financial Plan
assumes that 75% of those immigrants who otherwise would have
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lost benefits will become citizens, resulting in projected savings to the City
in public assistance expenditures of $6 million in fiscal year 1999, $24
million in fiscal year 2000 and $25 million in fiscal year 2001. Federal
legislation enacted August 5, 1997, reinstated eligibility for even more
immigrants currently on the rolls than projected. The outyear estimates made by
OMB are preliminary and depend on a variety of factors, which are impossible to
predict, including the implementation of workfare and child care programs
modified by newly enacted State law, the impact of possible litigation
challenging the law, and the impact of adverse economic developments on welfare
and other benefit programs. In accordance with the Federal welfare reform law,
the Governor submitted a State plan to the Federal government and such plan was
deemed complete as of December 2, 1996. New York State's welfare reform,
bringing the State into compliance with the 1996 Welfare Act and making changes
to the Home Relief program, was signed into law on August 20, 1997. The
Governor submitted an amended State plan to the Federal government, reflecting
these changes, on September 20, 1997. Implementation of the changes at the
State level will in part determine the possible costs or savings to the City.
it is expected that OMB's preliminary estimates of potential costs will change,
based on new policies to be developed by the State and City with respect to
benefits no longer funded as Federal entitlements.
On September 11, 1997, the State Comptroller released a report entitled
"The 1997-98 Budget: Fiscal Review and Analysis" in which he identified several
risks to the State Financial Plan and estimated that the State faces a
potential imbalance in receipts and disbursements of approximately $1.5 billion
for the State's 1998-99 fiscal year and approximately $3.4 billion for the
State's 1999-2000 fiscal year. The 1998-99 fiscal year estimate by the State
Comptroller is within the range discussed by the Division of the Budget in the
section entitled "Outyear Projections of Receipts and Disbursements" in the
Annual Information Statement of August 15, 1997. Any increase in the 1997-98
reserve for future needs would reduce this imbalance further and, based upon
results to date, such an outcome is considered possible. In addition, the
Comptroller identified risks in future years from an economic slowdown and from
spending and revenue actions enacted as a part of the 1997-98 budget that will
add pressure to future budget balance. The Governor is required to submit a
balanced budget each year to the State Legislature.
On August 11, 1997 President Clinton exercised his line item veto powers
to cancel a provision in the Federal Balanced Budget Act of 1997 that would
have deemed New York State's health care provider taxes to be approved by the
federal government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was sanctioned by federal
legislation in 1987 and 1991. However, the federal Health Care Financing
Administration (HCFA) regulations governing the use of provider taxes require
the State to seek waivers from HCFA that would grant explicit approval of the
provider taxing system now in place. The State filed the majority of these
waivers with HCFA in 1995 but has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-98 Financial Plan does not anticipate
any provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the
HCFA regulations governing such taxes. The Governor has stated that this
proposal does not appear to address all of the State's concerns, and
negotiations are ongoing between the State and HCFA. In addition, the City of
New York and other affected parties in the health care industry have filed a
lawsuit challenging the constitutionality of the President's line item veto.
On July 31, 1997, the New York State Tax Appeals Tribunal delivered a
decision involving the computation of itemized deductions and personal income
taxes of certain high income taxpayers. By law, the State cannot appeal the
Tribunal's decision. The decision will lower income tax liability attributable
to such taxpayers for the 1997 and earlier open tax years, as well as on a
prospective basis.
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Ratings Agencies. As of December 16, Moody's Investors Service, Inc.
("Moody's") confirmed its New York State general obligation bond rating of
single-A2, and Fitch IBCA ("Fitch") had assigned it an A-plus. On November 9,
1999 Standard & Poor's ("S&P") raised its rating on the New York General
Obligation Bonds from A to A-plus commenting that the outlook looked stable.
On October 6, 1998, Moody's confirmed its New York State general
obligation bond rating of single-A2. On April 20, 1998, New York's general
obligation bond ratings were the lowest of any state, except Louisiana. Moody's
had rated New York State at A2, S&P had given it an A and Fitch had assigned it
an A-plus.
On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds to A from A-, and, in addition, revised its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P rated the State's general obligation bonds AA- from August 1987 to
March 1990 and A+ from November 1982 to August 1987. In March 1990, S&P lowered
its rating of all of the State's general obligation bonds from AA- to A. On
January 13, 1992, S&P lowered its rating on the State's general obligation
bonds from A to A-, and, in addition, reduced its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On
April 26, 1993 S&P revised the rating outlook assessment to stable. On February
14, 1994, S&P revised its outlook on the State's general obligation bonds to
positive and, on August 5, 1996, confirmed its A- rating.
On February 10, 1997, Moody's confirmed its A2 rating on the State's
general obligation long-term indebtedness. On June 6, 1990, Moody's changed its
ratings on all of the State's outstanding general obligation bonds from A1 to
A, the rating having been A1 since May 27, 1986. On November 12, 1990, Moody's
confirmed the A rating. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1.
Authorities. The fiscal stability of the State is related in part to the
fiscal stability of its public authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit
markets could be impaired, and the market price of its outstanding debt may be
materially adversely affected, if any of its public authorities were to default
on their respective obligations. As of September 31, 1998 there were 17 public
authorities that had outstanding debt of $100 million or more each, and the
aggregate outstanding debt, including refunding bonds, of all state public
authorities was $94 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects financed or operated,
such as tolls charged for the use of highways, bridges or tunnels, rentals
charged for housing units and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.
Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a
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portion of Queen Counties, as part of an estimated $7 billion financing plan.
As of the date of this AIS, LIPA has issued over $5 billion in bonds secured
sorely by ratepayer charges. LIPA's debt is not considered either
State-supported or State-related debt.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State HFA, the New York State Urban Development Corporation and certain other
Authorities have in the past required and continue to require substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts, may be
required for these, or other, Authorities in the future. In addition, certain
other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
Metropolitan Transportation Authority. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line
on Staten Island. Through its affiliated agency, the Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance the mass
transit portion of these operations, the MTA has depended, and will continue to
depend for operating support upon a system of State, local government and TBTA
support, and, to the extent available, Federal operating assistance, including
loans, grants and operating subsidies. If current revenue projections are not
realized and/or operating expenses exceed current projections, the TA or
commuter railroads may be required to seek additional State assistance, raise
fares or take other actions.
Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by
the MTA and a special one-quarter of 1 percent regional sales and use tax--
that provide revenues for mass transit purposes, including assistance to the
MTA. In addition, since 1987, State law has required that the proceeds of a one
quarter of 1% mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region be deposited in a special MTA fund for
operating or capital expenses. Further, in 1993 the State dedicated a portion
of the State petroleum business tax to fund operating or capital assistance to
the MTA. The 1999-2000 enacted budget provides State assistance to the MTA
totaling approximately $1.4 billion, an increase of $55 million over the
1998-99 fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance
a portion of a new $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board approved the 1995-99 Capital Program and subsequently
amended it in August 1997 and in March 1999. The MTA plan now totals $12.55
billion. This plan supersedes the overlapping portion of the MTA's 1992-96
Capital Program. This is the fourth capital plan since the Legislature
authorized procedures for the adoption, approval and amendment of MTA capital
programs and is designed to upgrade the performance of the MTA's transportation
systems by investing in new rolling stock, maintaining replacement schedules
for existing assets and bringing the MTA system into a state of good repair.
The currently approved 1995-99 Capital Program assumes the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan is projected to be financed with
assistance from the federal government, the State, the City of New York, and
from various other revenues generated from actions taken by the MTA.
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The MTA is expected to submit a proposed capital plan for 2000 through
2004 by October 1, 1999 for consideration by the CPRB. There can be no
assurance that the proposed capital plan will be approved by the CPRB without
significant modifications, that the plan as adopted will be adequate to finance
the MTA's capital needs over the plan period, or that funding sources
identified in the approved plan will not be reduced or eliminated.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 and 2000-04
Capital Programs or parts thereof, will not be delayed or reduced. Should
funding levels fall below current projections, the MTA would have to revise its
1995-99 and 2000-04 Capital Programs accordingly. If the 1995-99 and 2000-04
Capital Programs are delayed or reduced, ridership and fare revenues may
decline, which could, among other things, impair the MTA's ability to meet its
operating expenses without additional assistance.
Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1999-2000
fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550 million,
and has continued funding at this new level since that date.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have
been determined by the Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid failed to
agree on any recommendations for a new formula.
Municipal Indebtedness. Counties, cities, towns, villages and school
districts have engaged in substantial short-term and long-term borrowings. In
1997, the total indebtedness of all localities in the State, other than New
York City, was approximately $21.0 billion. A small portion (approximately $80
million) of that indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling State legislation. For further
information on the debt of New York localities, see tables 33 and 34 below.
State law requires the Comptroller to review and make recommendations
concerning the budgets of those local government units (other than New York
City) authorized by State law to issue debt to finance deficits during the
period that such deficit financing is outstanding. Twenty-two localities had
outstanding indebtedness for deficit financing at the close of their fiscal
year ending in 1997.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes end bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other
large-scale potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
Litigation. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those
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that involve: (i) employee welfare benefit plans where plaintiffs are seeking a
declaratory judgment nullifying on the ground of federal preemption provisions
of Section 2807-c of the Public Health Law and implementing regulations which
impose a bad debt and charity care allowance on all hospital bills and a 13
percent surcharge on inpatient bills paid by employee welfare benefit plans;
(ii) several challenges to provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology; (iii) the validity
of agreements and treaties by which various Indian tribes transferred title to
the State of certain land in central and upstate New York; (iv) challenges to
the practice of using patients' Social Security benefits for the costs of care
of patients of State Office of Mental Health facilities; (v) an action against
State and City officials alleging that the present level of shelter allowance
for public assistance recipients is inadequate under statutory standards to
maintain proper housing; (vi) alleged responsibility of State officials to
assist in remedying racial segregation in the City of Yonkers; (vii) alleged
responsibility of the State Department of Environmental Conservation for a
plaintiff's inability to complete construction of a cogeneration facility in a
timely fashion and the damages suffered thereby; (viii) challenges to the
promulgation of the State's proposed procedure to determine the eligibility for
and nature of home care services for Medicaid recipients; (ix) a challenge to
the constitutionality of petroleum business tax assessments authorized by Tax
Law SS 301; (x) an action for reimbursement from the State for certain costs
arising out of the provision of preschool services and programs for children
with handicapping conditions, pursuant to Sections 4410 (10) and (11) of the
Education Law; (xi) a challenge to the constitutionality of the Clean
Water/Clean Air Bond Act of 1996 and its implementing regulations; (xii) two
challenges to regulations promulgated by the Superintendent of Insurance that
established excess medical malpractice premium rates for the 1986-87 through
1996-97 fiscal years; and (xiii) an action to compel the State to enforce sales
and excise taxes imposed on tobacco products and motor fuel sold to non-Indian
customers on Indian reservations.
The General Purpose Financial Statements for the 1998-99 fiscal year
report estimated probable awarded and anticipated unfavorable judgments of$895
million, of which $132 million is expected to be paid during the 1999-2000
fiscal year (for more information on the State's estimated liability, see
footnote 14 in the General Purpose Financial Statements for the 1998-99 fiscal
year).
Adverse developments in the proceedings described below, other proceedings
for which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced 1999-2000 Financial Plan. The State believes that the 1999-2000
Financial Plan includes sufficient reserves to offset the costs associated with
the payment of judgments that may be required during the 1999-2000 fiscal year.
These reserves include (but are not limited to) amounts appropriated for court
of claims payments and projected fund balances in the General Fund (for a
discussion of the State's projected fund balances for the 1999-2000 fiscal
year, see the section entitled "Current Fiscal Year"). In addition, any amounts
ultimately required to be paid by the State may be subject to settlement or may
be paid over a multi-year period. There can be no assurance, however, that
adverse decisions in legal proceedings against the State would not exceed the
amount of all potential 1999-2000 Financial Plan resources available for the
payment of judgments, and could therefore affect the ability of the State to
maintain a balanced 1999-2000 Financial Plan.
New York City
The fiscal health of the State may also be particularly affected by the
fiscal health of the City, which continues to require significant financial
assistance from the State. Although the City has maintained balanced budgets in
each of its last seventeen fiscal years and is projected to achieve balanced
operating results for the 1999-2000 fiscal year, there can be no assurance that
the gap closing actions proposed in the Financial Plan can be successfully
implemented or that the City will maintain a balanced budget in future years
without additional state aid, revenue increases or expenditure reductions.
Additional tax increases and reductions in essential City services could also
adversely affect the City's economic base. The City depends on State aid both
to enable the City to balance its budget and to meet its cash requirements.
There can be no assurance that there will not be reductions in State aid to the
City from amounts currently projected; that State
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budgets will be adopted by the April 1st Statutory deadline or interim
appropriations enacted; or that any such reductions or delays will not have
adverse effects on the City's cash flow or revenues. The State could also be
affected by the ability of the City to market its securities successfully in
the public credit markets. The City has achieved balanced operating results for
each of its fiscal years since 1981 as reported in accordance with the
then-applicable GAAP standards. Current law requires the City to prepare
four-year annual financial plans, which are reviewed and revised on a quarterly
basis and includes capital, revenue, and expense projections and outlines
proposed gap-closing for the years with projected budget gaps. An annual
financial report for its most recent completed fiscal year is prepared at the
end of October of each year. The City's current Financial Plan projects a
surplus in the 1999 and 2000 fiscal years, before discretionary transfers and
budget gaps for each of the 2001, 2002 and 2003 fiscal years.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities and a "Control Period" from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to exercise various
fiscal-monitoring functions over the City, and upon the occurrence or
"substantial likelihood and imminence" of the occurrence of certain events,
including, but not limited to a City operating budget deficit of more than $100
million, the Control Board is required by law to reimpose a Control Period.
Currently, the City and its "Covered Organizations" (i.e., those which
receive or may receive money from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "City Financial
Plan"), which the City prepares annually and updates periodically and which
includes the City's capital revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
projections set forth in the City Financial Plan are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing
needs. In City fiscal year 1997-98, the State constitutional debt limit would
have prevented the City from entering into new capital contracts. Therefore, in
1997, the State created the New York City Transitional Finance Authority (TFA)
in order to finance a portion of the City's capital program. Despite this
additional financing mechanism, the City currently projects that, if no further
action is taken, it will reach its debt limit in City's current fiscal year
1999-2000. To continue its capital plan without interruption, the City is
proposing an amendment to the State Constitution to change the methodology used
to calculate the debt limit. Since an amendment to the Constitution to raise
the debt limit could not take effect until City fiscal year 2001 -02 at the
earliest, the City has decided to securitize a portion of its share of the
proceeds from the settlement with the nation's tobacco companies. However, a
number of potential developments may affect both the availability and level of
funding that the City will receive from the tobacco settlement. City officials
have indicated that, should their efforts to securitize a portion of City
tobacco settlement proceeds fail or not be accomplished in a timely manner, the
City will request that the State increase the borrowing authority of the TFA.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected federal or State
aid is not forthcoming, if unforeseen developments in the economy significantly
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reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases
in taxes and reductions in essential City services. The City might also seek
additional assistance from the State. Unforeseen developments and changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with its Financial Plan. According to recent staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax
revenues and produced a substantial surplus for the City in City fiscal year
1997-98. Recent staff reports also indicate that the City projects a surplus
for City fiscal year 1998-99. Although several sectors of the City's economy
have expanded over the last several years, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the performance of the
national economy. In addition, the size of recent tax reductions has increased
to over $2 billion in City fiscal year 1999-2000 through the expiration of a
personal income tax surcharge, the repeal of the non-resident earnings tax and
the elimination of the sales tax on clothing items costing less than $110.
Staff reports have indicated that recent City budgets have been balanced in
part through the use of non-recurring resources and that the City's Financial
Plan relies in part on actions outside its direct control. These reports have
also indicated that the City has not yet brought its long-term expenditure
growth in line with recurring revenue growth and that the City is likely to
continue to face substantial gaps between forecast revenues and expenditures in
future years that must be closed with reduced expenditures and/or increased
revenues. In addition to these monitoring agencies, the Independent Budget
Office (IBO) has been established pursuant to the City Charter to provide
analysis to elected officials and the public on relevant fiscal and budgetary
issues affecting the City.
For the 1999 fiscal year, the City had an operating surplus, before
discretionary and other transfers, and achieved balanced operating results,
after discretionary and other transfers, in accordance with GAAP. The 1999
fiscal year is the nineteenth year that the City has achieved an operating
surplus, before discretionary and other transfers, and balanced operating
results, after discretionary and other transfers.
On June 14, 1999, the City released the Financial Plan for the 2000
through 2003 fiscal years, which relates to the City and certain entities which
receive funds from the City. The Financial Plan reflects changes as a result of
the City's expense and capital budgets for fiscal year 2000, which were adopted
on June 7, 1999. The Financial Plan projects revenues and expenditures for the
2000 fiscal year balanced in accordance with GAAP and projects gaps of $1.8
billion, $1.9 billion and $1.8 billion for fiscal years 2001 through 2003,
respectively.
Changes since adoption of the City's Expense Budget for the 1999 fiscal
year in June 1998, prior to the June 1998 Financial Plan, include: (i) an
increase in projected tax revenues of $762 million, $558 million, $417 million
and $1.4 billion in fiscal years 2000 through 2003, respectively; (ii) $300
million, $250 million, $300 million and $300 million of projected resources in
fiscal years 2000 through 2003, respectively, from the receipt by the City of
funds from the settlement of litigation with the leading cigarette companies;
(iii) a reduction in the assumed collection of $350 million of projected rent
payments for the City's airports to $210 million and a delay in the receipt of
such payments from fiscal year 2000 to fiscal year 2001; (iv) anticipated
proceeds from the proposed sale of the Coliseum in fiscal year 2001 totaling
$345 million; and (v) net increases in spending of $817 million, $739 million,
$713 million and $1.05 billion in fiscal years 2000 through 2003, including
spending for Medicaid, education initiatives, anti-smoking programs, employee
fringe benefit costs, and other agency programs. The Financial Plan includes a
discretionary transfer in the 1999 fiscal year of
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$2.6 billion primarily to pay debt service due in fiscal year 2000, for budget
stabilization purposes, a proposed discretionary transfer in fiscal year 2000
to pay debt service due in fiscal year 2001 totaling $429 million, and a
proposed discretionary transfer in fiscal year 2001 to pay debt service due in
fiscal year 2002 totaling $345 million.
In addition, the Financial Plan sets forth gap-closing actions to
eliminate a previously projected gap for the 2000 fiscal year and to reduce
projected gaps for fiscal years 2001 through 2003. The gap-closing actions for
the 2000 through 2003 fiscal years include: (i) additional agency actions
totaling $502 million, $371 million, $293 million and $283 million for fiscal
years 2000 through 2003, respectively; (ii) additional Federal aid of $75
million in each of fiscal years 2000 through 2003, which include the proposed
restoration of $25 million of Federal revenue sharing and $50 million of
increased Federal Medicaid aid; and (iii) additional State actions totaling
approximately $125 million in each of fiscal years 2000 through 2003. The
Financial Plan also reflects a tax reduction program, which includes the
elimination of the City's non-residents earning tax, the extension of current
tax reductions for owners of cooperative and condominium apartments and a
proposed income tax credit for low income wage earners.
The Financial Plan provides no additional wage increases for City
employees after their contracts expire in fiscal years 2000 and 2001. In
addition, the economic and financial condition of the City may be affected by
various financial, social, economic and political factors which could have a
material effect on the City.
The City annually prepares a modification to its financial plan in October
or November which amends the financial plan to accommodate any revisions to
forecast revenues, expenditures and intergovernmental aid and to specify any
additional gap-closing initiatives to the extent required to offset decreases
in projected revenues or increases in projected expenditures. The Mayor is
expected to publish the first quarter modification for the 2000 fiscal year in
November.
Assumptions. The Financial Plan assumes (i) approval by the Governor and
the State Legislature of the extension of the 14% personal income tax
surcharge, which is scheduled to expire on December 31, 1999 and the extension
of which is projected to provide revenue of $168 million, $507 million, and
$530 million in the 2000, 2001, and 2002 fiscal years, respectively, and of the
extension of the 12.5% personal income tax surcharge, which is scheduled to
expire on December 31, 1998 the extension of which is projected to provide
revenue of $187 million, $531 million and $554 million, and $579 million in the
1999 through 2002 fiscal years, respectively; (ii) collection of the projected
rent payments for the City's airports, totaling $365 million, $175 million,
$170 million, and $70 million in the 1999 through 2002 fiscal years,
respectively, which may depend on the successful completion of negotiations
with the Port Authority or the enforcement of the City's rights under the
existing leases through pending legal actions; and (iii) State approval of the
repeal of the Wicks law relating to contracting requirements for City
construction projects and the additional State funding assumed in the Financial
Plan, and State and Federal approval of the State and Federal gap-closing
actions proposed by the City in the Financial Plan. It is expected that the
Financial Plan will engender public debate which will continue through the time
the budget is scheduled to be adopted in June 1998, and that there will be
alternative proposals to reduce taxes (including the 12.5% personal income tax
surcharge) and increase in spending. Accordingly, the Financial Plan may be
changed by the time the budget for the 1999 fiscal year is adopted. Moreover,
the Financial Plan provides no additional wage increases for City employees
after their contracts expire in fiscal years 2000 and 2001. In addition, the
economic and financial condition of the City may be affected by various
financial, social, economic and political factors which could have a material
effect on the City.
The 2000-2003 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economies and modest employment
growth and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 2000-2003 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent,
if any, to which wage increases for City employees exceed the annual wage costs
assumed for the 2000 through 2003 fiscal years;
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continuation of projected interest earnings assumptions for pension fund assets
and current assumptions with respect to wages for City employees affecting the
City's required pension fund contributions; the willingness and ability of the
State to provide the aid contemplated by the Financial Plan and to take various
other actions to assist the City; the ability of HHC, the BOE and other such
agencies to maintain balanced budgets; the willingness of the Federal
government to provide the amount of Federal aid contemplated in the Financial
Plan; the impact on City revenues and expenditures of Federal and State welfare
reform and any future legislation affecting Medicare or other entitlement
programs; adoption of the City's budgets by the City Council in substantially
the forms submitted by the Mayor; the ability of the City to implement cost
reduction initiatives, and the success with which the City controls
expenditures; the impact of conditions in the real estate market on real estate
tax revenues; the City's ability to market its securities successfully in the
public credit markets; and unanticipated expenditures that may be incurred as a
result of the need to maintain the City's infrastructure.
City Employees. Substantially all of the City's full-time employees are
members of labor unions. The Financial Emergency Act requires that all
collective bargaining agreements entered into by the City and the Covered
Organizations be consistent with the City's current financial plan, except for
certain awards arrived at through impasse procedures. During a Control Period,
and subject to the foregoing exception, the Control Board would be required to
disapprove collective bargaining agreements that are inconsistent with the
City's current financial plan.
Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i)
during the period of negotiations between the City and a union representing
municipal employees concerning a collective bargaining agreement; (ii) if an
impasse panel is appointed, then during the period commencing on the date on
which such panel is appointed and ending sixty days thereafter or thirty days
after it submits its report, whichever is sooner, subject to extension under
certain circumstances to permit completion of panel proceedings; or (iii)
during the pendency of an appeal to the Board of Collective Bargaining.
Although State law prohibits strikes by municipal employees, strikes and work
stoppages by employees of the City and the Covered Organizations have occurred.
The 2000-2003 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to Federal or State funds or water and sewer funds, will increase from
an estimated level of 211,050 on June 30, 1999 to an estimated level of 212,401
by June 30, 2003, before implementation of the gap-closing programs included in
the Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The Financial Plan reflects the costs of the settlements and
arbitration awards with the United Federation of Teachers ("UFT"), a coalition
of unions headed by District Council 37 of the American Federation of State,
County and Municipal Employees ("District Council 37") and other bargaining
units, which together represent approximately 98% of the City's workforce, and
assumes that the City will reach agreement with its remaining municipal unions
under terms which are generally consistent with such settlements and
arbitration awards. These contracts are approximately five years in length and
have a total cumulative net increase of 13%. Assuming the City reaches similar
settlements with its remaining municipal unions, the cost of all settlements
for all City-funded employees would exceed $2 billion annually, during fiscal
years 2000 through 2003. The Financial Plan provides no additional wage
increases for City employees after their contracts expire in fiscal years 2000
and 2001. The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
The City's pension expenditures in fiscal year 1999 were $1.43 billion. In
each of fiscal years 2000 through 2003, these expenditures are expected to
approximate $1.29 billion, $1.23 billion, $.95 billion and $.76 billion,
respectively. Certain of the systems provide pension benefits of 50% to 55% of
"final pay" after 20 to 25 years of service with additional benefits for
subsequent years of service. For the 1998 fiscal year, the City's total annual
pension costs, including the City's pension costs not associated with the five
major actuarial systems, plus Federal Social Security tax payments by the City
for the year, were approximately
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18.93% of total payroll costs. In addition, contributions are also made by
certain component units of the City and other government units directly to the
three cost sharing multiple employer actuarial systems. The State Constitution
provides that pension rights of public employees are contractual and shall not
be diminished or impaired. For the 1998 fiscal year, the City's total annual
pension costs, including the City's pension costs not associated with the five
major actuarial systems, plus Federal Social Security tax payments by the City
for the year, were approximately 18.93% of total payroll costs. In addition,
contributions are also made by certain component units of the City and
government units directly to the three cost sharing multiple employer actuarial
systems. The State Constitution provides that pension rights of public
employees are contractual and shall not be diminished or impaired.
Reports on the City Financial Plan. From time to time, the Control Board
staff, OSDC, the City Comptroller, the IBO and others issue reports and make
public statements regarding the City's financial condition, commenting on,
among other matters, the City's financial plans, projected revenues and
expenditures and actions by the City to eliminate projected operating deficits.
Some of these reports and statements have warned that the City may have
underestimated certain expenditures and overestimated certain revenues and have
suggested that the City may not have adequately provided for future
contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of its
expenditure increases and to provide necessary services. It is reasonable to
expect that reports and statements will continue to be issued and to engender
public comment.
From time to time, the Control Board staff, OSDC, the City Comptroller,
the IBO and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City to
eliminate projected operating deficits. Some of these reports and statements
have warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the City's future economic and social conditions and have questioned
whether the City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide necessary
services. It is reasonable to expect that reports and statements will continue
to be issued and to engender public comment.
On July 14, 1999, the City Comptroller issued a report on the adopted
budget for fiscal year 2000 and the Financial Plan. Taking into account the
risks and additional resources identified in the report, the report projected a
surplus for fiscal year 2000 of between $223 million and $891 million,
including the $429 million surplus allocated to the Budget Stabilization
Account. In addition, taking into account the risks and additional resources
identified in the report and the budget gaps projected in the Financial Plan,
the report projected budget gaps of between $1.8 billion and $3.5 billion, $1.7
billion and $3.6 billion, and $1.7 billion and $4.1 billion in fiscal years
2001 through 2003, respectively.
With respect to fiscal years 2000 through 2003, the report identified
baseline risks of between $338 million and $998 million, $654 million and $2.4
billion, $600 million and $2.4 billion and $719 million and $2.9 billion,
respectively, depending upon whether (i) the State approves the extension of
the 14% personal income tax surcharge; (ii) the City incurs additional labor
costs as a result of the expiration of labor contracts starting in fiscal year
2001 which, if settled at the current forecast level of inflation, would result
in additional costs totaling $345 million in fiscal year 2001, $713 million in
fiscal year 2002 and $1.1 billion in fiscal year 2003; (iii) the State approves
the continuation in fiscal years 2000 through 2003 of temporary State Medicaid
cost containment; and (iv) the City receives $300 million, $250 million, $300
million and $300 million in fiscal years 2000 through 2003, respectively, from
the tobacco settlement. Additional risks identified in the report for fiscal
years 2000 through 2003 include assumed payments from the Port Authority
relating to the City's claim for back rentals, which are the subject of
arbitration; State and Federal gap-closing actions proposed in the Financial
Plan; possible increased overtime expenditures; the sale of the New York City
Coliseum in fiscal year 2001; the write down of outstanding education aid
receivables of approximately $100 million in
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each of fiscal years 2002 and 2003; and a possible $149 million shortfall in
tax revenues in fiscal year 2003. The report noted that these risks may be
offset by additional resources of between $659 million and $873 million in
fiscal years 2000 through 2003, due to the potential for higher than forecast
tax revenues, lower than forecast payables for prior years, possible debt
service savings, additional State education aid, the possible failure to spend
funds for the construction of three sports facilities and lower pension costs
resulting from excess earnings on pension assets in the 1999 fiscal year.
In his report, the City Comptroller also noted that possible changes to
the assumptions and methods used to compute actuarial liabilities, including
changes in the mortality, disability, investment return and wage assumptions,
could increase the City's pension expenditures by up to $600 million annually,
and that the Financial Plan has provided reserves of $65 million, $250 million,
$300 million and $260 million in fiscal years 2000 through 2003 to absorb some
of the anticipated cost increases. The report further noted that the City
Comptroller's forecast is contingent on the continued growth of the City
economy and that the fear of renewed inflationary pressures has created
uncertainty in the bond market which may dampen economic growth in the future.
The report also indicated that a possible negotiated settlement of a class
action, filed on behalf of approximately 65,000 persons challenging the
Department of Corrections policy of strip searching detainees arrested for
nonfelony offenses, may expose the City to substantial costs from the
settlement of litigation. The report noted that, while settlement negotiations
with representatives of the class are being conducted and, therefore, estimates
of the potential cost of this litigation cannot be determined, the City has
recently settled four cases for $25,000 each.
On August 25, 1998, the City Comptroller issued a report reviewing the
current condition of the City's major physical assets and the capital
expenditures required to bring them to a state of good repair. The report
estimated that the expenditure of approximately $91.83 billion would be
required over the next decade to bring the City's infrastructure to a
systematic state of good repair and address new capital needs already
identified, and that the City's current Ten-Year Capital Strategy, together
with funding received from other sources, is projected to provide approximately
$52.08 billion. This represents the first time the Comptroller has issued such
a report since May 1979. The capital need identified in the 1979 report was
approximately two times greater than the actual capital expenditures for the
period covered by that report. OMB notes that in the 1979 report, the
Comptroller identified a capital need over seven times greater than the capital
budget then proposed by the Mayor. The Comptroller's current report estimates a
capital need of approximately twice the amount of the capital spending proposed
by the Mayor.
The recent report noted that the City's ability to meet all capital
obligations is limited by law, as well as funding capacity, and that the issue
for the City is how best to set priorities and manage limited resources. The
report stated that its analysis is not limited to assets valued over $10
million. It is noted that the annual City capital asset condition survey as
required by section 1110-a of the City Charter reviews items valued at $10
million or more. The report also includes major systems like traffic signal
systems, street lighting, the East River bridges and assets leased to the
Transit Authority and the Water Board. The report's findings relate only to
current infrastructure and do not address future capacity or technology needs.
While the report indicates that the demands of the City's infrastructure
outstrip the City's ability to pay for them, the report identifies several
potential alternative methods for capital financing.
On July 15, 1999, the staff of the OSDC issued a report on the Financial
Plan. With respect to fiscal year 2000, the report identified a possible gap of
$13 million, reflecting revenues which could exceed projections in the
Financial Plan by $290 million, a $200 million shortfall in anticipated Federal
and State assistance, a possible $70 million increase in overtime costs and the
write down of approximately $33 million of outstanding education aid
receivables. With respect to fiscal years 2001 through 2003, the report
identified net risks of $530 million, $447 million and $266 million which, when
added to gaps projected in the Financial Plan, would result in gaps of $2.4
billion, $2.3 billion and $2.1 billion in fiscal years 2001 through 2003,
respectively. The risks identified in the report included a $200 million
shortfall in anticipated Federal and State assistance in each of fiscal years
2001 through 2003, the potential for increased overtime costs, the write down
of outstanding State education aid receivables of approximately $100 million in
each of fiscal
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years 2002 and 2003, $100 million of unspecified asset sales in fiscal year
2002 and delays in the receipt of Port Authority lease payments assumed in the
Financial Plan. However, the report noted that tax revenues could be greater
than forecast by the City by $155 million, $210 million and $255 million in
fiscal years 2001 through 2003, respectively. The report also identified a
number of other issues, including a possible delay in the receipt of the City's
share of the proceeds under the settlement with the nation's tobacco companies;
the extension of the 14% personal income tax surcharge; the possibility of
pension costs being $250 million greater than assumed in the Financial Plan in
each of fiscal years 2001 through 2003, as a result of changed actuarial
assumptions; and the potential for wage increases which, at the projected
inflation rate, would increase gaps by $285 million, $635 million and $1.0
billion in fiscal years 2001 through 2003, respectively. The report also noted
the possibility that the Federal Reserve will raise interest rates and slow the
economy, which could depress Wall Street profits below the levels projected by
the City and have the potential to seriously impact the City's nonproperty tax
revenue forecasts.
On July 15, 1999, the staff of the Control Bond issued a report reviewing
the Financial Plan. The report noted that the City is likely to end fiscal year
2000 in balance. However, the report identified risks of $562 million, $293
million, $640 million and $499 million for fiscal years 2000 through 2003,
respectively, which, when combined with the City's projected gaps, results in
estimated gaps of $562 million, $2.1 billion, $2.5 billion and $2.3 billion for
fiscal years 2000 through 2003, respectively, before making provision for any
increased labor costs which may occur when the current contracts with City
employees expire in calendar year 2000. The report noted the possibility that
non-property taxes in fiscal year 2000 could be $250 million greater than
forecast in the Financial Plan. However, the report also identified risks for
fiscal years 2000 through 2003, which include (i) the possibility that the City
may decide to fund the $63 million annual cost of teachers' salary
supplementation for fiscal years 2000 through 2003, which the State failed to
fund in the 1999 fiscal year, and an additional risk of approximately $100
million in each of fiscal years 2002 and 2003 for BOB resulting from the
write-down of funds owed to BOE by the State which have been outstanding for
ten or more years; (ii) the receipt of assumed rental payments from the Port
Authority relating to the City's claim for back rents, which are the subject of
arbitration; (iii) a possible delay in the receipt of $300 million from the
tobacco settlement in fiscal years 2000 and 2001; (iv) $200 million of Federal
and State gap-closing actions assumed in the Financial Plan for each of fiscal
years 2000 through 2003; and (v) $177 million in fiscal year 2000 from the
lapse of State Medicaid cost containment, which has been extended subsequent to
the report.
In its report, the staff of the Control Board noted that total debt
service is expected to increase from 9.2% of total revenues and 15.8% of tax
revenues in the 1999 fiscal year to 11.6% of total revenues and 19% of tax
revenues in fiscal year 2003, and that the City's capital plant will require
additional resources at the same time that a rising debt service burden must be
contained. With respect to HHC, the report noted that HHC revenues are expected
to fall during the Financial Plan period, primarily due to falling Medicaid
receipts, that HHC will face increasing financial pressure when the State
implements mandatory Medicaid managed care beginning in fiscal year 2000 and
that the eventual size of the projected gaps for HHC in fiscal years 2002 and
2003 may change substantially from current projections, as the revenue impact
of proposed State and Federal reforms, growth in managed care and shifting
utilization patterns remain largely uncertain. Finally, the report noted that,
given the length of the current expansion, there is an increasing probability
that a recession related to the end of the long bull market will occur by the
end of the Financial Plan period, and it is likely that the next downturn, if
and when it occurs, will have a disproportionately great impact on the City
because of its dependence on income flows from financial services.
Previous Reports. From time to time, the Control Board staff, OSDC, the
City Comptroller, the IBO and others issue reports and make public statements
regarding the City's financial condition, commenting on, among other matters,
the City's financial plans, projected revenues and expenditures and actions by
the City to eliminate projected operating deficits. Some of these reports and
statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the
City may not have adequately provided for future contingencies. Certain of
these reports have analyzed the City's future economic and social conditions
and have questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and to
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provide necessary services. It is reasonable to expect that reports and
statements will continue to be issued and to engender public comment.
On May 24, 1999, the City Comptroller issued a report on the financial
plan published on April 22, 1999 (the "April Financial Plan"). With respect to
the 1999 fiscal year, the report identified a possible surplus of $94 million,
after $2.1 billion of discretionary transfers and subsidy payments assumed in
the April Financial Plan, due to the possibility of higher than forecasted tax
revenues. Taking into account the risks and additional resources identified in
the report, the report projected a surplus for fiscal year 2000 of between $31
million and $211 million, in addition to the $429 million surplus allocated to
the Budget Stabilization Account and the $200 million General Reserve in the
Executive Budget. In addition, taking into account the risks and additional
resources identified in the report and the budget gaps projected in the April
Financial Plan, the report projected budget gaps of between $1.8 billion and
$3.0 billion, $1.8 billion and $3.1 billion, and $2.0 billion and $3.6 billion
in fiscal years 2001 through 2003, respectively.
With respect to fiscal years 2000 through 2003, the report identified
baseline risks of between $698 million and $873 million, $1.0 billion and $2.2
billion, $978 million and $2.2 billion, and $1.1 billion and $2.7 billion,
respectively, depending upon whether the State approves the extension of the
14% personal income tax surcharge and whether the City incurs additional labor
costs as a result of the expiration of labor contracts starting in fiscal year
2001 which, if settled at the current forecast level of inflation, would result
in additional costs totaling $345 million in fiscal year 2001, $713 million in
fiscal year 2002 and $1.1 billion in fiscal year 2003. Additional risks
identified in the report for fiscal years 2000 through 2003 include the
revenues from the nonresident earnings tax, which the State Legislature has
voted to repeal, at a potential cost to the City of between $360 million and
$398 million annually starting in fiscal year 2000; assumed payments from the
Port Authority relating to the City's claim for back rentals, which are the
subject of arbitration; State and Federal gap-closing actions proposed in the
April Financial Plan; possible increased overtime expenditures; the sale of the
New York City Coliseum in fiscal year 2001; and the write-down of outstanding
education aid receivables of approximately $100 million in each of fiscal years
2002 and 2003. The report also noted that these risks may be offset by
additional resources of approximately $900 million in each of fiscal years 2000
through 2002 and approximately $800 million in fiscal year 2003, due to the
potential for higher than forecast tax revenues, lower than forecast payables
for prior years, possible debt service savings, additional tax revenues if the
State failed to approve the proposed sales tax reductions assumed in the April
Financial Plan, additional State education aid and the possible failure to
spend funds for the construction of three sports facilities. The report further
noted that expenditure growth continued to exceed revenue growth, and that
deficits could increase if the economy deteriorates. In addition, the report
noted that HHC faces a number of uncertainties that may have a negative impact
on its long-term viability, including proposed State and Federal reductions to
both Medicaid and Medicare and a significant decline in patient utilization.
The decline in utilization has been primarily reflected in Medicaid revenue
which accounts for approximately 50% of HHC's total revenues, and which has
been adversely affected by a smaller welfare population, local welfare cost
containment initiatives and greater competition for Medicaid funds among area
hospitals. The report also indicated that a possible negotiated settlement of a
class action, filed on behalf of approximately 63,000 persons challenging the
Department of Corrections policy of strip searching detainees arrested for
nonfelony offenses, may expose the City to substantial costs from the
settlement of litigation.
On May 20, 1999, the staff of the OSDC issued a report on the Executive
Budget for fiscal year 2000. The report notes that tax revenues are likely to
be higher than forecast by the City for fiscal years 1999 and 2000 by a total
of $275 million, which may be needed to offset potential budget risks, such as
a possible delay in the receipt of the proceeds from the tobacco settlement and
shortfalls in Federal and State gap-closing aid assumed in the April Financial
Plan. In addition, the report noted that the Governor is expected to approve
legislation, despite objections from a number of State and City officials,
which could repeal the nonresident income tax, which contributes approximately
$360 million annually to the City, and that the City Council is contemplating
restoring budget cuts proposed by the Mayor. With respect to the subsequent
fiscal years in the April Financial Plan, the report noted that, while the
budget gaps have been reduced to about $1.7 billion annually, they make no
provision for wage increases after the expiration of current contracts which,
at the
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projected rate of inflation, would increase costs by more than $1 billion by
fiscal year 2003. In addition, the report noted that it is anticipated that an
independent actuarial consulting firm reviewing the assumptions and
methodologies to compute City pension contributions will issue its report in
June 1999 and will recommend changes, such as a reduction in the pension fund
investment earnings assumption. These changes, in addition to those that the
City Actuary may recommend, could cost in excess of $500 million annually. In
addition, the report noted that legislation is under consideration that would
increase retirement benefits for certain City employees. The report noted that
the City has already included between $195 million and $280 million annually in
the April Financial Plan for fiscal years 2001 through 2003 to cover these
potential costs, and that pension costs could be reduced by about $550 million
in fiscal year 2002 by accelerating the recognition of investment gains over
the last three years, rather than phasing them in over a five-year period.
However, the report noted that the savings would not be sufficient to prevent
budget gaps from widening beginning in fiscal year 2003. Finally, the report
noted that the City remains vulnerable to an economic downturn which could
result in a significant shortfall in projected nonproperty tax revenues and
higher pension fund contributions and public assistance costs.
On May 27, 1999, the staff of the Control Board issued a report on the
April Financial Plan. The report noted that the City will end the 1999 fiscal
year with a substantial surplus and that the budget proposed by the Mayor for
fiscal year 2000 also appears to be balanced. However, the report noted that
the lack of a State budget leaves uncertainties as to the amount of
intergovernmental aid which will be available to the City in fiscal year 2000,
and that the proposed elimination by the State of the City's nonresident
earnings tax will require the City to make appropriate adjustments to its
revenue and expenditure forecasts. The report further noted that large gaps
still exist in subsequent fiscal years of the April Financial Plan, even before
accounting for known risks such as the impact of future collective bargaining
negotiations. Finally, the report noted that the City's business and personal
income taxes are particularly susceptible to the vagaries of the financial
markets and, if the economy falters, the City will likely experience a decline
in revenues and an increase in social service costs which will increase the
out-year gaps in the April Financial Plan.
On May 14, 1999, the IBO released a report providing its analysis of the
April Financial Plan. The report estimated a potential surplus of $356 million
in fiscal year 2000 and potential gaps of $2.3 billion, $3.0 billion and $3.1
billion for fiscal years 2001 through 2003, respectively, which reflect, among
other things, salary increases for City employees totaling $232 million, $607
million and $1.0 billion in fiscal years 2001 through 2003, respectively, which
are not included in the April Financial Plan. Additional re-estimates by the
IBO include tax revenue estimates which exceed those set forth in the April
Financial Plan by $144 million, $289 million, $356 million, $406 million and
$361 million in fiscal years 1999 through 2003, respectively. Uncertainties
identified in the report include collection of projected rent payments for the
City's airports totaling $330 million, $150 million and $120 million in fiscal
years 2001 through 2003, respectively, possible additional overtime
expenditures totaling $114 million in each of fiscal years 2000 through 2003
and Federal and State gap-closing actions assumed in the April Financial Plan
relating to Medicaid assistance or cost containment, State tort reform
legislation and State funding for low income uninsured disabled children. The
report noted that, while the strength of the local economy is helping the City
solve many of its near term budget problems, persistently large projected
out-year gaps remain a major concern for the City, and even a modest slackening
of the growth forecast for the next four years could increase projected budget
gaps.
Seasonal Financing. The City since 1981 has fully satisfied its seasonal
financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. The City anticipates that its
seasonal financing needs for its 2000 fiscal year will be satisfied by the
issuance of the Notes. The City issued $500 million of short-term obligations
in the 1999 fiscal year to finance the City's projected cash flow needs for the
1999 fiscal year. The City issued $1.075 billion of short-term obligations in
fiscal year 1998 to finance the City's projected cash flow needs for the 1998
fiscal year. The City issued $2.4 billion of short-term obligations in fiscal
year 1997. Seasonal financing requirements for the 1996 fiscal year increased
to $2.4 billion from $2.2 billion and $1.75 billion in the 1995 and 1994 fiscal
years, respectively. The delay in the adoption of the State's budget in certain
past fiscal years has required the City to issue short-term notes in amounts
exceeding those expected early in such fiscal years.
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Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the 1999 Modification and 2000-2003 Financial Plan
City Financial Plan. The City is a party to numerous lawsuits and is the
subject of numerous claims and investigations. The City has estimated that its
potential future liability on account of outstanding claims against it as of
June 30, 1999 amounted to approximately $3.5 billion. This estimate was made by
categorizing the various claims and applying a statistical model, based
primarily on actual settlements by type of claim during the preceding ten
fiscal years, and by supplementing the estimated liability with information
supplied by the City's Corporation Counsel.
Ratings Agencies. On February 24, 1998 Moody raised its rating on New York
City General Obligation Bonds from Baa1 to A3. Likewise S&P raised its rate to
A-minus from triple-B-plus on July 16, 1998. Also Fitch increased its rating to
A from A-minus on March 8, 1999. Fitch commented that the rating upgrade
reflected sustained broad based economic growth, a surging real estate market
that should continue to accrue benefits over the next few years, and strong
financial operating results.
On August 6, 1998, as well as July 2, June 8 and May 27, Fitch rated New
York City's tax-exempt general obligation bonds as "A-". Fitch qualified that
rating, stating that concerns still remained over significant projected outyear
budget funding challenges coupled with sizable reliance on the securities
industry. On July 2, 1998, Moody's revised its rating on the New York City
General Obligation Bonds to Aaa from Baa1.
On July 16, 1998, S&P increased New York City's bond rating to A-, up one
notch from BBB+, but analysts at the agency also cautioned that New York still
had room for improvement and that they were worried about the City's rising
long-term debt and the Council's plan to cut taxes by $200 million this year
and $500 million in future years. On July 7, 1998, S&P had assigned its
triple-B-plus rating to New York City general obligation bonds, stating that
the ratings had been placed on CreditWatch with positive implications.
On February 3, 1998, S&P raised its credit outlook for New York City's
outstanding general obligation bonds from stable to positive but maintained its
BBB-plus rating. The City has held this rating since July 10, 1995, when S&P
lowered its rating from A-to BBB+ and removed City bonds from CreditWatch. S&P
stated that "structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector." Other
factors identified by S&P's in lowering its rating on City bonds included a
trend of using one-time measures, including debt refinancings, to close
projected budget gaps, dependence on unratified labor savings to help balance
the City Financial Plan, optimistic projections of additional federal and State
aid or mandate relief, a history of cash flow difficulties caused by State
budget delays and continued high debt levels. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P. On
July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 10, 1995, S&P revised its rating of City
bonds downward to BBB+, as discussed above. On November 25, 1996, S&P issued a
report which stated that, if the City reached its debt limit without the
ability to issue bonds through other means, it would cause a deterioration in
the City's infrastructure and significant cutbacks in the capital plan which
would eventually impact the City's economy and revenues, and could have
eventual negative credit implications.
On February 24, 1998 Moody's raised its rating for City general obligation
bonds from Baa1 to A3, based on improvement in its financial condition and
economy. Previously, on July 17, 1997, Moody's had changed its outlook on City
bonds to positive from stable. On March 1, 1996, Moody's stated that the rating
for the City's Baa1 general obligation bonds remains under review for a
possible downgrade pending the outcome of the adoption of the City's budget for
the 1997 fiscal year and in light of the status of the debate on public
assistance and Medicaid reform; the enactment of a State budget, upon which
major assumptions
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regarding State aid are dependent, which may be extensively delayed; and the
seasoning of the City's economy with regard to its strength and direction in
the face of a potential national economic slowdown. Moody's ratings of City
bonds were revised in November 1981 from B (in effect since 1977) to Ba1, in
November 1983 to Baa, in December 1985 to Baa1, in May 1988 to A and again in
February 1991 to Baa1.
On February 3, 1998, Fitch Investors Service, Inc. ("Fitch") set its
rating of City general obligation bonds at A-, which it has maintained since
July 15, 1993. On February 28, 1996, Fitch placed the City's general obligation
bonds on FitchAlert with negative implications. On November 5, 1996, Fitch
removed the City's general obligation bonds from FitchAlert although Fitch
stated that the outlook remains negative. Since then Fitch has revised the
outlook to stable. There is no assurance that such ratings will continue for
any given period of time or that they will not be revised downward or withdrawn
entirely. Any such downward revision or withdrawal could have an adverse effect
on the market prices of the City's general obligation bonds.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state
and local income taxes, could have a severe impact on funding methods under
which municipalities operate. With respect to property taxes, the report noted
that the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest
deduction would result in a significant reduction in affordability and, thus,
in the demand for, and the valuation of, real estate. The report noted that
rapid losses in property valuations would be felt by many municipalities,
hurting their revenue raising abilities. In addition, the report noted that the
loss of the current deduction for real property and state and local income
taxes from Federal income tax liability would make rate increases more
difficult and increase pressures to lower existing rates, and that the cost of
borrowing for municipalities could increase if the tax-exempt status of
municipal bond interest is worth less to investors. Finally, the report noted
that tax anticipation notes issued in anticipation of property taxes could be
hurt by the imposition of a flat tax, if uncertainty is introduced with regard
to their repayment revenues, until property values fully reflect the loss of
mortgage and property tax deductions.
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APPENDIX D
SPECIAL INVESTMENT CONSIDERATIONS
RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
Overview
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per share and the interest
income of, the Vista California Tax Free Money Market Fund or the Vista
California Intermediate Tax Free Income Fund, or result in the default of
existing obligations, including obligations which may be held by the Vista
California Tax Free Money Market Fund or the Vista California Intermediate Tax
Free Income Fund. The following section provides only a brief summary of the
complex factors affecting the financial condition of California, and is based
on information obtained from California, as publicly available prior to the
date of this Statement of Additional Information. The information contained in
such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local
issuers may be unrelated to the creditworthiness of California, and that there
is no obligation on the part of California to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1994, with ratings increases since 1996. The ratings of certain
related debt of other issuers for which California has an outstanding lease
purchase, guarantee or other contractual obligation (such as for state-insured
hospital bonds) are generally linked directly to California's rating. Should
the financial condition of California deteriorate again, its credit ratings
could be reduced, and the market value and marketability of all outstanding
notes and bonds issued by California, its public authorities or local
governments could be adversely affected.
Economic Factors. California's economy is the largest among the 50 states
and one of the largest in the world. The State's population of almost 33
million represents more than 12% of the total United States population and grew
by 26% in the 1980s, more than double the national rate. Population growth
slowed to less than 1% annually in 1994 and 1995, but rose to 1.8% in 1996.
During the early 1990's, net population growth in the State was due to births
and foreign immigration, but in recent years, the in-migration from the other
states has increased.
Total personal income in the State, at an estimated $865 billion in 1997,
accounts for almost 13% of all personal income in the nation. Total employment
is more than 14 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
were all severely affected, particularly in southern California. Employment
levels stabilized by late 1993 and pre-recession job levels were reached in
1996. Unemployment, while remaining higher than the national average, has come
down from its 10% recession peak to 5.6% in summer, 1998. Economic indicators
show a recovery underway in California since the start of 1994 particularly in
high technology manufacturing and services, including computer software,
electronic manufacturing and motion picture/ television production, and other
services, entertainment and tourism, and both residential and commercial
construction. The Asian economic crisis beginning in mid-1997 has significantly
reduced exports to that region, although this has been offset by increased
exports to Latin America and other areas. Overall, the Asian crisis is expected
to have a moderate dampening effect on the State's economy, but the economy is
still expected to outpace the nation in 1999. Any delay or reversal of the
recovery may create new shortfalls in State revenues.
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Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations
may be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full
cash value of the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2% per year, except under
new construction or change of ownership (subject to a number of exemptions).
Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay
debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme
Court in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a nonvoter-appointed levy of "general taxes" which were not
dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on
Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State
Constitution, which contain a number of provisions affecting the ability of
local agencies to levy and collect both existing and future taxes, assessments,
fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended
or increased without voter approval after December 31, 1994 must be approved by
a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges," defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment,
imposed by a [local government] upon a parcel or upon a person as an incident
of property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which
generate revenues exceeding the funds required to provide the property related
service or are used for unrelated purposes. There are new notice, hearing and
protest procedures for levying or increasing property related fees and charges,
and, except for fees or charges for sewer, water and refuse collection services
(for fees for electrical and gas service, which are not treated as "property
related" for purposes of Article XIIID), no property related fee or charge may
be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments,
fees and charges. Consequently, local voters could, by future initiative,
repeal, reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
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determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as
reasonable user charges or fees, and certain other non-tax funds, including
bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two-year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been
under the State limit. State appropriations were $6.3 billion under the limit
for fiscal year 1998-99.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in
laws or the California Constitution may also affect the ability of the State or
local issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of
November 1, 1998, the State had outstanding approximately $18.7 billion of
long-term general obligation bonds, plus $825 million of general obligation
commercial paper which will be refunded by long-term bonds in the future, and
$6.5 billion of lease-purchase debt supported by the State General Fund. The
State also had about $7.2 billion of authorized and unissued long-term general
obligation bonds and lease
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purchase debt. In FY 1997-98, debt service on general obligation bonds and
lease purchase debt was approximately 4.4% of General Fund revenues.
Recent Financial Results. The principal sources of General Fund revenues
in 1996-1997 were the California personal income tax (47% of total revenues),
the sales tax (34%), bank and corporation taxes (12%), and the gross premium
tax on insurance (2%). The State maintains a Special Fund for Economic
Uncertainties (the "SFEU"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund, but which is required to be replenished as
soon as sufficient revenues are available. Year-end balances in the SFEU are
included for financial reporting purposes in the General Fund balance. Because
of the recession and an accumulated budget deficit, no reserve was budgeted in
the SFEU from 1992-93 to 1995-96.
General. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Recent Budgets. As a result of the severe economic recession from 1990-94
and other factors, the State experienced substantial revenue shortfalls, and
greater than anticipated social service costs, in the early 1990's. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the Years 1991-92 to 1994-95
(although not all of these actions were taken in each year):
o significant cuts in health and welfare program expenditures;
o transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on
local government;
o transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing State funding for schools;
o reduction in growth of support for higher education programs, coupled
with increases in student fees;
o revenue increases (particularly in the 1992-93 Fiscal Year budget), most
of which were for a short duration;
o increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration had requested); and
o various one-time adjustments and accounting changes (some of which have
been challenged in court and reversed).
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. For a two-month period in the summer of 1992,
pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April 1996.
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The State's financial condition improved during the 1995-96, 1996-97 and
1997-98 fiscal years, with a combination of better than expected revenues, a
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
three fiscal years.
The economy grew during these fiscal years, and as a result, the General
Fund took in greater tax revenue (around $2.2 billion in 1995-96, $1.6 billion
in 1996-97 and $2.1 billion in 1997-98) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97. The accumulated budget
deficit from the recession years was finally eliminated. The Department of
Finance estimates that the State's budget reserve (the SFEU) totaled about $400
million as of June 30, 1997 and $1.8 billion at June 30, 1998.
FY 1997-98 Budget. In May 1997, the California Supreme Court ruled that
the State had acted illegally in 1993 and 1994 by using a deferral of payments
to the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.235 billion, which was made in late July 1997,
and substantially "used up" the then-expected additional General Fund revenues
for the fiscal year. The 1997-98 Budget Act provided another year of rapidly
increasing funding for K-14 public education. Support for higher education
units in the State also increased by about 6 percent. Because of the pension
payment, most other State programs were funded at levels consistent with prior
years, and several initiatives had to be dropped. The final results for FY
1997-98 showed General Fund revenues and transfers of $54.7 billion and
expenditures of $53.3 billion.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal
law, new time limits are placed on receipt of welfare aid.
FY 1998-99 Budget. The FY 1998-99 Budget Act was signed on August 21,
1998. After giving effect to line-item vetoes made by the Governor, the Budget
plan resulted in spending of about $57.3 billion for the General Fund and $14.7
billion for Special Funds. The Budget Act assumed General Fund revenues and
transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act,
the Legislature passed a number of additional fiscal bills, which resulted in a
net increase of expenditures of about $250 million, but the Administration also
raised its estimate of revenues from the 1997-98 fiscal year. In total, the
Administration projected the balance in the SFEU at June 30, 1999 would be
about $1.2 billion. In November 1998, the Legislative Analyst's Office released
a report saying that revenues were somewhat lower, and expenditures somewhat
higher, than projected in the Budget Act, but the net variance would be within
the $1.2 billion reserve amount. The Administration's projections for the
balance of FY 1998-99 and for FY 1999-2000 will be released in early January.
As has been the case in the last several years, spending on K-12 education
increased significantly, by a total of $2.2 billion, with proected per-pupil
spending of $5,695, more than one-third higher than the per-pupil spending
during the last recession year of 1993-94. Funding to support higher education
was also increased significantly (15% for the University of California and 14%
for the California State University system). The Budget included some increases
in health and welfare programs, including the first increase in the monthly
welfare grant since levels were cut during the recession.
One of the most important elements of the 1998-99 Budget Act was agreement
on substantial tax cuts. The largest of these is a phased-in cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting in 1999, the VLF is reduced by 25%. Under current law, VLF
funds are automatically transferred to cities and counties, so the new
legislation provides for the General Fund to make up the reductions. If State
General Fund revenues continue to grow above certain targeted levels in future
years (a development which appears unlikely given more recent revenue
projections), the cut could reach as
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much as 67.5% by the year 2003. The initial 25% VLF cut will be offset by about
$500 million in General Fund money in FY 1998-99, and $1 billion for future
years. Other tax cuts in FY 1998-99 include an increase in the dependent credit
exemption for personal income tax filers, restoration of a renter's tax credit
for taxpayers, and a variety of business tax relief measures. The total cost of
these tax cuts is estimated at $1.4 billion for FY 1998-99.
Although, as noted, the 1998-99 Budget Act projects a budget reserve in
the SFEU of about $1.2 billion on June 30, 1999, the General Fund fund balance
on that date also reflects $1.0 billion of "loans" which the General Fund made
to local schools in the recession years, representing cash outlays above the
mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund
and from schools' entitlements. The 1998-99 Budget Act contained a $300 million
appropriation from the General Fund toward this settlement.
Although the State's economy is producing record revenues to the State
government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a
growing population with many immigrants. These factors which limit State
spending growth also put pressure on local governments. There can be no
assurances that, if economic conditions weaken, or other factors intercede, the
State will not experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels which had existed prior to the
recession. After 1996, Fitch and Standard & Poor's raised their ratings of
California's general obligation bonds, which as of August 1998 were assigned
ratings of "A+" from Standard & Poor's, "Aa3" from Moody's and "AA-" from
Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in
welfare payments and the use of certain cigarette tax funds for health costs.
All of these cases are subject to further proceedings and appeals, and if
California eventually loses, the final remedies may not have to be implemented
in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
the State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at
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approximately 75% of General Fund expenditures in recent years, including the
effect of implementing reductions in certain aid programs. To reduce State
General Fund support for school districts, the 1992-93 and 1993-94 Budget Acts
caused local governments to transfer $3.9 billion of property tax revenues to
school districts, representing loss of the post-Proposition 13 "bailout" aid.
Local governments have in return received greater revenues and greater
flexibility to operate health and welfare programs. However, except for
agreement in 1997 on a new program for the State to substantially take over
funding for local trial courts (saving cities and counties some $400 million
annually), there has been no large-scale reversal of the property tax shift to
help local government.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY 1995-96 and FY1996-97. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August
1997 in order to comply with the federal welfare reform law. Generally,
counties play a large role in the new system, and are given substantial
flexibility to develop and administer programs to bring aid recipients into the
workforce. Counties are also given financial incentives if either at the county
or statewide level the "Welfare-to-Work" programs exceed minimum targets;
counties are also subject to financial penalties for failure to meet such
targets. Counties remain responsible for providing "general assistance" for
able-bodied indigents who are ineligible for other welfare programs. The
long-term financial impact of the new CalWORKs system on local governments is
still unknown.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for
beneficial use and occupancy by the municipality during the term of the lease.
Abatement is not a default, and there may be no remedies available to the
holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g., due to earthquake). In the event abatement occurs with respect to a
lease obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due. Although litigation is brought from time to time which challenges the
constitutionality of such lease arrangements, the California Supreme Court
issued a ruling in August 1998 which reconfirmed the legality of these
financing methods.
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Other Considerations
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program), including
risks related to the policy of awarding exclusive contracts to certain
hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal
Obligations in which the Funds may invest, future allocations of state revenues
to local governments or the abilities of state or local governments to pay the
interest on, or repay the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Funds' portfolios
could be affected by an interruption of revenues because of damaged facilities,
or, consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance
coverage rates; (ii) an insurer to perform on its contracts of insurance in the
event of widespread losses; or (iii) the federal or State government to
appropriate sufficient funds within their respective budget limitations.
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