As filed via EDGAR with the Securities and Exchange Commission
on March 1, 1999.
File No. 2-82710
ICA No. 811-3032
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____ [_]
Post-Effective Amendment No. 21 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 19 [X]
Fundamental Funds, Inc.
(Exact name of registrant as specified in charter)
67 Wall Street
New York, New York 10005
(Address of principal executive office)
(212) 809-1855
(Area code and telephone number)
Copies to:
Stephen C. Leslie Carl Frischling, Esq.
Cornerstone Equity Advisors, Inc. Kramer Levin Naftalis & Frankel LLP
67 Wall Street 919 Third Avenue
New York, New York 10005 New York, New York 10022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to |_| on ( ) pursuant to
paragraph (b) paragraph (b)
|X| 60 days after filing pursuant to |_| on ( ) pursuant to
paragraph (a)(1) paragraph (a)(1)
|_| 75 days after filing pursuant to |_| on ( ) pursuant to
paragraph (a)(2) of paragraph (a)(2) rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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NEW YORK MUNI FUND(R)
New York Muni Fund, "New York's Oldest Triple Tax-Free Mutual Fund"
(the"Fund"), is a series of Fundamental Funds, Inc. (the "Company"), a Maryland
corporation.
PROSPECTUS DATED APRIL 30, 1999
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Risk/Return Summary.......................................................
Financial Highlights......................................................
Investment Objective and Policies.........................................
Investment Strategies.....................................................
Special Risks.............................................................
Pricing of Fund Shares....................................................
Purchase of Shares........................................................
Redemption of Shares......................................................
Distribution Expenses.....................................................
Management................................................................
Dividends and Tax Matters.................................................
APPENDIX - Ratings of Municipal Bonds.....................................
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RISK/RETURN SUMMARY
Investment Objective
The Fund seeks to provide a high level of income that is exempt from federal and
New York State and local income tax.
Principal Investment Strategies
The Fund will attempt to achieve its objective investing at least 80% of its
total assets in municipal obligations of New York State, its political
subdivisions, and its other duly constituted authorities and corporations.
Principal Risks of Investing in the Fund
There is no guarantee that the Fund will achieve its stated objective. In fact,
you could lose money by investing in the Fund. In making your investment
decision, you should understand that the Fund's net asset value (NAV), yield,
and total return may be adversely affected by any or all of the following
factors:
o Interest rate risk - Changes in interest rates cause the prices and yields
of debt securities to fluctuate;
o Credit risk - Certain issuers of securities may fail to make timely
payments of interest and principal on the Fund's investments;
o Concentration risk - Because the Fund invests its assets mainly in the
issuers of a single state, New York, it is subject to greater losses
arising from adverse political or economic events affecting New York
issuers; and
o Diversification risk - Because the Fund may invest a greater percentage of
its assets in a few issuers, there is an increased likelihood that a few
issuers of securities may cause losses to the Fund.
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the Fund.
The bar chart shows the performance of the Fund for each of the last 10 calendar
years. The table shows how the Fund' average annual return for 1, 5, and 10
years compare with those of a broad measure of market performance.
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Bar Chart
The bar chart illustrates how the Fund' returns vary from year to year. As
always, past performance is no way to predict future performance.
1998 - (2.69)%
1997 - 1.46%
1996 - (7.73)%
1995 - 15.67%
1994 - (20.47)%
1993 - 12.58%
1992 - 11.83%
1991 - 15.73%
1990 - (0.99)%
1989 - 9.60%
The Fund' best performance for one quarter was 8.15% for the quarter ended
9/30/91. The Fund' worst performance for one quarter was (10.09)% for the
quarter ended 12/31/94.
Average Annual Total Returns Table
The table below shows the Fund' average annual total returns for the 1, 5, and
10 year periods of the Fund's existence in comparison to the Lehman Brothers
Municipal Bond Index for the same periods. The table provides some indication of
the risks of investing in the Fund by showing how the Fund's average annual
total returns for the periods noted compare with that of a broad measure of
market performance. As always, past performance is no way to predict future
performance.
Average Annual Returns as One Year 5 Years 10 years
of 12/31/98
New York Muni Fund (2.69)% (3.47)% 2.86%
Lehman Brothers Municipal
Bond Index
================================================================================
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
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Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)......................................... __%
Maximum Deferred Sales Charge (Load) (as a percentage of __).............. __%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
[and other Distributions]................................................. __%
Redemption Fee (as a percentage of amount redeemed, if applicable)........ __%
Exchange Fee.............................................................. __%
Maximum Account Fee....................................................... __%
Annual Fund Operating Expenses (expenses that are deducted
from Fund assets)......................................................... __%
Management Fees........................................................... __%
Distribution [and/or Service] (12b-1) Fees................................ __%
Other Expenses............................................................ __%
_____________________________ __ %
_____________________________ __ %
_____________________________ __ %
Total Annual Fund Operating Expenses...................................... __%
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
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You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
The Example does no reflect sales charges (loads) on reinvested
dividends [and other distributions]. If these sales charges (loads) were
included, your costs would be higher.
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FINANCIAL HIGHLIGHTS
The following selected per share data and ratios for each of the years
in the five-year period ended December 31, 1998 has been audited by __________,
independent certified public accountant: [INSERT FINANCIALS]
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's fundamental investment objective is to provide you with a
high level of income that is excluded from gross income for Federal income tax
purposes and exempt from New York State and New York City personal income taxes
and is consistent with the preservation of capital. Under normal market
conditions, at least 80% of the Fund's assets will be invested in securities
that are free from Federal, New York State and New York City income taxes.
The Fund's investment objective and its investment policies and
strategies with respect to futures, options, lending portfolio securities and
borrowing (described below) are fundamental policies that cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares.
As used in this Prospectus, the phrase majority of the Fund's
outstanding shares means the vote of the lesser of (1) 67% of the Fund's shares
present at a meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy at such a meeting or (2)
more than 50% of the Fund's outstanding shares.
The Fund attempts to achieve its objective by investing substantially
all (at least 80%) of its total assets in municipal obligations defined herein
which are rated within the four highest quality grades for bonds as determined
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff")
or within the three highest quality grades for municipal notes as determined by
Moody's, S&P, Fitch or Duff or, if unrated, are judged by Fund management to be
of comparable quality, and which are issued by the State of New York, its
political subdivisions, and its other duly constituted authorities and
corporations, the interest from which, in the opinion of counsel to the issuer,
is totally excluded from gross income for Federal income tax purposes, does not
constitute a preference item and, therefore, will not be subject to the Federal
alternative minimum tax on individuals and is exempt from New York State and New
York City personal income taxes. At least 65% of the value of the Fund's net
assets (except when maintaining a temporary defensive position) will be invested
in New York municipal obligations. There can be no assurance that the Fund's
objective will be achieved. The Fund's ability to achieve its objective is
subject to the continuing ability of the issuers of municipal obligations to
meet their principal and interest payments, and is further subject to
fluctuations in interest rates as well as other factors.
While the municipal obligations in which the Fund may invest are
generally deemed to have adequate to very strong protection of principal and
interest, those rated within the lowest of the quality grades described above
are considered medium-grade obligations which have speculative characteristics
as well. For example, obligations rated Baa by Moody's have been determined by
Moody's to be neither highly protected nor poorly secured, and although interest
payments and principal security appear adequate for the present, certain
protective elements may
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be lacking or may be characteristically unreliable over any great length of
time. Similarly, obligations rated BBB by S&P, Fitch or Duff are regarded by
S&P, Fitch and Duff as having adequate capacity to pay interest and repay
principal, and while such obligations 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
obligations in this category than in higher rated categories.
Although the Fund intends to invest primarily in higher quality
municipal obligations as described above, up to 10% of its total assets may be
invested in municipal obligations rated lower than Baa by Moody's or BBB by S&P,
Fitch or Duff and as low as Caa by Moody's or CC by S&P, Fitch or Duff, or if
unrated, are judged by Fund management to be of comparable quality. Investments
rated Ba or lower by Moody's and BB or lower by S&P, Fitch or Duff normally
provide higher yields, but involve greater risk because of their speculative
characteristics and are commonly referred to as "junk bonds." (See "Special
Risks-Special Risk Factors Relating to Lower Rated Securities.")
It should be noted that ratings are general and not absolute standards
of quality or guarantees of the creditworthiness of an issuer. The ratings of
Moody's, S&P, Fitch and Duff 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, although ratings may be
useful in evaluating the safety of interest and principal payments, they do not
evaluate the market value risk of these bonds. Therefore, although these ratings
may be an initial criterion for selection of portfolio investments, the Manager
also will evaluate these securities and the ability of the issuers of such
securities to pay interest and principal. The Fund's ability to achieve its
investment objective may be more dependent on the Manager's credit analysis than
might be the case for a fund that invested in higher rated securities only. Once
the rating of a portfolio security or the quality determination ascribed by Fund
management to an unrated portfolio security has been downgraded, the Fund will
consider all circumstances deemed relevant in determining whether to continue to
hold the security, but in no event will the Fund retain such securities if it
would cause the Fund to have 20% of the value of its total assets invested in
securities rated lower than Baa by Moody's or BBB by S&P, Fitch or Duff, or if
unrated, are judged by Fund management to be of comparable quality. The purchase
of unrated securities is subject to guidelines that may be set for Fund
management from time to time by the Fund's Board of Directors. A description of
the ratings of municipal obligations as determined by Moody's, S&P, Fitch and
Duff is included in the Appendix to this Prospectus.
The Fund invests in municipal obligations that have remaining
maturities ranging from short-term maturities (less than one year) to long-term
maturities (in excess of fifteen years). Depending on market conditions, the
Fund attempts to achieve a favorable tradeoff between longer maturities that
have higher income as opposed to shorter maturities with relatively less income.
Because the Fund may purchase bonds that mature in more than one year, invests
in inverse floating variable rate bonds, assumes some credit risk and does not
have a stable net asset value (the value of its shares fluctuates), it is not a
money market fund. The longer the maturity of a municipal obligation, the
greater the impact of fluctuating interest rates on the
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market value of the instrument. In periods of rising interest rates, the market
value of municipal obligations generally declines in order to bring the current
yield in line with prevailing interest rates. Conversely, in periods of
declining interest rates, the market value of municipal obligations generally
rises. Although fluctuating interest rates affect the market value of all
municipal obligations, short-term obligations are generally less sensitive to
such factors than long-term obligations. During periods of rapidly rising
interest rates, the Fund intends to adopt various corrective measures (i.e.,
shortening the average length of maturities of portfolio securities, raising the
overall quality of portfolio investments) in order to minimize the effect of
such rates on per share net asset value during such periods.
Temporary Defensive Positions
To offset fluctuations in share value, Fund management will attempt to
adopt a temporary defensive posture during periods of economic difficulty
affecting either the economy as a whole or, more specifically, individual
issuers involved in the Fund's portfolio. Such practice may include, among other
modifications, reducing or eliminating holdings in securities of issuers such as
state and local governments which the Fund believes may be adversely affected by
changing economic conditions or political events, shortening average maturity
and/or upgrading the average quality of the Fund's portfolio. These defensive
measures may have the effect of reducing the income to the Fund from the
portfolio. Moreover, notwithstanding the imposition of such measures, Fund
management may not be able to foresee developments in the economy sufficiently
in advance to avoid significant declines in market value. To the extent that the
Fund is in a temporary defensive posture, the Fund's objective may not be
achieved.
Municipal Obligations
Municipal obligations include debt obligations of states, territories
and possessions of the United States and of any political subdivisions thereof,
such as counties, cities, towns, districts and authorities. Municipal
obligations are issued to raise funds for a variety of purposes, including
construction of a wide range of public facilities, refunding of outstanding
obligations, obtaining funds for general operating expenses, and lending to
other public institutions and facilities. In addition, certain types of
qualified private activity bonds are issued by, or on behalf of, public
authorities to obtain funds for privately operated facilities.
Also included within the definition of municipal obligations are
short-term, tax-exempt debt obligations, known as municipal notes, which are
generally issued in anticipation of receipt by the issuer of revenues from
taxes, the issuance of longer term bonds, or other sources. States,
municipalities, and other issuers of tax-exempt securities may also issue
short-term debt, often for general purposes, known as "municipal commercial
paper." All of these obligations (excluding those just referred to as "municipal
commercial paper") are included within the term "municipal obligations," as used
in this Prospectus, if their interest payments are excluded for Federal income
tax purposes.
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Yields on municipal obligations depend on a variety of factors,
including the general condition of the money and municipal securities markets,
the size of a particular offering, the maturity of the obligation and the rating
of the issue. Unlike other types of securities, municipal obligations have
traditionally not been subject to regulation by, or registration with, the
Securities and Exchange Commission.
The two principal classifications of municipal obligations are general
obligation bonds and revenue bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from only the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source. Qualified
private activity bonds that are municipal obligations are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of the
issuer of such bonds. The credit quality of qualified private activity bonds is
usually related to the credit standing of the industrial user involved. The Fund
reserves the right to invest up to 20% of its total assets in qualified private
activity bonds, if such bonds meet the Fund's investment criteria.
There are also a variety of hybrid and special types of municipal
obligations, as well as numerous differences in the security of municipal
obligations, both within and between the two principal classifications described
above.
Portfolio Transactions and Turnover
The Manager provides the Fund with investment advice and
recommendations for the purchase and sale of portfolio securities. All orders
for the purchase and sale of portfolio securities are placed by the Manager,
subject to the general control of the Fund's directors. The Manager may sell
portfolio securities prior to their maturity if market conditions and other
considerations indicate, in the opinion of the Manager, that such sale would be
advisable. In addition, the Manager may engage in short-term trading when it
believes it is consistent with the Fund's investment objective. Also, a security
may be sold and another of comparable quality may be simultaneously purchased to
take advantage of what the Manager believes to be a temporary disparity in the
normal yield relationships of two securities. The frequency of portfolio
transactions-the Fund's turnover rates-will vary from year to year depending
upon market conditions. A high turnover rate (over 100%) increases transaction
costs and the possibility of taxable short-term gains (see "Dividends and Tax
Matters") which, in turn, will reduce the Fund's return. Therefore, the Manager
weighs the added costs of short-term investment against anticipated gains.
INVESTMENT STRATEGIES
In seeking to achieve its investment objective, the Fund utilizes
various investment strategies, including borrowing to purchase additional
securities, investing in participation interests, variable and floating rate
instruments, purchasing municipal obligations that are offered on a
"when-issued" or "delayed delivery" basis and, when deemed necessary in the
opinion of
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Fund management, making temporary investments in certain taxable obligations, as
described below. The Fund's fundamental investment restrictions also permit
buying and selling of interest rate futures contracts ("futures contracts"),
using options to purchase or sell such contracts, using options to purchase or
sell debt securities, and writing covered call options and cash-secured puts.
The use of options and futures contracts may benefit the Fund and its
shareholders by improving the Fund's liquidity and by helping to stabilize the
value of its net assets. In addition, the Fund is permitted to enter into
repurchase agreement and reverse repurchase agreement transactions, to lend its
portfolio securities and to invest up to 15% of its net assets in illiquid
securities.
Each investment strategy is briefly described below with a short
example of how it can be used by the Fund.
Futures Contracts
A futures contract is an agreement between two parties to buy and sell
a security for a set price on a future date. Futures contracts are traded on
designated "contract markets" which, through their clearing corporations,
guarantee performance of the contracts. Presently, there are futures contracts
based on such debt securities as long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, three-month U.S. Treasury Bills, and bank certificates of deposit.
Although most futures contracts call for actual delivery or acceptance of debt
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of debt security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss. Similarly,
a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of debt security and the same
delivery date. If the offsetting sale price exceeds the purchase price, the
purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction. In the unlikely
event that the Fund was unable to enter into a closing transaction of an open
futures or options position, the Fund could be forced to perform certain actions
as specified by the futures or options contract. This would depend on the type
of outstanding contract involved. The two types of methods by which futures and
options contracts are closed in the absence of offsetting trades are by index
value and by delivery.
Futures and options contracts in financial instruments such as
municipal bonds and LIBOR rates, settle by index value. That means that on the
last trading day of the contract, all outstanding contracts are automatically
closed out at the value of the index that day. The effect on the Fund would be
exactly the same as if a closing transaction had been effected at that price.
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Futures and options in financial instruments such as Treasury bonds and
notes, if not closed out, will result in actual delivery of the securities in
question. The holder of a long futures contract or an option contract that was
exercised could be forced to purchase (take delivery of) a specified amount of
securities at a specified price. Likewise the entity that was short a futures
contract or option that did not enter into a closing transaction prior to
expiration, could be forced to deliver a specific amount of securities at a
specified price according to the terms of the futures or option contract.
The inability of the Fund to enter into a closing contract could result
in the Fund being forced to deliver or take delivery of a specific amount of
securities at a specific price. Disposing of or obtaining the specified
securities could involve considerable expense to the Fund and could affect the
Fund's net asset value.
When the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." The segregated custodial account will be in
an amount equal to the total market value of the futures contract, less the
initial margin deposited therefor. Subsequent payments to and from the broker or
account, called "variation margin," will be made on a daily basis as the price
of the underlying debt security fluctuates making the long and short positions
of the futures contract more or less valuable, a process known as "mark to the
market."
The purpose of a futures contract, in the case of a portfolio holding
long-term municipal debt securities, is to gain the benefit of changes in
interest rates without actually buying or selling long-term debt securities.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of debt securities has an effect similar to the actual sale of such
securities, although the sale of the futures contract might be accomplished more
easily and quickly given the greater liquidity in the futures market. For
example, if the Fund holds long-term debt securities and it anticipates a rise
in long-term interest rates, it could, in lieu of disposing of its portfolio
securities, enter into futures contracts for the sale of similar long-term
securities. If rates increased and the value of the Fund's portfolio securities
declined, the value of the Fund's futures contracts would increase, thereby
protecting the Fund by preventing net asset value from declining as much as it
otherwise would have declined. Similarly, entering into futures contracts for
the purchase of debt securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities other
than the underlying securities. For example, if the Fund expects long-term
interest rates to decline, it might enter into futures contracts for the
purchase of long-term securities in order to gain rapid market exposure that may
offset anticipated increases in the cost of securities it intends to purchase,
while continuing to hold higher-yield, short-term securities or waiting for the
long-term market to stabilize. The Board of Directors has adopted a percentage
restriction limiting the aggregate market value of the futures contracts the
Fund holds to an amount not to exceed 20% of the market value of its total
assets.
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Options
An option gives the holder a right to buy or sell futures contracts, or
securities, in the future. The Fund will only buy options listed on national
securities exchanges except for agreements, sometimes called cash puts, which
may accompany the purchase of a new issue of bonds from a dealer. Unlike a
futures contract, which requires the parties to the contract to buy and sell a
security on a set date, an option on a futures contract, for example, merely
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, all that
is lost is the price, called the "premium," paid for the option. Further,
because the value of the option is fixed at the point of sale, there are no
daily cash payments to reflect the change in the value of the underlying
contract. However, since an option gives the buyer the right to enter into a
contract at a set price for a fixed period of time, its value does change daily,
and the change is reflected in the net asset value of the Fund.
In addition to options on futures contracts, there are options that
give the buyer the right to buy or sell actual debt securities, such as
tax-exempt bonds. Currently, the market for options on tax-exempt securities is
very small. It is anticipated that it will become substantially larger in the
future. A put option gives the buyer of the option the right to sell a
designated security for a set price, and a call option gives the buyer the right
to buy a security for a set price on or before a specified date. The "writer,"
or seller, of a call option, for example, is required to sell the security
described in the option to the holder of the option, if the holder decides to
buy such security. For undertaking this obligation, the writer receives a
premium, less the commission charged by a broker, which the writer retains
regardless of whether the option is exercised. The Fund will only write call
options on securities it holds in its portfolio, (referred to as covered call
writing) or will write "cash secured puts," as defined below. The buyer of such
a put pays the Fund a premium for the option to sell to the Fund a specific bond
at a specified price within a specified period of time. The Fund will maintain
adequate cash reserves to purchase the underlying bond should the put option be
exercised, by placing in a segregated account, only liquid assets, such as cash,
U.S. Government securities or other appropriate high-grade debt obligations
("cash secured puts"). The Fund retains the premium whether or not the option is
exercised. However, the Fund will be obligated to purchase the bond at the
exercise price regardless of how much the market value of the bond has declined
below the exercise price. As a covered call option writer, the Fund earns
additional income from premiums, but it risks losing any appreciation of the
security covered by the option if interest rates decline. Option writing can be
used advantageously to generate incremental income when the outlook is for
relatively stable bond prices; however, such income may be taxable. The
aggregate market value of the options on debt securities held or written by the
Fund may not exceed 25% of the Fund's total net assets. The risk involved in
writing options (or selling futures) is not limited to the value of the options,
since the maximum potential loss to the Fund is the cost of closing out the
short options (or futures) positions which theoretically has no limit.
Participation in options transactions involves certain risks (see "Special
Risks").
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Investing in Other Investment Companies
The Fund may invest indirectly in municipal obligations by investing in
other investment companies. Such investments may involve the payment of premiums
above the net asset value of such issuers' portfolio securities, are subject to
limitations under the Investment Company Act of 1940 and are constrained by
market availability. As a shareholder in an investment company, the Fund would
bear its ratable share of that investment company's expenses, including its
advisory and administration fees. The Fund would continue to pay its own
management fees and other expenses with respect to its investments in shares of
a closed-end investment company.
Repurchase Agreements
The Fund may enter into repurchase agreement transactions. Under a
repurchase agreement, the Fund acquires a debt instrument for a relatively short
period (usually not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the Fund's money is invested. The Fund's repurchase agreements will at all times
be fully collateralized in an amount at least equal to the purchase price
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily, and as the value of instruments declines,
the Fund will require additional collateral. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the Fund may
incur a loss. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreement transactions only
in amounts such that the total of the reverse repurchase agreements and all
other borrowings combined will not exceed 33-1/3% of the Fund's total assets at
the time it enters into a reverse repurchase agreement. Such transactions
involve the sale of securities held by the Fund, with an agreement that the Fund
will repurchase such securities at an agreed upon price and date. The Fund will
employ reverse repurchase agreements when necessary to meet unanticipated net
redemptions so as to avoid liquidating other portfolio investments during
unfavorable market conditions, or as a technique to enhance income. At the time
it enters into a reverse repurchase agreement, the Fund will place in a
segregated custodial account high-quality liquid debt securities having a dollar
value equal to the repurchase price. The Fund will utilize reverse repurchase
agreements when the interest income to be earned from portfolio investments is
greater than the interest expense incurred as a result of the reverse repurchase
transactions. Any reverse repurchase agreement entered into by the Fund
constitutes a borrowing, has leveraging effects and makes the Fund's net asset
value more volatile.
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Lending of Portfolio Securities
In order to generate income, the Fund may lend its portfolio securities
in an amount up to 33-1/3% of total assets to broker-dealers, major banks or
other recognized domestic institutional borrowers of securities not affiliated
with the Manager. The borrower at all times during the loan must maintain cash
or cash equivalent collateral or provide to the Fund an irrevocable letter of
credit equal in value to at least 100% of the value of the securities loaned.
During the time portfolio securities are on loan, the borrower pays the Fund any
dividends or interest paid on such securities, and the Fund may invest the cash
collateral in high-grade, short-term, tax-exempt instruments and earn income, or
it may receive an agreed-upon amount of interest income from the borrower who
has delivered equivalent collateral or a letter of credit.
Temporary Investments
The Fund may from time to time invest a small portion of its total
assets, on a temporary basis, in high-grade fixed-income obligations, the
interest on which is subject to Federal, New York State and/or New York City
income tax. Such high-grade quality investments include obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
obligations of domestic branches of U.S. banks, including certificates of
deposit and bankers' acceptances.
Investments of this kind may be obtained by the Fund pending investment
or reinvestment in municipal obligations of the proceeds from the sale of Fund
shares or the sale by the Fund of portfolio securities. In addition, the Fund
may invest in highly liquid taxable obligations to avoid the necessity of
liquidating portfolio securities to meet redemptions by investors. Although
there are no specific limitations other than those imposed under the Code (see
"Dividends and Tax Matters") on the portion of Fund assets that may be invested
in taxable obligations, it is anticipated that on a 12-month average, taxable
obligations will constitute less than 10% of the value of the Fund's portfolio.
Fund management also anticipates that a cash reserve will be maintained
for purposes of meeting the day-to-day operating expenses of the Fund as well as
redemptions of Fund shares. Such cash reserve may be maintained in either
interest or non-interest bearing form, at the discretion of the Fund's
directors. Furthermore, if maintained in interest-bearing form, it is
anticipated that all or part of such interest will be subject to Federal, New
York State and/or New York City income tax. However, it is expected that, on a
12-month average, such reserve will constitute less than 5% of the Fund's total
assets.
Illiquid Securities
The Fund will not invest more than 15% of its net assets (taken at
market value) in illiquid securities, including repurchase agreements with
maturities in excess of seven days.
The Fund may invest in securities that are subject to restrictions on
resale because they have not been registered under the Securities Act of 1933
(the "1933 Act"). These securities are sometimes referred to as private
placements. Although securities which may be resold only to
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"qualified institutional buyers" in accordance with the provisions of Rule 144A
under the 1933 Act are technically considered "restricted securities", the Fund
may purchase Rule 144A securities without regard to the limitation on
investments in illiquid securities described above, provided that a
determination is made that such securities have a readily available trading
market. Fund management will determine the liquidity of Rule 144A securities
under the supervision of the Fund's Board of Directors. The liquidity of Rule
144A securities will be monitored by Fund management and, if as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Fund's holding of illiquid securities will be reviewed to determine
what, if any, action is required to assure that the Fund does not exceed its
applicable percentage limitation for investments in illiquid securities.
Fund management anticipates that the market for certain restricted
securities such as inverse floaters that are created in the secondary market
will expand further as a result of this relatively new regulation and the
development of automated systems for the trading, clearing and settlement of
unregistered securities, as more institutions and dealers invest in and make
markets in these securities.
In reaching liquidity decisions, Fund management will consider, inter
alia, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wanting to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
When-lssued Purchases
Municipal securities are frequently offered on a "when-issued" basis.
When so offered, the price and coupon rate are fixed at the time the commitment
to purchase is made, but delivery and payment for the when-issued securities
take place at a later date. Normally, the settlement date occurs between 15-45
days from the date of purchase. During the period between purchase and
settlement, no interest accrues to the purchase. The price that the Fund would
be required to pay may be in excess of the market value of the security on the
settlement date. While securities may be sold prior to the settlement date, the
Fund intends to purchase such securities for the purpose of actually acquiring
them unless a sale becomes desirable for investment reasons. At the time the
Fund makes a commitment to purchase a municipal security on a when-issued basis,
it will record the transaction and reflect the value of the security in
determining its net asset value. That value may fluctuate from day to day in the
same manner as values of other municipal securities held by the Fund. The Fund
will establish a segregated account with its custodian bank in which it will
maintain cash or high-grade liquid debt securities determined daily to be equal
in value to its commitments for when-issued securities. Generally, both the
when-issued securities and the securities held in the segregated account will
tend to experience appreciation when interest rates decline and depreciation
when interest rates increase. Accordingly, the purchase of when-issued
securities may increase the volatility of the Fund's net asset value. The Fund
may invest in when-issued securities without limitation.
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At such time as the Fund is required to pay for when-issued securities,
it will meet its obligation from then-available cash flow, sale of the
securities held in the separate account, sale of other securities, or (although
it would not normally expect to do so) from the sale of the when-issued
securities themselves (which may have a market value greater or less than the
Fund's payment obligation). Sale of securities to meet such obligations carries
with it a greater potential for the realization of capital gains, which are not
excluded from gross income for Federal, state or local income tax purposes.
Delayed-Delivery Transactions
The Fund may buy and sell securities on a "delayed-delivery" basis,
with payment and delivery taking place at a future date. The market value of
securities purchased in this way may change before the delivery date, which
could affect the market value of the Fund's assets, and could increase
fluctuations in the Fund's yield and net asset value. Ordinarily, the Fund will
not earn interest on the securities purchased until they are delivered.
Participation Interests, Variable and Inverse Floating Rate Instruments
The Fund may purchase participation interests from financial
institutions. These participation interests give the purchaser an undivided
interest in one or more underlying municipal obligations.
The Fund may also invest in municipal obligations which have variable
interest rates that are readjusted periodically. Such readjustment may be based
either upon a predetermined standard, such as a bank prime rate or the U.S.
Treasury bill rate, or upon prevailing market conditions. Many variable rate
instruments are subject to redemption or repurchase at par on demand by the Fund
(usually upon no more than seven days' notice). All variable rate instruments
must meet the quality standards of the Fund. The Manager will monitor the
pricing, quality and liquidity of the variable rate municipal obligations held
by the Fund.
The Fund may purchase inverse floaters which are instruments whose
interest rates bear an inverse relationship to the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed-rate bond. For example, a
municipal issuer may decide to issue two variable rate instruments instead of a
single long-term, fixed-rate bond. The interest rate on one instrument reflects
short-term interest rates. Typically, this component pays an interest rate that
is reset periodically through an auction process, while the interest rate on the
other instrument (the inverse floater) pays a current residual interest rate
based on the total difference between the total interest paid by the issuer on
the municipal obligation and the auction rate paid on the auction component.
This reflects the approximate rate the issuer would have paid on a fixed-rate
bond, multiplied by two, minus the interest rate paid on the short-term
instrument. Depending on market availability, the two portions may be recombined
to form a fixed-rate municipal bond.
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The Fund may purchase both the auction and the residual components. (See
"Special Risk Factors Relating to Inverse Floating Rate Instruments").
The Fund may invest in municipal obligations that pay interest at a
coupon rate equal to a base rate, plus additional interest for a certain period
of time if short-term interest rates rise above a predetermined level or "cap".
The amount of such an additional interest payment typically is calculated under
a formula based on a short-term interest rate index multiplied by a designated
factor.
The Fund may purchase various types of structured municipal bonds whose
interest rates fluctuate according to changes in other interest rates for some
period and then revert to a fixed rate. The relationship between the interest
rate on these bonds and the other interest rate or index may be direct or
inverse, or it may be based on the relationship between two other interest rates
such as the relationship between taxable and tax-exempt interest rates.
Borrowing For Investment and For Other Purposes
The Fund may borrow money from banks (including its custodian bank) or
from other lenders to the extent permitted under applicable law, for temporary
or emergency purposes, to meet redemptions or for purposes of leveraging and may
pledge its assets to secure such borrowings. Borrowing for investment increases
both investment opportunity and investment risk. Such borrowings in no way
affect the Federal or New York State tax status of the Fund or its dividends. If
the investment income on securities purchased with borrowed money exceeds the
interest paid on the borrowing, the net asset value of the Fund's shares will
rise faster than would otherwise be the case. On the other hand, if the
investment income fails to cover the Fund's costs, including the interest on
borrowings or if there are losses, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative factor
known as leverage.
The Investment Company Act of 1940 (the "1940 Act") requires the Fund
to maintain asset coverage of at least 300% for all such borrowings, and should
such asset coverage at any time fall below 300%, the Fund would be required to
reduce its borrowings within three days to the extent necessary to meet the
requirements of the 1940 Act. To reduce its borrowings, the Fund might be
required to sell securities at a time when it would be disadvantageous to do so.
In addition, because interest on money borrowed is a Fund expense that
it would not otherwise incur, the Fund may have less net investment income
during periods when its borrowings are substantial. The interest paid by the
Fund on borrowings may be more or less than the yield on the securities
purchased with borrowed funds, depending on prevailing market conditions.
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SPECIAL RISKS
Special Risk Factors Relating to Non-Diversification
The Fund's portfolio is non-diversified and may have greater risk than
a diversified portfolio. As a non-diversified investment company, the Fund could
conceivably invest all of its assets in one issuer. However, in order to qualify
as a "regulated investment company" for Federal income tax purposes, the Fund
must comply with the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), which limit the aggregate value of all holdings
(except U.S. Government and cash items, as defined in the Code), each of which
exceeds 5% of the Fund's total assets, to an aggregate amount of 50% of such
assets, and which further limit the holdings of a single issuer (with the same
exceptions) to 25% of the Fund's total assets. Therefore, for our purposes,
non-diversification means that, with regard to the Fund's total assets, 50% of
such assets may be invested in as few as two single issuers. (These limits are
measured at the end of each quarter.) In the event of decline of
creditworthiness or default on the obligations of one or more such issuers
exceeding 5%, an investment in the Fund will involve greater risk than in a fund
that has a policy of diversification.
Many of the Fund's portfolio securities will be obligations which are
related in such a way that an economic, business or political development or
change affecting one such security also would affect the other portfolio
securities (e.g., securities the interest on which is paid from revenues of
similar types of projects). As a result, the Fund's portfolio may be subject to
greater risk as compared to a portfolio composed of more varied obligations or
issuers. Furthermore, the relatively high degree of similarities among the
issuers of obligations in the Fund's portfolio may result in a greater degree of
fluctuation in the market value of the portfolio.
Special Risk Factors Relating to Futures and Options
There are certain risks in investing in options and interest rate
futures contracts. With respect to the use of futures contracts, although the
Fund intends to purchase or sell futures contracts only if there is an active
market for such contracts, no assurance can be given that a liquid market will
exist for any particular contract at any particular time. Many futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If it is not possible, or the Fund determines not to close a
futures position in anticipation of adverse price movements, the Fund will be
required to make daily cash payments of variation margin. In such circumstances,
an increase in the value of the portion of the portfolio being hedged, if any,
may offset partially or completely losses on the futures contract.
In addition, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract. However, the risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract approaches.
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The Manager could also be incorrect in its expectations about the
direction or degree of various interest rate movements in the time span within
which the movements take place. Predicting interest rate direction involves
skills and techniques different from those used in most investment strategies,
and there is no guarantee that such predictions will be accurate.
The risk the Fund assumes when it buys an option is the loss of the
premium paid for the option. In order to benefit from buying an option, the
price of the underlying security must change sufficiently to cover the premium
paid, the commissions paid, both in the acquisition of the option and in a
closing transaction, or the exercise of the option and subsequent sale of the
underlying security. (The Fund could enter into a closing transaction by
purchasing an option if it had previously sold one, or by selling an option if
it had previously bought one, with the same terms as the option previously
acquired.) Nevertheless, the price change in the underlying security does not
assume a profit, because prices in the options market may not reflect such a
change.
The risk involved in writing options on futures contracts the Fund
owns, or on securities held in its portfolio, is that there could be an increase
in the market value of such contracts or securities. In such case, the option
would be exercised and the asset would be sold at a lower price than the cash
market price. To some extent, the risk of not realizing a gain could be reduced
by entering into a closing transaction. However, the cost of closing the option
and terminating the Fund's obligation might be more or less than the premium
received when it originally wrote the option. Further, the Fund might not be
able to close the option because of insufficient activity in the options market.
The risk involved in writing options (or selling futures) is not limited to the
value of the options, since the maximum potential loss to the Fund is the cost
of closing out the short options (or futures) positions which theoretically has
no limit.
Finally, in deciding whether to use futures contracts or options,
consideration must be given to brokerage commission costs, which are normally
higher than those associated with general securities transactions.
Special Risk Factors Relating to Lower Rated Municipal Bonds
You should carefully consider the relative risks of investing in the
higher yielding (and, therefore, higher risk) securities in which the Fund may
invest. These are bonds such as those rated Ba to Caa by Moody's or BB to CC by
S&P, Fitch or Duff or, if unrated, are judged by Fund management to be of
comparable quality. They generally are not meant for short-term investing and
may be subject to certain risks with respect to the issuing entity and to
greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. Bonds rated Ba by Moody's are judged to have
speculative elements; their future cannot be considered as well assured and
often the protection of interest and principal payments may be very moderate.
Bonds rated BB by S&P, Fitch or Duff are regarded as having predominantly
speculative characteristics and, while such obligations have less near-term
vulnerability to default than other speculative grade debt, they face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest
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and principal payments. Bonds rated CC by S&P, Fitch or Duff are regarded as
having the highest degree of speculation; while such bonds may have some small
degree of quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Bonds rated as low
as Caa by Moody's may be in default or may present elements of danger with
respect to principal or interest. The Fund will not purchase bonds in default.
Investments in bonds rated Ba or lower by Moody's and BB or lower by
S&P, Fitch or Duff, while generally providing greater income and opportunity for
gain than investments in higher rated bonds, usually entail greater risk of
principal and income (including the possibility of default or bankruptcy of the
issuers of such bonds), and may involve greater volatility of price (especially
during periods of economic uncertainty or change) than investments in higher
rated bonds. However, since yields may vary over time, no specific level of
income can be assured. These lower rated, high yielding securities generally
tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates. Lower rated
securities will also be affected by the market's perception of their credit
quality (especially during times of adverse publicity) and the outlook for
economic growth. In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. The prices for these securities may be
affected by legislative and regulatory developments. For example, new Federal
rules require that savings and loan associations gradually reduce their holdings
of high-yield securities. An effect of such legislation may be to significantly
depress the prices of outstanding lower rated high yielding fixed-income
securities. Factors adversely affecting the market price and yield of these
securities will adversely affect the Fund's net asset value. In addition, the
retail secondary market for these securities may be less liquid than that of
higher rated bonds; adverse conditions could make it difficult at times for the
Fund to sell certain securities or could result in lower prices than those used
in calculating the Fund's net asset value. Therefore, judgment may at times play
a greater role in valuing these securities than in the case of investment grade
fixed-income securities, and it also may be more difficult during certain
adverse market conditions to sell these lower rated securities at their fair
value to meet redemption requests or to respond to changes in the market.
Special Risk Factors Relating to Zero Coupon Bonds
The Fund may invest in zero coupon bonds and pay-in-kind bonds (bonds
which pay interest through the issuance of additional bonds), which involve
special considerations. These securities may be subject to greater fluctuations
in value due to changes in interest rates than interest-bearing securities and
thus may be considered more speculative than comparably rated interest-bearing
securities. In addition, current Federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
Federal income taxes, the Fund may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio
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securities under disadvantageous circumstances in order to generate cash to
satisfy these distribution requirements. Fund management anticipates that
investments in zero coupon securities and pay-in-kind bonds will not ordinarily
exceed 25% of the value of the Fund's total assets.
Special Risk Factors Relating to Inverse Floating Rate Instruments
Changes in interest rates inversely affect the rate paid on inverse
floating rate instruments ("inverse floaters"). The inverse floaters' price will
be more volatile than that of a fixed rate bond. Additionally, some inverse
floaters contain a "leverage factor" whereby the interest rate moves inversely
by a "factor" to the benchmark. For example, the rates on the inverse floating
rate note may move inversely at three times the benchmark rate. Certain interest
rate movements and other market factors can substantially affect the liquidity
of inverse floaters. These instruments are designed to be highly sensitive to
interest rate changes and may subject the holders thereof to extreme reductions
of yield and possibly loss of principal.
Special Risk Factors Relating to New York Issuers
You should carefully consider the special risks inherent in the Fund's
investment in municipal obligations of New York issuers. These risks result from
the financial condition of New York State and certain of its public bodies and
municipalities, including New York City. Beginning in early 1975, New York State
(the "State"), New York City (the "City") and other entities faced serious
financial difficulties which jeopardized the credit standing and impaired the
borrowing abilities of such entities and contributed to high interest rates on,
and lower market prices for, debt obligations issued by them. A recurrence of
such financial difficulties, as may be currently developing, or a failure of
certain financial recovery programs related thereto could result in defaults or
declines in the market values of various municipal obligations in which the Fund
may invest. If there should be a default or other financial crisis relating to
the State, the City, a State or City agency, or other municipality, the market
value and marketability of outstanding municipal obligations of New York issuers
in the Fund's portfolio and the interest income to the Fund could be adversely
affected.
A number of pending court actions have been brought against or involve
the State, its agencies, or other municipal subdivisions of the State, which
actions relate to financing, the use of tax or other revenues for the payment of
obligations and claims that would require additional public expenditures.
Adverse decisions in such cases could require extraordinary appropriations or
expenditure reductions or both and might have a materially adverse effect on the
financial condition of the State and its agencies and municipal subdivisions.
Any such adverse effect could affect, to some extent, all municipal securities
issued by the State, its agencies, or municipal subdivisions.
To the extent that State agencies and local governments seek special
State assistance, the ability of the State to pay its obligations as they become
due or to obtain additional financing
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<PAGE>
could be adversely affected, and the marketability of notes and bonds issued by
the State, its agencies, and other governmental entities may be impaired.
Other Considerations
It is expected that a substantial portion of the assets of the Fund
will be derived from professional money managers and investors who intend to
invest in the Fund as part of an asset-allocation or market-timing investment
strategy. These investors are likely to redeem or exchange their Fund shares
frequently to take advantage of anticipated changes in market conditions. The
strategies employed by investors in the Fund may result in considerable assets
moving in and out of the Fund. Consequently, the Company expects that the Fund
will generally experience significant portfolio turnover, which will likely
cause higher expenses and additional costs and affect the Fund's performance.
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Fund that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
PRICING OF FUND SHARES
The price of Fund shares is based on the Fund's net asset value. The
net asset value per share is determined as of the close of trading on the New
York Stock Exchange (currently 4:00 P.M., New York time) on each day that both
the New York Stock Exchange and the Fund's custodian bank are open for business
and on any other day during which there is a sufficient degree of trading in the
Fund's portfolio securities that the Fund's net asset value might be materially
affected by changes in the value of its portfolio securities, unless there have
been no shares tendered for redemption or orders to purchase shares received.
The Fund's shares will not be priced on the following days when the New York
Stock Exchange is closed: New Year's Day, Dr. Martin Luther King Jr.'s Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. The net asset value per share is computed
by taking the value of all assets of the Fund, subtracting the liabilities of
the Fund, and dividing by the number of outstanding shares. For purposes of
determining net asset value, expenses of the Fund are accrued daily and taken
into account.
The value used by the Fund in computing the current price per share for
the purpose of purchase and redemption of Fund shares (the net asset value per
share) means an amount which reflects calculations to the nearest 1/10th of one
cent.
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The Fund's portfolio securities are valued on the basis of prices
provided by an independent pricing service when, in the opinion of persons
designated by the Fund's Board of Directors, such prices are believed to reflect
the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Municipal daily or weekly
variable rate demand instruments will be priced at par value plus accrued
interest. Securities not priced in a manner described above and other assets are
valued by persons designated by the Fund's trustees using methods which the
trustees believe accurately reflects fair value. The prices realized from the
sale of these securities could be less than those originally paid by the Fund or
less than what may be considered the fair value of such securities.
Included in the portfolio of the Fund in determining net asset value is
the value of all when-issued securities that the Fund has committed itself to
purchase. However, the Fund's ability to purchase such securities remains
constant (see "Investment Objective and Policies").
The Fund's most recent asset value can be obtained by calling
1-800-322-6864 7 days a week, 24 hours a day. To obtain more detailed
information on the Fund's net asset value, yield, performance and portfolio
composition you can call 1-800-322-6864 weekdays 9:00 AM-8:00 PM Eastern time.
PURCHASE OF SHARES
You may purchase shares directly from the Fund without a sales charge
on any day the New York Stock Exchange is open for business. The public offering
price for shares purchased is the net asset value per share of the Fund next
determined after a purchase order becomes effective. Orders for the purchase of
Fund shares become effective (i) immediately, if received prior to 4:00 P.M. New
York time on any business day. Shares being purchased will begin accruing
dividends on the day following the date of purchase and continue to earn
dividends until the date of redemption. Information regarding transmittal of
funds by bank wire and procurement of a Federal Reserve Draft may be obtained
from your bank. All payments (including checks from individual investors) must
be in U.S. dollars. If your check does not clear your purchase will be canceled
and you could be liable for any losses or fees incurred. Firstar Mutual Fund
Services, LLC will charge a $20 fee against a shareholders account for any
payment check returned to the Custodian.
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The minimum initial purchase is $1,000 and the minimum subsequent
purchase is $100. Subsequent investments are made in the same manner as an
initial purchase is made.
All shares purchased are confirmed to you and credited to your account
at the net asset value determined as described herein under the heading
"Determination of Net Asset Value." Share certificates are issued only on
written request by you to Fundamental Family of Funds, c/o Firstar Trust
Company, P.O. Box 701, Milwaukee, WI 53201-0701. There is no charge for share
certificates. Certificates are not issued for fractional shares. Certificates
will only be issued in amounts of 1,000 or more shares. The issuance of
certificates may be discontinued at any time without prior notice. The Fund
reserves the right to reject any purchase order. The Fund reserves the right to
limit the number of purchase order checks processed at any one time and will
notify investors prior to exercising this right. If this right is exercised, the
Fund will return checks immediately.
Although shares of the Fund may be purchased without a sales charge if
you purchase them directly from the Fund, you may be charged a fee for effecting
transactions in the Fund's shares through securities dealers, banks, or other
financial institutions.
The Fundamental Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when you open a new account and invest $100 or more
per month through the Fundamental Automatic Investment Program. The Program
permits an existing shareholder to purchase additional shares of any Fund
(minimum $50 per transaction) at regular intervals. Under the Automatic
Investment Program, shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, the account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is not a business day, funds
will be transferred the next business day thereafter. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. To establish an Automatic Investment Account, complete and
sign Section F of the Purchase Application and send it to the Transfer Agent.
Shareholders may cancel this privilege or change the amount of purchase at any
time by calling 1-800-322-6864 or by mailing written notification to:
Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, WI 53201-0701. The change will be effective five business days
following receipt of notification by the Transfer Agent. A Fund may modify or
terminate this privilege at any time or charge a service fee, although no such
fee currently is contemplated. However, a $20 fee will be imposed by Firstar
Mutual Fund Services, LLC if sufficient funds are not available in the
shareholder's account at the time of the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, the Transfer Agent will not monitor the amount
of contributions to ensure that they do not exceed the amount allowable for
Federal tax purposes. Firstar Mutual Fund Services,
-27-
<PAGE>
LLC will assume that all retirement plan contributions are being made for the
tax year in which they are received.
Methods of Payment
Payment by Wire: An expeditious method of investing in the Fund is
through the transmittal of Federal funds by bank wire to Firstar Bank Milwaukee,
N.A. (the "Bank"). Federal funds transmitted by bank wire to the Bank and
received by it prior to 4:00 P.M. New York time are priced at the net asset
value determined on such day. Federal funds received after 4:00 P.M. New York
time will be available on the next business day. Funds other than Federal funds
transmitted by bank wire may or may not be converted into Federal funds on the
day received by the Bank depending upon the time the funds are received and the
bank wiring the funds. We encourage you to make payment by wire in Federal
funds. The Fund will not be responsible for delays in the wiring system.
To purchase shares by wiring funds, instruct a commercial bank to wire
your money to:
Firstar [Bank Milwaukee, N.A.]
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar [Bank Milwaukee, N.A.]
Account # 112952137
Further credit: The Fundamental Family of Funds
Name of shareholder and account number (if known)
Instructions for new accounts should specify the name, address, and social
security number of each person in whose name the shares are to be registered and
the name of the Fund. If you are an existing shareholder, you need only furnish
your account number and the name of the Fund. Failure to submit required
information may delay investment.
Payment by Mail: Purchase orders for which remittance is to be made by
check may be submitted directly by mail to Fundamental Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The
U.S. Postal Service and other independent delivery services are not agents of
the Fund. Therefore, deposit of purchase requests in the mail or with such
services does not constitute receipt by Firstar Mutual Fund Services, LLC or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Purchase requests sent by overnight or express mail should be directed
to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, Third
Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202. Checks should be
made payable to Fundamental Family of Funds.
When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from an account statement you have received or otherwise
indicate your account number and the name of the Fund.
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<PAGE>
Personal Delivery: For personal delivery instructions, please call the
Fund at (800) 322-6864.
Exchange for Municipal Securities: If you own municipal obligations
meeting the criteria for investment by the Fund, you may exchange such
securities for shares of the Fund. All such exchanges are discretionary with the
Fund. If you desire to make such an exchange, you should contact the Fund prior
to delivering any securities in order to establish that the securities are
acceptable for exchange, to determine what transaction charges, if any, may be
imposed and to obtain delivery instructions for such securities. The value of
the securities being exchanged will be determined in the same manner that the
value of the Fund's portfolio securities is determined (see "Determination of
Net Asset Value"); the specific method of determining the value will be provided
to you on request. The Fund reserves the right to refuse any such exchange, even
if the securities offered by an investor meet the general investment criteria of
the Fund. A capital gain or loss for Federal income tax purposes may be realized
by the investor following the exchange. Maturing bonds or detached coupons
submitted within five (5) business days of the payment date are credited on the
payment date.
Exchange Privilege. For your convenience, the Exchange Privilege
permits you to purchase shares in any of the other funds for which Fund
management acts as the investment manager in exchange for shares of the Fund at
respective net asset values per share. Exchange instructions may be given in
writing to Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI
53201-0701, the Fund's transfer agent, and must specify the number of shares of
the Fund to be exchanged and the fund into which the exchange is being made. The
telephone exchange privilege will be made available to shareholders
automatically. You may telephone exchange instructions by calling Firstar Mutual
Fund Services, LLC at (800) 322-6864. Before any exchange, you must obtain, and
should review, a copy of the current prospectus of the fund into which your
exchange is being made. Prospectuses may be obtained by calling or writing the
Fund. See also "Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for Federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
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<PAGE>
REDEMPTION OF SHARES
Shares of the Fund are redeemable at your option without charge at the
next determined net asset value following receipt by Firstar Mutual Fund
Services, LLC, of a redemption request in proper order. To effect a redemption,
you may utilize the Check Redemption Privilege, the Telephone Redemption
Privilege, the Expedited Redemption Privilege, or the regular redemption
procedure. Due to the cost of maintaining an account, the Fund reserves the
right to redeem an account involuntarily, on not less than 60 days' written
notice, at any time an investor has reduced his or her account to less than
$100. During the 60-day period, a shareholder may increase his or her holdings
to $100 or more, and thereby avoid an involuntary redemption.
When redemption requests are received by Firstar Mutual Fund Services,
LLC, by 4:00 P.M. New York time on any day during which the net asset value is
determined (see "Pricing of Fund Shares"), the redemption will be effective on
such day, and payment will be made on the next business day based on the net
asset value next determined after receipt of the redemption instruction. If a
redemption notice is received after 4:00 P.M. New York time, the redemption will
be effective on the next business day, and payment will be made thereafter on
the second business day. In the event you wish to liquidate your holdings, you
will be entitled to all dividends declared through the date of redemption. At
times, the Fund may be requested to redeem shares for which it has not yet
received good payment. The Fund may delay, or cause to be delayed, the mailing
of a redemption check until such time as it has assured itself that good payment
has been received from the purchase of such shares, which may take up to 15 days
from the purchase date. In the case of payment by check, the determination of
whether the check has been paid by the paying institution generally takes up to
seven days, but may take longer. You may avoid this delay by purchasing shares
by wire or by using a certified or official bank check drawn on a U.S. bank. In
the event of delays in payment of redemption proceeds, the Fund will take all
available steps to expedite collection of the investment check. If shares were
purchased by check, you may write checks against such shares only after 15 days
from the date the purchase was executed. Shareholders who draw against shares
purchased fewer than 15 days from the date of original purchase, will be charged
usual and customary bank fees. The Fund reserves the right to suspend the right
of redemption or postpone the day of payment (1) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), (2) when the trading markets normally used by the Fund are restricted
or an emergency exists as determined by the Securities and Exchange Commission
(the "Commission") as to make the disposal of the Fund's investments or
determination of its net asset value unreasonably impracticable, or (3) for such
other periods as the Commission by order may permit to protect the Fund's
shareholders.
You may realize a taxable capital gain or loss when shares are
redeemed, depending on their net asset value. On all redemption requests
(including redemption checks) for joint accounts, the signatures of all joint
owners are required unless shareholders have designated otherwise.
-30-
<PAGE>
Check Redemption Privilege
You may request that the Fund provide you with redemption checks
("Checks") drawn on the Fund's account by either (i) completing the appropriate
section of the application order form or (ii) subsequent written request to the
Fund. These Checks will be sent only to the individuals in whose name the
account is registered and only to the address of record with the Fund. You may
use the Checks in any lawful manner and make them payable to the order of any
person or company in an amount of $100 or more. Dividends continue to be earned
until the Check clears the Fund account and is paid by Firstar Mutual Fund
Service, LLC. The Fund may delay, or cause to be delayed, payment of redemption
proceeds until such time as it or Firstar Mutual Fund Service, LLC has assured
itself that good payment has been collected for the purchase of such shares. In
addition, the Fund reserves the right not to honor Check redemption requests
received by Firstar Mutual Fund Service, LLC within 15 days from the purchase
date if the shares to be redeemed have been purchased by check. You will be
subject to the same rules and regulations that the Bank applies to checking
accounts in general. There is currently no charge to you for the use of the
Checks, except that Firstar Mutual Fund Service, LLC imposes a $20 charge if an
investor requests that it stop payment of a Check or if it cannot honor a Check
due to insufficient funds or other valid reasons.
When a Check is presented for payment, Firstar Mutual Fund Service,
LLC, as your agent, will cause the Fund to redeem a sufficient number of shares
in your account to cover the amount of the Check. Shares for which stock
certificates have been issued may not be redeemed by Check. Since the net asset
value of the Fund's shares changes daily, you should make certain that the total
value of your account is sufficient to cover the amount of your Check.
Otherwise, the Check will be returned marked insufficient funds. Checks may not
be used to close an account. The Check Redemption Privilege may be modified or
terminated by either the Fund or Firstar Mutual Fund Service, LLC upon 60 days'
written notice to shareholders.
Telephone Redemption Privilege
You may direct redemptions of up to $150,000 worth of shares per day by
telephone either (i) by completing the appropriate section of the application
form or (ii) by later signature guaranteed* written request. Telephone calls
will be recorded. Firstar Mutual Fund Service, LLC will act on instructions that
it reasonably believes to be genuine. The proceeds of the redemption will only
be mailed to the address of record with the Fund, or a preauthorized bank
address. (Available only if established on the account application and if there
has been no change of address by telephone within the preceding 30 days.) The
Fund reserves the right to refuse a telephone redemption and may limit the
amount and frequency. The Telephone Redemption Privilege may be modified or
terminated at any time by either the Fund or Firstar Trust Company. Neither the
Fund nor its transfer agent will be liable for following instructions that they
reasonably believe to be genuine. It is the Fund's policy to provide that a
written confirmation statement of all telephone call transactions be mailed to
shareholders at their address of record within 3 business days after the
telephone call transaction. You should verify the accuracy of telephone call
transactions immediately upon receipt of your confirmation
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<PAGE>
statement. As a result of this policy, you will bear the risk of loss in the
event of a fraudulent telephone exchange or redemption transaction.
Expedited Redemption Privilege
Requests for expedited redemption may be made by letter or telephone
for amounts equal to or exceeding $5,000, if you have previously filed with
Firstar Mutual Fund Service, LLC a signed telephone authorization form available
from the Fund, or completed the appropriate Section of the Application Form. If
the request is for more than $5,000, proceeds of the expedited redemption will
be transferred by Federal Reserve wire to the commercial bank specified in the
authorization form or to a correspondent bank if your bank is not a member of
the Federal Reserve System. Firstar Mutual Fund Service, LLC charges a $12
service fee for each payment of redemption proceeds made by Federal wire. This
fee will be deducted from your account. If the correspondent bank fails to
notify your bank immediately, there could be a delay in crediting the funds to
your bank account. Proceeds of less than $5,000 will be mailed to your address.
The Fund reserves the right to refuse an expedited redemption and may limit the
amount and frequency.
This privilege may be modified or terminated at any time without prior
notice by either the Fund or Firstar Mutual Fund Service, LLC. Any time funds
are wired by the Bank, the proceeds of redemption may be subject to the
deduction of the Bank's usual and customary charges for wiring funds.
Requests by letter should be addressed to Fundamental Family of Funds,
c/o Firstar Mutual Fund Service, LLC, P.O. Box 701, Milwaukee, WI 53201-0701.
In order to qualify to use the Expedited Redemption Privilege, you must
complete the appropriate portion of the new account application and your initial
payment for purchase of the Fund's shares must be drawn on, and redemption
proceeds paid to, the same bank and account as designated on the application.
In order to change the commercial bank or account designated to receive
the redemption proceeds, you must send a written request to Fundamental Family
of Funds, c/o Firstar Mutual Fund Service, LLC, P.O. Box 701, Milwaukee, WI
53201-0701. Such request must be signed by each shareholder with each signature
guaranteed by an eligible guarantor (see above).
- --------------
*A signature guarantee must be from an eligible guarantor institution approved
by Fundamental Shareholder Services, Inc. Signature guarantees in proper form
generally will be accepted from domestic banks, a member of a national
securities exchange, credit unions and savings associations, as well as from
participants in the Securities Transfer Agents Medallion Program ("STAMP"). If
you have any questions with respect to signature guarantees, please call the
transfer agent at (800) 322-6864.
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<PAGE>
Regular Redemption Procedure
You may redeem your shares by sending a written request, together with
duly endorsed stock certificates, if any, to Fundamental Family of Funds, c/o
Firstar Mutual Fund Service, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. All
certificates and all written requests for redemption must be endorsed by you.
For redemptions exceeding $50,000 (and for all written redemption requests,
regardless of amount, made within 30 days following any change in account
registration), your endorsement must be signature guaranteed, as described
above. Firstar Mutual Fund Service, LLC may, at its option, request further
documentation from corporations, executors, administrators, trustees or
guardians. If requested, redemption proceeds of more than $5,000 will be wired
into any member bank of the Federal Reserve System. However, such transaction
may be subject to a deduction of the Bank's usual and customary charges for
wiring funds. The Fund will accept other suitable verification arrangements for
foreign investors. The U.S. Postal Service and other independent delivery
services are not agents of the Fund. Therefore, deposit of redemption requests
in the mail or with such services does not constitute receipt by Firstar Mutual
Fund Service, LLC or the Fund. Please do not mail letters by overnight courier
to the post office box address. Redemption requests sent by overnight or express
mail should be directed to: Fundamental Family of Funds, c/o Firstar Mutual Fund
Services, Third Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
Redemptions by mail will not become effective until all documents in the form
required have been received by Firstar Mutual Fund Service, LLC.
Requests for redemption subject to any special condition, or which
specify an effective date other than as provided herein, cannot be accepted and
will be returned to you.
How to Transfer Shares
Shares may be transferred from one person to another by sending to
Firstar Mutual Fund Service, LLC a written request for such transfer, signed by
the registered owner(s) exactly as the account is registered with each signature
guaranteed as described above, with (i) the name(s) of the new registered
owner(s), (ii) the social security number or taxpayer identification number for
the new registration, and (iii) the redemption option elected. If the shares
being transferred are represented by certificates in the possession of the
investor, such certificates, properly signed with signature guarantees, must
also be forwarded to Firstar Mutual Fund Service, LLC. In addition, Firstar
Mutual Fund Service, LLC reserves the right to request any additional documents
that may be required for transfer by corporations, executors, administrators,
trustees, and guardians.
Reopening an Account
You may reopen an account with a minimum investment of $100 or more
without filing a new application form during the year in which your account was
closed or during the following calendar year, provided that the information on
your original form is still applicable. The Fund
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<PAGE>
may require you to file a statement that all information on the original account
application form remains applicable.
DISTRIBUTION EXPENSES
The Board of Directors and shareholders of the Fund have approved a
plan of distribution under Rule 12b-1 of the 1940 Act (the "Plan"). Pursuant to
the Plan, the Fund may pay certain promotional and advertising expenses and may
compensate certain registered securities dealers and financial institutions for
services provided in connection with processing orders for the purchase or
redemption of Fund shares, and for furnishing other shareholder services.
Payments by the Fund shall not, in the aggregate, in any fiscal year of
the Fund, exceed one-half of 1% of daily net assets of the Fund for expenses
incurred in distributing and promoting the Fund's shares. The Plan will make
payments only for expenses actually incurred by such dealers and financial
institutions. If the Plan is terminated in accordance with its terms, the
obligation of the Fund to make payments pursuant to the Plan, including any
prior expenses carried forward, will cease and the Fund will not be required to
make any payments for expenses incurred after the date the Plan terminates.
Because these payments are paid out of the Fund's assets on a continual basis
over time, these fees will increase the cost of your investment and may cost you
more than other types of sales charges.
MANAGEMENT
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone"
or the "Manager"). Cornerstone's principal business address is 67 Wall Street,
New York, New York 10005. Cornerstone is an investment adviser registered with
the Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Fund's investment portfolio and directs the purchase and sales of
its investment securities.
Cornerstone's advisory contract with the Fund was approved at a Special
Meeting shareholders held on March ___, 1999. At that meeting, shareholders also
ratified Cornerstone's advisory fees of $___________, which amounted to ____% of
the Fund's average net assets for the period from September 29, 1998 to December
31, 1998. Cornerstone's advisory fee was based on the following table:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
<S> <C>
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
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<PAGE>
The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and
Chief Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment Corp., a
broker/dealer; he was a partner of Tucker Anthony Securities, a broker/dealer;
and he was a senior vice-president of Pryor McClendon Counts & Co., a
broker/dealer.
DIVIDENDS AND TAX MATTERS
Dividends and Distributions
The Fund declares all of its net investment income as a dividend, on a
daily basis, prior to calculating net asset value, on shares of record at the
close of business on the preceding day. Dividends are distributed monthly.
Capital gains, if any, will normally be distributed in December of each fiscal
year of the Fund. The amounts paid, and distribution dates thereof, are subject
to determination by the Fund's Board of Directors. All dividends paid and
capital gains distributed are paid in additional shares of the Fund's common
stock, which are credited to the shareholder's account. If you desire to receive
such distribution in cash, you must file an election with Firstar Mutual Fund
Services, LLC, which election will remain in effect until Firstar Mutual Fund
Services, LLC is notified by you in writing to change the election, at least ten
(10) days prior to payment date. Distributions declared in the months of
October, November or December will be treated as received by shareholders of
record in such months as of December 31 even if they are not paid until the
following January. Certificates will not be issued for dividend distributions.
Tax Matters
The Fund intends to continue to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders.
o Exempt-interest dividends from the Fund will be exempt from federal regular
income tax and New York State and New York City personal income tax.
o Ordinary dividends from the Fund are taxable as ordinary income and
dividends from the Fund's long-term capital gains are taxable as capital
gain.
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<PAGE>
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in the form of cash or additional shares. They may
also be subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they had
been paid the previous December.
o Firstar Trust Company will mail you tax statements annually showing the
amounts and tax status of the distributions you received.
o When you sell (redeem) or exchange shares of a Fund, you must recognize any
gain or loss.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in the
Fund.***
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<PAGE>
APPENDIX
RATINGS OF MUNICIPAL BONDS
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors Services, Inc.
rating symbols and their meanings is as follows:
Aaa-Bonds which are 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 by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the Aaa securities or fluctuation of
protective elements may be of a greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than 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 characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
A-1
<PAGE>
Ca-Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
I. Con. (---)--Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by 1. earnings of projects under construction, 2. earnings of
projects unseasoned in operation experience, 3. rentals which begin when
facilities are completed, or 4. payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of condition.
Standard & Poor's Corporation
A brief description of the applicable S&P Corporation rating symbols
and their meanings is as follows:
AAA-This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to repay principal and interest is very strong, and in the majority of
instances they differ from AAA issues in only small degrees.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and
A-2
<PAGE>
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C-The rating C is reserved for income bonds on which no interest is
being paid.
D-Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or minus (-): The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional Ratings: the letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. Accordingly, the investor should exercise his own judgment with
respect to such likelihood and risk.
Fitch
Ratings
A brief description of the applicable Fitch Investors Service, Inc.
rating symbols and their meanings is as follows:
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 the 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 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
A-3
<PAGE>
more vulnerable to adverse changes in economic conditions and circumstances 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 an adverse impact 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.
BB
Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
A-4
<PAGE>
DDD, DD AND D
Bonds rated DDD, DD and D are in actual or imminent default of interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA Category covering 12-36 months or the
DDD, DD or D categories.
DUFF & PHELPS, INC.
RATING DEFINITION
SCALE
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong.
AA- Risk is AA modest but may vary slightly from time to time
AA- because of economic conditions.
A+ Protection factors are average but adequate. However,
A risk factors are more variable and greater in periods of
A- economic stress.
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable variability
BBB- in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective financial
BB- protection factors fluctuate according to industry conditions
or company fortunes. Overall quality may move up or down
frequently within this category.
B+ Below investment grade and possessing risk that obliga-
B tions will not be met when due. Financial protection
B- factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or
into a higher or lower rating grade.
A-5
<PAGE>
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest
or preferred dividends. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
RATING DEFINITION
SCALE
High Grade
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Satisfactory Grade
Duff 3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
Duff 4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
A-6
<PAGE>
Default
Issuer failed to meet scheduled principal and/or interest payments.
Ratings of Municipal Notes
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors Service, Inc.
rating symbols for municipal notes and their meanings is as follows:
MIG-1 - This is the highest rating assigned by Moody's to municipal
notes and designates noted judged to be of the best quality.
MIG-2 - This rating designates notes of a high quality by all
standards. However, the margins of protection, although ample, are not as large
as in the preceding group.
MIG-3 - This rating designates notes which are of a favorable quality,
with all security elements accounted for. However, such notes are lacking the
undeniable strength of notes in the preceding two groups. Market access for
refinancing, in particular, is likely to be less well established.
Short-Term Ratings
Fitch
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.
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
A-7
<PAGE>
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 a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Short-Term Municipal Loans
Moody's highest rating for short-term municipal loans is MIG-1/VMIG-1.
Moody's states that short-term municipal securities rated MIG-1/VMIG-1 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. Loans bearing the MIG-2/VMIG-2 designation are
of high quality, with margins of protection ample although not so large as in
the MIG-1/VMIG-1 group.
S&P's highest rating for short-term municipal loans is SP-1. S&P states
that short-term municipal securities bearing the SP-1 designation have very
strong or strong capacity to pay principal and interest. Those issues rated SP-1
which are determined to possess overwhelming safety characteristics will be
given a plus (+) designation. Issues rated SP-2 have satisfactory capacity to
pay principal and interest.
Other Municipal Securities and Commercial Paper
"Prime-1" is the highest rating assigned by Moody's for other
short-term municipal securities and commercial paper, and "A- 1+" and "A-1" are
the two highest ratings for commercial paper assigned by S&P (S&P does not rate
short-term tax-free obligations). Moody's uses the numbers 1, 2 and 3 to denote
relative strength within its highest classification of "Prime", while S&P uses
the number 1+, 1, 2 and 3 to denote relative strength within its highest
classification of "A". Issuers rated "Prime" by Moody's have the following
characteristics: their short-term debt obligations carry the smallest degree of
investment risk, margins of support for current indebtedness are large or stable
with cash flow and asset protection well assured, current liquidity provides
ample coverage of near-term liabilities and unused alternative financing
arrangements are generally available. While protective elements may change over
the intermediate or longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations. Commercial paper
issuers rated "A" by S&P have the following characteristics: liquidity ratios
are better than industry average, long-term debt rating is A or better, the
issuer has access to at least two additional channels of borrowing, and basic
earnings and cash flow are in an upward trend. Typically, the issuer is a strong
company in a well-established industry and has superior management.
A-8
<PAGE>
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
NEW YORK MUNI FUND(R)
67 Wall Street
New York NY 10005
1-800-___-____
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800- SEC-0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
================================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(___-____)
Monday through Friday
8:30 a.m. to 5:00 p.m. (EST)
================================================================================
The Fund's Investment Company Act File number is 811-3032.
A-9
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NEW YORK MUNI FUND
a series of Fundamental Funds, Inc.
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the Fund's current Prospectus, a copy of which may be obtained
by writing to The Fund at (________________), or by calling (800) (_________).
Shareholder inquiries may also be placed through this number.
THIS STATEMENT IS DATED APRIL 30, 1999
AND SUPPLEMENTS THE FUND'S PROSPECTUS OF THE SAME DATE.
<PAGE>
TABLE OF CONTENTS
Page
----
FUND HISTORY ................................................................
INVESTMENT OBJECTIVE AND POLICIES ...........................................
INVESTMENT LIMITATIONS ......................................................
MANAGEMENT OF THE FUND ......................................................
OWNERSHIP OF SECURITIES .....................................................
INVESTMENT MANAGEMENT AND OTHER SERVICES ....................................
DISTRIBUTION PLAN ...........................................................
PORTFOLIO TRANSACTIONS.......................................................
TAXES........................................................................
DESCRIPTION OF SHARES........................................................
CERTAIN LIABILITIES..........................................................
PURCHASE OF SHARES ..........................................................
PRICING OF SHARES ...........................................................
CALCULATION OF YIELD.........................................................
FINANCIAL STATEMENTS.........................................................
APPENDIX.....................................................................A-1
- 2 -
<PAGE>
FUND HISTORY
Fundamental Funds, Inc. (the "Company") was incorporated under the laws
of the State of New York on January 30, 1980, and was reorganized as a Maryland
corporation on December 31, 1990. The Company has one series, the New York Muni
Fund (the "Fund") and is an open-end, non-diversified management investment
company. On April 24, 1996, the Company changed its name from New York Muni
Fund, Inc. to its current name Fundamental Funds, Inc.
INVESTMENT POLICIES AND RESTRICTIONS
The investment restrictions described below have been adopted by the
Fund as fundamental policies which cannot be changed without approval of a
majority of the outstanding shares of the Fund. The "majority of outstanding
shares" means the vote of the lesser of (1) 67% of the Fund's shares present at
a meeting of shareholders if the holders of more than 50% of the outstanding
shares are present in person or by proxy at such meeting or (2) more than 50% of
the Fund's outstanding shares.
1. The Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase securities
in accordance with the Fund's investment program, including reverse repurchase
agreements, delayed delivery and
- 3 -
<PAGE>
when-issued securities, which may be considered the issuance of senior
securities; (b) the Fund may engage in transactions that may result in the
issuance of a senior security to the extent permitted under applicable
regulations, interpretations of the 1940 Act or an exemptive order; (c) the Fund
may engage in short sales of securities to the extent permitted in its
investment program and other restrictions; (d) the purchase or sale of futures
contracts and related options shall not be considered to involve the issuance of
senior securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act.
2. The Fund will not underwrite any issue of securities, except to the
extent that the purchase of municipal obligations directly from the issuer, in
accordance with the Fund's investment objective, policies and restrictions, may
be deemed to be an underwriting.
3. The Fund will not purchase or sell real estate. This restriction
shall not prevent the Fund from investing in municipal obligations secured by
real estate or interests therein.
4. The Fund will not invest in commodity contracts, except that the
Fund may, to the extent appropriate under its investment program, purchase
securities of companies engaged in whole or in part in such activities, may
enter into transactions in financial and index futures contracts and related
options and may engage in transactions on a when-issued or forward commitment
basis.
- 4 -
<PAGE>
5. The Fund will not invest in oil, gas or thermal mineral exploration,
or development programs.
6. The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase debt instruments,
including bonds, debentures, notes and municipal commercial paper; (b) enter
into repurchase transactions; and (c) lend portfolio securities provided that
the value of such loaned securities does not exceed one-third of the Fund's
total assets.
7. The Fund may borrow money from banks (including its custodian bank)
or from other lenders to the extent permitted under applicable law, for
temporary or emergency purposes, to meet redemptions or for purposes of
leveraging, but only if, immediately after such borrowing, the value of the
Fund's assets, including the amount borrowed, less its liabilities, is equal to
at least 300% of the amount borrowed, plus all outstanding borrowings. If at any
time the value of the Fund's assets fails to meet the 300% asset coverage
requirement, the Fund will, within three days (not including Sundays and
holidays), reduce its borrowings to the extent necessary to meet the 300% test.
The Fund may enter into certain futures contracts and options related thereto
and the Fund may enter into commitments to purchase securities in accordance
with the Fund's investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements.
- 5 -
<PAGE>
8. The Fund will not invest 25% or more of its total assets in
securities of issuers in any one industry; provided, however, that such
limitation shall not be applicable to municipal obligations other than those
municipal obligations backed only by the assets and revenues of non-governmental
users, nor shall it apply to municipal obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
In addition to the foregoing, the Fund is subject to the following
non-fundamental restrictions:
1. The Fund will not purchase a qualified private activity bond if as a
result of such purchase more than 20% of the Fund's total assets, determined at
market value at the time of the proposed investment, would be invested in
qualified private activity bonds.
2. The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then- current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 20% of the fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
3. The Fund will not invest more than 15% of its net assets in illiquid
investments, including repurchase agreements maturing in more than seven days,
securities that
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<PAGE>
are not readily marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the Securities Act of 1933.
4. The Fund will 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 the Fund.
Since the Fund may invest in qualified private activity bonds, its
shares may not be an appropriate investment for "substantial users" of
facilities financed by industrial development bonds (as defined in Treasury
regulation section 1.103- 11), or "related persons" to such users (within the
meaning of section 147(a)of the Internal Revenue Code of 1986, as amended (the
"Code")).
The Fund, together with any of its "affiliated persons" (as described
in the 1940 Act), may only purchase up to 3% of the total outstanding securities
of any underlying investment company. Accordingly, when the Fund or such
"affiliated persons" hold shares of any of the underlying investment companies,
the Fund's ability to invest fully in shares of those investment companies is
restricted, and the Fund must then, in some instances, select alternative
investments that would not have been its first preference.
- 7 -
<PAGE>
The 1940 Act also provides that an underlying investment company whose
shares are purchased by the Fund will be obligated to redeem shares held by the
Fund and its affiliates only in an amount up to 1% of the underlying investment
company's outstanding securities during any period of less than 30 days. Shares
held by the Fund and its affiliates in excess of 1% of an underlying investment
company's outstanding securities therefore will be considered not readily
marketable securities, which together with other such illiquid securities may
not exceed 15% of the Fund's net assets.
In certain circumstances, an underlying investment company may
determine to make payment of a redemption by the Fund wholly or partly by a
distribution in kind of securities from its portfolio, in lieu of cash, in
conformity with rules of the Securities and Exchange Commission. In such cases,
the Fund may hold securities distributed by an underlying investment company
until it determines that it is appropriate to dispose of such securities.
There can be no assurance that funds for investing in municipal
obligations will be available for investment. The Fund does not intend to invest
in such funds unless it is likely that the potential benefits of such investment
justify the payment of any applicable premium or sales charge.
Where relevant in this Statement of Additional Information, the term
"issuer" is defined as the entity which has either actually issued the security
or which is ultimately responsible for payment of the obligation. For purposes
of diversification of the Fund's
- 8 -
<PAGE>
investments, separate issues by the same issuer will be considered as distinct
or diverse investments provided that such issues differ either with respect to
collateral (i.e., the pledge of specific revenue or taxes standing as security
for the payment of the obligation) or guarantor of ultimate payment.
ADDITIONAL INFORMATION RELATING TO MUNICIPAL OBLIGATIONS
Municipal Bonds
Municipal bonds are long-term debt obligations, generally with a
maturity at the time of issuance of greater than three years, of states and
their political subdivisions issued to obtain funds for various public purposes,
including construction of a wide range of public facilities, such as airports,
bridges, highways, housing, hospital, mass transportation, schools, streets and
water and sewer works. Other purposes for which municipal bonds may be issued
include refunding outstanding obligations; obtaining funds for general operating
expenses; or obtaining funds to lend to public or private institutions for
construction of such facilities as educational, hospital and housing facilities.
In addition, certain types of bonds may be issued by public authorities to
finance privately operated housing facilities, sports facilities, convention or
trade show facilities, and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. Other types of qualified private
activity bonds, the proceeds of which are used for the construction, equipment,
repair or improvement of privately operated industrial
- 9 -
<PAGE>
or commercial facilities, may constitute municipal bonds, although current
Federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal bonds are general
obligation and revenue bonds. General obligation bonds are secured by the
issuer's pledge of faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from only revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue sources such as from the user
of the facility being financed. Qualified private activity bonds are, in most
cases, revenue bonds and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The payment of the principal and
interest on such bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.
Municipal Notes
Municipal notes are short-term obligations, generally with a maturity
at the time of issuance of six months to three years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, and project notes. Tax anticipation notes are sold to
provide working capital to states and municipalities in anticipation of
collection of taxes. Bond anticipation notes are issued to provide funds
temporarily in anticipation of a bond sale. Revenue anticipation notes are sold
in expectation of receipt of other
- 10 -
<PAGE>
revenues, such as funds under the Federal Revenue Sharing Program. Project notes
are issued by local agencies in connection with such programs as construction of
low-income housing in order to provide construction financing prior to permanent
financing. Project notes are guaranteed by the U.S. Department of Housing and
Urban Development and consequently are secured by the full faith and credit of
the United States.
Variable Rate Instruments
Municipal bonds and notes are sometimes issued with a variable interest
rate ("variable rate instruments"). The interest rate on variable rate
instruments is usually tied to an objective standard, such as the 90-day
Treasury Bill rate or the prime rate of a bank involved in the financing. Prime
rates can change daily; the auction for 90-day Treasury Bill rates is held
weekly. In addition to having a variable interest rate, any such instruments are
subject to repayment of principal on demand by the Fund, usually in not more
than five business days. Both the variable rate feature and the principal
repayment on demand feature tend to reduce fluctuations in the price of variable
rate instruments; these instruments are generally of interest and sold to
institutional investors. Also available are participation interests in loans to
municipal issuers, which are similar except that these loan participations are
made available through a commercial bank that arranges the tax-exempt loan.
Participation interests are frequently backed by an irrevocable bank letter of
credit or a guarantee by a financial institution and give the Fund the right to
demand, on short notice (usually not more than seven days), payment of all or
any part of the principal amount and accrued interest. The Board of Directors
will determine that
- 11 -
<PAGE>
the participation interest in the municipal securities meets the Fund's
prescribed quality standards. The Fund's management has been instructed by the
Board of Directors to monitor the pricing, quality and liquidity of any variable
rate demand instruments held, including participation interests supported by
letters of credit or guarantee, on the basis of published financial information
and reports of the rating agencies and other analytical sources. The Fund's
management will also monitor the creditworthiness of the guarantor. Banks retain
fees for their role in an amount equal to the excess of the interest paid on the
municipal securities over the negotiated yield at which the participation
interests were purchased. In the event that the participation interest that the
Fund acquires includes the right to demand payment of principal and accrued
interest from the issuer of the participation interest pursuant to a letter of
credit or other commitment, the maturity will be deemed to be equal to the time
remaining until the principal amount can be recovered from the issuer through
demand, although the stated maturity may be in excess of one year. To the extent
that variable rate instruments and loan participations may lack liquidity
(unless payable on demand or within seven days), they are subject to the
restriction on illiquid securities, described herein under the caption
"Investment Objective, Policies and Restrictions".
- 12 -
<PAGE>
Other Information
A portion of the Fund's assets may be invested in qualified hospital
bonds. Such bonds are rated on the basis of feasibility studies that project
occupancy levels, revenues and expenses. The gross receipts and income of
hospitals are affected by many future events and conditions (including among
other things, demand for hospital services, the ability of the hospital to
provide such services, competition, actions by insurers and governmental
agencies, the cost and possible unavailability of malpractice insurance, and the
funding of medicare and medicaid programs), whose effects are often difficult to
predict. Changes or future developments in all of the foregoing areas may have
an adverse effect on the price or marketability of such bonds.
A part of the Fund's assets may be invested in obligations of state and
local housing authorities. Such obligations are not part of the general
obligations of the state or the municipality in question. To a large extent,
such obligations are generally supported by Federal housing subsidy programs.
Any weakness in such programs or their administration, or the failure by a state
or local housing authority to meet the qualifications required for coverage
under such programs, may result in a decrease or the elimination of such Federal
subsidies and could adversely affect payment of principal and interest on
housing authority bonds. These factors as well as general economic factors
affecting housing in general could cause a decrease in the value or
marketability of such bonds.
- 13 -
<PAGE>
A portion of the Fund's assets may be invested in municipal obligations
that are moral obligation bonds issued by agencies and authorities of the State
of New York (i.e., issued pursuant to the municipality's good faith and credit
to pay principal and interest). Under the statutes applicable to such bonds, the
State may be called on to restore any deficits in capital reserve funds of such
agencies or authorities created with respect to the bonds. Any such restoration
requires appropriation by the state legislature for such purposes, and
accordingly, the statutes do not constitute legally enforceable obligations or
debt of the State. The agencies or authorities in question have no taxing power,
and on a default by such agencies or authorities, there are no guarantees that
payments of principal and interest will be met.
ADDITIONAL INFORMATION RELATING TO LOWER RATED SECURITIES
The lower quality securities in which the Fund may invest (i.e., those
rated lower than Baa by Moody's or BBB by S&P, Fitch or Duff or determined by
Fund management to be a comparable quality if unrated) generally produce a
higher current yield than do securities of higher ratings. However, these
obligations are considered speculative because they involve greater price
volatility and risk than do higher rated securities and the yields on these
securities will tend to fluctuate over time. Although the market value of all
fixed-income securities varies as a result of changes in prevailing interest
rates (e.g., when interest rates rise, the market value of fixed-income
securities can be expected to decline), values of lower rated securities tend to
react differently than the values of higher rated securities. The prices of
lower rated securities
- 14 -
<PAGE>
are less sensitive to changes in interest rates than higher rated securities.
Conversely, lower rated securities also involve a greater risk of default by the
issuer in the payment of principal and income and are more sensitive to economic
downturns and recessions than higher rated securities. The financial stress
resulting from an economic downturn could have a greater negative effect on the
ability of issuers of lower rated securities to service their principal and
interest payments, to meet projected business goals and to obtain additional
financing than on more creditworthy issuers. In the event of an issuer's default
in payment of principal or interest on such securities, or any other securities
in the Fund's portfolio, the net asset value of the Fund will be negatively
affected. Moreover, as the market for lower rated securities is a relatively new
one which has not yet been tested through a recession, a severe economic
downturn might increase the number of defaults, thereby adversely affecting the
value of all outstanding lower rated municipal bonds and disrupting the market
for such securities. Securities purchased by the Fund as part of an initial
underwriting present an additional risk due to their lack of market history.
These risks are exacerbated with respect to securities rated CCC or lower by
S&P, Fitch or Duff or Caa or lower by Moody's. Unrated securities generally
carry the same risks as do lower rated securities.
The Fund may invest in lower rated securities that are structured as
zero coupon or pay-in-kind bonds. Such securities may be more speculative and
subject to greater fluctuation in value due to changes in interest rates than
lower rated, income-bearing securities. In addition, zero coupon and pay-in-kind
securities are also subject to the risk that in the event of a default, a fund
may realize no return on its investment, because these securities do not pay
- 15 -
<PAGE>
cash interest. Zero coupon, or deferred interest, securities are debt
obligations that do not entitle the holder to any periodic payment of interest
prior to maturity or a specified date when the securities begin paying current
interest (the "cash payment date") and therefore are issued and traded at a
discount from their face amounts or par value. Pay-in-kind securities are
securities that pay interest through the issuance of additional securities.
Holders of zero coupon securities are considered to receive each year the
portion of the original issue discount on such securities that accrues that year
and must include such amount in gross income, even though the holders receive no
cash payments during the year. Consequently, as a fund is accruing original
issue discount on these securities prior to the receipt of cash payment, it is
still subject to the requirement that it distribute substantially all of its
income to its shareholders in order to qualify as a "regulated investment
company" under applicable tax law. Therefore, such fund may have to dispose of
its portfolio securities under disadvantageous circumstances or leverage itself
by borrowing to generate the cash necessary to satisfy its distribution
requirements.
Lower rated securities are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of lower
rated securities tend to be institutions, rather than individuals, a factor that
further limits the secondary market. To the extent that no established retail
secondary market exists, many lower rated securities may not be as liquid as
Treasury and investment grade securities. The ability of the Fund to sell lower
rated securities will be adversely affected to the extent that such securities
are thinly traded or illiquid. Moreover, the ability of the Fund to value lower
rated securities becomes
- 16 -
<PAGE>
more difficult, and judgment plays a greater role in valuation, as there is less
reliable, objective data available with respect to such securities that are
thinly traded or illiquid.
Because investors may perceive that there are greater risks associated
with the medium to lower rated securities of the type in which the Fund may
invest, the yields and prices of such securities may tend to fluctuate more than
those for securities with a higher rating. Changes in perception of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
in the lower quality segments of the fixed-income securities market than do
changes in higher quality segments of such market, resulting in greater yield
and price volatility.
The general legislative environment has included discussions and
legislative proposals relating to the tax treatment of high-yield securities.
Any or a combination of such proposals, if enacted into law, could negatively
affect the value of the high-yield securities in the Fund's portfolio. The
likelihood of any such legislation is uncertain.
Fund management believes that the risks of investing in such
high-yielding securities may be minimized through careful analysis of
prospective issuers. Although the opinion or ratings services such as Moody's,
S&P, Fitch and Duff is considered in selecting portfolio securities, they relate
to credit risk and evaluate the safety of the principal and the interest
payments of the security, not their market value risk. Additionally, credit
rating agencies may experience slight delays in updating ratings to reflect
current events. The Fund relies, primarily, on its own credit analysis, which
includes a study of the existing debt, capital
- 17 -
<PAGE>
structure, ability to service debts and to pay dividends, and the current trend
of earnings for any issuer under consideration for the Fund's investment
portfolio. This may suggest, however, that the achievement of the Fund's
investment objective is more dependent on its proprietary credit analysis, than
is otherwise the case for a fund that invests in higher quality securities.
Temporary Defensive Investments
The Fund may invest in the following temporary defensive investments:
U.S. Government Obligations. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
Short-Term Obligations. These include high quality, short-term obligations such
as domestic and foreign commercial paper (including variable-amount master
demand notes), bankers'
- 18 -
<PAGE>
acceptances, certificates of deposit and demand and time deposits of domestic
and foreign branches of U.S. banks and foreign banks, and repurchase agreements.
[Portfolio Turnover]
MANAGEMENT OF THE FUND
Directors and Officers
The business of the Company is managed under the direction of the Board
of Directors. Specifically, the Board of Directors is responsible for oversight
of the Fund by reviewing and approving necessary agreements with the Fund's
service providers, and mandating policies for the Fund's operations.
Directors and officers of the Fund, together with information as to
their principal business occupations during the last five years, are shown
below. Each director who is considered to be an "interested person" of the Fund,
as defined in the 1940 Act, is indicated by as asterisk (*). The Board Members
listed below were elected by the Fund's shareholders at a Special Meeting held
on March __, 1999.
- 19 -
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
Position(s) Held Principal Occupation(s) During
Name, Address, and Age with Fund Past Five Years
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William J. Armstrong Director Vice President and Treasurer,
[Address] Ingersoll-Rand Company (5/86 -
Present); Trustee, Chase Vista
Age: 56 Funds.
- ----------------------------------------------------------------------------------------------------------------
L. Greg Ferrone Director Senior Manager, ARC Partners
83 Ronald Court (10/97 - Present); Consultant,
Ramsey, New Jersey 07446 IntraNet, Inc. (4/90 - 10/97);
Age: 47 Sales & Marketing Director,
RAV Communications (4/85 - 4/90);
Vice President/Regional Manager,
National Westminster Bank
USA (3/78 - 4/85).
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- 20 -
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen C. Leslie* President Chairman and CEO,
67 Wall Street Cornerstone Equity Advisors,
New York, New York 10005 Inc. (6/97 - Present); Partner,
Age: 45 Wall Street Capital Group (3/97
- 6/97); Partner, Wall Street
Investment Corp. (11/95 -
3/97); Partner, Tucker Anthony
Securities (8/95 - 10/95); Senior
Vice President, Pryor
McClendon Counts & Co. (5/94
- 8/95); Senior Vice President,
Siebert Capital Markets (6/93 -
5/94).
- ----------------------------------------------------------------------------------------------------------------
G. John Fulvio* Treasurer/Chief Treasurer, Cornerstone Equity
67 Wall Street Financial Officer Advisors, Inc. (4/97 - Present);
New York, New York 10005 Partner, Speer & Fulvio (3/87 -
Age: 4/97).
</TABLE>
- 21 -
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Leroy E. Rodman Director Counsel, Morrison, Cohen,
[Address] Singer & Weinstein, LLP
(1996 - Present); Senior Partner,
Age: 85 Teitelbaum, Hiller, Rodman,
Paden & Hibsher, P.C. (1990 -
1996).
- ----------------------------------------------------------------------------------------------------------------
Dr. Yvonne Scruggs-Leftwich Director Executive Director and Chief
[Address] Operating Officer, Black
Leadership Forum, Inc.;
Age: 65 Director, Joint Center For
Political and Economic Studies
(1991 - Present).
================================================================================================================
</TABLE>
Mr. Leslie is the chief portfolio manager and Mr. Fulvio the Treasurer
of the Fund's adviser, Cornerstone Equity Advisors, Inc. All of the Directors of
the Fund are also Trustees of The California Muni Fund and Fundamental
Fixed-Income Fund.
For services and attendance at board meetings and meetings of
committees which are common to the Fund, Fundamental Fixed-Income Fund and The
California Muni Fund (other affiliated mutual funds for which the Fund's
investment manager acts as the investment adviser), each Director of the Fund
who is not affiliated with the Fund's investment manager is
- 22 -
<PAGE>
compensated at the rate of $6,500 per quarter prorated among the three funds
based on their respective net assets at the end of each quarter. Each such
Director is also reimbursed by the three funds, on the same basis, for actual
out-of-pocket expenses relating to his attendance at meetings. Some Directors
received additional compensation at a rate of $125 per hour for services related
to servicing on the Portfolio Review Committee. As of the date of this Statement
of Additional Information, Directors and officers of the Fund as a group owned
beneficially less than 1% of the Fund's outstanding shares.
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
<TABLE>
<CAPTION>
================================================================================================================================
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual From Fund and
Name of Person*, Compensation as Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Directors
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
L. Greg Ferrone, $12,401 N/A N/A $19,500
Director
================================================================================================================================
</TABLE>
* Mr. Ferrone is the only current Board Member who served in that capacity
during the fiscal year ended 1998.
- 23 -
<PAGE>
Portfolio Review Committee
Pursuant to the terms of an assurance of discontinuance (the
"assurance") entered into with the Department of Law of the State of New York,
the Fund has established and will maintain for a period of at least five years
from April 15, 1994, a Portfolio Review Committee of its Board of Directors,
consisting of no fewer than three independent directors. Mr. Ferrone, the sole
remaining Independent Director currently serves on the Portfolio Review
Committee.
The Portfolio Review Committee oversees the Fund's (i) investment
performance and strategies; (ii) the adequacy of internal controls and
procedures applicable to portfolio personnel and activity; (iii) the amendment,
as they may deem necessary in the exercise of their duties, of the Fund's
Prospectus; and (iv) compliance with investment policies stated in the Fund's
Prospectus, with such other policies as the Board of Directors may from time to
time establish, and with all applicable laws, rules and regulations. The
Portfolio Review Committee also reviews all annual and semi-annual reports prior
to their dissemination to shareholders. The Portfolio Review Committee is
required to keep a record of its meetings and has the authority to retain such
expert (legal, financial or accounting) assistance as the Committee in its sole
discretion deems necessary in the exercise of their duties.
- 24 -
<PAGE>
OWNERSHIP OF SECURITIES
As of __________ except as set forth below, no person owned
beneficially or of record more than 5% of the outstanding shares of the Fund. As
of that date, the officers and Board Members of the Fund beneficially owned less
than 1% of the shares of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The Fund is currently managed by Cornerstone Equity Advisors, Inc.
("Cornerstone" or the "Manager"). Cornerstone's Chairman and Chief Executive
Officer is Mr. Stephen C. Leslie, who is also President of the Fund. Mr. Leslie
is one of two individuals who may be considered a "control person" of
Cornerstone. Cornerstone's Treasurer, Mr. G. John Fulvio, is the Treasurer and
Chief Financial Officer of the Fund. Mr. Fulvio is not considered a "control
person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following percentages
of the Fund's average daily net asset value:
- 25 -
<PAGE>
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
The fee levels noted above are identical to those received by the
Fund's previous advisers, Tocqueville Asset Management, L.P. ("Tocqueville"),
and Fundamental Portfolio Advisors, Inc. ("FPA").
From September 29, 1998 to December 31, 1998 Cornerstone received an
aggregate advisory fee of $____________. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of
$____________. From January 1, 1998 to May 30, 1998 FPA received an aggregate
advisory fee of $____________. For the fiscal year ended December 31, 1997 FPA
received an aggregate advisory fee of $____________. For the fiscal year ended
December 31, 1996 FPA received an aggregate advisory fee of $787,962.
[CREDITS FOR THE ADVISORY FEE STATED SEPARATELY]. The investment
management agreement with FPA provided an expense limitation of 1.50% of the
- 26 -
<PAGE>
Fund's average daily net assets. The agreement with Cornerstone also contains
such limitations, while the interim agreement with Tocqueville did not provide
such limitations.
Administrator, Transfer Agent, and Accounting Agent
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
WI 53201-0701 currently acts as Administrator, Transfer Agent, and Accounting
Agent of the Fund.
[Description of Services and aggregate compensation for the
administration services.]
Custodian and Independent Public Accountant
Firstar Bank Milwaukee, N.A. (the "Bank"), 615 East Michigan Street,
Milwaukee, WI 53201-0701, acts as Custodian of the Fund's cash and securities.
______________, acts as independent certified public accountants for
the Fund, performing an annual audit of the Fund's financial statements and
preparing its tax returns.
- 27 -
<PAGE>
DISTRIBUTION PLAN
The Board of Directors and shareholders of the Fund have approved a
plan of distribution under Rule 12b-1 of the 1940 Act (the "Plan"). Pursuant to
the Plan, the Fund may pay certain promotional and advertising expenses and may
compensate certain registered securities dealers and financial institutions for
services provided in connection with the processing of orders for purchase or
redemption of the shares of the Fund and furnishing other shareholder services.
Payments by the Fund shall not in the aggregate in any fiscal year of the Fund
exceed 1/2 of 1% of daily net assets of the Fund. The Fund may enter into
shareholder processing and service agreements (the "Shareholder Service
Agreements") with any securities dealer who is registered under the Securities
Exchange Act of 1934 and a member in good standing of the National Association
of Securities Dealers, Inc., and with banks and other financial institutions,
who may wish to establish accounts or sub-accounts on behalf of their customers
("Shareholder Service Agents"). For processing investor purchase and redemption
orders, responding to inquiries from Fund shareholders concerning the status of
their accounts and operations of the Fund and communicating with the Fund, the
Fund may pay each such Shareholder Service Agent to cover expenditures for
advertising, sales literature and other promotional materials on behalf of the
Fund.
The fees payable to Shareholder Service Agents under Shareholder
Service Agreements will be negotiated by the Fund's management. The Fund's
management will report quarterly to the Board of Directors on the rate to be
paid under each such agreement and the amounts paid or payable under such
agreements. It will be based upon the management's analysis of (1) the
contribution that the Shareholder Service Agent makes to the Fund by
- 28 -
<PAGE>
increasing Fund assets and reducing expense ratios; (2) the nature, quality and
scope of services being provided by the Shareholder Service Agent; (3) the cost
to the Fund if shareholder services were provided directly by the Fund or other
authorized persons; (4) the costs incurred by the Shareholder Servicing Agent in
connection with providing services to shareholders; and (5) the need to respond
to competitive offers of others which could result in assets being withdrawn
from the Fund and an increase in the expense ratio for the Fund.
No interested persons of the Fund had a direct or indirect financial
interest in the operation or plan or related agreements. The Board of Directors
of the Fund, including a majority of the "disinterested" Directors who have no
direct or indirect financial interest in the operation of the Plan or any
agreements relating thereto, authorized the Fund to enter into an agreement with
(____________________), under the Plan. The agreement provides that the Fund may
pay the usual and customary agency's commission to (______________) for
producing and placing Fund advertising in newspapers, magazines or other
periodicals, on radio or television, or in direct marketing campaigns. In
addition to the foregoing, the Fund may pay (_______________) for marketing
research and promotional services specifically relating to the distribution of
Fund shares, including office space, facilities and equipment, salaries,
training and administrative expenses, computer systems and software,
communications, supplies, photocopying and similar types of expenses.
The Plan will continue in effect from year to year if specifically
approved at least annually by the Board of Directors and the affirmative vote of
a majority of the Directors who
- 29 -
<PAGE>
are not parties to any Shareholder Service Agreement or "interested persons" of
any such party by votes cast in person at a meeting called for such purpose. In
approving the Plan, the Directors determined, in the exercise of their business
judgment and in light of their fiduciary duties as Directors of the Fund, that
there was a reasonable likelihood that the Plan would benefit the Fund and its
shareholders. The Plan may only be renewed if the Directors make a similar
determination for each subsequent year. The Plan may not be amended to increase
the maximum amount of payments by the Fund to its Shareholder Service Agents
without shareholder approval, and all material amendments to the provisions of
the Plan must be approved by a vote of the Board of Directors and of the
Directors who have no direct or indirect interest in the Plan, cast in person at
a meeting called for the purpose of such vote.
The Plan provides that the Fund's management shall provide, and that
the independent Directors shall review, quarterly reports setting forth the
amounts expended pursuant to the Plan and the purpose for which the amounts were
expended. It further provides that while the Plan is in effect, the selection
and nomination of those Directors of the Fund who are not "interested persons"
of the Fund is committed to the discretion of the independent Directors.
During the year ended December 31, 1998, the Fund paid $(_______) for
expenses incurred pursuant to the Plan, which amount was spent in the
distribution of the Fund's shares, including expenses for: advertising --
$(______); printing and mailing of Prospectuses to other than current
shareholders -- $(______); and sales, and shareholder servicing support
- 30 -
<PAGE>
services and other distribution services, -- $(______). Of the amount paid by
the Fund during last year, $(_______) was paid to (______________) for expenses
incurred and services rendered by it pursuant to the Plan.
CALCULATION OF YIELD
The Fund's yield quotations and average annual total return quotations
as they may appear in the Prospectus, this Statement of Additional Information
or in advertising and sales material, are calculated by standard methods
prescribed by the Securities and Exchange Commission.
The Fund's yield is computed by dividing the Fund's net investment
income per share during a base period of 30 days, or one month, by the net asset
value per share of the Fund on the last day of such base period in accordance
with the following formula:
Yield = 2[( a-b +1)6 -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
- 31 -
<PAGE>
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
1. The yield to maturity of each obligation held by the Fund is
computed based on the market value of the obligation (including actual accrued
interest, if any) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest, if any).
2. The yield to maturity of each obligation is then divided by 360 and
the resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest income on
the obligation for each day of the subsequent month that the obligation is in
the portfolio. For these purposes, it is assumed that each month has 30 days.
3. Interest earned on all debt obligations during the 30-day or
one-month period is then totaled.
- 32 -
<PAGE>
4. The maturity of an obligation with a call provision(s) is the next
call date on which the obligation reasonably may be expected to be called or, if
none, the maturity date.
5. In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest of
the obligation is used in lieu of yield to maturity to determine interest income
earned on the obligation.
In the case of a tax-exempt obligation with original issue discount where the
discount based on the current market value of the obligation exceeds the then
remaining portion of original issue discount (i.e. market discount), the yield
to maturity used to determine interest income earned on the obligation is the
imputed rate based on the original issue discount calculation. In the case of a
tax-exempt obligation with original issue discount where the discount based on
the current market value of the obligation is less than the then remaining
portion of the original issue discount (market premium), the yield to maturity
used to determine interest income earned on the obligation is based on the
market value of the obligation.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the Fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, the Fund may elect (1) to
amortize the discount or premium on a remaining security, based on the cost of
the security, to the weighted average maturity date, if such information is
available, or to the
- 33 -
<PAGE>
remaining term of the security, if the weighted average maturity date is not
available, or (2) not to amortize the discount or premium on a remaining
security.
For the purposes of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of each obligation in the Fund's
portfolio each day that the obligation is in the portfolio. The Fund does not
use equalization accounting in the calculation of yield. Expenses accrued during
any base period, if any, pursuant to the Plan are included among the expenses
accrued during the base period. Any reimbursement accrued pursuant to the Plan
during a base period, if any, will reduce expenses accrued pursuant to such
plan, but only to the extent the reimbursement does not exceed the accrued
expenses for the base period.
The Fund's yield for the one-month period ended December 31, 1998
determined in accordance with the above formula was (____)%.
Average annual total return quotations are computed by finding the
average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period (assuming all dividends
and distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment made at
the end of a designated period (or fractional portion thereof)
- 34 -
<PAGE>
For purposes of the above computation, it is assumed that all dividends and
distributions made by the Fund are reinvested at net asset value during the
designated period. The average annual total return quotation is determined to
the nearest 1/100 of 1%. The average annual total return for the year ended
December 31, 1998 was - (____)%. For the five-year period ended December 31,
1998, the average annual total return was (___)% and for the ten year period
ended December 31, 1998, the average annual total return was (___)%.
In determining the average annual total return (calculated as provided
above), recurring fees, if any, that are charged to all shareholder accounts are
taken into consideration. For any account fees that vary with the size of the
account, the account fee used for purposes of the above computation is assumed
to be the fee that would be charged to the Fund's mean account size.
- 35 -
<PAGE>
The Fund may also from time to time advertise its taxable equivalent
yield. The Fund's taxable equivalent yield is determined by dividing that
portion of the Fund's yield (calculated as described above) that is tax-exempt
by one minus the stated marginal Federal income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt. The
taxable equivalent yield of the Fund for the one-month period ended December 31,
1998 was (___)% for a taxpayer whose income was subject to the then highest
combined Federal, New York State and New York City income tax rate of 46.43%.
The Fund's yield and average annual total return will vary from time to
time depending on market conditions, the composition of the Fund's portfolio and
operating expenses of the Fund. These factors and possible differences in the
methods used in calculating yields and returns should be considered when
comparing performance information regarding the Fund to information published
for other investment companies and other investment vehicles. Yields and return
quotations should also be considered relative to changes in the value of the
Fund's shares and the risks associated with the Fund's investment objectives and
policies. At any time in the future, yields and return quotations may be higher
or lower than past yields or return quotations and there can be no assurance
that any historical yield or return quotation will continue in the future.
- 36 -
<PAGE>
PURCHASE OF SHARES
You may purchase shares directly from the Fund without a sales charge
on any day the New York Stock Exchange is open for business. The public offering
price for shares purchased is the net asset value per share of the Fund next
determined after a purchase order becomes effective. Orders for the purchase of
Fund shares become effective (i) immediately, if received prior to 4:00 P.M. New
York time on any business day. All payments (including checks from individual
investors) must be in U.S. dollars. If your check does not clear your purchase
will be canceled and you could be liable for any losses or fees incurred.
Firstar Mutual Fund Services, LLC will charge a $20 fee against a shareholders
account for any payment check returned to the Custodian.
The minimum initial purchase is $1,000 and the minimum subsequent
purchase is $100. Subsequent investments are made in the same manner as an
initial purchase is made.
All shares purchased are confirmed to you and credited to your account
at the net asset value determined as described herein under the heading "Pricing
of Shares."
Although shares of the Fund may be purchased without a sales charge if
you purchase them directly from the Fund, you may be charged a fee for effecting
transactions in the Fund's shares through securities dealers, banks, or other
financial institutions.
The Fundamental Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when
- 37 -
<PAGE>
you open a new account and invest $100 or more per month through the Fundamental
Automatic Investment Program. The Program permits an existing shareholder to
purchase additional shares of any Fund (minimum $50 per transaction) at regular
intervals. Under the Automatic Investment Program, shares are purchased by
transferring funds from a shareholder's checking or bank money market account in
an amount of $50 or more designated by the shareholder. At the shareholder's
option, the account designated will be debited and shares will be purchased on
the date selected by the shareholder. There must be a minimum of seven days
between automatic purchases. If the date selected by the shareholder is not a
business day, funds will be transferred the next business day thereafter. Only
an account maintained at a domestic financial institution which is an Automated
Clearing House member may be so designated. To establish an Automatic Investment
Account, complete and sign Section F of the Purchase Application and send it to
the Transfer Agent. Shareholders may cancel this privilege or change the amount
of purchase at any time by calling 1-800-322-6864 or by mailing written
notification to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services,
LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The change will be effective five
business days following receipt of notification by the Transfer Agent. A Fund
may modify or terminate this privilege at any time or charge a service fee,
although no such fee currently is contemplated. However, a $20 fee will be
imposed by Firstar Mutual Fund Services, LLC if sufficient funds are not
available in the shareholder's account at the time of the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, the Transfer Agent will not monitor the amount
of contributions to ensure that
- 38 -
<PAGE>
they do not exceed the amount allowable for Federal tax purposes. Firstar Mutual
Fund Services, LLC will assume that all retirement plan contributions are being
made for the tax year in which they are received.
Methods of Payment
Payment by Wire: An expeditious method of investing in the Fund is
through the transmittal of Federal funds by bank wire to Firstar Bank Milwaukee,
N.A. (the "Bank"). Federal funds transmitted by bank wire to the Bank and
received by it prior to 4:00 P.M. New York time are priced at the net asset
value determined on such day. Federal funds received after 4:00 P.M. New York
time will be available on the next business day. Funds other than Federal funds
transmitted by bank wire may or may not be converted into Federal funds on the
day received by the Bank depending upon the time the funds are received and the
bank wiring the funds. We encourage you to make payment by wire in Federal
funds. The Fund will not be responsible for delays in the wiring system.
To purchase shares by wiring funds, instruct a commercial bank to wire
your money to:
Firstar [Bank Milwaukee, N.A.]
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar [Bank Milwaukee, N.A.]
Account # 112952137
Further credit: The Fundamental Family of Funds
Name of shareholder and account number (if known)
- 39 -
<PAGE>
Instructions for new accounts should specify the name, address, and social
security number of each person in whose name the shares are to be registered and
the name of the Fund. If you are an existing shareholder, you need only furnish
your account number and the name of the Fund. Failure to submit required
information may delay investment.
Payment by Mail: Purchase orders for which remittance is to be made by
check may be submitted directly by mail to Fundamental Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The
U.S. Postal Service and other independent delivery services are not agents of
the Fund. Therefore, deposit of purchase requests in the mail or with such
services does not constitute receipt by Firstar Mutual Fund Services, LLC or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Purchase requests sent by overnight or express mail should be directed
to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, Third
Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202. Checks should be
made payable to Fundamental Family of Funds.
- 40 -
<PAGE>
When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from an account statement you have received or otherwise
indicate your account number and the name of the Fund.
Personal Delivery: For personal delivery instructions, please call the
Fund at (800) 322-6864.
Exchange for Municipal Securities: If you own municipal obligations
meeting the criteria for investment by the Fund, you may exchange such
securities for shares of the Fund. All such exchanges are discretionary with the
Fund. If you desire to make such an exchange, you should contact the Fund prior
to delivering any securities in order to establish that the securities are
acceptable for exchange, to determine what transaction charges, if any, may be
imposed and to obtain delivery instructions for such securities. The value of
the securities being exchanged will be determined in the same manner that the
value of the Fund's portfolio securities is determined (see "Determination of
Net Asset Value"); the specific method of determining the value will be provided
to you on request. The Fund reserves the right to refuse any such exchange, even
if the securities offered by an investor meet the general investment criteria of
the Fund. A capital gain or loss for Federal income tax purposes may be realized
by the investor following the exchange. Maturing bonds or detached coupons
submitted within five (5) business days of the payment date are credited on the
payment date.
- 41 -
<PAGE>
Exchange Privilege. For your convenience, the Exchange Privilege
permits you to purchase shares in any of the other funds for which Fund
management acts as the investment manager in exchange for shares of the Fund at
respective net asset values per share. Exchange instructions may be given in
writing to Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI
53201-0701, the Fund's transfer agent, and must specify the number of shares of
the Fund to be exchanged and the fund into which the exchange is being made. The
telephone exchange privilege will be made available to shareholders
automatically. You may telephone exchange instructions by calling Firstar Mutual
Fund Services, LLC at (800) 322-6864. Before any exchange, you must obtain, and
should review, a copy of the current prospectus of the fund into which your
exchange is being made. Prospectuses may be obtained by calling or writing the
Fund. See also "Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for Federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
- 42 -
<PAGE>
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
CAPITAL STOCK
The Company is authorized to issue 1,000,000,000 shares of common
stock, par value $.001 per share, of which 500,000,000 shares are designated
"New York Muni Fund Series" and the balance of which are unclassified. All
shares of the Fund are entitled to equal participation in dividends and
distributions declared by the Fund and in its net assets on liquidation
remaining after satisfaction of all outstanding liabilities. The Fund's shares
are fully paid and non-assessable when issued and have no preemptive or
conversion rights. Holders of common stock are entitled to one vote for each
full share and to such fraction of a vote that corresponds to any fractional
shares. The Fund will not normally hold annual shareholders' meetings.
Shareholders may remove directors from office by a majority of votes entitled to
be cast at a meeting of shareholders. Shareholders holding 10% or more of the
Fund's outstanding stock may call a special meeting of shareholders.
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<PAGE>
TAX MATTERS
The following is only a summary of certain additional federal income
tax considerations generally affecting the Fund and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company for
federal income tax purposes under Subchapter M of the Code. As a regulated
investment company, the Fund is not subject to federal income tax on the portion
of its net investment income (i.e., taxable interest, dividends and other
taxable ordinary income, net of expenses) and capital gain net income (i.e., the
excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) 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. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and will therefore count toward satisfaction of the Distribution
Requirement.
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<PAGE>
If the Fund has a net capital loss (i.e., the excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward up
to eight years and treated as a short-term capital loss which can be used to
offset capital gains in such years. As of December 31, 1997, the Fund has
capital loss carryforwards of $24,147,000 expiring through December 31, 2005.
Under Code Section 382, if the Fund has an "ownership change," the Fund's use of
its capital loss carryforwards in any year following the ownership change will
be limited to an amount equal to the net asset value of the Fund immediately
prior to the ownership change multiplied by the highest adjusted long-term
tax-exempt rate (which is published monthly by the Internal Revenue Service (the
"IRS")) in effect for any month in the 3-calendar-month period ending with the
calendar month in which the ownership change occurs (the rate for April 1998 is
5.04%). The Fund will use its best efforts to avoid having an ownership change.
However, because of circumstances which may be beyond the control of the Fund,
there can be no assurance that the Fund will not have, or has not already had,
an ownership change. If the Fund has or has had an ownership change, any capital
gain net income for any year following the ownership change in excess of the
annual limitation on the capital loss carryforwards will have to be distributed
by the Fund and will be taxable to shareholders as described under "Fund
Distributions" below.
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
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<PAGE>
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 general, gain or loss recognized by the Fund on the disposition of
an asset will be a capital gain or loss. In addition, gain will be recognized as
a result of certain constructive sales, including short sales "against the box."
However, gain recognized on the disposition of a debt obligation (including
municipal obligations) purchased by the Fund at a market discount (generally, at
a price less than its principal amount) will be treated as ordinary income to
the extent of the portion of the market discount which accrued during the period
of time the Fund held the debt obligation.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (2) the asset is otherwise held by the Fund as part of a "straddle" (which
term generally excludes a situation where the asset is stock and the Fund grants
a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (3) the asset is stock and the Fund
grants an in-the-money qualified covered call option with respect thereto. In
addition, the Fund may be required to defer the recognition of a loss on the
disposition of an
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<PAGE>
asset held as part of a straddle to the extent of any unrecognized gain on the
offsetting position. Any gain recognized by the Fund on the lapse of, or any
gain or loss recognized by the Fund from a closing transaction with respect to,
an option written by the Fund will be treated as a short-term capital gain or
loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction and (2) the
capital interest on acquisition indebtedness under Code section 263(g). Built-in
losses will be preserved where the Fund has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed
through to the Fund's shareholders.
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<PAGE>
Certain transactions that may be engaged in by the Fund (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
that year together with any other gain or loss that was previously recognized
upon the termination of Section 1256 contracts during the year. Any capital gain
or loss for the taxable year with respect to Section 1256 contracts (including
any capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The Fund, however, may elect not to have
this special tax treatment apply to Section 1256 contracts that are part of a
"mixed straddle" with other investments of the Fund that are not Section 1256
contracts.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss incurred
after October 31 as if it had been incurred in the succeeding year.
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<PAGE>
In addition to satisfying the requirements described above, the 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 the 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 each of which the
Fund has not invested more than 5% of the value of the its total assets in
securities of such issuer and 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. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security, not the issuer of the option.
If for any taxable year the 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.
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<PAGE>
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.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The 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
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<PAGE>
avoid liability for the excise tax. However, investors should note that the Fund
may in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable 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 will not qualify for the 70% dividends-received deduction for
corporate shareholders.
The Fund may either retain or distribute to shareholders its net
capital gain for each taxable year. The Fund currently intends to distribute any
such amounts. Net capital gain that is distributed and designated as a capital
gain dividend will be taxable to shareholders as long-term capital gain,
regardless of the length of time a 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.
The Fund intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Fund's
taxable year at least 50% of the Fund's total assets consists of tax-exempt
municipal obligations. Distributions from the Fund will constitute
exempt-interest dividends to the extent of the Fund's tax-exempt interest income
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<PAGE>
(net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of the Fund are excluded by them from gross income
for federal income tax purposes. However, shareholders required to file federal
income tax returns 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 discussed below. Distributions by the 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.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 generally will 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.
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<PAGE>
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 the 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 the Fund will
likely be subject to tax on dividends paid by the 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.
Distributions by the 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 realized from a sale
of the shares, as discussed below.
Distributions by the 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
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<PAGE>
a shareholder purchases shares of the Fund reflects realized but undistributed
income or gain, or unrealized appreciation in the value of assets held by the
Fund, a subsequent distribution of such amounts will be taxable to the
shareholder in the manner described above, although it economically constitutes
a return of capital.
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which they 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
provided 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.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder who (1) has failed to
provide a correct taxpayer identification number, (2) is subject to backup
withholding for failure properly to report the receipt of interest or dividend
income, or (3) has failed to certify to the Fund that it is not subject to
backup withholding or that it is an "exempt recipient" (such as a corporation).
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<PAGE>
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the 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 the 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. For
this purpose, the special holding period rules of Code Section 246(c)(3) and (4)
generally will apply in determining the holding period of shares. Capital losses
in any year are deductible only to the extent of capital gains plus, in the case
of a noncorporate taxpayer, $3,000 of ordinary income.
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<PAGE>
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
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to the shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) on 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 or redemption of shares of the Fund, capital gain
dividends and exempt-interest dividends and amounts retained by the Fund that
are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income and
capital gain dividends received in respect of, and any gains realized on the
sale of, shares of the Fund will be subject to U.S. federal income tax at the
rates applicable to U.S. taxpayers.
In the case of a foreign noncorporate shareholder, the Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise
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<PAGE>
exempt from withholding (or subject to withholding at a reduced treaty rate),
unless the shareholder furnishes the Fund with proper notification of its
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 the Fund,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and 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, perhaps with retroactive effect.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the Fund.
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<PAGE>
PORTFOLIO TRANSACTIONS
The Fund's management provides the Fund with investment advice and
recommendations for the purchase and sale of portfolio securities. Newly issued
securities are usually purchased from the issuer or an underwriter, at prices
including underwriting fees; other purchases and sales are usually placed with
those dealers from whom it appears that the best price or execution will be
obtained. All orders for the purchase and sale of portfolio securities are
placed by the Fund's management, subject to the general control of the Fund's
Directors. The Fund's management may sell portfolio securities prior to their
maturity if market conditions and other considerations indicate, in the opinion
of the Fund's management, that such sale would be advisable. In addition, the
Fund's management may engage in short-term trading when it believes it is
consistent with the Fund's investment objective. Also, a security may be sold
and another of comparable quality may be simultaneously purchased to take
advantage of what the Fund's management believes to be a temporary disparity in
the normal yield relationships of two securities. The Fund's management is
generally responsible for the implementation, or supervision of the
implementation, of investment decisions, including the allocation of principal
business and portfolio brokerage, and the negotiation of commissions.
It is the Fund's policy to seek execution of its purchases and sales at
the most favorable prices through responsible broker-dealers and in agency
transactions, at competitive commission rates. When considering broker-dealers,
the Fund will take into account such
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factors as the price of the security, the size and difficulty of the order, the
rate of commission, if any, the reliability, financial condition, integrity and
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund's management.
During the last three fiscal years from 1996-98, the Fund paid
$_______, $________, and $_________, respectively, in brokerage commissions.
The Board of Directors of the Fund is authorized to adopt a brokerage
allocation policy pursuant to the Securities Exchange Act of 1934 which would
permit the Fund to pay a broker-dealer which furnishes research services a
higher commission than that which might be charged by another broker-dealer
which does not furnish research services, or which furnishes research services
deemed to be of a lesser value, provided that such commission is deemed
reasonable in relation to the value of the brokerage and research services
provided by the broker-dealer.
Section 28(e)(3) of the Securities Exchange Act of 1934 defines
"Brokerage and Research Services" as including, among other things, advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, and
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<PAGE>
offering securities transactions and performing functions incidental thereto
(such as clearance and settlement).
It is not the Fund's practice to allocate principal business or
brokerage on the basis of sales of Fund shares which may be made through brokers
or dealers, although broker-dealers effecting purchases of Fund shares for their
customers may participate in principal transactions of brokerage allocation as
described above.
FINANCIAL STATEMENTS
Audited financial statements of the Fund for the year ended December
31, 1998 [WILL BE ATTACHED] hereto.
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<PAGE>
APPENDIX A
SPECIAL FACTORS AFFECTING THE NEW YORK MUNI FUND
Some of the significant financial considerations relating to he
investments of the New York Muni 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.
Current Fiscal Year
Overview
The State's current fiscal year began on April 1, 1998 and ends on
March 31, 1999 and is referred to herein as the State's 1998-99 fiscal year.
This section of the Annual Information Statement (AIS) reflects estimates of
receipts and disbursements for the State's 1998-99 fiscal year as formulated in
the Financial Plan released on June 25, 1998 and updated on February 9, 1999
(Update).
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The Legislature adopted the debt service component of the State budget
for the 1998-99 fiscal year on March 30, 1998 and the remainder of the budget on
April 18, 1998. In the period prior to adoption of the budget for the current
fiscal year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house). The 1998-99 State
Financial Plan described in this AIS reflects the impact of the Legislature's
and Governor's actions on the budget through the date of this AIS. For a full
discussion of the process of adopting the State's 1998-99 budget, please see
"State Organization -- State Financial Procedures" in this AIS.
General Fund disbursements in 1998-99 are now projected to grow by
$2.43 billion over the 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
Definitions for the General Fund and all other funds are provided in Exhibit A
to this AIS.
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The State's enacted budget includes several new multi-year tax
reduction initiatives, including acceleration of the State-funded property and
local income tax relief for senior citizens under the School Tax Relief Program
(STAR), expansion of the child care income-tax credit for middle-income
families, a phased-in reduction of the general business tax, and reduction of
several other taxes and fees, including an accelerated phase-out of assessments
on medical providers. The enacted budget also provides for significant increases
in spending for public schools, special education programs, and for the State
and City university systems. It also allocates $50 million for a new Debt
Reduction Reserve Fund (DRRF) that may eventually be used to pay debt service
costs on or to prepay outstanding State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the
General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund (TSRF), a balance of $158 million in the Community Projects Fund
(CPF), and a balance of $100 million in the Contingency Reserve Fund (CRF). The
TSRF can be used in the event of an unanticipated General Fund cash operating
deficit, as provided under the State Constitution and State Finance Law. The CPF
is used to finance various legislative and executive initiatives. The CRF
provides resources to help finance any extraordinary litigation costs during 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
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<PAGE>
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 the State economies. 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 time to time. See the Section entitled "Special
Considerations" below for a discussion of risks and uncertainties faced by the
State.
Current Fiscal Year (1998-99 State Financial Plan)
The State issues quarterly modifications to the cash-basis State
Financial Plan in July, October, and January, as provided by law. These
modifications summarize actual receipts and disbursements to date for each
reporting period and revised estimates of total receipts and disbursements for
the current fiscal year.
The State issued its Third Quarterly Update to the 1998-99 State
Financial Plan on January 27, 1999, in conjunction with the release of the
1999-2000 Executive Budget. To provide readers with a summary of previous
changes to the 1998-99 Financial Plan, the review of the Third Quarterly Update
is preceded by a brief summary of the State's prior quarterly updates.
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Prior Quarterly Updates (current fiscal year)
The State issued its First Quarterly Update to the cash-basis 1998-99
State Financial Plan on July 30, 1998. The update reported that the State's
Financial Plan remained balanced. In the update, the State made several
revisions to its receipts estimates, which had the net effect of increasing
projected General Fund receipts by $250 million over the Financial Plan issued
with the enacted budget (June 25, 1998). Stronger-than-expected personal income
tax and sales tax collections in the first quarter were the main reason for the
revision to the receipts estimate. The State made no changes to its disbursement
projections in the 1998-99 Financial Plan.
As updated in July, the Financial Plan projected a closing balance in
the General Fund of $1.67 billion, with the balance comprised of a $1.01 billion
reserve for future needs, $400 million in the Tax Stabilization Reserve Fund,
$100 million in the Contingency Reserve Fund (after a planned deposit of $32
million in 1998-99), and $158 million in the Community Projects Fund.
On October 30, 1998, the State issued the second of its three quarterly
updates to the 1998-99 Financial Plan ("Mid-Year Update"). In the Mid-Year
Update, the State projected that the Financial Plan would remain in balance,
with projected total receipts and transfers from other funds of $37.84 billion,
an increase of $29 million over the amount projected in the First Quarterly
Update. No changes were made to the July disbursement projections, with total
disbursements and transfers to other funds of $36.78 billion expected at that
time.
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<PAGE>
The Mid-Year Update projected a closing balance in the General Fund of
$1.7 billion, with the balance comprised of $1.04 billion reserved for future
needs, $400 million in the Tax Stabilization Reserve Fund, $100 million in the
Contingency Reserve Fund and $158 million in the Community Projects Fund.
Third Quarterly Update (current fiscal year)
The State revised the cash-basis 1998-99 State Financial Plan on
January 27, 1999, with the release of the 1999-2000 Executive Budget. The
changes from prior quarterly updates reflect actual results through December
1998, as well as updated economic and spending projections for the balance of
the current fiscal year.
The 1998-99 Financial Plan currently projects a year-end available cash
surplus of $1.79 billion in the General Fund, an increase of $749 million over
the surplus estimate in the Mid-Year Update. Strong growth in receipts as well
as lower-than-expected disbursements during the first nine months of the fiscal
year account for the higher surplus estimate, as described in more detail below.
The 1999-2000 Executive Budget proposes using the projected available
surplus from 1998-99 to offset a portion of the incremental loss of tax receipts
from enacted tax cuts scheduled to be effective for the 2000-01 and 2001-02
fiscal years. To make this surplus available for the tax reduction program, the
State plans to deposit $1.79 billion in the tax refund
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reserve to pay tax refunds in 1999-2000 from overpayments of taxes in 1998-99.
This action has the effect of decreasing reported personal income receipts in
1998-99, while increasing reported receipts in 1999-2000, as these refunds will
no longer be a charge against current revenues in 1999-2000 (for a more complete
discussion of the tax refund reserve, see table 5 in the AIS and the text
preceding that table). The 1999-2000 Financial Plan assumes that these
additional receipts will become a part of the 1999-2000 closing fund balance,
and not used to support 1999-2000 operations.
Revisions to 1998-99 Receipts Estimates
Total receipts and transfers from other funds to be deposited in the
General Fund in 1998-99 are projected to be $36.78 billion, $1.06 billion less
than projected at the time of the Mid-Year Update. The forecast for 1998-99 tax
receipts has been increased by $729 million, but this increase is more than
offset by the decision to create reserves for the payment of $1.79 billion in
personal income tax refunds for the 1998 tax year, which has the effect of
reducing reported receipts (as discussed above). The balance of the tax refund
reserve on March 31, 1999 is now projected to be $2.32 billion, including $521
million as a result of LGAC.
Prior to refund reserve transactions, personal income tax collections
for 1998-99 are now projected at $20.69 billion, an increase of 13 percent from
comparable 1997-98 receipt levels. After reflecting the tax refund reserve
transactions discussed above, reported income tax receipts are projected at
$20.18 billion, or $1.26 billion less than projected in October. Projected
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business tax receipts have been increased by $4 million, to $4.79 billion, and
user tax collections by $23 million, to $7.23 billion. Other tax receipts are
projected to increase by $27 million from the Mid-Year Update and are now
expected to total $1.10 billion for the fiscal year. Miscellaneous receipts and
transfers from other funds are projected to reach $3.48 billion, $145 million
higher than in the MidYear Update.
Revisions to 1998-99 Disbursements Estimates
The State now projects total General Fund disbursements and transfers
to other funds of $36.62 billion in 1998-99, a reduction of $161 million from
the Mid-Year Update. The State has lowered its estimate of disbursements for
local assistance by $248 million and for State operations by $54 million. Higher
projected spending for general State charges ($71 million) and transfers to
other funds ($70 million) partially offset these reductions.
In local assistance, spending from the Community Projects Fund, which
pays primarily for legislative initiatives, has lagged behind earlier
projections and accounts for $68 million of the $248 million downward revision.
Similarly, special education claims from school districts are running below
projections, leading the State to lower its spending estimate by $32 million for
1998-99. Lower-than-expected program and administrative costs in welfare ($99
million),Medicaid ($32 million), and Children and Families Services ($21
million) account for most of the remaining downward revisions in projected local
assistance spending.
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In State operations, projected spending is lower by $54 million
primarily due to savings from the Statewide hiring freeze, agency attrition
management, and continued nonpersonal service efficiencies.
Revised higher spending for fringe benefits ($71 million) reflects
higher-than-anticipated costs for employee benefits and health insurance.
Transfers for debt service decline $29 million because of higher refunding
savings and other debt management activities. Capital projects transfers
increase by $5 million, while other transfers increase by $94 million primarily
to cover unanticipated shortfalls in the State Lottery Fund ($80 million) and
the Oil Spill Fund ($ 10 million).
Closing General Fund Balance
The State now projects a closing balance of $799 million in the General
Fund, a decrease of $899 million from the Mid-Year Update. The decline reflects
the payment of the $1.04 billion undesignated reserve identified in October plus
additional surplus monies projected in the January Update into the tax refund
reserve (as described above). The projected closing balance of $799 million in
the General Fund is comprised of $473 million in the Tax Stabilization Reserve
Fund, following a new $73 million deposit in 1998-99; $100 million in the
Contingency Reserve Fund, following a planned $32 million deposit; and the
remaining balance of $226 million in the Community Projects Fund.
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1999-2000 Fiscal Year (Executive Budget Forecast)
The Governor presented his 1999-2000 Executive Budget to the
Legislature on January 27, 1999. The Executive Budget contains financial
projections for the State's 1998-99 through 200102 fiscal years, and a proposed
Capital Program and Financing Plan for the 1999-2000 through 2003-04 fiscal
years. The Governor will prepare amendments to his Executive Budget, as
permitted under law. These amendments will be reflected in a revised Financial
Plan that will be released on or before February 26, 1999. There can be no
assurance that the Legislature will enact into law the Executive Budget as
proposed by the Governor, or that the State's adopted budget projections will
not differ materially and adversely from the projections set forth in this
Update. For a more detailed discussion of the State's budgetary process and
uncertainties involving its forecasts and projections, see "State Organization -
State Financial Procedures" in the AIS and "Special Considerations" below.
The 1999-2000 Financial Plan is projected to have receipts in excess of
disbursements on a cash basis in the General Fund, after accounting for the
transfer of available receipts from 1998-99 to 1999-2000. Total General Fund
receipts, including transfers from other funds, are projected to be $38.66
billion, an increase of $1.88 billion over projected receipts in the current
fiscal year. General Fund disbursements, including transfer to other funds, are
recommended to grow by 1.3 percent to $37. 10 billion, an increase of $482
million over 1998-99. State Funds spending is projected to total $49.33 billion,
an increase of $867 million or 1.8 percent from the
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current year. Under the Governor's recommendations, spending from All
Governmental Funds is also expected to grow by 1.8 percent, increasing by $1.25
billion to $72.66 billion.
The State is projected to close the 1999-2000 fiscal year with a
balance in the General Fund of $2.36 billion. The balance is comprised of $1.79
billion in tax reduction reserves, $473 million in the Tax Stabilization Reserve
Fund and $ 100 million in the Contingency Reserve Fund.
1998-99 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. The State's fund structure adheres to the accounting
standards of the Governmental Accounting Standards Board. This section discusses
significant activities in the General Fund and the other governmental funds
anticipated in 1998-99.
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 received
almost all State taxes and other resources not dedicated to
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particular purpose. In the State's 1998-99 fiscal year, the General Fund is
expected to account for approximately 47.6 percent of all Government Funds
disbursements and 70.1 percent of total State Funds disbursement. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payment in other fund types.
Total receipts and transfers from other funds are projected to be
$38.66 billion, an increase of $4.89 billion from the 1997-98 fiscal year. Total
General Fund disbursements and transfers to other funds are projected to be
$37.10 billion, an increase of $2.92 billion from the 1997-98 fiscal year.
Projected General Fund Receipts
The 1999-2000 Financial Plan projects General Fund receipts (including
transfers from other funds) of $38.66 billion, an increase of $1.88 billion over
the estimated 1998-99 level. After adjusting for tax law and administrative
changes, recurring growth in the General Fund tax base is projected to be
approximately three percent during 1999-2000.
The forecast of General Fund receipts in 1999-2000 reflects the next
stage of the School Tax Relief (STAR) property tax reduction program, which has
an incremental cost of $638 million in 1999-2000, as well as the continuing
impact of earlier tax reductions totaling approximately $2 billion. In addition,
the Executive Budget reflects several new tax reduction proposals that are
projected to have only a modest impact on receipts in 1999-2000 and 2000-01,
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but are expected to reduce receipts by $1.04 billion annually when fully phased
in at the end of 2003-04.
The largest new tax cut proposals call for further reductions in the
personal income tax to benefit middle income taxpayers. These proposals increase
the income threshold where the top tax rate of 6.85 percent applies and doubles
the value of the dependent exemption to $2,000. The fully effective annual cost
of these proposals is $600 million in fiscal year 2003-04. In addition, the
Executive Budget includes several other targeted tax cut proposals, including:
reducing certain energy taxes; lowering the alternative minimum tax on
corporations from 3 percent to 2.5 percent; extending the business tax rate
reductions enacted for general corporations last year to banks and insurance
companies; creating a New York Capital Asset Exclusion for investments in a New
York business; creating a new credit for job creation in cities; expanding the
Qualified Emerging Technology Credit; conforming the estate tax to recent
federal changes; eliminating several nuisance taxes and fees, including minimum
taxes imposed on petroleum and aviation businesses; and expanding the income tax
credit benefits provided to farmers to ease school property tax burdens.
Together, these targeted reductions will have a full annual value of
approximately $440 million.
Personal income tax collections for 1999-2000 are projected to reach
$22.83 billion, an increase of $2.65 billion (13.2 percent) over 1998-99. This
increase is due in part to refund reserve transactions (including those
described earlier) which serve to increase reported 1999-2000 personal income
tax receipts by $1.77 billion. Collections also benefit from the
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estimated increase in income tax liability of 13.5 percent in 1998 and 5.3
percent in 1999. The large increases in liability in recent years have been
supported by the continued surge in taxable capital gains realizations. This
activity is related at least partially to recent changes in the federal tax
treatment of such income. The growth in capital gains income is expected to
plateau in 1999. Growth in 1999-2000 personal income tax receipts is partially
offset by the diversion of such receipts into the School Tax Relief Fund, which
finances the STAR tax reduction program. For 1999-2000, $1.22 billion will be
deposited into this fund, an increase of $638 million.
User tax and fees are projected at $7.16 billion in 1999-2000, a
decrease of $72 million from the current year. The decline in this category
reflects the incremental impact of already-enacted tax reductions, and the
diversion of $30 million of additional motor vehicle registration fees to the
Dedicated Highway and Bridge Trust Fund. Adjusted for these changes, the
underlying growth of user taxes and fees is projected at 2.5 percent. The
largest source of receipts in this category is the sales and use tax, which
accounts for nearly 80 percent of projected receipts. The continuing base of the
sales tax is projected to grow 4.4 percent in the coming year, and assumes the
Legislature will not enact additional "sales-tax free" weeks that would a&ct
receipts before December 1, 1999, when the sales and use tax on clothing and
footwear under $110 is eliminated.
Business tax receipts are expected to total $4.53 billion in 1999-2000,
$267 million below 199899 estimated results. The intact of tax reductions
scheduled in law, as well as slower growth in the underlying tax base, explain
the decline in this category of the Financial Plan.
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Receipts from other taxes, which are comprised primarily of receipts
from estate and gift taxes and pari-mutuel taxes on wagering, are expected to
decline $119 million to $980 million in 19992000. The ongoing effect of tax cuts
already in law is the main reason for the decline. In addition, this category
formerly included receipts from the real property gains tax that was repealed in
1996, and receipts from the real property transfer tax that, since 1996, have
been earmarked to support various environmental programs.
Miscellaneous receipts includes license revenues, income from fees and
fines, abandoned property proceeds, investment income, and a portion of the
assessments levied on medical providers. Miscellaneous receipts are expected to
total $1.24 billion in 1999-2000, a decline of $292 million from 1998-99.
Roughly $165 million of this decline is attributable to the ongoing phase-out of
medical provider assessments. In addition, the Executive Budget proposes
eliminating medical provider assessments on April 1, 1999, one year earlier than
planned, which accounts for another $26 million of the year-to-year decline in
miscellaneous receipts (the remainder of the provider assessment savings is
reflected in lower General Fund disbursements).
Transfers to the General Fund consist primarily of tax revenues in
excess of debt service requirements. State sales tax proceeds in excess of
amounts needed to support debt service payments for LGAC account for 82 percent
of the 1999-2000 receipts in this category. Transfers to the General Fund
decline $63 million in 1999-2000, reflecting lower projected receipts from the
real estate transfer tax.
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Projected General Fund Disbursements
The 1999-2000 Financial Plan projects General Fund disbursements and
transfers to other funds of $37.10 billion, an increase of $482 million over
projected spending for the current year. Grants to local governments constitute
approximately 67 percent of all General Fund spending, and include payments to
local governments, non-profit providers and individuals. Disbursements in this
category are projected to decrease $87 million (0.4 percent) to $24.81 billion
in 1999-2000, in part due to a $175 million decline in proposed spending for
legislative initiatives.
General Fund spending for school aid is projected at $9.99 billion on a
State fiscal year basis, an increase of $292 million (3.0 percent) from the
current fiscal year. The Executive Budget recommends additional funding for
operating aid, building aid, and textbook and computer aids. It also funds the
remainder of aid payable for the 1998-99 school year. These increases are
partially offset by the elimination of categorical grants, reductions in BOCES
aid, and other formula modifications. A new Educational Improvement block grant
replaces categorical programs such as pre-kindergarten and minor maintenance to
give school districts greater flexibility in meeting locally determined needs.
Medicaid spending is estimated to total $5.50 billion in 1999-2000, a
modest decline of $87 million or 1.6 percent from 1998-99. To achieve program
savings, the Executive Budget recommends a series of cost containment actions,
including restructuring rates paid to providers for certain services, shifting
treatments for certain services to outpatient settings, and
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maximizing allowable federal funds. At the same time, medical providers would
benefit from the proposed acceleration of the phase-out of provider assessments
already scheduled in law. The State had planned to eliminate provider
assessments on April 1, 2000; the Executive Budget proposes eliminating them one
year earlier. As a result, health care providers will not be required to pay
$223 million in assessments in 1999-2000.
Spending on welfare is projected at $1.49 billion, a decline of $41
million (2.7 percent) from 1998-99. Since 1994-95, State spending on welfare has
fallen by $709 million, or 32 percent, driven by significant welfare changes
initiated at the State and federal levels and a large, steady decline in the
number of people receiving benefits. Several trends have contributed to falling
caseloads, including the State's strong economic performance over the past three
years; State, federal and local welfare-to-work initiatives that have expanded
training and support services to assist recipients in becoming self-sufficient;
tightened eligibility review for applicants; and aggressive fraud prevention
measures.
Local assistance spending for Children and Families Services is
projected at $864 million in 19992000, down $42 million (4.7 percent) from
1998-99. The decline in General Fund spending is offset by higher spending on
child care and child welfare services that is occurring with federal Temporary
Assistance for Needy Families ("TANF") funds, which has allowed the State to
lower General Fund spending while still expanding services in this area.
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In Mental Health, the State projects spending of $619 minion in
1999-2000, an increase of $40 million (7 percent) over 1998-99, including $23
million in additional funding for the Community Reinvestment Program. Mental
Retardation and Developmental Disabilities spending increases by $17 million to
$576 million. Major components of spending growth include an inflation
adjustment for Medicaid programs, annualization of new community services from
1998-99, and the first year of the NYS-CARES initiative that is projected to
invest $129 million in State funds over the next five years to develop
community-based beds for persons on waiting lists.
Spending for all other local assistance programs will total $5.72
billion in 1999-2000, a decline of $266 million from 1998-99. Lower spending of
$175 million for legislative member items in 1999-2000 accounts for the majority
of the year-to-year change. Proposed actions to restructure the State's tuition
assistance program produce a decline of $17 million from the previous fiscal
year. Unrestricted aid to local governments is estimated at $822 million, $9
million below 1998-99 levels.
State Operations reflect the costs of running the Executive,
Legislative and Judicial branches of government. Spending in this category is
projected to increase $225 million or 3.4 percent above 1998-99, and reflects
the annualized costs of 1998-99 collective bargaining agreements, the decline in
federal receipts that offset General Fund spending for mental hygiene programs,
the costs of staffing a new State prison, and growth in the Legislative and
Judiciary
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budgets. The State's overall workforce is projected to remain stable at
approximately 191,200 persons.
Personal service costs are projected to be $5.01 billion, an increase
of $128 million from the current year. No funding is included in the Financial
Plan for incremental costs from new collective bargaining agreements after the
current labor contracts expire on April 1, 1999. Nonpersonal service is
projected to be $1.87 billion, with the increase of $97 million used primarily
to fund Year 2000 compliance and related activities in the Office for
Technology.
Total spending for general State charges is projected to grow by $47
million (2.1 percent) in 1999-2000. The increase is comprised of higher payments
for health insurance, Court of Claims settlements and taxes on State-owned
lands, offset by decreases for pension contributions and higher reimbursements
for fringe benefit costs charged to positions financed by non-General funds,
which lower General Fund expenses.
Transfers in support of debt service are projected to grow
approximately $185 million or 9 percent in 1999-2000, from $2. 10 billion to
$2.29 billion. The reclassification of SUNY community college debt service ($36
million) from local assistance accounts for a portion of this annual increase.
The remainder reflects annualized costs from prior borrowings and a portion of
the Governor's proposed debt reduction program which has the effect of
increasing costs in the short-term in order to reduce outstanding debt more
rapidly. Transfers in support of capital projects for 1999-2000 are estimated to
total $438 million and are comprised of $188 million
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for direct capital spending to finance a variety of recreational, educational
and cultural projects and $250 million as the second annual deposit to the Debt
Reduction Reserve Fund (DRRF) that was created in 1998-99. Other transfers
decline by $71 million from 1998-99, as the one-time transfers in the current
year for the Lottery and Oil Spill Funds do not recur in 1999-2000.
Closing General Fund Balance
The State is projected to close the 1999-2000 fiscal year with a
General Fund balance of $2.36 billion. The balance is comprised of $1.79 billion
that the Governor is proposing to set aside as a tax reduction reserve, $473
million in the Tax Stabilization Reserve Fund and $100 million in the
Contingency Reserve Fund. The entire $226 million balance in the Community
Projects Fund is expected to be used in 1999-2000, with $80 million spent to pay
for existing projects and the remaining balance of $146 million, against which
there are currently no appropriations as a result of the Governor's 1998 vetoes,
used to fund other expenditures in 1999-2000.
Non-recurring Resources
The Division of the Budget projects that the 1999-2000 Financial Plan
contains only $33 million in non-recurring resources, or less than one-tenth of
one percent of General Fund disbursements. In 1999-2000, the largest one-time
resources consist of a $15 million loan repayment from the Long Island Power
Authority and $8 million from the anticipated sale of
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State property at 270 Broadway in New York City. The remaining amounts include
various routine transfers to the General Fund.
Fund Balances
The 1998-99 Financial Plan projects a closing fund balance in the
General Fund of $1.42 billion. This fund balance is composed of a reserve of
$761 million available for future needs, a $400 million balance in the TSRF, a
$158 million balance in the CPF, and a balance of $100 million in the CRF, after
a projected deposit of $32 million in 1998-99.
Outyear Projections of Receipts and Disbursements
State law requires the Governor to propose a balanced budget each year.
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 1999-00
General Fund budget gap of approximately $1.7 billion and an updated projection
of $1.11 billion for 2000-01, and a $2.08 billion gap for 2001-02. As a result
of changes made in the 1998-99 enacted budget the 1999-00 gap is now expected to
be roughly $1.3 billion, or about $400 million less than previously projected,
after application of reserves created as part of the 1998-99 budget process.
Such reserves would not be available against subsequent year imbalances.
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These estimates assume that the Legislature will enact the 1999-2000
Executive Budget and accompanying legislation in its entirety. The gaps also
include $500 minion in unspecified annual spending efficiencies, which is
comparable to the Governor's Executive Budget assumptions in previous fiscal
years. Future Financial Plans are also likely to count on savings from
efficiencies, workforce management efforts, aggressive efforts to maximize
federal and other non-General Fund resources, and other efforts to control State
spending. Nearly all the actions proposed by the Governor to balance the
1999-2000 Financial Plan recur and grow in value in future years. The Division
of the Budget projects that, if the projected budget gap for 2000-01 is closed
with recurring actions, the 2001-02 budget gap would be reduced to $963 million
under current projections.
The Executive Budget assumes the use of the $1.79 billion tax reduction
reserve to offset the incremental loss in tax receipts resulting from previously
enacted and proposed tax reductions beginning in 2000-01. The Financial Plan
currently assumes that $589 million of the reserves (about one-third of the
amount available) will be applied in 2000-01, with the remaining $1.2 billion
used in 2001-02. The State may alter how it apportions the reserves across the
three years of the projection period.
The Governor is required by law to propose a balanced budget each year
and Will propose steps necessary to address any potential remaining budget gaps
in subsequent budgets. The Division of the Budget estimates that the State has
closed projected budget gaps of $5.0
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billion, $3.9 billion and $2.3 billion in its 1995-967 1996-97 and 1997-98
fiscal years, respectively, and ended each of these years with a cash surplus.
Receipts
General Fund receipts fall to an estimated $35.99 billion in 2000-01
reflecting the incremental impact of already enacted tax reductions, the impact
of prior tax refund reserve transactions and the earmarking of receipts for
dedicated highway purposes. Receipts are projected to grow modestly to $36.20
billion in 2001-02, again re receipts growth, as well as the incremental impact
of tax reductions recommended with the Executive Budget.
Personal income tax receipts are projected to decline to $20.72 billion
in 2000-01. The decline from 1999-2000 reflects the positive impact of tax
refund reserve transactions on 1999-2000 receipts and reduced growth in
underlying liability. The slowdown in liability growth results from a moderate
slowdown in personal income and wage increases and an end to the rapid
escalation in taxable capital gains realizations. In addition, receipts are
reduced by the incremental value of the STAR tax reduction plan and the required
deposit of personal income tax receipts into the STAR Fund. Personal income tax
receipts for 2001-02 are projected to increase to $20.94 billion. The modest
increase results from continued normal growth in liability offset by increasing
deposits to the STAR Fund.
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Receipts from user taxes and fees are estimated to total $6.88 billion
in 2000-01, a decline of $281 million from 1999-2000. This decline results, in
part, from the dedication of an increased portion of motor fuel tax receipts to
the Dedicated Highway and Bridge Trust Fund. Further, receipts growth is reduced
due to the incremental impact of already-enacted tax reductions such as the
elimination of the sales tax on clothing and shoes priced under $110. User taxes
and fees receipts increase to an estimated $7.10 billion by 2001-02. Moderate
economic growth projected over the next several years will keep underlying
growth in the sales tax base in the 4 to 5 percent range over the 2000-01 and
2001-02 periods.
Business tax receipts are estimated to decline to $4.33 billion in
2000-01 as the impact of recently enacted tax reductions begin to take effect.
Receipts are projected to fall to $4.19 billion in 2001-02, reflecting the
ongoing effect of business tax reductions and the recommended changes associated
with energy tax reform and reduction, as well as other business tax reductions
proposed in the 1999-2000 Executive Budget.
Other taxes are projected to decline to $813 million in 2000-01 as the
impact of estate tax reductions and the elimination of the gift tax begin to
affect receipts. Further, the remainder of receipts from the real property gains
tax will fall off as prior year liabilities and assessments are drawn down.
Other tax receipts fall to an estimated $772 million in 2001-02 as the impact of
estate and gift tax reduction provisions enacted in 1997 are fully phased in.
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Miscellaneous receipts are estimated to total $1.20 billion in 2000-01,
a decline of $38 million from the prior year. Receipts in this category are
projected to reach $1.17 billion in 2001-02.
Transfers from other funds are estimated to grow to $2.04 billion in
2000-01, including the transfer back to the General Fund of Capital Projects
Fund resources. Transfers fall slightly in 2001 -02 as normal growth in LGAC
transfers associated with the sales tax is offset by declines in other
transfers.
Disbursements
The State currently projects spending to grow by $1.09 billion (2.9
percent) in 2000-01 and an additional $1.8 billion (4.7 percent) in 2001-02.
General Fund spending increases at a higher rate in 2001-02 than in 2000-01,
driven primarily by higher growth rates for Medicaid, welfare, Children and
Families Services, and Mental Retardation, as well as the loss of federal money
that offsets General Fund spending.
Local assistance spending accounts for most of the projected growth in
General Fund spending in the outyears, increasing by $1.04 billion in 2000-01
and $1.46 billion in 2001-02. School aid, which accounts for the largest share
of General Fund spending, is projected to grow by $612 million (6.1 percent) in
2000-01 and $578 million (5.5 percent) in 2001-02. Continuing growth in building
aid and selected operating aid drives most of this higher spending. Other
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education spending, particularly in pre-school handicapped programs, is also
expected to grow strongly, increasing by roughly $70 million (8 to 9 percent)
annually, as enrollment growth and higher per pupil costs produce higher growth.
Medicaid is the next largest General Fund program. Spending is expected
to grow by $313 million (5.7 percent) in 2000-01 and $452 million (7.8 percent)
in 2001-02. Consistent with national trends, underlying growth in health care
costs is projected at 6.5 percent over the projection period. The State expects
proposed cost containment and managed care to reduce the Medicaid program's
spending base, but not to alter the underlying forces driving the rise in health
care costs. In welfare, spending is expected to increase by less than 3 percent
in 2000-01, but grow at 6 percent in 2001-02 as caseloads stabilize and federal
work participation rules require additional State resources. Spending on
Children and Families Services is expected to increase rapidly in both 2000-01
and 2001 -02, reflecting welfare-to-work investments and the loss of federal
money in 2001-02 that is currently used to offset General Fund spending. Mental
hygiene programs continue to grow faster than inflation because of recently
enacted community investment commitments, as well as the continued loss of
federal offsets. Most other programs are expected to grow at historical rates,
generally around inflation.
State operations costs are projected to increase by $179 million (2.6
percent) in 2000-01 and $171 million (2.4 percent) in 2001-02. Most of this
increase reflects the costs of staffing additional correctional facilities, the
loss of federal money used to offset General Fund spending in mental hygiene
agencies, modest inflationary increases in non-personal service costs, and
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additional spending for computer systems and technology initiatives. Consistent
with past practice, the State's outyear projections do not assume any new costs
from collective bargaining agreements negotiated after the current round of
contracts expire in April.
General State charges are projected to increase by $95 million in
2000-01 and $76 million in 2001-02. The growth reflects inflationary increases
for health insurance and other benefits for State employees. The projections do
not assume any changes in existing benefits.
Capital project transfers are expected to increase as a result of the
Governor's proposed debt reduction initiatives that drive higher pay-as-you-go
spending in the future. Other transfers show little change in the outyears.
Other Governmental Funds
In addition to the General Fund, the State Financial Plan includes
Special Revenue Funds, Capital Projects Funds and Debt Service Funds which are
discussed below. Amounts below do not include other sources and uses of funds
transferred to or from other fund types.
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
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expenditures for specified purposes. Although activity in this fund type is
expected to comprise approximately 41 percent of total governmental funds
receipts in the 1998-99 fiscal year, three-quarters of that activity relates to
federally-funded programs.
For 1999-2000, the Financial Plan projects disbursements of $30.54
billion from Special Revenue Funds ("SRFs") derived from either State or federal
sources, an increase of $537 million or 1.8 percent over 1998-99. Disbursements
from State SRFs are projected at $8.61 billion, an increase of $315 million or
3.8 percent from 1998-99. The STAR program, disbursements for which increase by
$638 million from 1998-99, accounts for most of the year-to-year growth in State
SRF spending. The elimination of medical provider assessments on April 1, 1999
partially offsets this growth. Disbursements from federal SRFS, which account
for approximately three-quarters of all special revenue spending, are estimated
at $21.93 billion in 1999-2000, an increase of $222 million or 1.0 percent from
1998-99. The year-to-year growth in federal SRF spending is primarily due to
increases in federal contributions for Children and Family Assistance ($123
million), education ($170 million), labor ($89 million) and the expanded Child
Health Plus program ($96 million), offset by a decrease in welfare ($259
million).
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
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to certain local governments or public authorities. This fund type consists of
the Capital Projects Fund, which is supported by tax receipts transferred from
the General Fund, and various other capital funds established to distinguish
specific capital construction purposes supported by other revenues. In the
1998-99 fiscal year, activity in these funds is expected to comprise 5.5 percent
of total governmental receipts.
Disbursements from Capital Projects funds in 1999-2000 are estimated at
$4.41 billion, or $145 million higher than 1998-99. The proposed spending plan
includes: $2.61 billion in disbursements for transportation purposes, including
State and local highway and bridge programs; $709 million for environmental
activities; $348 million for correctional services; $272 million for SUNY and
CUNY; and $271 million for mental hygiene projects.
Approximately 22 percent of capital projects spending in 1999-2000 is
proposed to be financed with State "pay-as-you-go" resources. State-supported
bond issuances, including general obligation bonds and
lease-purchase/contractual obligations, finance 46 percent of capital projects
spending, with federal grants financing the remaining 32 percent.
Debt Service Funds
Debt Service Funds are used to account for the payment of principal and
interest on long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements (see the
section entitled "Debt and Other Financing
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Activities -- Outstanding Debt of the State and Certain Authorities" in this
AIS). This fund type is expected to comprise 3.8 percent of total governmental
fund receipts in the 1998-99 fiscal year. Receipts in these funds in excess of
debt service requirements may be transferred to the General Fund, Capital
Projects Funds and Special Revenue Funds, pursuant to law.
Disbursements from Debt Service Funds are estimated at $3.68 billion in
1999-2000, an increase of $384 million in debt service costs from 1998-99. The
increase in debt service is primarily attributable to bonds previously issued in
support of the following: $131 million for State and local highway and bridge
programs financed by the Dedicated Highway and Bridge Trust Fund; $80 million
for SUNY and CUNY higher education purposes, and $38 million for the mental
hygiene programs financed through the Mental Health Services Fund. Disbursements
on bonds for SUNY's upstate community colleges, previously appropriated as local
aid, have now been reclassified as debt service spending.
Special Considerations
General
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not
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under the control of the State. Because of the uncertainty and unpredictability
of these factors, their impact cannot, as a practical matter, be included in the
assumptions underlying the State's projections at this time.
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, the condition of the financial sector,
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 corresponding material and adverse effects on
the State's projections of receipts and disbursements. For a discussion of
uncertainties in the current economic forecast, see the section entitled
"Economic and Demographics -- Current Economic Outlook."
Projections of total State receipts in the 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
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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 collection
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, as
indicated in the section
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entitled "Current Fiscal Year -- Fund Balances." For more information on
litigation pending against the State, see the section entitled "Litigation" in
this AIS.
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
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 have helped to
create projected structural budget gaps for the State. These gaps result 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 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. For example,
the fiscal effects of tax reductions adopted in the last several fiscal years
(including 1998-99) are projected to grow
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more substantially beyond the 1998-99 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.
The Division of Budget believes that its projections of receipts and
disbursements relating to the 1999-2000 Executive Budget, and the assumptions on
which they are based, are reasonable. The projections assume no changes in
federal tax law, which could substantially alter the current receipts forecast.
In addition, these projections do not include funding for new collective
bargaining agreements after the current contracts expire on April 1, 1999. Each
percentage increase in employee wages would add roughly $70 million in new
Financial Plan costs. Collective bargaining commitments at current inflationary
rates would increase labor costs by approximately $480 million by the end of the
projection period.
The State's outyear projections may change substantially as the budget
process for 1999-2000 continues. For example, the Governor will propose
amendments to the 1999-2000 Executive Budget, as permitted under law. These
amendments, which will be reflected in a revised Financial Plan to be released
on or before February 26, 1999, may materially and adversely impact the
projections set forth in this Update and are likely to include additional
funding for public schools. Actual results for the fiscal year may also differ
materially and adversely from the projections set forth in this Update. Finally,
the Legislature may not enact
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the Governor's proposals or the State's actions may be insufficient to preserve
budgetary balance or to align recurring receipts and disbursements in either
1999-2000 or in future fiscal years.
The fiscal effects of tax reductions adopted in the last several fiscal
years and those proposed by the Governor in the 1999-2000 Executive Budget are
projected to grow more substantially beyond the 1999-2000 fiscal year. The
incremental annual cost of enacted or proposed tax reductions is estimated to
peak at $2.1 billion in 2000-01, then gradually decline to about $1 billion in
2003-04.
Over the long-term, uncertainties with regard to the economy present
the largest potential risk to future budget balance in New York State. For
example, a downturn in the financial markets or the wider economy is possible, a
risk that is heightened by the lengthy expansion currently underway. The
securities industry is more important to the New York economy than the national
economy, potentially amplifying the impact of an economic downturn. A large
change in stock market performance during the forecast horizon could result in
wage and unemployment levels that are significantly different from those
embodied in the forecast. Merging and downsizing by firms, as a consequence of
deregulation or continued foreign competition, may also have more significant
adverse effects on employment than expected. Finally, a "forecast error" of one
percentage point in the estimated growth of receipts could cumulatively raise or
lower results by over $1 billion by 2002.
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An ongoing risk to the State Financial Plan arises from the potential
impact of certain litigation and federal disallowances now pending against the
State, which could produce adverse effects on the State's projections of
receipts and disbursements. The Financial Plan assumes no significant federal
disallowances or other federal actions that could affect State finances. For
more information on certain litigation pending against the State, see the
section entitled "Litigation" in this Update and in the AIS.
To guard against these risks, the State has projected reserves of $2.36
billion in 1999-2000, comprised of $1.79 billion that the Governor is proposing
to set aside as a tax reduction reserve, $473 million in the Tax Stabilization
Reserve Fund and $100 million in the Contingency Reserve Fund.
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
they operate on. 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.
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In 1996, the State established the Year 2000 Date Change Initiative to
facilitate and coordinate New York State's Y2K compliance effort. The Office for
Technology ("OFT"), under the direction of the Governor's Office of State
Operations, is responsible for monitoring the State's compliance progress and
for providing assistance and resources to State agencies. Each agency is
responsible for bringing their individual systems into Year 2000 compliance.
Year 2000 compliance has been identified by the Governor as New York State's
number one technology priority.
In 1997, OFF completed a risk assessment of 712 State data processing
systems and prioritized those systems for purposes of Year 2000 compliance. The
State has estimated that investments of at least $140 million will be required
to bring the State's approximately 350 mission critical and high priority
systems into Year 2000 compliance. Mission-critical systems are those that may
impact the public health, safety and welfare of the State and its citizens, and
for which failure could have a material and adverse impact on State operations.
High-priority systems are critical for a State agency to fulfill its mission or
deliver services. The State allocated over $117 million in centralized Year 2000
funding in 1998-99 to those agencies that maintain mission-critical and
high-priority systems. Agencies are also expending funds from their capital
budgets to address the Year 2000 compliance issue. The State is planning to
spend an additional $19 million in 1999-2000 for Year 2000 embedded chip
compliance, and is also making a contingent appropriation available for
unforeseen emergencies. The Year 2000 compliance effort may require additional
funding above amounts assumed in the State Financial Plan, but those amounts are
not assumed to be material.
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OFIF is monitoring compliance progress for the State's mission-critical
and high-priority systems and is reporting compliance progress to the Governor's
office on a quarterly basis. As of December 1998, the State had completed 93
percent of overall compliance effort for its mission-critical systems; 18
systems are now Year 2000 compliant and the remaining systems are on schedule to
be compliant by the first quarter of 1999. As of December 1998, the State has
completed 70 percent of overall compliance effort on the high-priority systems;
168 systems are now Year 2000 compliant and the remaining systems are on
schedule to be compliant by the second quarter of 1999. Compliance testing is
expected to be completed by the end of calendar 1999.
The State is also addressing a number of issues related to bringing its
mission critical systems into compliance, including: testing throughout 1999 of
over 800 data exchange interfaces with federal, state, local and private data
partners; completion of an inventory of priority equipment and systems that may
depend on embedded chips and may therefore need remediation in 1999; and
contacting critical vendors and supply partners to obtain Year 2000 compliance
status information and assurances.
Since problems could be identified during the compliance testing phase
that could produce compliance delays, the State is also requiring its agencies
to complete contingency plans for priority systems and business processes by the
first quarter of 1999. These plans will be integrated into the State Emergency
Response Plan and coordinated by the State Emergency Management Office. In
addition, the State Public Service Commission has ordered that all State
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regulated utilities complete Year 2000 activities for mission-critical systems,
including contingency plans, by July 1, 1999. The State has also been working
with local governments since December 1996 to raise awareness, promote action
and provide assistance with Year 2000 compliance.
While New York 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.
Tax Refund Reserve Account
Personal income tax net collections in recent years have been affected
by the pattern of refund payments made and reflect transactions in the tax
refund reserve account. The tax refund reserve account is used to hold moneys
available to pay tax refunds. The Comptroller deposits into this account tax
moneys in the amounts and at the times determined in the discretion of the
Commissioner of Taxation and Finance. The deposit of moneys in the account
during a fiscal year reduces receipts for such fiscal year, and the withdrawal
of moneys from the account increases receipts in the fiscal year of withdrawal.
The tax refund reserve account also includes
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amounts made available as a result of the LGAC financing program that are
required to be on deposit in this account. Beginning in 1998-99, a portion of
personal income tax collections will be deposited directly in the School Tax
Reduction (STAR) Fund to be used to make payments to reimburse local governments
for their revenue decreases due to the STAR program.
Cash-Basis Results for Prior Fiscal Years
The State reports its financial results on two bases of accounting: the
cash basis, showing receipts and disbursements; and the modified accrual basis,
prescribed by Generally Accepted Accounting Principles (GAAP), showing revenues
and expenditures. These financial terms are described in the Glossary of
Financial Terms in Exhibit A to this Annual Information Statement.
General Fund 1995-96 through 1997-98
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 most
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. A narrative
description of cash-basis results in the General Fund is presented below. For a
description of the principal State taxes and fees, see Exhibit B to this Annual
Information Statement.
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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 tax and revenue anticipation notes (TRANs). A national recession, followed by
the lingering economic slowdown in New York and the 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.
1997-98 Fiscal Year
The State ended its 1997-98 fiscal year 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 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 $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
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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 Local Government Assistance Corporation (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 199697.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.
1996-97 Fiscal Year
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 surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.
The General Fund closing balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million and an additional deposit of $65
million in 1996-97. In addition, $41 million remained on deposit in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing balance did not include
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$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.
1995-96 Fiscal Year
The State ended its 1995-96 fiscal year on March 31, 1996 with a
General Fund cash surplus, as reported by DOB, of $445 million. The cash surplus
was derived from higher-than-expected receipts, savings generated through agency
cost controls, and lower-than-expected welfare spending.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to a $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance included $237
million on deposit in the TSRF. In addition, $41 million was on deposit in the
CRF. The remaining $9 million reflected amounts then on deposit in the Revenue
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Accumulation Fund. The General Fund closing balance did not include $678 million
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, 1996.
General Fund receipts and transfers from other funds (including net
refund reserve account activity) totaled $32.81 billion, a decrease of 1.1
percent from 1994-95 levels. General Fund disbursements and transfers to other
funds totaled $32.68 billion for the 1995-96 fiscal year, a decrease of 2.2
percent from 1994-95 levels.
Other Governmental Funds (1995-96 through 1997-98)
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 and the
Metropolitan Transportation Authority (MTA).
In the Special Revenue Funds, disbursements increased from $26.26
billion to $27.65 billion over the last three years, primarily as a result of
increased costs for the federal share of
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Medicaid. 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 declined over the three
year period from $3.97 billion to $3.56 billion as spending for miscellaneous
capital programs decreased, partially offset by increases for mental hygiene,
health and environmental programs. The composition of this fund type's receipts
also changed as the dedicated transportation taxes began to be deposited,
general obligation bond proceeds declined substantially, federal grants remained
stable, and reimbursements from public authority bonds (primarily transportation
related) increased.
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 continued 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. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund (see "Debt and Other Financing Activities -- Local Government
Assistance Corporation").
GAAP-Basis Results for Prior Fiscal Years
The Comptroller prepares a comprehensive annual financial report on a
GAAP basis for governments as promulgated by the Governmental Accounting
Standards Board. The report,
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generally released in July each year, contains general purpose financial
statements with a Combined Balance Sheet and its Combined Statement of Revenues,
Expenditures and Changes in Fund Balances. These statements are audited by
independent certified public accountants. The following table summarizes recent
governmental funds results on a GAAP basis. For information regarding the
State's account and financial reporting requirements, see the section entitled
"State Organization -- Accounting, Financial Reporting and Budgeting."
General Purpose Financial Statements of the State for the fiscal year
ended March 31, 1998 will be available on or before July 28, 1998. Copies of the
1997 report (and of the 1998 report when it is available) may be obtained from
the Director of Financial Reporting at the Office of the State Comptroller, Gov.
A.E. Smith Building, Albany, N.Y. 12236 (Tel. 518-473-8977).
1997-98 Fiscal Year
The State completed its 1997-98 fiscal year with a combined
Governmental Funds operating surplus of $1.80 billion, which included operating
surpluses in the General Fund ($1.56 billion), in Capital Projects Funds ($232
million) and in Special Revenue Funds ($49 million), offset in part by an
operating deficit in Debt Service Funds ($43 million).
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General Fund
The State reported a General Fund operating surplus of $1.56 million
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 resulted in part from 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. These gains were partially offset by an increase in payables to local
governments of $308 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, and decreases 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, spurred by
increased consumer confidence. Business taxes grew $28 million, an increase of
0.5 percent. Other taxes fell primarily because revenues for estate and gift
taxes decreased. Miscellaneous revenues decreased $380 million, or 12.7 percent
decrease, due to a decline in receipts from the Medical Malpractice Insurance
Association and from medical provider assessments.
Expenditures increased $147 million (0.4 percent) from the prior fiscal
year, with the largest increases occurring in education and social services.
Education expenditures grew $391
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million (3.6 percent), mainly due to an increase in State support for public
schools. This growth was offset, in part, by a reduction in spending for
municipal and community colleges. Social services expenditures increased $233
million (2.6 percent) to fund growth in these programs.
Increases in other State aid spending were offset by a decline in general
purpose aid of $235 million (28.8 percent) due to statutory changes in the
payment schedule. Increases in personal and non-personal service costs were
offset by a decrease in pension contributions 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 Fund Types
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 $795 million (3.3 percent) as a result of increased 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
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$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. Expenditures
increased $146 million (4.5 percent) primarily as a result of increased capital
construction spending 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.
1996-97 Fiscal Year
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 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.
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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
Malpractice Insurance Association and from medical provider assessments.
Expenditures increased $830 million (2.6 percent) from the prior fiscal
year, with the largest increase occurring in pension contributions and State aid
for education spending. Pension
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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 Dormitory 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 Fund Types
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 uses decreased $275 million
(8.0 percent) primarily because of declines in amounts transferred to other
funds.
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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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1995-96 Fiscal Year
The State completed its 1995-96 fiscal year with a combined
Governmental Funds operating surplus of $432 million, which included an
operating surplus in the General Fund of $380 million, in the Capital Projects
Funds of $276 million and in the Debt Service Funds of $185 million, offset in
part by an operating deficit of $409 million in the Special Revenue Funds.
General Fund
The State reported a General Fund operating surplus of $380 million for
the 1995-96 fiscal year, as compared to an operating deficit of $1.43 billion
for the prior fiscal year. The 1995-96 fiscal year surplus reflects several
major factors, including the cash-basis surplus and the benefit of $529 million
in LGAC bond proceeds which were used to fund various local assistance programs.
This was offset in part by a $437 million increase in tax refund liability
primarily resulting from the effects of ongoing tax reductions and (to a lesser
extent) changes in accrual measurement policies, and increases in various other
expenditure accruals.
Revenues increased $530 million (nearly 1.7 percent) over the prior
fiscal year with an increase in personal income taxes and miscellaneous revenues
offset by decreases in business and other taxes. Personal income taxes grew $715
million, an increase of 4.3 percent. The increase in personal income taxes was
caused by moderate employment and wage growth and the
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strong financial markets during 1995. Business taxes declined $295 million or
5.8 percent, resulting primarily from changes in the tax law that modified the
distribution of taxes between the General Fund and other fund types, and reduced
business tax liability. Miscellaneous revenues increased primarily because of an
increase in receipts from medical provider assessments.
Expenditures decreased $716 million (2.2 percent) from the prior fiscal
year with the largest decrease occurring in State aid for social services
program and State operations spending. Social services expenditures decreased
$739 million (7.5 percent) due mainly to implementation of cost containment
strategies by the State and local governments, and reduced caseloads. General
purpose and health and environment expenditures grew $139 million (20.2 percent)
and $121 million (33.3 percent), respectively. Health and environment spending
increased as a result of increases enacted in 1995-96. In State operations,
personal service costs and fringe benefits declined $241 million (3.8 percent)
and $55 million (3.6 percent), respectively, due to staffing reductions. The
decline in non-personal service costs of $170 million (8.6 percent) was caused
by a decline in the litigation accrual. Pension contributions increased $103
million (66.4 percent) as a result of the return to the aggregate cost method
used to determine employer contributions.
Net other financing sources nearly tripled, increasing $561 million,
due primarily to an increase in bonds issued by LGAC, a transfer from the Mass
Transportation Operating Assistance Fund and transfers from public benefit
corporations.
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Special Revenue, Debt Service and Capital Projects Fund Types
An operating deficit of $409 million was reported for Special Revenue
Funds for the 1995-96 fiscal year which decreased the accumulated fund balance
to $468 million. Revenues increased $1.45 billion over the prior fiscal year
(5.8 percent) as a result of increases in federal grants and lottery revenues.
Expenditures increased $1.21 billion (5.4 percent) as a result of increased
costs for social services programs and an increase in the distribution of
lottery proceeds to school districts. Other financing uses increased $693
million (25.1 percent) primarily because of an increase in federal
reimbursements transferred to other funds.
Debt Service Funds ended the 1995-96 fiscal year with an operating
surplus of over $185 million and, as a result the accumulated fund balance
increased to $1.94 billion. Revenues increased $10 million (0.5 percent) because
of increases in both dedicated taxes and mental hygiene patient fees. Debt
service expenditures increased $201 million (9.5 percent). Net other financing
sources increased threefold to $299 million, due primarily to increases in
patient reimbursement revenues.
An operating surplus of $276 million was reported in the Capital
Projects Funds for the State's 1995-96 fiscal year and, as a result, the
accumulated deficit fund balance in this fund type decreased to $712 million.
Revenues increased $260 million (14.9 percent) primarily because a larger share
of the petroleum business tax was shifted from the General Fund to the Dedicated
Highway and Bridge Trust Fund, and due to an increase in federal grant revenues
for transportation and local waste water treatment projects. Capital Projects
Funds expenditures increased $194 million (5.7 percent) in State fiscal year
1995-96 because of increased expenditures for education and health and
environmental projects. Net other financing sources increased by $577 million as
a result of an increased in proceeds from financing arrangements.
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Economics and Demographics
This section presents economic information about the State which may be
relevant in evaluating the future prospects of the State. However, the
demographic information and statistical data, which have been obtained from the
sources indicated, do not present all factors which may have a bearing on the
State's fiscal and economic affairs. Further, such information requires economic
and demographic analysis in order to assess the import of the data presented.
The data and analysis may be interpreted differently, according to the economist
or other expert consulted.
Current Economic Outlook
The State Financial Plan is based upon a February 1998 projection by
DOB of national and State economic activity. The information in this section and
in the tables below summarize the national and State economic situation and
outlook upon which projections of receipts and certain disbursements were made
for the 1998-99 Financial Plan.
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The national economy has maintained a robust rate of growth during the
past six quarters as the expansion, which is well into its seventh year,
continues. Since early 1992, approximately 16 1/2 million jobs have been added
nationally. The State economy has also continued to expand, but growth remains
somewhat slower than in the nation. Although the State has added over 400,000
jobs since late 1992, employment growth in the State has been hindered during
recent years by significant cutbacks in the computer and instrument
manufacturing, utility, defense, and banking industries. Government downsizing
has also moderated these job gains.
The State has updated its mid-year forecast of national and State
economic activity through the end of calendar year 2000. At the national level,
although the current projected nominal growth rate for 1999 represents only a
small change from the earlier forecast, in real, inflation-adjusted terms, the
annual growth rate is now anticipated to be significantly higher than had been
previously predicted. However, even with the upward adjustment in the forecast,
economic growth nationally during both 1999 and 2000 is still expected to be
slower than it was during 1998. The financial and economic turmoil which started
in Asia and has spread to other parts of the world is expected to continue to
negatively affect U. S. trade balances throughout most of 1999 and could reduce
U. S. economic growth even more than projected. In addition, growth in domestic
consumption, which has been a major driving force behind the nation's strong
economic performance in recent years, is forecasted to slow in 1999 as consumer
confidence retreats from historic highs and stock market gains cease to provide
massive amounts of extra discretionary income. However, the lower short-term
interest rates which are projected to be in force during 1999 are expected to
help prevent a more severe drop in overall economic growth.
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The revised forecast projects real Gross Domestic Product ("GDP")
growth of 2.4 percent in 1999, well below the projected 1998 growth rate of 3.7
percent. In 2000, real GDP growth is expected to continue at a similar pace,
increasing by 2.3 percent. The growth of nominal GDP is projected to decline
from 4.8 percent in 1998 to 3.6 percent in 1999, then rise somewhat to 4.0
percent in 2000. Inflation is expected to exceed the extremely low rate of 1998,
but still stay well controlled, with price increases of slightly over two
percent in both 1999 and 2000. The annual rate of job growth is expected to
decrease from 2.6 percent in 1998 to 2.0 percent in 1999 and 1.5 percent in
2000. Growth in both personal income and wages is also expected to slow somewhat
in 1999 and again in 2000, while corporate profits are projected to continue the
lackluster performance which began in 1998.
The State economic forecast has been modified for 1999 and 2000 from
the one used in earlier updates of the Financial Plan. Continued growth is
projected in 1999 and 2000 for employment, wages, and personal income, although
the growth is expected to moderate from the 1998 pace. However, a continuation
of international financial and economic turmoil may result in a sharper slowdown
than currently projected. Personal income is estimated to have grown by 4.9
percent in 1998, fueled in part by a continued large increase in financial
sector bonus payments at the beginning of the year, and is projected to grow by
4.2 percent in 1999 and 4.0 percent in 2000. Increases in bonus payments in 1999
and 2000 are projected to be
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modest, a distinct shift from the torrid rate of the last few years. Overall
employment growth is anticipated to continue at a modest rate, reflecting the
slowing growth in the national economy, continued spending restraint in
government, and restructuring in the manufacturing, health care, social service,
and banking sectors.
The forecast for continued growth, and any resultant impact on the
State's 1998-99 Financial Plan, contains some uncertainties.
Stronger-than-expected gains in employment and wages could lead to surprisingly
strong growth in consumer spending. Investments could also remain robust.
Conversely, net exports could plunge even more sharply than expected, with
adverse impacts on the growth of both consumer spending and investment. The
inflation rate may differ significantly from expectations due to the upward
pressure of a tight labor market and the downward pressure of price reductions
emanating from the economic weakness in Asia. In addition, the State economic
forecast could over- or underestimate the level of future bonus payments or
inflation growth, resulting in forecasted average wage growth that could differ
significantly from actual growth. Similarly, the State forecast could fail to
correctly account for declines in banking employment and the direction of
employment change that is likely to accompany telecommunications and energy
deregulation.
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The New York Economy
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
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
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 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.
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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 nonfarm 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.
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The importance of the different sectors of the State's economy relative
to the national economy is shown in the following table, which compares
nonagricultural employment and income by industrial categories for the State and
the nation as a whole. 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.
Economic and Demographic Trends
In the calendar years 1987 through 1997, 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, total personal income in the
State has risen more slowly than the national average since 1988. Total State
nonagricultural employment has declined as a share of national nonagricultural
employment. State per capita personal income has historically been
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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. The following table compares
per capita personal income for the State and the nation.
Debt and Other Financing Activities
Legal Categories of State Debt and Other Financings
State financing activities include general obligation debt of the State
and State-guaranteed debt, to which the full faith and credit of the State has
been pledged, as well as lease-purchase and contractual-obligation financings,
moral obligation financings and other financings through public authorities and
municipalities, where the State's legal obligation to make payments to those
public authorities and municipalities for their debt service is subject to
annual appropriation by the Legislature. These categories are described in the
Glossary of Financial Terms in Exhibit A and in more detail below.
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General Obligation and State-Guaranteed Financing
There are a number of methods by which the State itself may incur debt.
The State may issue general obligation bonds. 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
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 general obligation 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. However, since 1990 the State's ability to issue TRANs has been limited
due to enactment of the fiscal reform program which created LGAC (see "Local
Government Assistance Corporation" below). 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
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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. In order to
provide flexibility within these maximum term limits, the State has utilized the
BANs authorization to conduct a commercial paper program to fund disbursements
eligible for general obligation bond financing.
Pursuant to specific constitutional authorization, the State may also
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. 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
finances. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities were suspended in 1995. JDA recently
resumed its lending activities under a revised set of lending programs and
underwriting guidelines. 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
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experienced a debt service cash flow shortfall had it not completed the 1997
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. The
State does not anticipate that it will be called upon to make any payments
pursuant to the State guarantee in the 1998-99 fiscal year.
Payments of debt service on State general obligation and
State-guaranteed bonds and notes are legally enforceable obligations of the
State.
Lease-Purchase and Contractual-Obligation Financing
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, 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.
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The State has also entered into a financing arrangement with LGAC to restructure
the way the State makes certain local aid payments (see "Local Government
Assistance Corporation" below).
The State also 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 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.
Moral Obligation and Other 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 includes 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
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has never been a default on any moral obligation debt of any public authority.
The State does not intend to increase statutory authorizations for moral
obligation bond programs. From 1976 through 1987, the State was called upon to
appropriate and make payments totaling $162.8 million to make up deficiencies in
the debt service reserve funds of the Housing Finance Agency (HFA) pursuant to
moral obligation provisions. In the same period, the State also expended
additional funds to assist the Project Finance Agency, the Urban Development
Corporation (UDC) and other public authorities which had moral obligation debt
outstanding. The State has not been called upon to make any payments pursuant to
any moral obligations since the 1986-87 fiscal year and no such requirements are
anticipated during the 1998-99 fiscal year.
In addition to the moral obligation financing 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 (NYC MAC) was created in 1975 to provide financing assistance to New York
City. To enable NYC MAC to pay debt service on its obligations, NYC MAC
receives, subject to annual appropriation by the Legislature, receipts from the
4 percent 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 New York City. The legislation
creating NYC MAC also includes a moral obligation provision. Under its enabling
legislation, NYC MAC's authority to issue moral obligation bonds and notes
(other than refunding bonds and notes) expired on December 31, 1984. In 1995,
the State created the
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Municipal Assistance Corporation for the City of Troy (Troy MAC). The bonds
issued by Troy MAC do not include the moral obligation provisions.
The State also provides for contingent contractual-obligation financing
for the Secured Hospital Program pursuant to legislation enacted in 1985. Under
this financing method, the State entered into service contracts which obligate
the State to pay debt service, subject to annual appropriations, on bonds
formerly issued by the New York State Medical Care Facilities Finance Agency
(MCFFA) and now included as debt of the DASNY in the event there are shortfalls
of revenues from other sources. The State has never been required to make any
payments pursuant to this financing arrangement, nor does it anticipate being
required to do so during the 1998-99 fiscal year. The legislative authorization
to issue bonds under this program expired on March 1, 1998.
Local Government Assistance Corporation
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments that had been
traditionally funded through the State's annual seasonal borrowing. The
legislation authorized LGAC to issue its bonds and notes in an amount to yield
net proceeds not in excess of $4.7 billion (exclusive of certain refunding
bonds). Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing.
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The legislation also dedicated revenues equal to one-quarter of the four cent
State sales and use tax to pay debt service on these bonds. The legislation also
imposed a cap on the annual seasonal borrowing of the State at $4.7 billion,
less net proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the legislative
leaders have certified the need for additional borrowing and provided a schedule
for reducing it to the cap. If borrowing above the cap is thus permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. This provision capping the seasonal
borrowing was included as a covenant with LGAC's bondholders in the resolution
authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net
proceeds of $4.7 billion, completing the program. The impact of LGAC's
borrowing, as well as other changes in revenue and spending patterns, is that
the State has been able to meet its cash flow needs throughout the fiscal year
without relying on short-term seasonal borrowings.
1998-99 Borrowing Plan
The State anticipates that its capital programs will be financed, in
part through borrowings by the State and its public authorities in the 1998-99
fiscal year. The projection of State borrowings for the 1998-99 fiscal year is
subject to change as market conditions, interest rates and other factors vary
throughout the fiscal year.
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The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
As described below, efforts to reduce debt, unanticipated delays in the
advancement of certain projects and revisions to estimated proceeds needs will
modestly reduce projected borrowings in 1998-99. The State's 1998-99 borrowing
plan now projects issuances of $331 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANS) and $154
million in general obligation commercial paper. The State has issued $179
million in Certificates of Participation to finance equipment purchases
(including costs of issuance, reserve funds, and other costs) during the 1998-99
fiscal year. Of this amount, it is anticipated that approximately $83 million
will be used to finance agency equipment acquisitions, and $96 million to
address Statewide technology issues related to Year 2000 compliance.
Approximately $228 million for information technology related to welfare reform,
originally anticipated to be issued during the 1998-99 fiscal year, is now
expected to be delayed until 1999-2000.
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Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.85 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99. Included therein are borrowings by: (i) Dormitory
Authority of the State of New York (DASNY) for the State University of New York
(SUNY); the City University of New York (CUNY); health, mental health and
educational facilities including the State Education Department; new facilities
for the Office of the State Comptroller and the New York State and Local
Retirement Systems; and for parking facilities; (ii) the Thruway Authority for
the Dedicated Highway and Bridge Trust Fund and Consolidated Highway Improvement
Program; (iii) Urban Development Corporation (UDC) (doing business as the Empire
State Development Corporation) for prison and sports facilities; (iv) Housing
Finance Authority (HFA) for housing programs; and (v) the Environmental
Facilities Corporation (EFC) and the Energy Research and Development Authority
(ERDA) for environmental projects. This includes an estimated $247 million to be
issued for the Community Enhancement Facilities Assistance Program (CEFAP) for
economic development purposes, consisting of sports facilities, cultural
institutions, transportation, infrastructure and other community facility
projects. Four public authorities (Thruway Authority, DASN-Y, UDC and HFA) are
authorized to issue bonds to finance a total of $425 million of CEFAP projects
under this program. The 1999-2000 Executive Budget proposes reducing CEFAP by
$75 million to $350 million.
The projection of State borrowings for the 1998-99 fiscal year is
subject to change as market conditions, interest rates and other factors vary
through the end of the fiscal year.
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Outstanding Debt of the State and Certain Authorities
For purposes of analyzing the financial condition of the State, debt of
the State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State and lease-purchase and
contractual obligations of public authorities (and municipalities) where debt
service is paid from State appropriations (including dedicated tax sources, and
other revenues such as patient charges and dormitory facilities rentals). In
addition, a broader classification, referred to as State-related debt, includes
State-supported debt, as well as certain types of contingent obligations,
including moral-obligation financing, certain contingent contractual-obligation
financing arrangements, and State-guaranteed debt described above, where debt
service is expected to be paid from other sources and State appropriations are
contingent in that they may be made and used only under certain circumstances.
State-Supported Debt Outstanding
General Obligation Bond Programs
The first type of State-supported debt, general obligation debt, is
currently authorized for three programmatic categories: transportation,
environmental and housing. The amount of general obligation bonds and BANs
issued in the 1995-96 through 1997-98 fiscal years (excluding bonds issued to
redeem BANs) were $333 million, $439 million, and $486 million, respectively.
Transportation-related bonds are issued for State highway and bridge
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improvements, aviation, highway and mass transportation projects and purposes,
and rapid transit, rail, canal, port and waterway programs and projects.
Environmental bonds are issued to fund environmentally-sensitive land
acquisitions, air and water quality improvements, municipal non-hazardous waste
landfill closures and hazardous waste site cleanup projects. As of March 31,
1998, the total amount of outstanding general obligation debt was $5.03 billion,
including $294 million in BANs.
Lease-Purchase and Contractual-Obligation Financing Programs
The second type of State-supported debt, lease-purchase and
contractual-obligation financing arrangements with public authorities and
municipalities, has been used primarily by the State to finance the State's
highway and bridge program, SUNY and CUNY buildings, health and mental hygiene
facilities, prison construction and rehabilitation, and various other State
capital projects.
The State has utilized and expects to continue to utilize
lease-purchase and contractual-obligation financing arrangements to finance its
capital programs, in addition to authorized general obligation bonds. Some of
the major capital programs financed by lease-purchase and contractual obligation
agreements are highlighted below.
Transportation. The State Department of Transportation is primarily
responsible for maintaining and rehabilitating the State's system of highways
and bridges, which includes 40,000
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State highway lane miles and 7,500 State bridges. The Department also oversees
and funds programs for rail and aviation projects and programs that help defray
local capital expenses associated with road and bridge projects.
Legislation enacted in 1991 established the Dedicated Highway and
Bridge Trust Fund to provide for the dedication of a portion of the petroleum
business tax and certain other transportation-related taxes and fees for
transportation improvements. Legislation enacted in 1996 authorized a five-year,
$12.7 billion plan for State and local highways and bridges through 1999-2000,
to be financed by a combination of federal grants, pay-as-you-go capital and
bond proceeds supported by the Dedicated Highway and Bridge Trust Fund, and a
small amount of general obligation bonds remaining under previous
authorizations. The 1998-99 enacted budget increased this plan to $13 billion.
The State has supported the capital plans of the MTA in part by
entering into service contracts relating to certain bonds issued by the MTA.
Legislation adopted in 1992 and 1993 also authorized payments, subject to
appropriation, of a portion of the petroleum business tax from the State's
Dedicated Mass Transportation Trust Fund to the MTA and authorized it to be used
as a source of payment for bonds to be sold by the MTA to support its capital
program. See the section entitled "Authorities and Localities" for additional
information about the MTA.
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Education. The State finances the physical infrastructure of SUNY and
CUNY and their respective community colleges and the State Education Department
through direct State capital spending and through financing arrangements with
the DASNY, paying all capital costs of the senior colleges and sharing equally
with local governments for the community colleges, except that SUNY dormitories
are financed through dormitory fees. The following tables have been adjusted to
reflect DASNY's SUNY Upstate Community Colleges program as State-supported debt.
The 34 SUNY campuses include more than 2,300 buildings including
classrooms, dormitories, libraries, athletic and student facilities and other
buildings of which 84 percent are over 20 years of age. Together with the 30
SUNY community colleges, the SUNY system serves nearly 290,000 full-time
students. The CUNY system is composed of 11 senior colleges and 6 community
colleges that serve approximately 150,000 full-time students.
Mental Hygiene/Health. The State provides care for its citizens with
mental illness, mental retardation, and developmental disabilities, and for
those with chemical dependencies, through the Office of Mental Health (OMH), the
Office of Mental Retardation and Developmental Disabilities (OMRDD) and the
Office of Alcoholism and Substance Abuse Services (OASAS). Historically, this
care has been provided at large State institutions. Beginning in the 1980s the
State adopted policies to provide institutional care to those most in need and
to expand care in community residences. OMRDD has closed 12 of its 20
developmental centers. OMH has reduced its adult institutional population from
22,000 in 1982 to 5,825 at the end of 1997-98.
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In 1997, OMH released a "Statewide Comprehensive Plan for Mental Health
Services 1997-2001." The plan presents the programmatic and fiscal strategy of
implementing an integrated community-based system of care, de-emphasizing State
adult inpatient hospitalization. It estimates that the State-operated adult
inpatient census will decline to a range of 3,700 to 4,700 by the end of the
decade. As OMH approaches its long-term census targets and inpatient bed needs
diminish, plans are underway to develop alternative uses for surplus facilities.
Capital investments for these programs are primarily supported by patient
revenues through financing arrangements with DASNY.
Various capital programs for Department of Health facilities have also
been financed by DASNY using contractual-obligation financing arrangements.
Corrections. During the 10-year period 1983-92, the State's prison
system more than doubled in size due to the unprecedented increase in demand for
prison space. Today, the system houses approximately 70,000 inmates in 70
facilities with 3,000 buildings. Although the Department of Correctional
Services (DOCS) capital program was focused primarily on rehabilitation of
existing facilities in the early 1990s, continued inmate population growth and
projected future growth indicate the need for both expansion of existing
facilities and new facilities. The 1997-98 budget authorized the addition of
approximately 3,100 beds in response to this population growth. The 1998-99
enacted budget authorized an additional 1,500 beds.
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Other Programs. The State also uses lease-purchase and
contractual-obligation financing arrangements for the institutional facilities
of the Office of Children and Family Services (formerly known as the Division
for Youth), and Youth Opportunity Centers; the State's housing programs; and
various environmental, economic development, and State building programs. In
addition, DASNY has issued taxable pension bonds to refinance the balance of a
pre-existing State pension liability, for the purpose of achieving present value
savings.
The following table shows the total amount of authorized and
outstanding State-supported debt as of March 31, 1998. In addition to showing
the amounts of authorized and outstanding general obligation and LGAC debt, the
table provides the amount of authorized and outstanding lease-purchase and
contractual obligation debt by purpose, issuer, and program. Debt authorizations
for general obligation bonds and LGAC are for entire programs which are approved
or enacted all at one time and are expected to be fully issued. Authorizations
for lease-purchase and contractual-obligation debt for the State's capital
programs are generally enacted annually by the Legislature and are usually
consistent with bondable capital projects appropriations. Authorization does not
however, indicate an intent to sell bonds for the entire amount of those
authorizations, because capital appropriations often include projects that do
not materialize or are financed from other sources. For example, there are no
current plans for the Thruway Authority to issue any of the authorizations for
the suburban transportation program or the remaining emergency highway
authorizations.
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State-Related Debt Outstanding
The category of State-related debt includes the State-supported debt
described above, moral obligation and certain other financings and
State-guaranteed debt. The total State-related debt has decreased during each of
the lost three fiscal years, with substantial decreases in moral obligation
financing.
Debt Service Requirements
The current and future debt service (principal and interest)
requirements on State supported debt outstanding as of March 31, 1998 for the
fiscal years 1999-2003 are $3.46 billion, $3.45 billion, $3.37 billion, $3.38
billion, and $3 .13 billion, respectively. The requirements of LGAC and Other
Financing Obligations of public authorities are the gross amounts due from the
authorities to bondholders within the fiscal year when the authority makes the
payment. The amounts shown do not reflect other associated costs or revenues
anticipated to be available, such as interest earnings or capitalized interest.
Thus, the requirements shown are generally in excess of the amounts paid by the
State during the State fiscal year.
Long-Term Trends
During the prior ten years, State-supported long-term debt service
increased by 9.1 percent annually to $3.20 billion by 1997-98 as available
revenues increased by 3.8 percent annually. The relative comparable growth in
revenues and debt service resulted in increases in
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the ratio of debt service to revenues from fiscal years 1988-89 to 1997-98. The
ratio is estimated to increase to 7.25 percent in fiscal year 1998-99.
Principal and interest payments on general obligation bonds and
interest payments on BANs were $749.7 million for the 1997-98 fiscal year, and
are estimated to be $753.4 million for 1998-99. Principal and interest payments
on fixed rate and variable rate bonds issued by LGAC were $326.6 million for the
1997-98 fiscal year, and are estimated to be $345.6 million for 1998-99. State
lease-purchase and contractual-obligation payments (including State installment
payments relating to COPs), classified as "Other Financing Obligations", were
$2.12 billion in fiscal year 1997-98, and are estimated to be $2.40 billion in
fiscal year 1998-99.
Total outstanding State-related debt increased from $24.89 billion at
the end of the 1988-89 fiscal year to $37.00 billion at the end of the 1997-98
fiscal year, an average annual increase of 4.5 percent. State-supported debt
increased from $12.46 billion at the end of the 1988-89 fiscal year to $34.25
billion at the end of the 1997-98 fiscal year, an average annual increase of
11.9 percent. During the prior ten year period, annual personal income in the
State rose from $367.1 billion to $559.1 billion, an average annual increase of
4.8 percent. Thus, State-supported debt grew at a faster rate than personal
income while State-related obligations grew at a slower rate. Expressed in other
terms, the total amount of State-supported debt outstanding grew from 3.4
percent of personal income in the 1988-89 fiscal year to 6.1 percent for the
1997-98 fiscal year while State-related debt outstanding declined from 6.8
percent to 6.6
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percent of personal income for the same period. These trends are expected to
continue in the 1998-99 fiscal year, although State-supported debt outstanding
is expected to modestly increase to 6.2 percent of personal income.
State Financial Procedures
The State Budget Process
The requirements of the State budget process are set forth in Article
VII of the State Constitution and the State Finance Law. The process begins with
the Governor's submission of the Executive Budget to the Legislature each
January, in preparation for the start of the fiscal year on April 1. (The
submission date is February 1 in years following a gubernatorial election.) The
budget must contain a complete plan of available receipts and projected
disbursements for the ensuing fiscal year ("State Financial Plan"). The proposed
State Financial Plan must be balanced on a cash basis and must be accompanied by
bills that: (i) set forth all proposed appropriations and reappropriations, (ii)
provide for any new or modified revenue measures, and (iii) make any other
changes to existing law necessary to implement the budget recommended by the
Governor.
In acting on the bills submitted by the Governor, the Legislature has
the power to alter both recommended appropriations and proposed changes to
substantive law. The Legislature may strike out or reduce an item of
appropriation recommended by the Governor. The
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Legislature may add items of appropriation, provided such additions are stated
separately. These additional items are then subject to line-item veto by the
Governor. If the Governor vetoes an appropriation or a bill (or portion thereof)
related to the budget, these can be reconsidered in accordance with the rules of
each house of the Legislature. If approved by two-thirds of the members of each
house, the measure will become law notwithstanding the Governor's veto.
Once the appropriation bills and other bills become law, DOB revises
the State Financial Plan to reflect the Legislature's actions, and begins the
process of implementing the budget. Throughout the fiscal year, DOB monitors
actual receipts and disbursements, and may adjust the estimates in the State
Financial Plan. Adjustments may also be made to the State Financial Plan to
reflect changes in the economy, as well as new actions taken by the Governor or
the Legislature. The Governor is required to submit to the Legislature quarterly
budget updates which include a revised cash-basis State Financial Plan, and an
explanation of any changes from the previous State Financial Plan. As required
by the State Finance Law, the Governor updates the State Financial Plan within
30 days of the close of each quarter of the fiscal year, generally issuing
reports by July 30, October 30, and in January, as part of the Executive Budget.
The Legislature may enact, subject to approval by the Governor,
additional appropriation bills or revenue measures, including tax reductions,
during any regular session or, if called into session for that purpose, any
special session of the Legislature. In the event additional appropriation bills
or revenue measures are disapproved by the Governor, the Legislature has
authority to override the Governor's veto upon the vote of two-thirds of the
members of each
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house of the Legislature. The Governor may present deficiency appropriation
bills to the Legislature near the end of the fiscal year to supplement
inadequate appropriations or to provide new appropriations for purposes not
covered by the regular and supplemental appropriation bills.
Fiscal Controls
The State Constitution requires the Comptroller to audit the accrual
and collection of revenues and receipts of the State. In addition, the
Comptroller is required to audit all official State accounts and all claims
against the State before payment. No such payment may be made unless the
Comptroller has approved it.
Disbursements from the State funds are limited to the lowest of (i)
appropriations, (ii) available cash or (iii) in accordance with appropriate
legal authority, the amounts allocated by the Director of the Budget.
Disbursements requiring federal funding, which must be appropriated, are limited
to the amounts anticipated from federal programs and may not be made in the
absence of appropriate certifications from the Director of the Budget. Contracts
for disbursements in excess of $10,000 require the Comptroller's approval with
approval dependent upon, in most cases, the existence of an appropriation and
the issuance of a certificate of availability by the Director of the Budget. The
Budget Director must review all applications for State participation in
continuing grant-or contract-supported programs, with specified exceptions.
Certain legislative leaders have the opportunity to make recommendations on the
applications.
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No appropriation may be increased or decreased by transfer or
otherwise, except by (i) the interchange within a fund, among items of a
particular program or purpose, of moneys appropriated for such program or
purpose in such fund, with limited exceptions, or (ii) the enactment of certain
emergency appropriations. Moneys or other financial resources from one fund may
also be loaned to another fund, only if such loan is repaid in full prior to the
end of the month in which the loan was made, except as provided by law.
In addition, the Governor has traditionally exercised substantial
authority in administering the State Financial Plan by limiting disbursements
after the Legislature has enacted appropriation bills and revenue measures. The
Governor may, primarily through DOB, limit spending by State departments, or
delay construction projects to control disbursements. An important limitation of
the Governor's ability to restrict disbursements is that local assistance
payments, which make up approximately 70 percent of General Fund disbursements
(including operating transfers to other funds), are generally mandated by
statute. The Court of Appeals has held that, even in an effort to maintain a
balanced financial plan, neither the Governor nor the Director of the Budget has
the authority to refuse to make a disbursement mandated by law.
Investment of State Moneys
The Comptroller is responsible for the investment of substantially all
State moneys. By law, such moneys may be invested only in obligations issued or
guaranteed by the federal government or the State, certain general obligations
of other states, direct obligations of the
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State's municipalities and obligations of certain public authorities, certain
corporate obligations, certain bankers' acceptances, and certificates of deposit
secured by legally qualified governmental securities. All securities in which
the State invests moneys held by funds administered within the State Treasury
must mature within seven years of the date they are purchased. Money impounded
by the Comptroller for payment of TRANs may only be invested, subject to the
provisions of the State Finance Law, in (i) obligations of the federal
government, (ii) certificates of deposit secured by such obligations, or (iii)
obligations of or obligations guaranteed by agencies of the federal government
as to which the payment of principal and interest is guaranteed by the federal
government.
Accounting, Financial Reporting and Budgeting
Historically, the State has accounted for, reported and budgeted its
operations on a cash basis. Under this form of accounting, receipts are recorded
only at the time money or checks are deposited in the State Treasury, and
disbursements are recorded only at the time a check is drawn. As a result,
actions and circumstances, including discretionary decisions by certain
governmental officials, can affect the timing of payments and deposits and
therefore can significantly affect the cash amounts reported in a fiscal year.
Under cash-basis accounting, all estimates and projections of State receipts and
disbursements relating to a particular fiscal year are of amounts to be
deposited in or disbursed from the State Treasury during that fiscal year,
regardless of the fiscal period to which particular receipts or disbursements
may otherwise be attributable.
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The State also has an accounting and financial reporting system based
on GAAP and currently formulates a GAAP financial plan. GAAP for governmental
entities requires use of (i) the modified accrual basis of accounting for
governmental and certain fiduciary fund types to measure changes in financial
position, and (ii) the full accrual basis of accounting for public benefit
corporations, college and university funds (except for depreciation on fixed
assets) and certain fiduciary fund types to measure net income. Under modified
accrual procedures, revenues are recorded when they become both measurable and
available to finance expenditures; expenditures are generally recognized and
recorded when the State incurs a liability to pay for goods or services, or
makes a commitment to make State aid payments, regardless of when actually paid.
Financial statements prepared in accordance with GAAP differ in format from the
State's traditional financial statements in that, among other things, they are
prepared on a modified or full accrual basis, whichever is appropriate, rather
than on a cash basis and include a combined balance sheet, reflect a
reorganization of the State's fund structure and report on the activities of all
funds.
State Government Employment
The State has approximately 191,000 full-time equivalent employees
funded from all funds, including part-time and temporary employees but excluding
seasonal, legislative and judicial employees.
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The current size of the State workforce reflects continuing efforts to
streamline operations and improve efficiency. The workforce is now 17.2 percent
smaller than it was eight years ago, when it peaked at 230,600 positions and the
State began its workforce reduction efforts. During the past four fiscal years,
concerted workforce initiatives have resulted in a reduction of about 20,000
positions (more than one half of the overall reduction since 1990), with levels
stabilized in the last fiscal year.
Negotiating units for State employees are defined by the State Public
Employment Relations Board. Collective bargaining negotiations are conducted by
the Governor's Office of Employee Relations except with respect to employees of
the Judiciary, public authorities and the Legislature. Such negotiations include
terms and conditions of employment except grade classification policies and
certain pension benefits. Approximately 93 percent of the State workforce is
unionized. The remainder of the workforce (about 12,000) is designated as
managerial or confidential and is excluded from collective bargaining. In
practice, however, the results of collective bargaining negotiations are
generally applied to all State employees within the executive agencies. The
State is currently preparing for negotiations with various unions to establish
new agreements since most of the existing contracts will expire on March 31,
1999.
Under the State's Taylor Law, the general statute governing public
employee-employer relations in the State, employees are prohibited from
striking. This form of job action against the State last occurred in 1979 by
employees of the Department of Correctional Services.
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State Retirement Systems
General
The New York State and Local Retirement Systems (the Systems) provide
coverage for public employees of the State and its localities (except employees
of New York City and teachers, who are covered by separate plans). The Systems
comprise the New York State and Local Employees Retirement System and the New
York State and Local Police and Fire Retirement System. The Comptroller is the
administrative head of the Systems. State employees made up about 38 percent of
the membership during the 1997-98 fiscal year. There were 2,802 other public
employers participating in the Systems, including all cities (except New York
City), all counties, most towns, villages and school districts (with respect to
nonteaching employees) and a large number of local authorities of the State.
As of March 31, 1998, 582,689 persons were in membership and 284,515
pensioners and beneficiaries were receiving benefits. The State Constitution
considers membership in any State pension or retirement system to be a
contractual relationship, the benefits of which shall not be diminished or
impaired. Members cannot be required to begin making contributions or make
increased contributions beyond what was required when membership began.
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Contributions
Funding is provided in large part by employer and employee
contributions. Employers contribute on the basis of the plan or plans they
provide for members. Members joining since mid-1976, other than police and fire
members, have been required to contribute 3 percent of their salaries.
By law, the State makes its annual payment to the Systems on or before
March 1 for the then current fiscal year ending on March 31 based on an estimate
of the required contribution prepared by the Systems. The Director of the Budget
is authorized to revise and amend the estimate of the Systems' bill for purposes
of preparing the State's budget for a fiscal year. Legislation also provides
that any underpayments by the State (as finally determined by the Systems) must
be paid, with interest at the actuarially assumed interest earnings rate, in the
second fiscal year following the year of the underpayment. Similarly, any
overpayment for a fiscal year serves as a credit against the Systems' estimated
bill for the second fiscal year following the fiscal year in which the
overpayment is made.
During the 1997-98 fiscal year, the State paid the Systems' 1997-98
estimated bill of $288.2 million. The difference between the amounts paid on the
estimated bill and the final bill with interest resulted in an underpayment of
the final bill in the amount of $3.1 million and will be billed on March 1, 2000
($2.9 million if paid on September 1, 1999).
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Assets and Liabilities
Assets are held exclusively for the benefit of members, pensioners and
beneficiaries. Investments for the Systems are made by the Comptroller as
trustee of the Common Retirement Fund, a pooled investment vehicle. The net
assets available for benefits as of March 31, 1998 were $106.3 billion
(including $1.9 billion in receivables). The present value of anticipated
benefits for current members, retirees, and beneficiaries as of March 31, 1998
was $84.8 billion. For current retirees and beneficiaries alone the amount was
$27.6 billion. Under the funding method used by the Systems, the net assets,
plus future actuarially determined contributions, are expected to be sufficient
to pay for the anticipated benefits of current members, retirees and
beneficiaries.
Authorities and Localities
Public Authorities
The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. For the purposes of this Annual Information
Statement, public authorities refer to public benefit corporations, created
pursuant to State law, other than local authorities. 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 and
restrictions set forth in legislative authorization. The State's access to the
public credit markets could be impaired
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and the market price of its outstanding debt may be materially and adversely
affected if any of its public authorities were to default on their respective
obligations, particularly those using the financing techniques referred to as
State-supported or State-related debt under the section entitled "Debt and Other
Financing Activities" in this AIS. As of December 31, 1997, there were 17 public
authorities that had outstanding debt of $100 million or more, and the aggregate
outstanding debt, including refunding bonds, of all State public authorities was
$84 billion, only a portion of which constitutes State-supported or
State-related debt.
The State has numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authorities generally pay their
operating expenses and debt service costs from revenues generated by the
projects they finance or operate, such as tolls charged for the use of highways,
bridges or tunnels, charges for public power, electric and gas utility services,
rentals charged for housing units, and charges for occupancy at medical care
facilities. In addition, State legislation authorizes several financing
techniques for public authorities that are described under the section entitled
"Debt and Other Financing Activities," above. 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, the affected localities may seek additional State
assistance if local assistance payments are diverted. Some authorities also
receive moneys from State
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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 provide
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 portion of
Queens 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 solely by
ratepayer charges. LIPA's debt is not considered either State-supported or
State-related debt.
Metropolitan Transportation Authority
The MTA oversees the operation of subway and bus lines in New York City
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 services in the New York metropolitan
area through the 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 (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 on, and will continue to depend on, operating
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support from the State, local governments and TBTA, including loans, grants and
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. Since 1987, State law also has required that the proceeds of a
one-quarter of 1 percent mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region be deposited in a special MTA fund for
operating or capital expenses. In 1993, the State dedicated a portion of certain
additional State petroleum business tax receipts to fund operating or capital
assistance to the MTA. For the 1998-99 fiscal year, State assistance to the MTA
is projected to total approximately $1.3 billion, an increase of $133 million
over the 1997-98 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 the $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 (CPRB) approved the 1995-99 Capital Program (subsequently
amended in August 1997), which supersedes the overlapping
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portion of the MTA's 1992-96 Capital Program. The 1995-99 Capital Program 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 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.
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 Capital
Program, 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 Capital
Program accordingly. If the 1995-99 Capital Program is 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.
The City of New York
The fiscal health of the State may also be affected by the fiscal
health of New York City (City), which continues to receive significant financial
assistance from the State. State aid
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contributes to the City's ability to balance its budget and meet its cash
requirements. The State may also be affected by the ability of the City and
certain entities issuing debt for the benefit of the City to market their
securities successfully in the public credit markets.
The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan (Financial Plan) annually and updates
it periodically, and prepares a comprehensive annual financial report describing
its most recent fiscal year each October. For current information on the City's
Financial Plan and its most recent financial disclosure, contact the Office of
the Comptroller, Municipal Building, Room 517, One Centre Street, New York, NY
10007, Attention: Deputy Comptroller for Public Finance.
Fiscal Oversight
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
(NYC MAC) to provide financing assistance to the City; the New York State
Financial Control Board (the Control Board) to oversee the City's financial
affairs; and 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. A "control period" existed from 1975 to 1986, during which the
City was subject to certain statutorily-prescribed fiscal controls. The Control
Board terminated the control period in 1986 when certain statutory
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conditions were met. State law requires the Control Board to reimpose a control
period 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 or impaired access to the public credit
markets.
Currently, the City and its Covered Organizations (i.e., those
organizations which receive or may receive moneys from the City directly,
indirectly or contingently) operate under the Financial Plan. The City's
Financial Plan summarizes its 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 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 1997, the State created the New York City Transitional Finance Authority
(TFA) to finance a portion of the City's capital program because the City was
approaching its State Constitutional general debt limit. Without the additional
financing capacity of the TFA, projected contracts for City capital projects
would have exceeded the City's debt limit during City fiscal year 1997-98.
Despite this additional financing mechanism, the City
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currently projects that, if no further action is taken, it will reach its debt
limit in City fiscal year 1999-2000. On June 2, 1997, an action was commenced
seeking a declaratory judgment declaring the legislation establishing the TFA to
be unconstitutional. On November 25, 1997 the State Supreme Court found the
legislation establishing the TFA to be constitutional and granted the
defendants' motion for summary judgment. The plaintiffs have appealed the
decision. Future developments concerning the City or entities issuing debt for
the benefit of the City, and public discussion of such developments, as well as
prevailing market conditions and securities credit ratings, may affect the
ability or cost to sell securities issued by the City or such entities and may
also affect the market for their outstanding securities.
Monitoring Agencies
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 the 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 generated a substantial surplus for the City in City fiscal year 1996-97.
Recent staff reports also indicate that the City projects a substantial surplus
for City fiscal year 1997-98. Although several sectors of the City's economy
have expanded recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the continued
profitability of the securities industries
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and the course of the national economy. 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 tends to rely 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. Copies of the most
recent staff reports by the Control Board, OSDC, City Comptroller, and IBO are
available by contacting the Control Board at 270 Broadway, 21st Floor, New York,
NY 10007, Attention: Executive Director, OSDC at 270 Broadway, 23rd Floor, New
York, NY 10007, Attention: Deputy Comptroller; the City Comptroller at Municipal
Building, Room 517, One Centre Street, New York, NY 10007, Attention: Deputy
Comptroller for Public Finance; and the IBO at 110 William Street, 14th Floor,
New York, NY 10038, Attention: Director.
Other Localities
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional oversight or
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financial assistance is not included in the projections of the State's receipts
and disbursements for the State's 1998-99 fiscal year.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. Both of these
emergency aid packages were largely continued through the 1998-99 budget. The
State also dispersed an additional $21 million among all cities, towns and
villages after enacting a 3.9 percent increase in General Purpose State Aid in
1997-98 and continued this increase in 1998-99.
The 1998-99 budget includes an additional $29.4 million in unrestricted
aid targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
The appropriation and allocation of general purpose local government
aid among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
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established to study the distribution and amounts of general purpose local
government aid and recommend a new formula by June 30, 1999, which may change
the way aid is allocated.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1996, the total indebtedness of all
localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.
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 and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial
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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
General
The legal proceedings listed below involve State finances and programs
and miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1998-99
fiscal year or thereafter. The State will describe newly initiated proceedings
which the State believes to be material, as well as any material and adverse
developments in the listed proceedings, in updates or supplements to the Annual
Information Statement.
As of the date of this AIS, except as described below, no current
litigation involves the State's authority, as a matter of law, to contract
indebtedness, issue its obligations, or pay such indebtedness when due, or
affects the State's power or ability, as a matter of law, to impose or collect
significant amounts of taxes and revenues.
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The State is party to other claims and litigation which its legal
counsel has advised are not probable of adverse court decisions or are not
deemed adverse and material. Although the amounts of potential losses resulting
from this litigation, if any, are not presently determinable, it is the State's
opinion that its ultimate liability in these cases is not expected to have a
material and adverse effect on the State's financial position in the 1998-99
fiscal year or thereafter.
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 1998-99 Financial Plan. The State believes that the
proposed 1998-99 Financial Plan includes sufficient reserves to offset the costs
associated with the payment of judgments that may be required during the 1998-99
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
1998-99 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 1998-99 Financial Plan
resources available for the payment of judgments, and could therefore affect the
ability of the State to maintain a balanced 1998-99 Financial Plan.
With respect to pending and threatened litigation, the State has
reported liabilities of $872 million for awarded and anticipated unfavorable
judgments, of which $90 million is expected to
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be paid within the 1998-99 fiscal year. The remainder, $782 million, is reported
as a long-term obligation of the State and represents an increase of $552
million from the prior year.
State Finance Policies
Insurance Law
Proceedings have been brought by two groups of petitioners challenging
regulations promulgated by the Superintendent of Insurance that established
excess medical malpractice premium rates for fiscal years 1986-87 through
1996-97 (New York State Health Maintenance Organization Conference, Inc., et al
v. Muhl, et al. ["HMO"], and New York State Conference of Blue Cross and Blue
Shield Plans, et al. v. Muhl, et al. ["Blue Cross 'I' and CII'"], Supreme Court,
Albany County). By order filed January 22, 1997, the Court in Blue Cross I
permitted the plaintiffs in HMO to intervene and dismissed the challenges to the
rates for the period prior to 1995-96. By decision dated July 24, 1997, the
Court in Blue Cross I held that the determination made by the Superintendent in
establishing the 1995-96 rate was arbitrary and capricious and directed that
premiums paid pursuant to that determination be returned to the payors. The
State has appealed this decision. The petitioners did not cross appeal. In Blue
Cross II, by amended judgment dated April 2, 1998, the Supreme Court annulled
the regulation setting the 1996-97 premium rate and directed that all 1996-97
excess malpractice premiums be returned to the payors. The State will not be
obligated in either case to pay moneys to any petitioner. Adverse determinations
would result in refunds from the affected insurers.
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Tax Law
In New York Association of Convenience Stores, el al. v. Urbach, et
al., petitioners, New York Association of Convenience Stores, National
Association of Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek
Stores, Inc. seek to compel respondents, the Commissioner of Taxation and
Finance and the Department of Taxation and Finance, to enforce sales and excise
taxes imposed pursuant to Tax Law Articles 12-A, 20 and 28 on tobacco products
and motor fuel sold to non-Indian consumers on Indian reservations. In orders
dated August 13, 1996 and August 24, 1996, the Supreme Court, Albany County,
ordered, inter alia, that there be equal implementation and enforcement of said
taxes for sales to non-Indian consumers on and off Indian reservations, and
further ordered that, if respondents failed to comply within 120 days, no
tobacco products or motor fuel could be introduced onto Indian reservations
other than for Indian consumption or, alternately, the collection and
enforcement of such taxes would be suspended statewide. Respondents appealed to
the Appellate Division, Third Department, and invoked CPLR 5519(a)(1), which
provides that the taking of the appeal stayed all proceedings to enforce the
orders pending the appeal. Petitioner's motion to vacate the stay was denied. In
a decision entered May 8, 1997, the Third Department modified the orders by
deleting the portion thereof that provided for the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco products. The Third Department held, inter alia, that petitioners had
not sought such relief in their petition and that it was an error for the
Supreme Court to have awarded such undemanded relief without adequate notice of
its intent to do so. On May 22, 1997, respondents appealed to the Court of
Appeals on other grounds, and
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again invoked the statutory stay. On October 23, 1997, the Court of Appeals
granted petitioners' motion for leave to cross-appeal from the portion of the
Third Department's decision that deleted the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco. The case was argued before the Court of Appeals on March 24, 1998. On
July 9, 1998, the New York Court of Appeals reversed the order of the Appellate
Division, Third Department, and remanded the matter to the Supreme Court, Albany
County, for further proceedings. The Court held that the petitioners had
standing to assert an equal protection claim, but that their claim did not
implicate racial discrimination. The Court remanded the case to Supreme Court,
Albany County, for resolution of the question of whether there was a rational
basis for the Tax Department's policy of non-enforcement of the sales and excise
taxes on reservation sales of cigarettes and motor fuel to non-Indians. In a
footnote, the Court stated that, in view of its disposition of the case,
petitioners' cross-appeal regarding the statewide suspension of the taxes is
"academic."
Clean Water/Clean Air Bond Act of 1996
In Robert L. Schulz, et al. v. The New York State Executive, et al.
(Supreme Court, Albany County, commenced October 16, 1996), plaintiffs challenge
the enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
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law for some single work or purpose distinctly specified therein and forbidding
incorporation of other statutes by reference.
In an opinion dated June 9, 1998, the Court of Appeals affirmed the
July 17, 1997 order of the Appellate Division, Third Department, affirming the
lower court dismissal of this case. On September 9, 1998, plaintiff sought
review of this decision from the United States Supreme Court. On November 2,
1998, the United States Supreme Court denied certiorari.
Line Item Veto
In an action commenced in June 1998 by the Speaker of the Assembly of
the State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998.
State Programs
Medicaid
Several cases challenge provisions of Chapter 81 of the Laws of 1995
which alter the nursing home Medicaid reimbursement methodology on and after
April 1, 1995. Included are
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New York State Health Facilities Association, et al. v. DeBuono, el al., St.
Luke's Nursing Center, el al. v. DeBuono, et al., New York Association of Homes
and Services for the Aging v DeBuono et al (three cases), Healthcare Association
of New York State v. DeBuono and Bayberry Nursing Home et al. v. Pataki, et al.
Plaintiffs allege that the changes in methodology have been adopted in violation
of procedural and substantive requirements of State and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and
home health care providers and organizations challenge promulgation by the State
Department of Social Services (DSS) in June 1992 of a home assessment resource
review instrument (HARRI), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).
In several cases, plaintiffs seek retroactive claims for reimbursement
for services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E. F. S. Medical
Supplies v. Dowling Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric
Medical Association v. Wing and New York State Psychiatric Association v. Wing.
These cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time-barred. In a judgment dated September 5,
1996, the Supreme Court, Albany
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County, dismissed Matter of New York State Radiological Society v. Wing as
time-barred. By order dated November 26, 1997, the Appellate Division, Third
Department, affirmed that judgment. By decision dated June 9, 1998, the Court of
Appeals denied leave to appeal. The time in which to seek further review has
expired in the latter case. By decision and order dated December 15, 1998, the
Appellate Division, First Department dismissed Appel v. Wing, E.F.S. Medical
Supplies v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric
Medical Association v. Wing and New York Psychiatric Association v. Wing as time
barred.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law ss. 2807-d, which imposes a tax on the gross receipts hospitals and
residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public Health Law ss.ss. 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997 enforced
the terms of the decision. The State has appealed that order. By decision and
order dated August 31, 1998, the Appellate Division, Second Department, affirmed
that order. On September 30, 1998, the State moved for re-argument or, in the
alternative, for a certified question for the Court of Appeals to review. By
order dated January 7, 1999 the motion was denied. A final order was entered in
Supreme Court on January 26, 1999. The time for the State to appeal from the
January 26, 1999 order has not yet expired.
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Shelter Allowance
In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing. In a decision dated April 16,
1997, the Court held that the shelter allowance promulgated by the Legislature
and enforced through DSS regulations is not reasonably related to the cost of
rental housing in New York City and results in homelessness to families in New
York City. A judgment was entered on July 25, 1997, directing, inter alia, that
the State (i) submit a proposed schedule of shelter allowances (for the Aid to
Dependent Children program and any successor program) that bears a reasonable
relation to the cost of housing in New York City; and (ii) compel the New York
City Department of Social Services to pay plaintiffs a monthly shelter allowance
in the full amount of their contract rents, provided they continue to meet the
eligibility requirements for public assistance, until such time as a lawful
shelter allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State has appealed to the Appellate Division,
First Department from each and every provision of this judgment except that
portion directing the continued provision of interim relief.
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Civil Rights Claims
In an action commenced in 1980 (United States, et al. v. Yonkers Board
of Education, et al.), the United States District Court for the Southern
District of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to develop
and comply with a remedial educational improvement plan (EIP I). On January 19,
1989, the District Court granted motions by Yonkers and the NAACP to add the
State Education Department, the Yonkers Board of Education, and the State Urban
Development Corporation as defendants, based on allegations that they had
participated in the perpetuation of the segregated school system. On August 30,
1993, the District Court found that vestiges of a dual school system continued
to exist in Yonkers. On March 27, 1995, the District Court made factual findings
regarding the role of the State and the other State defendants (the State) in
connection with the creation and maintenance of the dual school system, but
found no legal basis for imposing liability. On September 3, 1996, the United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC ss. 1983 and the
Equal Educational Opportunity Act, 20 USC ss.ss. 1701, et seq., for the unlawful
dual school system, because the State, inter alia, had taken no action to force
the school district to desegregate despite its actual or constructive knowledge
of de jure segregation. By order dated October 8, 1997, the District Court held
that vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed
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educational improvement plan (EIP II) to eradicate these vestiges of
segregation. The October 8, 1997 order of the District Court ordered that EIP II
be implemented and directed that, within 10 days of the entry of the Order, the
State make available to Yonkers $450,000 to support planning activities to
prepare the EIP II budget for 1997-98 and the accompanying capital facilities
plan. A final judgment to implement EIP II was entered on October 14, 1997. On
November 7, 1997, the State appealed that judgment to the Second Circuit. The
appeal is pending. Additionally, the Court adopted a requirement that the State
pay to Yonkers approximately $9.85 million as its pro rata share of the funding
of EIP I for the 1996-97 school year. The requirement for State funding of EIP I
was reduced to an order on December 2, 1997 and reduced to a judgment on
February 10, 1998. The State appealed that order to the Second Circuit on
December 31, 1997 and amended the notice of appeal after entry of the judgment.
That appeal has been consolidated with the appeal of the EIP II appeal, and is
also pending.
On June 15, 1998, the District Court issued an opinion setting forth
the formula for the allocation of the costs of EIP I and EIP II between the
State and the City for the school years 1997-98 through 2005-06. That opinion
has not yet been reduced to an order.
Line Item Veto
In an action commenced in June 1998 by the Speaker of the Assembly of
the State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line
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item veto authority to certain portions of budget bills adopted by the State
Legislature contained in Chapters 56, 57 and 58 of the Laws of 1998. On July 10,
1998, the State filed a motion to dismiss this action. By order entered January
7, 1999, the court denied the State's motion to dismiss. On January 27, 1999,
the State appealed that order.
Real Property Claims
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County
of Oneida, the United States Supreme Court affirmed a judgment of the United
States Court of Appeals for the Second Circuit holding that the Oneida Indians
have a common-law right of action against Madison and Oneida Counties for
wrongful possession of 872 acres of land illegally sold to the State in 1795. At
the same time, however, the Court reversed the Second Circuit by holding that a
third-party claim by the counties against the State for indemnification was not
properly before the federal courts. The case was remanded to the District Court
for an assessment of damages, which action is still pending. The counties may
still seek indemnification in the State courts.
In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims for
250,000 acres, to add the State as a defendant, and to certify a class made up
of all individuals who currently purport to hold title within said 250,000 acre
area. These motions are returnable March 29, 1999.
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Several other actions involving Indian claims to land in upstate New
York are also pending. Included are Cayuga Indian Nation of New York v. Cuomo,
et al., and Canadian St. Regis Band of Mohawk Indians, et al. v State of New
York et al., both in the United States District Court for the Northern District
of New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions but may
enhance others.
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Exhibit A to Annual Information Statement
Glossary of Financial Terms
The following glossary, which is an integral part of this Annual
Information Statement, includes certain terms that are used herein and are
intended for use only in connection with the entire Annual Information
Statement.
Appropriation: An appropriation is a statutory authorization against
which liabilities may be incurred during a specific year, and from which
disbursements may be made, up to a stated amount, for the purposes designated.
Appropriations generally are authorizations, rather than mandates, to spend, and
disbursements from an appropriation need not, and generally do not, equal the
amount of the appropriation. An appropriation represents maximum spending
authority. Appropriations may be adopted at any time during the fiscal year.
Bond Anticipation Note or BANs: A bond anticipation note is a
short-term obligation, the principal of which is paid from the proceeds of the
bonds in anticipation of which such note is issued.
Capital Projects Funds: Capital Projects Funds, one of the four
GAAP-defined governmental fund types, account for financial resources of the
State to be used for the
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acquisition or construction of major capital facilities (other than those
financed by Special Revenue Funds, Proprietary Funds and Fiduciary Funds).
Cash Basis Accounting: Accounting, budgeting and reporting of financial
activity on a cash basis results in the recording of receipts at the time money
or checks are deposited in the State Treasury and the recording of disbursements
at the time a check is drawn, regardless of the fiscal period to which the
receipts or disbursements relate.
Certificates of Participation or COPs: Certificates of Participation
represent proportionate interests in certain lease payments made by the State
with respect to equipment or real property of the departments and agencies of
the State. Such lease payments are subject to annual appropriation by the
Legislature and the availability of money to the State for making such payments.
College and University Funds: College and University Funds account for
the operations of both the State University of New York and the senior colleges
of the City University of New York, including the research foundations,
endowment loan fund and capital and debt related activity.
Community Projects Fund or CRF: The State created this fund within the
General Fund in 1996 to fund certain community projects for the Legislature and
the Governor. The State
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transfers moneys from other General Fund accounts into the CPF, as provided by
law. Spending out of the CPF is governed by specific appropriations for each
account in the Fund.
Contingency Reserve Fund or CRF: This fund was established in 1993 to
assist the State in financing the costs of any extraordinary known or
anticipated litigation. Deposits to this fund are made from the General Fund.
Contractual-Obligation Financing: Contractual-obligation financing is
an arrangement pursuant to which the State makes periodic payments to a public
benefit corporation under a contract having a term not less than the
amortization period of debt obligations issued by the public benefit corporation
in connection with such contract. Payments made by the State are used to pay
debt service on such obligations and are subject to annual appropriation by the
Legislature and the availability of moneys to the State for the purposes of
making contractual payments.
Debt Reduction Reserve Fund or DRRF: The State created the DRRF in 1998
to accumulate surplus revenues to pay debt service costs on State-supported
bonds and to retire or defease such bonds. The State will make deposits to the
DRRF from the General Fund. Use of reserve funds requires an appropriation.
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Debt Service: Debt service refers to the payment of principal of and
interest on bonds, and interest on bond anticipation notes and tax and revenue
anticipation notes, in accordance with the respective terms thereof.
Debt Service Funds: Debt Service Funds, one of the four GAAP-defined
governmental fund types, account for the accumulation of resources (including
receipts from certain taxes, transfers from other funds and miscellaneous
revenues, such as dormitory room rental fees, which are dedicated by statute for
payment of lease-purchase rentals) for the payment of general long-term debt
service and related costs and payments under lease-purchase and
contractual-obligation financing arrangements.
Deficiency Budget: A deficiency budget provides for appropriations to
meet actual or anticipated obligations in excess of available appropriations or
for needs not foreseen when the original or supplemental budgets were adopted. A
deficiency budget is usually introduced near the end of the fiscal year to which
it relates.
Disbursement: A disbursement is a cash outlay and includes transfers to
other funds.
Executive Budget: The Executive Budget is the Governor's
constitutionally mandated annual submission to the Legislature which contains
his recommended program for the forthcoming fiscal year. The Executive Budget is
an overall plan of recommended appropriations. It projects disbursements and
expenditures needed to carry out the Governor's
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recommended program and receipts and revenues expected to be available for such
purpose. The recommendations contained in the Executive Budget serve as the
basis for the State Financial Plan (defined below) which is adjusted after the
Legislature acts on the Governor's submission. Under the State Constitution, the
Governor is required each year to propose an Executive Budget that is balanced
on a cash basis.
Expenditure: An expenditure, in GAAP terminology, is a decrease in net
financial resources as measured under the modified accrual basis of accounting.
In contexts other than GAAP, the State uses the term expenditure to refer to a
cash outlay or disbursement.
Fiduciary Funds: Fiduciary Funds refers to a GAAP-defined fund type
which accounts for assets held by the State in a trustee capacity or as agent
for individuals, private organizations and other governmental units and/or other
funds. These funds are custodial in nature and do not involve the measurement of
operations. Although the Executive Budget for a fiscal year generally contains
operating plans for Fiduciary Funds, and their results are included in the
Comptroller's GAAP-based financial statements, they are not included in the
State Financial Plan.
Fiscal Year: The State's fiscal year commences on April 1 and ends on
March 31. The term fiscal year refers to the fiscal year of the State unless the
context clearly indicates otherwise.
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Fund Accounting: The accounts of the State are presented on the basis
of GAAP funds and account groups, each of which is considered a separate
accounting entity. The operations of each fund are accounted for with a separate
set of self-balancing accounts that comprise the fund's assets, liabilities,
fund equity, revenues, and expenditures, or expenses, as appropriate. Government
resources are allocated to and accounted for in individual funds based upon the
purposes for which they are to be spent and the means by which spending
activities are controlled.
GAAP: GAAP refers to generally accepted accounting principles for state
and local governments, which are the uniform minimum standards of and guidelines
for financial accounting and reporting prescribed by the Governmental Accounting
Standards Board. GAAP requires fund accounting for all government resources and
the modified accrual basis of accounting for measuring the financial position
and changes therein of governmental funds. The modified accrual basis of
accounting recognizes revenues when they become measurable and available to
finance expenditures, and expenditures when a liability to pay for goods or
services is incurred or a commitment to make aid payments is made, regardless of
when actually paid.
General Fund: The General Fund, one of the four GAAP-defined
governmental fund types, is the major operating fund of the State and receives
all receipts that are not required by law to be deposited in another fund,
including most State tax receipts and certain fees, transfers from other funds
and miscellaneous receipts from other sources.
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Governmental Funds: Governmental funds refers to a category of
GAAP-defined funds which account for most governmental functions and which, for
the State, include four GAAP-defined governmental fund types: the General Fund,
Special Revenue Funds, Debt Service Funds, and Capital Projects Funds. The
State's projections of receipts and disbursements in the governmental funds
comprise the State Financial Plan.
Interfund Transfers: Under GAAP fund accounting principles, each fund
is treated as a separate fiscal and accounting unit with limitations on the
kinds of disbursements to be made. To comply with these limitations, moneys are
moved from one fund to another to make them available for use in the proper
fund, and are accounted for as "interfund transfers."
Lease-Purchase Financing: Lease-purchase financing is an arrangement
pursuant to which the State leases facilities from a public benefit corporation
or municipality for a term not less than the amortization period of the debt
obligations issued by the public benefit corporation or municipality to finance
acquisition and construction, and pays rent which is used to pay debt service on
the obligations. At the expiration of the lease, title to the facility vests in
the State in most cases. Generally the State's rental payments are expressly
subject to annual appropriation by the Legislature and availability of moneys to
the State for the purposes thereof.
Moral Obligation Financing: Moral obligation financing is an
arrangement pursuant to which the State provides, by statute, that it will pay
such money as may be required to make up
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any deficiency in a debt service reserve fund established to assure payment of
designated bonds. Moral obligation payments are subject to appropriation by the
Legislature.
Receipts: Receipts consist of cash actually received during the fiscal
year and include transfers from other funds.
Revenue Accumulation Fund: This fund holds certain tax receipts
temporarily before their deposit into other funds.
Revenues: Revenues, in GAAP terminology, are an increase in net
financial resources, as measured for governmental funds under the modified
accrual basis of accounting. In contexts other than GAAP, the State uses the
term revenues to refer to income or receipts.
Short-Term Investment Pool or STIP: The combination of available cash
balances in funds within the State Treasury on a daily basis for investment
purposes.
Special Revenue Funds: Special Revenue Funds, one of the four
GAAP-defined governmental fund types, account for the proceeds of specific
revenue sources (other than expendable trusts or major capital projects), such
as federal grants, that are legally restricted to specified purposes.
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State Financial Plan: The State Financial Plan sets forth projections
of State receipts and disbursements in the governmental fund types for each
fiscal year and is prepared by the Director of the Budget based initially upon
the recommendations contained in the Executive Budget. After the budget is
enacted, the State Financial Plan is adjusted to reflect revenue measures,
appropriation bills and certain related bills enacted by the Legislature. It
serves as the basis for the administration of the State's finances by the
Director of the Budget, and is updated quarterly, or more frequently as
necessary, during the fiscal year.
State Funds: State funds refers to a category of funds which includes
the General Fund and all other State controlled moneys, excluding federal
grants. This category captures all governmental disbursements except spending
financed with federal grants.
Supplemental Budget: A supplemental budget provides additional
appropriations for the support of government made after adoption of the budget
for the fiscal year. Under the State Constitution, the Governor may, with the
consent of the Legislature, submit supplemental appropriations bills at any time
before the close of a legislative session.
Tax and Revenue Anticipation Notes or TRANS: Notes issued in
anticipation of the receipt of taxes and revenues, direct or indirect for the
purposes and within the amounts of appropriations theretofore made.
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Tax Refund Reserve Account: The tax refund reserve account is used to
hold moneys available to pay tax refunds. During a given fiscal year, the
deposit of moneys in the account reduces receipts and the withdrawal of moneys
from the account increases receipts. There is no requirement that moneys
withdrawn from this account be replaced.
Tax Stabilization Reserve Fund or TSRF: This fund was created to hold
surplus revenue that can be used in the event of any unanticipated General Fund
deficit. Amounts within this fund can be borrowed to cover any year-end deficit
and must be repaid within six years in no less than three equal annual
installments. The fund balance cannot exceed two percent of General Fund
disbursements for the fiscal year; contributions are limited to two-tenths of
one percent of General Fund disbursements in that year.
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Exhibit B to Annual Information Statement
Principal State Taxes and Fees
Personal income taxes are imposed on the New York income of
individuals, estates and trusts. Personal income taxes will account for 56
percent of estimated General Fund receipts during the State's 1998-99 fiscal
year. The State tax adheres closely to the definitions of adjusted gross income
and itemized deductions used for federal personal income tax purposes, with
certain modifications. Legislation enacted in 1991 phased out the benefit of
graduated income tax tables for taxpayers with adjusted gross income above
$100,000. A State earned income tax credit is allowed at 20 percent of the
federal credit. Under legislation enacted in 1995 the top tax rate fell to
7.59375 percent for the 1995 tax year, 7.125 percent for the 1996 tax year, and
6.85 percent for the 1997 tax year and thereafter, and the standard deduction
was increased over the same period. Legislation in 1998 accelerated the credit
available to farmers for property taxes, excluded certain income recovered by
holocaust victims, and increased the dependent care credit for those with
incomes under $50,000 beginning in 1999.
User taxes and fees consist of several taxes on consumption, the
largest of which is the State sales and use tax. The sales and use tax applies
to the sale or use within the State of most tangible personal property,
commercial and industrial utility service billings, charges for meals, hotel and
motel occupancy and admission charges, as well as certain services. The State
sales tax rate is 4 percent. Of the 4 percent tax rate, 3 percent is deposited
in the General Fund and
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1 percent is deposited to the Local Government Assistance Tax Fund to meet debt
service requirements on Local Government Assistance Corporation bonds. Receipts
in excess of debt service requirements are transferred back to the General Fund.
Under legislation enacted in 1996, clothing was exempted from the State
sales and use tax for a one week period in January 1997. Other 1996 legislation
exempted receipts of parking facilities owned and operated by municipalities and
local parking authorities, eliminated the sales tax on certain vessels and
aircraft, and eliminated the sales tax on certain printed promotional materials
delivered in New York.
Legislation enacted in 1997 exempted clothing costing less than $100
from the State's 4 percent sales tax for the weeks of September first through
the seventh in 1997 and 1998 and will make the exemption permanent on December
1, 1999. Beginning September 1, 1997 the law exempted from the sales tax
automotive emissions testing equipment required for tests mandated by the
Federal Clean Air Act. In addition, on December 1, 1997 the sales tax was
eliminated on: bulk sales costing less than 50 cents made through vending
machines; coin operated photocopying; coin operated carwashes; purchase of
charter busses; and repair and maintenance of those busses; hot beverages sold
through vending machines and food and drink sold through vending machines that
would be exempt if sold in a retail store; coin dispensed luggage carts; wine
consumed at a wine tasting; admissions to live circuses; and parking services
provided by homeowners associations, including condominium and co-op
shareholders. The legislation also extended for five years the current exemption
from the sales tax of the incremental cost of an
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alternative fuel vehicle and adds an exemption for receipts from the sale of the
service of installing alternative fuel vehicle refueling property and receipts
from the retail sale of such property. Finally, the legislation provided that on
March 1, 1999 the amount sales tax vendors are allowed keep for their sales tax
collection services is increased from 1.5 percent of their sales tax liability
not to exceed $100 per quarter to 3.5 percent of their sales tax liability not
to exceed $150 per quarter.
Legislation in 1998 increased the existing sales tax exemption
threshold for clothing in the September 1, 1998 through September 7, 1998 week
from $100 to $500 and added footwear to the list of items exempt. The
legislation also added an eight-day exemption period for such items from January
17, 1999 through January 23, 1999 and made clothing and footwear costing $110 or
less permanently exempt on December 1, 1999. Other initiatives in the
legislation exempted computer system hardware used to develop computer software
for sale, telecommunications central office equipment, coin operated phone
charges of less than 25 cents and college textbooks.
The State imposes a tax on cigarettes at the rate of 56 cents per
package of twenty cigarettes and imposes a tax on other tobacco products equal
to 20 percent of the wholesale price of such products. The tax rate on
cigarettes was raised from 39 to 56 cents and the tax rate on tobacco products
other than cigarettes was increased from 15 percent to 20 percent in 1993.
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Motor fuel and diesel motor fuel taxes are levied at eight cents per
gallon upon the sale, generally for highway use, of gasoline and diesel fuel.
The diesel fuel tax was reduced to eight cents per gallon on January 1, 1996.
Approximately two-thirds of the proceeds of the motor fuel and diesel motor fuel
taxes are earmarked for special funds, and the General Fund receives gasoline
tax revenues attributable to two and one-quarter cents per gallon and diesel
fuel tax revenues attributable to six and one-quarter cents per gallon.
Motor vehicle fees are derived from a variety of sources, including
motor vehicle registration fees and driver licensing fees, which together
account for most motor vehicle fee revenue. From April 1, 1993 to December 31,
1994, 13 percent of registration fee receipts were earmarked to the Dedicated
Highway and Bridge Trust Fund. On January 1, 1995, this percentage rose to 17
percent and on January 1,1996 (and thereafter) to 20 percent of such receipts.
Legislation enacted in 1997 provided for five-year licenses instead of four-year
licenses, and for the retention of refunds. Legislation enacted in 1998 reduced
motor vehicle registration fees by 25 percent and re-instituted the prior refund
policy and increased the percent of such fees earmarked to the Dedicated Highway
and Bridge Trust Fund to 28 percent on April 1, 1998, 34 percent on July 1, 1998
and to 45.5 percent on February 1, 1999.
The State imposes alcoholic beverage excise taxes at various rates on
liquor, beer, wine and specialty beverages. Separate licensing fees are imposed
on those who sell alcoholic beverages in New York. The fees vary depending on
the type and location of the establishment or premises operated by the licensee,
as well as the class of beverage for which the license is
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issued. Legislation enacted in 1998 reduced the excise tax on beer from 16 cents
per gallon to 13.5 cents per gallon.
The highway use tax revenue is derived from three sources: the truck
mileage tax, related highway use permit fees and the fuel use tax. The truck
mileage tax is levied on commercial vehicles, at rates graduated by vehicle
weight, based on miles traveled on State highways. Legislation enacted in 1998
will cut the truck mileage tax by 25 percent beginning in January 1999. Highway
use permits are issued triennially at $15 for an initial permit and $4 for a
permit renewal. The fuel use tax is an equitable compliment to the State's motor
fuel tax and sales tax paid by those who purchase fuel in New York. It is levied
on commercial vehicles having three or more axles or a gross vehicle weight of
more than 26,000 pounds. Currently all collections from the highway use tax are
deposited in the Dedicated Highway and Bridge Trust Fund.
The State reduced its tax on non-refillable soda containers from two
cents to one cent as of December 1, 1995. Legislation enacted in 1997 repeals
the remaining 1 cent tax on non-refillable beverage containers on October 1,
1998.
The State imposes a 5 percent auto rental tax on charges for any rental
of passenger cars rented or used in the State, subject to certain exceptions
including leases covering a period of one year or more.
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Business taxes include a general business corporation franchise tax as
well as specialized franchise taxes on banks, insurance companies, utilities and
certain transportation and transmission companies, and a cents per-gallon-based
levy on businesses engaged in the sale or importation for sale of various
petroleum products. During the State's 1991-92, 1992-93, and 1993-94 fiscal
years, business taxes were generally subject to a 15 percent surcharge.
Beginning in 1994 the surcharge was phased out over a three-year period and has
been eliminated since July 1, 1997.
The corporation franchise tax is the largest of the business taxes, and
the State's third largest source of revenue. It is imposed on all domestic
general business corporations and foreign general business corporations which do
business or conduct certain other activities in the State. The tax is imposed,
generally, at a rate of 9 percent of taxable income allocated to New York and at
a rate as low as 8 percent for small businesses. Taxable income is defined as
federal taxable income with certain modifications.
Legislation enacted in 1998 reduces the general business tax rate from
9 percent to 7.5 percent in three steps beginning in 1999; reduced the corporate
alternative minimum tax rate from 3.5 percent to 3 percent in two steps
beginning in 1998; reduced the fixed dollar minimum corporate tax for most small
businesses from $325 to $100 beginning in 1998; reduced the tax rate applied to
Subchapter S corporations by 40 percent or more beginning in 1998; adopted an
investment tax credit for investment in securities trading infrastructure and
institutes tax benefits for investments and employment in emerging technology
companies.
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The franchise taxes on public utilities and certain other transmission
and transportation companies are the second largest source of receipts among the
business taxes. These consist of various franchise taxes imposed on public
utilities, including taxes on the utilities' issued stock and taxes on
utilities' intrastate gross earnings and gross income.
Legislation enacted in 1996 provided that as of January 1, 1997, the
franchise tax rate imposed on truckers and railroads was reduced from .75
percent to .6 percent of gross earnings. As of January 1, 1998 truckers and
railroads were allowed to choose between taxation under this tax or taxation
under the general business corporation tax.
Legislation enacted in 1997 reduced the 3.5 percent gross receipts tax
imposed upon gas, electric, and telephone service to 3.25 percent on October 1,
1998 and then to 2.5 percent on January 1, 2000. Local telephone companies and
other franchise taxpayers will realize an additional rate cut of .375 percent in
their franchise tax on July 1, 2000. Also, the franchise tax on trucking and
railroads will be reduced on July 1, 2000 from .6 percent to .375 percent.
Additional 1997 legislation established the Power for Jobs program which made
400 megawatts of low cost power available for job creation and expansion with
the utilities recouping their losses through a tax credit. Legislation enacted
in 1998 expands to 450 megawatts and accelerates the phase-in of the Power for
Jobs program.
Insurance taxes are imposed on insurance corporations, brokers and
certain insurers at a basic rate of 9 percent of entire net income allocable to
New York, based on the level of
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activity of an insurance company in the State during the taxable year. In
addition, there is a franchise tax on net premiums written or received by
insurance corporations on risks resident or located within the State, at rates
between 0.8 percent and 1.3 percent, depending on policy type, as well as
certain taxes imposed under the Insurance law. Legislation enacted in 1997
provided that on or after January 1, 1998 the overall limit on the combined
taxes of 2.6 percent of premiums is reduced, for life insurance companies, to
2.0 percent and the gross premiums tax on such components is decreased from .8
percent to .7 percent. Also, the legislation provides preferential premium tax
rates to captive insurance companies that insure the primary risks of their
parent and affiliated companies.
The State imposes a franchise tax on banking corporations at a basic
tax rate of 9 percent of entire net income with certain exclusions, and subject
to special rates for institutions with low net worth. The 9 percent rate
represents a reduction from the rate of 12 percent that was in effect until
1985, when the bank tax was restructured. The 1985 changes were extended through
taxable years beginning before January 1, 2001. Legislation enacted in 1997
allows banks a net operating loss deduction which can be carried forward against
the bank franchise tax. This applies to NOL's sustained on or after January 1,
2001. The legislation also allows banks to form Subchapter S corporations which
will exempt them from taxation under the bank tax and allow the same tax
treatment as other Subchapter S subsidiaries. 1998 legislation authorizes an
investment tax credit for the purchase of tangible personal property used in a
bank's normal course of business as a broker or dealer in connection with the
purchase or sale of stocks or bonds.
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The State imposes a petroleum businesses tax on the privilege of
operating a petroleum business in the State. It is measured by the quantity of
various petroleum products imported into the State for sale or use. The tax is
imposed at various cents-per-gallon rates depending on the type of petroleum
product. The cents-per-gallon tax rates are indexed to reflect petroleum price
changes but are limited to changes of no more than 5 percent of the tax rate in
any one year. The portion of the receipts from this tax deposited to the General
Fund has declined significantly, reflecting the dedication of receipts to
transportation accounts, and the adoption in 1994,1995, and 1996 of a variety of
tax relief measures. Legislation enacted in 1996, which will be fully phased in
on April 1, 1999, provided for reductions in the petroleum business taxes on
residual petroleum, non-automotive diesel and diesel fuel used by motor vehicles
and railroads, utilities, and commercial enterprises, and the elimination of the
petroleum business taxes imposed on fuel used in manufacturing. In addition, the
legislation also provides reimbursements of the tax paid for aviation gasoline
when the fuel is consumed outside New York.
Other tax revenues include taxes on pari-mutuel wagering, estate and
gift taxes, taxes on real estate transfers and on gains from the sale of certain
real estate where the consideration exceeds $1 million, and certain other minor
taxes.
The State imposes estate taxes on the estates of deceased New York
residents, and on that part of a nonresident's net estate made up of real and
tangible personal property located within New York State, in excess of any gifts
already made. Estate tax rates range from 2 percent of
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the first $50,000 of net taxable transfers to 21 percent of net taxable
transfers in excess of $10,100,000. Estate tax liability is computed on the
basis of the federal definition of "gross estate". Reflecting the composition of
many decedents' estates in New York, collections of this tax are heavily
influenced by fluctuations in the value of common stock. Under legislation
enacted in 1997 the State estate tax will be reduced in 1998 and then converted
to a pick-up tax on February 1, 2000. Legislation enacted in 1998 generally
extends the provisions of the 1997 federal statutory changes to New York
estates. The most meaningful provisions extend the benefits available to
family-owned businesses, and property with conservation easements.
Gift taxes are imposed on taxable gifts made during a taxpayee's
lifetime after allowable exclusions. In recent years, certain factors, such as
higher permissible marital deductions and the unification of the estate and gift
taxes and tax credits have resulted in a substantially reduced gift tax base. In
1996, legislation was enacted to correct a technical problem that prevented some
gift taxpayers from receiving the full advantage of these tax deductions. Under
legislation enacted in 1997 the gift tax will be reduced in 1999 and then
repealed on January 1, 2000.
The real estate transfer tax applies to each real property conveyance,
subject to certain exceptions, at a rate of $2 for each $500 of consideration or
fraction thereof. Legislation enacted in 1995 dedicated a portion of real estate
transfer tax receipts for deposit into the Environmental Protection Fund (EPF).
Legislation enacted in 1996 extended and expanded the tax reductions for the
transfer of property into a real estate investment trust and earmarked all
receipts remaining after deposits in the EPF to the Clean Water / Clean Air Debt
Service Fund.
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Receipts in excess of the debt service requirements are transferred back to the
General Fund. Legislation enacted in 1998 increases the amount dedicated to the
EPF to $112 million.
The real property gains tax had been levied at the rate of 10 percent
on gains derived from certain real property transactions where the consideration
is $1 million or more. Legislation adopted in 1996 repealed the real property
gains tax on transfers occurring on or after June 15, 1996; however, some
receipts continue to flow to the General Fund based on transactions occurring
prior to such date.
The State levies pari-mutuel taxes on wagering activity conducted at
horse racetracks and more recently at simulcast theaters and off-track betting
parlors through the State. In previous years the State temporarily reduced its
tax rates and expanded simulcast opportunities and increased purses. Legislation
enacted in 1998 extends the tax cut and simulcast provisions to 2002. In
addition to pari-mutuel taxes, a 4 percent tax is levied on the charge for
admissions to racetracks and simulcast theaters, and a 5.5 percent tax is levied
on gross receipts from boxing and wresting exhibitions, including receipts from
broadcast and motion picture rights.
Miscellaneous receipts and other revenues include various fees, fines,
tuition, license revenues, lottery revenues, investment income, assessments on
various businesses (including healthcare providers), and abandoned property.
Miscellaneous receipts also include minor amounts received from the federal
government and deposited directly in the General Fund. Legislation enacted in
1997 provides for a phase-out of most of the assessments on health care
providers by April 1, 2001. Legislation enacted in 1998 accelerates the phaseout
of the health care provider assessments.
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PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Articles of Incorporation(1)
(2) Articles of Amendment (2)
(b) By-Laws of Registrant(1)
(c) Inapplicable
(d) Form of Advisory Agreement with Cornerstone Equity
Advisors, Inc.(3)
(e) Inapplicable
(f) Inapplicable
(g) Form of Custody Agreement with Registrant's Custodian(1)
(h) Inapplicable
(i) (a) Opinion of Counsel as to the legality of securities
being issued(1)
(b) Consent of Kramer Levin Naftalis & Frankel LLP(3)
(j) Consent of Accountants
(k) Inapplicable
(l) Inapplicable
(m) Form of Distribution Plan pursuant to Rule 12b-1
and related agreements(1)
(n) Financial Data Schedule (4)
(o) Inapplicable
- -----------------------
(1) Filed on October 26, 1990 as an Exhibit to Post-Effective Amendment No. 11
to the Registration Statement and incorporated herein by reference thereto.
(2) Filed on April 25, 1996 as an Exhibit to Post-Effective Amendment No. 18 to
the Registration Statements (accession number 0000922423-96-000189) and
incorporated herein by reference thereto.
(3) Filed as part of this document.
(4) To be filed by amendment
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant
Registrant is not controlled by or under common control with any other
person.
Item 25. Indemnification
Under the terms of the Registrant's Articles of Incorporation and
By-laws, the Registrant may indemnify any person who was or is a director,
officer or employee of the Registrant to the maximum extent permitted by law;
provided, however, that any such indemnification (unless ordered by a court)
shall be made by the Registrant only as authorized in the specific case upon a
determination that the indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the directors, by a
majority vote of a quorum which consists of directors who are neither
"interested persons" of the Registrant, as defined in Section 2(a)(19) of the
Investment Company Act of 1940, nor parties to the proceeding, or (ii) if the
required quorum is not obtainable or, if a quorum of such directors so directs,
by independent legal counsel in a written opinion. No indemnification will be
provided by the Registrant to any director or officer of the Registrant for any
liability to the Registrant or shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
Item 26. Business and Other Connections of Investment Advisor
Cornerstone Equity Advisors, Inc. is the interim investment advisor of
Registrant. For information as to the business, profession, vocation or
employment of a substantial nature of Cornerstone Equity Advisors, Inc., its
directors and its officers, reference is made to Part I of this Registration
Statement and to Form ADV filed under the Investment Advisers Act of 1940 by
Cornerstone Equity Advisors, Inc.
Item 27. Principal Underwriters
Registrant has no principal underwriter.
Item 28. Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Registrant, 67 Wall Street, New York, N.Y.
10005 and Firstar Bank Milwaukee, N.A., 615 East Michigan Street, Milwaukee, WI
53202, the Registrant's Custodian and Firstar Mutual Fund Services, LLC, 615
East Michigan Street, Milwaukee, WI 53202, the Registrant's Administrator and
Transfer Agent.
Item 29. Management Services
Inapplicable.
Item 30. Undertakings.
(1) The Registrant undertakes to comply with Section 16(c) of the
Investment Company Act of 1940 as though such provisions of the Act were
applicable to the Registrant, except that the
<PAGE>
request referred to in the third full paragraph thereof may only be made by
shareholders who hold in the aggregate at least 1 per centum of the outstanding
shares of the Registrant, regardless of the net asset value of the shares held
by such requesting shareholders.
(2) The Registrant undertakes to call a meeting of stockholders for the
purpose of voting upon the question of removal of one or more of the
Registrant's directors when requested in writing to do so by the holders of at
least 10% of the Registrant's outstanding shares of common stock and, in
connection with such meeting, to comply with the provisions of Section 16(c) of
the Investment Company Act of 1940 relating to shareholder communications.
(3) The Registrant undertakes to furnish each person to whom a
prospectus relating to its New York Muni Fund series is delivered, a copy of the
Fund's latest annual report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 1st day of March, 1999.
Registrant: FUNDAMENTAL FUNDS, INC.
By: /s/ Stephen C. Leslie
-------------------------
Stephen C. Leslie
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Stephen C. Leslie President (Principal Executive March 1, 1999
- -------------------------- Officer)
Stephen C. Leslie
* /s/ L. Greg Ferrone Director March 1, 1999
- --------------------------
L. Greg Ferrone
/s/ G. John Fulvio Treasurer (Principal Financial March 1, 1999
- -------------------------- and Accounting Officer)
G. John Fulvio
*By: /s/ Jules Buchwald
--------------------------------------
Jules Buchwald, Attorney-in-Fact,
pursuant to a power of attorney
dated April 24, 1991, previously
filed with the Securities and
Exchange Commission
<PAGE>
Index to Exhibit
Ex-99B.5 Form of Advisory Agreement with Cornerstone Equity Advisors, Inc.
Ex-99B.10 Consent of Kramer Levin Naftalis & Frankel LLP
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this ___ day of ______ , by and between
(_______), (the "Fund") and (_______) (the "Investment Adviser");
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and the rules and regulations
promulgated thereunder; and
WHEREAS, the Investment Adviser has a pending registration as an
investment adviser under the Investment Advisers Act of 1940, as amended (the
"Investment Advisers Act"), and engages in the business of acting as an
investment adviser; and
WHEREAS, the Fund and the Investment Adviser desire to enter into
an agreement to provide for the management of the assets of the Fund on the
terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
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1. Management. The Investment Adviser shall act as investment
adviser for the Fund and shall, in such capacity, supervise the investment and
reinvestment of the cash, securities or other properties comprising the Fund's
assets, subject at all times to the policies and control of the Fund's Board of
Directors/Trustees. The Investment Adviser shall give the Fund the benefit of
its best judgment, efforts and facilities in rendering its services as
investment adviser.
2. Duties of Investment Adviser. In carrying out its obligation
under paragraph 1 hereof, the Investment Adviser shall, subject at all times to
the policies and control of the Fund's Board of Directors/Trustees:
(a) supervise and manage all aspects of the Fund's
operations;
(b) provide the Fund or obtain for it, and thereafter
supervise, such executive, administrative, clerical
and shareholder servicing services as are deemed advisable by the Fund's Board
of Directors/Trustees;
(c) arrange, but not pay for, the periodic updating of
prospectuses and supplements thereto, proxy material, tax returns, reports to
the Fund's shareholders and reports to and filings with the Securities and
Exchange Commission and state Blue Sky authorities;
(d) provide the Fund with, or obtain for it, adequate
office space and all necessary office equipment and services, including
telephone service, heat, utilities, stationery supplies and similar items for
the Fund's principal office;
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(e) provide the Board of Directors/Trustees of the Fund on
a regular basis with financial reports and analyses on the Fund's operations and
the operations of comparable investment companies;
(f) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the Fund, and
whether concerning the individual issuers whose securities are included in the
Fund or the activities in which they engage, or with respect to securities which
the Investment Adviser considers desirable for inclusion in the Fund;
(g) determine what issuers and securities shall be
represented in the Fund's portfolio and regularly report them to the Board of
Directors/Trustees of the Fund;
(h) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly report
thereon to the Board of Directors/Trustees of the Fund; and
(i) take, on behalf of the Fund, all actions which
appear to the Fund necessary to carry into effect such purchase and sale
programs and supervisory functions as aforesaid, including the placing of orders
for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Adviser is
responsible for decisions to buy and sell securities for the Fund, broker-dealer
selection, and negotiation of brokerage commission rates. The Investment
Adviser's primary consideration in effecting a security transaction will be
execution at a price that is reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in connection
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with comparable transactions, including similar securities being purchased or
sold on a securities exchange during a comparable period of time.
In selecting a broker-dealer to execute each particular
transaction, the Investment Adviser will take the following into consideration:
the best net price available; the reliability, integrity and financial condition
of the broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. Accordingly, the price to the
Fund in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies and procedures as
the Board of Directors/Trustees may determine, the Investment Adviser shall not
be deemed to have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the Fund to pay a
broker or dealer that provides brokerage and research services to the Investment
Adviser for the Fund's use an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Investment
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Investment Adviser's overall responsibilities with respect to the Fund. The
Investment Adviser is further authorized to allocate the orders placed by it on
behalf of the Fund to such brokers and dealers who also provide research or
statistical material, or other services to the Fund or the Investment Adviser
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for the Fund's use. Such allocation shall be in such amounts and proportions as
the Investment Adviser shall determine and the Investment Adviser will report on
said allocations regularly to the Board of Directors/Trustees of the Fund
indicating the brokers to whom such allocations have been made and the basis
therefor.
4. Control by Board of Directors/Trustees. Any investment program
undertaken by the Investment Adviser pursuant to this Agreement, as well as any
other activities undertaken by the Investment Adviser on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the Board
of Directors/Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Investment Adviser shall at all times
conform to:
(a) all applicable provisions of the Investment
Company Act and the Investment Advisers Act and any rules and regulations
adopted thereunder as amended; and
(b) the provisions of the Registration Statements of the
Fund under the Securities Act of 1933, as amended, and the Investment Company
Act; and
(c) the provisions of the Articles of Incorporation of
the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended;
and (e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and the Investment Adviser as follows:
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(a) The Investment Adviser shall furnish, at its expense
and without cost to the Fund, the services of a President, Chief Financial
Officer, Secretary and to the extent necessary, such additional officers as may
be required by the Fund for the proper conduct of its affairs.
(b) The Investment Adviser shall further maintain, at its
expense and without cost to the Fund, a trading function in order to carry out
its obligations under subparagraph (i) of paragraph 2 hereof to place orders for
the purchase and sale of portfolio securities for the Fund.
(c) All of the ordinary business expenses incurred in the
operations of the Fund and the offering of its shares shall be borne by the Fund
unless specifically provided otherwise in this paragraph 6. These expenses
include but are not limited to brokerage commissions, legal, auditing, taxes or
governmental fees, the cost of preparing share certificates, custodian,
depository, transfer and shareholder service agent costs, expenses of issue,
sale, redemption and repurchase of shares, expenses of registering and
qualifying shares for sale, insurance premiums on property or personnel
(including officers and directors if available) of the Fund which inure to its
benefit, expenses relating to trustee and shareholder meetings, the cost of
preparing and distributing reports and notices to shareholders, the fees and
other expenses incurred by the Fund in connection with membership in investment
company organizations and the cost of printing copies of prospectuses and
statements of additional information distributed to shareholders.
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7. Compensation. The Fund shall pay the Investment Adviser a
portfolio management fee with respect to the Fund, which fee shall be computed
on the basis of the average net asset value of the Fund as ascertained at the
close of each business day and which fee shall be paid monthly in accordance
with the following schedule:
Fundamental U.S. Government Strategic Income Fund:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
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<S> <C>
Net asset value to $500,000,000 .75%
Net asset value of $500,000,000 or more but less than $1,000,000,000 .72%
Net asset value of $1,000,000,000 or more .70%
High-Yield Municipal Bond Series:
Average Daily Net Asset Value Annual Fee Payable
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Net asset value to $100,000,000 .80%
Net asset value of $100,000,000 or more but less than $200,000,000 .78%
Net asset value of $200,000,000 or more but less than $300,000,000 .76%
Net asset value of $300,000,000 or more but less than $400,000,000 .74%
Net asset value of $400,000,000 or more but less than $500,000,000 .72%
Net asset value of $500,000,000 or more .70%
Tax-Free Money Market Series; The California Muni Fund; New York Muni Fund:
Average Daily Net Asset Value Annual Fee Payable
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Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
8. Non-Exclusivity. The services of the Investment Adviser to the
Fund are not to be deemed to be exclusive, and the Investment Adviser shall be
free to render investment advisory and corporate administrative or other
services to others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers or directors of the
Investment Adviser may serve as officers or directors of the Fund, and that
officers or directors of the Fund may serve as officers or directors of the
Investment Adviser to the extent permitted by law; and that the officers and
directors of the Investment Adviser are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers, directors or trustees of any other firm or
corporation, including other investment companies.
9. Term and Approval. This Agreement shall become effective at
the close of business on the date hereof and shall remain in force and affect
for two years and thereafter from year to year, provided that such continuance
is specifically approved at least annually.
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10. Termination. This Agreement may be terminated upon sixty (60)
days' written notice to the Investment Adviser by vote of the Fund's Board of
Directors/Trustees or by vote of a majority of the Fund's outstanding voting
securities. This Agreement may be terminated by the Investment Adviser on sixty
(60) days' written notice to the Fund. The notice provided for herein may be
waived by either party to this Agreement. This Agreement shall automatically
terminate in the event of its assignment, the term "assignment" for the purpose
having the meaning defined in Section 2(a)(4) of the Investment Company Act.
11. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of the
Fund and that of the Investment Adviser shall be 67 Wall Street, New York, New
York 10005. If to the Fund, an additional copy of any notice under this
Agreement shall be provided to Kramer Levin Naftalis & Frankel LLP, 919 Third
Avenue, New York, New York 10022, attention to Carl Frischling, Esq.
12. Questions of Interpretation. Any question of interpretation
of any term or provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Investment Company Act shall be resolved
by reference to such term or provision of the Act and to interpretations
thereof, if any, by the United States Courts or in the absence of any
controlling decision of any such court, by rules, regulations or orders of the
Securities and Exchange Commission issued pursuant to said Act. In addition,
where the effect of a requirement of the Investment Company Act reflected in any
provision of this Agreement
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is released by rules, regulation or order of the Securities and Exchange
Commission, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in duplicate by their respective officers on the day and year
first above written.
(FUND)
Attest: By:
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(INVESTMENT ADVISER)
Attest:
By:
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[LETTERHEAD OF KRAMER LEVIN PARTNER]
March 1, 1999
Fundamental Funds, Inc.
67 Wall Street
New York, New York 10005
Re: New York Muni Fund
File No. 2-82710
Gentlemen:
We hereby consent to the reference to our firm as counsel in
Post-Effective Amendment No. 21 to Registration Statement No. 2-82710.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
