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PAINEWEBBER RMA
MONEY MARKET PORTFOLIO
U.S. GOVERNMENT PORTFOLIO
TAX-FREE FUND
CALIFORNIA MUNICIPAL MONEY FUND
NEW JERSEY MUNICIPAL MONEY FUND
NEW YORK MUNICIPAL MONEY FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
1-800-762-1000
STATEMENT OF ADDITIONAL INFORMATION
The six funds named above (each a "Fund") are professionally managed money
market funds, each with its own investment objective and policies as described
in the Funds' Prospectus. PaineWebber RMA Money Market Portfolio ("Money Market
Portfolio") and PaineWebber RMA U.S. Government Portfolio ("U.S. Government
Portfolio") are series of PaineWebber RMA Money Fund, Inc. ("Money Fund"). Money
Fund and PaineWebber RMA Tax-Free Fund, Inc. ("Tax-Free Fund") are Maryland
corporations (each a "Corporation"). PaineWebber RMA California Municipal Money
Fund ("California Municipal Money Fund") and PaineWebber RMA New York Municipal
Money Fund ("New York Municipal Money Fund") are series of PaineWebber Managed
Municipal Trust ("Managed Municipal Trust"). PaineWebber RMA New Jersey
Municipal Money Fund ("New Jersey Municipal Money Fund") is a series of
PaineWebber Municipal Money Market Series ("Municipal Money Market Series").
Managed Municipal Trust and Municipal Money Market Series are Massachusetts
business trusts (each a "Trust"). Tax-Free Fund, California Municipal Money
Fund, New Jersey Municipal Money Fund and New York Municipal Money Fund may be
referred to collectively as the "Municipal Funds." The investment adviser,
administrator and distributor of each Fund is PaineWebber Incorporated
("PaineWebber"); the sub-adviser and sub-administrator of each Fund is Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned asset
management subsidiary of PaineWebber. This Statement of Additional Information
is not a prospectus and should be read only in conjunction with the Funds'
current Prospectus, dated August 29, 1998. A copy of the Prospectus may be
obtained by contacting any PaineWebber Investment Executive or correspondent
firm or by calling 1-800-762-1000. This Statement of Additional Information is
dated August 29, 1998.
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INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELDS AND RATINGS OF MONEY MARKET INSTRUMENTS; FIRST TIER SECURITIES. The
yields on the money market instruments in which the Funds invest (such as U.S.
government securities, commercial paper, bank obligations and municipal
securities) are dependent on a variety of factors, including general money
market conditions, conditions in the particular market for the obligation, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and the ratings of the issue. The ratings of nationally recognized
statistical rating organizations ("NRSROs") represent their opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are general
and are not absolute standards of quality. Consequently, obligations with the
same rating, maturity and interest rate may have different market prices.
Subsequent to its purchase by a Fund, an issue may cease to be rated or its
rating may be reduced. If a security in a Fund's portfolio ceases to be a "First
Tier" security, as defined in Rule 2a-7 under the Investment Company Act of 1940
("1940 Act") below, or Mitchell Hutchins becomes aware that a security has
received a rating below the second highest rating by any NRSRO, Mitchell
Hutchins, and in certain cases the applicable Corporation's board of directors
or the applicable Trust's board of trustees (each a "board"), will consider
whether the Fund should continue to hold the obligation. A "First Tier" security
is a security that is either (1) rated in the highest short-term rating category
by at least two NRSROs, (2) rated in the highest short-term rating category by a
single NRSRO if only that NRSRO has assigned the obligation a short-term rating,
(3) issued by an issuer that has received such a short-term rating with respect
to a security that is comparable in priority and security (4) subject to a
guarantee rated in the highest short-term rating category or issued by a
guarantor that has received the highest short-term rating for a comparable debt
obligation or (5) unrated, but determined by Mitchell Hutchins to be of
comparable quality. A First Tier security rated in the highest short-term rating
category by a single NRSRO at the time of purchase that subsequently receives a
rating below the highest rating category from a different NRSRO may continue to
be considered a First Tier security.
Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax, California personal
income tax, New Jersey personal income tax, and New York State and New York City
personal income taxes (and also, when available, from the federal alternative
minimum tax) are rendered by bond counsel to the respective issuing authorities
at the time of issuance. Neither the Municipal Funds nor Mitchell Hutchins will
review the proceedings relating to the issuance of municipal securities or the
basis for such opinions. An issuer's obligations under its municipal securities
are subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors (such as the federal bankruptcy laws) and
federal, state and local laws that may be enacted that adversely affect the
tax-exempt status of interest on the municipal securities held by a Fund or of
the exempt-interest dividends received by a Fund's shareholders, extend the time
for payment of principal or interest, or both, or impose other constraints upon
enforcement of such obligations. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of issuers to meet their
obligations for the payment of principal of and interest on their municipal
securities may be materially and adversely affected.
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VARIABLE AND FLOATING RATE DEMAND INSTRUMENTS. Each Fund may invest in
variable and floating rate securities with demand features. A demand feature
gives a Fund the right to sell the securities back to a specified party, usually
a remarketing agent, on a specified date, at a price equal to their amortized
cost plus accrued interest. A demand feature is often backed by a letter of
credit, guarantee or other liquidity support arrangement from a bank or other
financial institution that may be drawn upon demand, after specified notice, for
all or any part of the exercise price of the demand feature. Generally, a Fund
intends to exercise demand features (1) upon a default under the terms of the
underlying security, (2) to maintain the Fund's portfolio in accordance with its
investment objective and policies or applicable legal or regulatory requirements
or (3) as needed to provide liquidity to the Fund in order to meet redemption
requests. The Fund may also exercise a demand feature if Mitchell Hutchins deems
it prudent to do so. The ability of a bank or other financial institution to
fulfill its obligations under a letter of credit, guarantee or other liquidity
arrangement might be affected by possible financial difficulties of its
borrowers, adverse interest rate or economic conditions, regulatory limitations
or other factors. The interest rate on floating rate or variable rate securities
ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury bill rate, or is otherwise reset to reflect market rates of
interest. Generally, these interest rate adjustments cause the market value of
floating rate and variable rate securities to fluctuate less than the market
value of fixed rate obligations.
Tender option bonds are long-term municipal securities sold by a bank or
other financial institution subject to a demand feature that gives the purchaser
the right to sell them to the bank or other financial institution at par plus
accrued interest at designated times (the "tender option"). The Funds may invest
in bonds with tender options that may be exercisable at intervals ranging from
daily to 397 days, and the interest rate on the bonds is typically reset at the
end of the applicable interval in an attempt to cause the bonds to have a market
value that approximates their par value. The tender option may not be
exercisable in the event of a default on, or significant downgrading of, the
underlying municipal securities, and may be subject to other conditions.
Therefore, a Fund's ability to exercise the tender option will be affected by
the credit standing of both the bank or other financial institution involved and
the issuer of the underlying securities.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities or other obligations and simultaneously commits to
resell them to the counterparty at an agreed-upon date or upon demand and at a
price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased obligations. A Fund maintains custody of the
underlying obligations prior to their repurchase, either through its regular
custodian or through a special "tri-party" custodian or sub-custodian that
maintains separate accounts for both the Fund and its counterparty. Thus the
obligation of the counterparty to pay the repurchase price on the date agreed to
or upon demand is, in effect, secured by such obligations. If their value
becomes less than the repurchase price, plus any agreed upon additional amount,
the counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price plus any agreed upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by a Fund upon
acquisition is accrued as interest and included in its net investment income.
PURCHASE AND SALE TRANSACTIONS. The counterparty in a simultaneous purchase
and sale transaction with a Fund agrees to buy from the Fund the same or a
similar security at a mutually agreed-upon time and
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price. The difference between the purchase cost and sale proceeds (which
includes the accrued interest on the security) determines the yield during the
term of the transaction. The Fund does not have the right to require the
counterparty to provide additional collateral if the market value of the
securities purchased by the Fund falls below the price at which the securities
are to be sold to the counterparty. In addition, in purchase and sale
transactions, full legal title to the securities sold to a Fund is transferred
to the Fund. If the counterparty defaults, the Fund's return on the transaction
is determined by the difference between the market value of the security bought
by the Fund and the amount paid by the Fund, plus related accrued interest. The
Fund would have rights against a defaulting counterparty for breach of contract
with respect to any losses that result from those market fluctuations.
REVERSE REPURCHASE AGREEMENTS. Money Market and U.S. Government Portfolios
may each enter into reverse repurchase agreements with banks and securities
dealers up to an aggregate value of not more than 5% of its net assets. Such
agreements involve the sale of securities held by a Fund subject to the Fund's
agreement to repurchase the securities at an agreed-upon date or upon demand and
at a price reflecting a market rate of interest. Such agreements are considered
to be borrowings and may be entered into only for temporary or emergency
purposes. While a reverse repurchase agreement is outstanding, a Fund's
custodian segregates assets to cover the Fund's obligations under the reverse
repurchase agreement. See "Investment Policies and Restrictions--Segregated
Accounts."
ILLIQUID SECURITIES. No Fund will invest more than 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days, simultaneous purchase and sale contracts with terms in
excess of seven days restricted securities and municipal lease obligations
(including certificates of participation) other than those Mitchell Hutchins has
determined to be liquid pursuant to guidelines established by the applicable
board. To the extent a Fund invests in illiquid securities, it may not be able
to readily liquidate such investments and may have to sell other investments if
necessary to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the 1933 Act. Institutional investors generally will not seek
to sell these instruments to the general public, but instead will often depend
either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities have developed as a result
of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain
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securities to qualified institutional buyers, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. Such markets include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by a Fund, however, could affect adversely the
marketability of such portfolio securities, and a Fund might be unable to
dispose of such securities promptly or at favorable prices.
The boards have delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins, pursuant to guidelines approved by each
board. Mitchell Hutchins takes into account a number of factors in reaching
liquidity decisions, including (1) the frequency of trades for the security, (2)
the number of dealers that make quotes for the security, (3) the number of
dealers that have undertaken to make a market in the security, (4) the number of
other potential purchasers and (5) the nature of the security and how trading is
effected (E.G., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities held by the Funds and reports periodically on such
decisions to the applicable board.
In making liquidity determinations with respect to municipal lease
obligations, Mitchell Hutchins takes into account a number of additional factors
relating specifically to the credit quality of the obligations, including, where
appropriate, (1) whether the underlying lease can be cancelled, (2) what
assurance there is that the assets underlying the lease can be sold, (3) the
strength of the lessee's general credit (E.G., its administrative, economic and
financial characteristics), (4) the likelihood that the municipality will
discontinue appropriating funding for the property because the property is no
longer deemed essential to the operations of the municipality (E.G., the
potential for an "event of nonappropriation") and (5) the legal recourse in the
event of a failure to appropriate. In making liquidity determinations, Mitchell
Hutchins will distinguish between direct investments in municipal lease
obligations (or participations therein) and investments in securities that may
be supported by municipal lease obligations or certificates of participation
therein. Because these municipal lease obligation-backed securities are based on
a well-established means of securitization, Mitchell Hutchins does not believe
that investing in such securities presents the same liquidity issues as direct
investments in municipal lease obligations.
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with the Fund's custodian, marked to market daily, at
least equal to the market value of the securities loaned, plus accrued interest.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. A Fund may reinvest cash collateral in money market
instruments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. Each Fund will retain authority to terminate any of its loans at any
time. A Fund may pay reasonable fees in connection with a loan and may pay the
borrower or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. A Fund will receive amounts equivalent
to any interest or other distributions on the
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securities loaned. A Fund will regain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights, when
regaining such rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the boards governing each Fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each Fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Funds may purchase
securities on a "when-issued" or "delayed delivery" basis. A security purchased
on a when-issued or delayed delivery basis is recorded as an asset on the
commitment date and is subject to changes in market value, generally based upon
changes in the level of interest rates. Thus, fluctuation in the value of the
security from the time of the commitment date will affect a Fund's net asset
value. When a Fund commits to purchase securities on a when-issued or delayed
delivery basis, its custodian segregates assets to cover the amount of the
commitment. See "Investment Policies and Restrictions--Segregated Accounts."
SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, the Fund will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the Fund's obligation or commitment under such
transactions.
CERTAIN POLICIES OF THE MUNICIPAL FUNDS
MUNICIPAL SECURITIES. The types of municipal securities identified in the
Prospectus may include obligations of issuers whose revenues are primarily
derived from mortgage loans on housing projects for moderate- to low-income
families. The Municipal Funds also may purchase mortgage subsidy bonds with a
remaining maturity of less than 13 months that are issued to subsidize mortgages
on single family homes and "moral obligation" bonds with a remaining maturity of
less than 13 months that are normally issued by special purpose public
authorities. In some cases the repayment of such bonds depends upon annual
legislative appropriations; in other cases repayment is a legal obligation of
the issuer, and if the issuer is unable to meet its obligations, repayment
becomes a moral commitment of a related government unit (subject, however, to
such appropriations).
PUT BONDS. The Municipal Funds may each invest in put bonds that have a
fixed rate of interest and a final maturity beyond the date on which the put may
be exercised. If the put is a "one time only" put, the Fund ordinarily will
either sell the bond or put the bond, depending upon the more favorable price.
If the bond has a series of puts after the first put, the bond will be held as
long as, in the judgment of Mitchell Hutchins, it is in the best interest of the
Fund to do so. There is no assurance that an issuer of a put bond acquired by
the Fund will be able to repurchase the bond on the exercise date, if the Fund
chooses to exercise its right to put the bond back to the issuer.
STAND-BY COMMITMENTS. A Municipal Fund may acquire stand-by commitments
under unusual market conditions to facilitate portfolio liquidity. Pursuant to a
stand-by commitment, a municipal bond dealer agrees to purchase the securities
that are the subject of the commitment at an amount equal to
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(1) the acquisition cost (excluding any accrued interest paid on acquisition),
less any amortized market premium and plus any accrued market or original issue
discount, plus (2) all interest accrued on the securities since the last
interest payment date or the date the securities were purchased, whichever is
later.
A Fund will enter into stand-by commitments only with those banks or other
dealers that, in the opinion of Mitchell Hutchins, present minimal credit risk.
A Fund's right to exercise stand-by commitments will be unconditional and
unqualified. Stand-by commitments will not be transferable by a Fund, although a
Fund may sell the underlying securities to a third party at any time. A Fund may
pay for stand-by commitments either separately in cash or by paying a higher
price for the securities that are acquired subject to such a commitment (thus
reducing the yield to maturity otherwise available for the same securities). The
acquisition of a stand-by commitment will not ordinarily affect the valuation or
maturity of the underlying municipal securities. Stand-by commitments acquired
by a Fund will be valued at zero in determining net asset value. Whether a Fund
paid directly or indirectly for a stand-by commitment, its cost will be treated
as unrealized depreciation and will be amortized over the period the commitment
is held by the Fund.
PARTICIPATION INTERESTS. The Municipal Funds may invest in participation
interests in municipal bonds, including industrial development bonds ("IDBs"),
private activity bonds ("PABs") and floating and variable rate securities. A
participation interest gives a Fund an undivided interest in a municipal bond
owned by a bank or other financial institution. A Fund has the right to sell the
instrument back to the financial institution. As discussed above under "Variable
and Floating Rate Demand Instruments," to the extent that payment of an
obligation is backed by a letter of credit, guarantee or liquidity support
arrangement from a bank or other financial institution, such payment may be
subject to the financial institution's ability to satisfy that commitment.
Mitchell Hutchins will monitor the pricing, quality and liquidity of the
participation interests held by each Municipal Fund, and the credit standing of
financial institutions issuing letters of credit, guarantees or liquidity
support arrangements supporting such participation interests, on the basis of
published financial information, reports of rating services and bank analytical
services. Under normal market conditions, New Jersey Municipal Money Fund will
not invest more than 25% of its total assets in participation interests or other
securities issued by or purchased from banks or other financial institutions.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly since 1994, with ratings increases since 1996. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.
ECONOMIC FACTORS
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 33 million represents
over 12% of the total United States population and grew by 26% in the 1980s,
more than double the national rate. Population growth slowed to less than 1%
annually
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in 1994 and 1995, but rose to 1.8% in 1996. During the early 1990's, net
population growth in the State was due to births and foreign immigration, but in
recent years, in-migration from the other states has increased.
Total personal income in the State, at an estimated $865 billion in 1997,
accounts for almost 13% of all personal income in the nation. Total employment
is over 14 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment, while remaining higher than the national average, has come down
from its 10% recession peak to 5.6% in summer, 1998. Economic indicators show a
steady and strong recovery underway in California since the start of 1994
particularly in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production, and
other services, entertainment and tourism, and both residential and commercial
construction. The Asian economic crisis beginning in mid-1997 will reduce
exports to that region, although this has been offset by increased exports to
Latin America and other areas. Overall, the Asian crisis is expected to have a
moderate dampening effect on the State's economy, but the economy is still
expected to outpace the nation in 1998 and 1999. Any delay or reversal of the
recovery may create new shortfalls in State revenues.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California Municipal Obligations may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on AD VALOREM property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value of the rate of AD VALOREM property taxes on real property and generally
restricts the reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise AD VALOREM taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% AD VALOREM tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of March
1, 1975, if acquired earlier), subject to certain adjustments. This system has
resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, but it was upheld by the U.S. Supreme Court in 1992.
Article XIIIA prohibits local governments from raising revenues through AD
VALOREM taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
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Article XIIIC requires that all new or increased local taxes be submitted to
the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges," defined for purposes of Article XIIID to mean
"any levy other than an AD VALOREM tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATIONS LIMITS. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
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for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments must
return any excess to taxpayers by rate reductions. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With more
liberal annual adjustment factors since 1988, and depressed revenues since 1990
because of the recession, few governments are currently operating near their
spending limits, but this condition may change over time. Local governments may
by voter approval exceed their spending limits for up to four years. During
fiscal year 1986-87, State receipts from proceeds of taxes exceeded its
appropriations limit by $1.1 billion, which was returned to taxpayers. Since
that year, appropriations subject to limitation have been under the State limit.
State appropriations were $6.3 billion under the limit for fiscal year 1997-98.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of August
1, 1998, the State had outstanding approximately $18.7 billion of long-term
general obligation bonds, plus $1.1 billion of general obligation commercial
paper which will be refunded by long-term bonds in the future, and $6.7 billion
of lease-purchase debt supported by the State General Fund. The State also had
about $7.8 billion of authorized and unissued long-term general obligation bonds
and lease-purchase debt. In FY 1997-98, debt service on general obligation bonds
and lease purchase debt was approximately 4.4% of General Fund revenues.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1996-1997 were the
California personal income tax (47% of total revenues), the sales tax (34%),
bank and corporation taxes (12%), and the gross premium tax on insurance (2%).
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are
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included for financial reporting purposes in the General Fund balance. Because
of the recession and an accumulated budget deficit, no reserve was budgeted in
the SFEU from 1992-93 to 1995-96.
GENERAL. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
RECENT BUDGETS. As a result of the severe economic recession from 1990-94
and other factors, the State experienced substantial revenue shortfalls, and
greater than anticipated social service costs, in the early 1990's. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the Years 1991-92 to 1994-95
(although not all of these actions were taken in each year):
- significant cuts in health and welfare program expenditures;
- transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on local
government;
- transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing State funding for schools;
- reduction in growth of support for higher education programs, coupled with
increases in student fees;
- revenue increases (particularly in the 1992-93 Fiscal Year budget), most
of which were for a short duration;
- increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
- various one-time adjustments and accounting changes (some of which have
been challenged in court and reversed).
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. For a two-month period in the summer of 1992,
pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April, 1996.
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The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.1 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled about $400 million as of June 30, 1997 and $1.8 billion at
June 30, 1998.
FY 1997-98 BUDGET. In May 1997, the California Supreme Court ruled that the
State had acted illegally in 1993 and 1994 by using a deferral of payments to
the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.235 billion, which was made in late July, 1997,
and substantially "used up" the then-expected additional General Fund revenues
for the fiscal year. The 1997-98 Budget Act provided another year of rapidly
increasing funding for K-14 public education. Support for higher education units
in the State also increased by about 6 percent. Because of the pension payment,
most other State programs were funded at levels consistent with prior years, and
several initiatives had to be dropped. The final results for FY 1997-98 showed
General Fund revenues and transfers of $54.7 billion and expenditures of $53.3
billion.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits are placed on receipt of welfare aid.
FY 1998-99 BUDGET. The FY 1998-99 Budget Act was signed on August 21, 1998.
In signing the Budget Act, the Governor vetoed $1.360 billion of General Fund
expenditures, and $160 million of Special Fund expenditures, resulting in
spending of $57.3 billion for the General Fund and $14.7 billion for Special
Funds. Of these vetoes, the Governor "set aside" $250 million to be used for
education programs supported by the Governor, but only if additional legislation
is passed before the end of the current session on August 31, 1998. The Budget
Act assumed General Fund revenues and transfers in FY 1998-99 of $57.0 billion.
Assuming the "set aside" monies are subsequently appropriated, the Governor
projects the balance in the SFEU at June 30, 1999 will be about $1.255 billion.
As has been the case in the last several years, spending on K-12 education
increased significantly, by a total of $2.2 billion, with projected per-pupil
spending of $5,695, more than one-third higher than the per-pupil spending
during the last recession year of 1993-94. Funding to support higher education
was also increased significantly (15% for the University of California and 14%
for the California State University system). The Budget included some increases
in health and welfare programs, including the first increase in the monthly
welfare grant since levels were cut during the recession.
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One of the most important elements of the 1998-99 Budget Act was agreement
on substantial tax cuts. The largest of these is a phased-in cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting in 1999, the VLF is reduced by 25%. Under current law, VLF
funds are automatically transferred to cities and counties, so the new
legislation provides for the General Fund to make up the reductions. If State
General Fund revenues continue to grow above certain targeted levels in future
years, the cut could reach as much as 67.5% by the year 2003. The initial 25%
VLF cut will be offset by about $500 million in General Fund money in FY
1998-99, and $1 billion for future years. Other tax cuts in FY 1998-99 include
an increase in the dependent credit exemption for personal income tax filers,
restoration of a renter's tax credit for taxpayers, and a variety of business
tax relief measures. The total cost of these tax cuts is estimated at $1.4
billion for FY 1998-99.
Although, as noted, the 1998-99 Budget Act projects a budget reserve in the
SFEU of $1.255 billion on June 30, 1999, the General Fund fund balance on that
date also reflects $1.0 billion of "loans" which the General Fund made to local
schools in the recession years, representing cash outlays above the mandatory
minimum funding level. Settlement of litigation over these transactions in July
1996 calls for repayment of these loans over the period ending in 2001-02, about
equally split between outlays from the General Fund and from schools'
entitlements. The 1998-99 Budget Act contained a $300 million appropriation from
the General Fund toward this settlement
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
BOND RATING
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from "AAA" levels which had existed prior to the recession.
After 1996, Fitch and Standard & Poor's raised their ratings of California's
general obligation bonds, which as of August 1998 were assigned ratings of "A+"
from Standard & Poor's, "A1" from Moody's and "AA-" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require the
State to make significant future expenditures or may substantially impair
revenues. Trial courts have recently entered tentative decisions or injunctions
which would overturn several parts of the State's recent budget compromises. The
matters covered by these lawsuits include reductions in welfare payments and the
use of certain cigarette tax funds for health costs.
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All of these cases are subject to further proceedings and appeals, and if
California eventually loses, the final remedies may not have to be implemented
in one year.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. However, except for agreement in 1997 on a
new program for the State to substantially take over funding for local trial
courts (saving cities and counties some $400 million annually), there has been
no large-scale reversal of the property tax shift to help local government.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1995-96 and FY1996-97. Los Angeles County's debt was downgraded by
Moody's and S&P in the summer of 1995. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
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ASSESSMENT BONDS. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
CALIFORNIA LONG TERM LEASE OBLIGATIONS. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (E.G., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (E.G., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
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The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California municipal securities in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL SECURITIES
NEW JERSEY MUNICIPAL SECURITIES. The financial condition of the State of
New Jersey, its public authorities (the "Authorities") and it local governments,
could affect the market values and marketability of, and therefore the net asset
value per share and the interest income of New Jersey Municipal Money Fund, or
result in the default of existing obligations, including obligations which may
be held by the Fund. The following section provides only a brief summary of the
complex factors affecting the financial situation in New Jersey and is based on
information obtained from New Jersey, certain of its Authorities and certain
other localities, as publicly available on the date of this Statement of
Additional Information. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to the
creditworthiness of New Jersey, and that there is no obligation on the part of
New Jersey to make payment on such local obligations in the event of default in
the absence of a specific guarantee or pledge provided by New Jersey.
ECONOMIC FACTORS. New Jersey is the ninth largest state in population and
the fifth smallest in land area. With an average of 1,077 people per square
mile, it is the most densely populated of all the states. The State's economic
base is diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. The extensive facilities of the Port Authority of New York and New
Jersey, the Delaware River Port Authority and the South Jersey Port Corporation
across the Delaware River from Philadelphia augment the air, land and water
transportation complex which has influenced much of the State's economy. The
State's central location in
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the northeastern corridor, the transportation and port facilities and proximity
to New York City make the State an attractive location for corporate
headquarters and international business offices. According to the United States
Bureau of the Census, the population of New Jersey was 7,170,000 in 1970,
7,365,000 in 1980, 7,730,000 in 1990 and 7,988,000 in 1996. Historically, New
Jersey's average per capita income has been well above the national average, and
in 1996 the State ranked second among the states in per capita personal income
($31,053).
While New Jersey's economy continued to expand during the late 1980s, the
level of growth slowed considerably after 1987. By the beginning of the national
recession in July 1990 (according to the National Bureau of Economic Research),
construction activity had already been declining in New Jersey for nearly two
years, growth had tapered off markedly in the service sectors and the long-term
downward trend of factory employment had accelerated, partly because of a
leveling off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment
from a peak of 3,689,800 in 1989 to a low of 3,457,900 in 1992. This loss has
been followed by an employment gain of 255,600 from May 1992 to June 1997, a
recovery of 97.5% of the jobs lost during the recession. In July 1991, S&P
lowered the State's general obligation bond rating from AAA to AA+.
Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 8.5%
during 1992. Since then, the unemployment rate fell to 6.2% during 1996 and 5.5%
for the six month period from January 1997 through June 1997.
For the recovery period as a whole, May 1992 to June 1997, service-producing
employment in New Jersey has expanded by 283,500 jobs. Hiring has been reported
by food stores, wholesale distributors, trucking and warehousing firms, security
and commodity brokers, business and engineering/management service firms,
hotels/hotel-casinos, social service agencies and health care providers other
than hospitals. Employment growth was particularly strong in business services
and its personnel supply component with increases of 17,300 and 7,500,
respectively, in the 12-month period ending June 1997.
In the manufacturing sector, employment losses slowed between 1992 and 1994.
After an average annual job loss of 33,500 from 1989 through 1992, New Jersey's
factory job losses fell to 13,300 during 1993 and 7,300 during 1994. During 1995
and 1996, however, manufacturing job losses increased slightly to 10,100 and
13,900 respectively, reflecting a slowdown in national manufacturing production
activity. While experiencing growth in the number of production workers in 1994,
the number declined in 1995 at the same time that managerial and office staff
were also reduced as part of nationwide downsizing. Through August 1996, layoffs
of white collar workers and corporate downsizing appeared to be abating.
Conditions have slowly improved in the construction industry, where
employment has risen by 18,600 since its low in May 1992. Between 1992 and 1996,
this sector's hiring rebound was driven primarily by increased homebuilding and
nonresidential projects. During 1996 and the first five months of 1997, public
works projects and homebuilding became the growth segments while nonresidential
construction lessened but remained positive.
STATE FINANCES. The State operates on a fiscal year beginning July 1 and
ending June 30. For example, "Fiscal Year 1999" refers to the State's fiscal
year beginning July 1, 1998 and ending June 30, 1999.
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The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenue and certain miscellaneous revenue items are recorded in the
General Fund. The appropriations act provides the basic framework for the
operation of the General Fund. Undesignated Fund Balances are available for
appropriation in succeeding fiscal years. There have been positive Undesignated
Fund Balances in the General Fund at the end of each year since the State
Constitution was adopted in 1947. The estimates for Fiscal Year 1998 and Fiscal
Year 1999 reflect the amounts contained in the Governor's Fiscal Year 1999
Budget Message delivered on February 10, 1998.
In Fiscal Years 1996 and 1997, the actual General Fund balances were $442.0
million and $280.5 million, respectively, and total Undesignated Fund Balances
were $882.2 million and $1,106.4 million. For Fiscal Years 1998 and 1999 General
Fund balances are estimated to be $268.7 million and $144.0 million,
respectively, and total Undesignated Fund Balances are estimated to be $1,021.3
million and $650.0 million.
FISCAL YEARS 1998 AND 1999 STATE REVENUE ESTIMATES--SALES AND USE TAX. The
revised estimate forecasts Sales and Use tax collections for Fiscal Year 1998 as
$4,720.0 million, a 6.9% increase from the Fiscal Year 1997 revenue. The Fiscal
Year 1999 estimate of $4,928.0 million is a 4.4% increase from the Fiscal Year
1998 estimate.
GROSS INCOME TAX. The revised estimate forecasts Gross Income Tax
collections for Fiscal Year 1998 of $5,340.0 million, a 10.7% increase from
Fiscal Year 1997 revenue. The Fiscal Year 1999 estimate of $5,860.0 million, is
a 9.7% increase from the Fiscal Year 1998 estimate. Included in the Fiscal Year
1998 estimate and the Fiscal Year 1999 estimate is the enactment of a property
tax deduction to be phased in over a three-year period, permitting a deduction
by resident taxpayers against gross income tax of a percentage of their property
taxes.
CORPORATION BUSINESS TAX. The revised estimate forecasts Corporation
Business Tax collection for Fiscal Year 1998 as $1,315.1 million, a 2.2%
decrease from Fiscal Year 1997 revenue. The Fiscal Year 1999 estimate of
$1,431.0 million, is an 8.8% increase from the Fiscal Year 1998 estimate.
GENERAL CONSIDERATIONS. Estimated receipts from State taxes and revenues,
including the three principal taxes set forth above, are forecasts based on the
best information available at the time of such forecasts. Changes in economic
activity in the State and the nation, consumption of durable goods, corporate
financial performance and other factors that are difficult to predict may result
in actual collections being more or less than forecasted.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such appropriation. In the
past when actual revenues have been less than the amount anticipated in the
budget, the Governor has exercised her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations
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were budgeted but not yet spent. Under the State Constitution, no general
appropriations law or other law appropriating money for any State purpose may be
enacted if the amount of money appropriated therein, together with all other
prior appropriations made for the same fiscal year, exceeds the total amount of
revenue on hand and anticipated to be available for such fiscal year, as
certified by the Governor.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
The financial condition of the State of New York ("New York State" or the
"State"), its public authorities and public benefit corporations (the
"Authorities") and its local governments, particularly the City of New York (the
"City"), could affect the market values and marketability of, and therefore the
net asset value per share and the interest income of a Fund, or result in the
default of existing obligations, including obligations which may be held by the
Fund. The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from New York State, certain of its Authorities, the City and certain
other localities as publicly available on the date of this Statement of
Additional Information. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to the
creditworthiness of New York State, and that there is no obligation on the part
of New York State to make payment on such local obligations in the event of
default in the absence of a specific guarantee or pledge provided by New York
State.
ECONOMIC FACTORS. 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.
Both the State and the City experienced substantial revenue increases in the
mid-1980s attributable directly (corporate income and financial corporations
taxes) and, indirectly (personal income and a variety of other taxes) to growth
in new jobs, rising profits and capital appreciation derived from the finance
sector of the City's economy. Economic activity in the City has experienced
periods of growth and recession and can be expected to experience periods of
growth and recession in the future. In recent years, the City has experienced
increases in employment. Real per capita personal income (I.E, per capita
personal income adjusted for the effects of inflation and the differential in
living costs) has generally experienced fewer fluctuations than employment in
the City. Although the City periodically experienced declines in real per capita
personal income between 1969 and 1981, real per capita personal income in the
City has generally increased from the mid-1980s until the present. In nearly all
of the years between 1969 and 1988 the City experienced strong increases in
retail sales. However, from 1989 to 1993, the City experienced a weak period of
retail sales. Since 1994, the City has returned to a period of growth in retail
sales. Overall, the City's economic improvement accelerated significantly in
fiscal year 1997. Much of the increase can be traced to the performance of the
securities industry, but the City's economy also produced gains in the retail
trade sector, the hotel and tourism industry, and business services, with
private sector employment higher than previously forecasted. The City's current
Financial Plan assumes that, after strong growth in 1997-1998, moderate economic
growth will exist through calendar year 2002, with moderating job growth
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and wage increases. However, there can be no assurance that the economic
projections assumed in the Financial Plan will occur or that the tax revenues
projected in the Financial Plan to be received will be received in the amounts
anticipated.
During the calendar years 1984 through 1991, the State's rate of economic
expansion was somewhat slower than that of the nation as a whole. In the
1990-1991 national recession, the economy of the Northeast region in general and
the State in particular was more heavily damaged than that of the rest of the
nation and has been slower to recover.
Although the national economy began to expand in 1991, the State economy
remained in recession until 1993, when employment growth resumed. Currently the
State economy continues 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 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. Personal
income increased substantially in 1992 and 1993. The State's economy entered
into the fourth year of a slow recovery in 1996. Most of the growth occurred in
the trade, construction and service industries, with business, social services
and health sectors accounting for most of the service industry growth.
The State has released information regarding the national and state economic
activity in its Annual Information Statement of the State of New York dated June
26, 1998 ("Annual Information Statement") and updated August 3, 1998 ("Update to
the Annual Information Statement"). At the State level, the Annual Information
Statement projects continued expansion during the 1998 calendar year, with
employment growth gradually slowing as the year progresses. The financial and
business service sectors are expected to continue to do well, while employment
in the manufacturing and government sectors will post only small, if any
declines. On an average annual basis, the employment growth rate in the State is
expected to be higher than in 1997 and the unemployment rate is expected to drop
further to 6.1 percent. Personal income is expected to record moderate gains in
1998. Wage growth in 1998 is expected to be slower than in the previous year as
the recent robust growth in bonus payments moderates.
Personal income tax collections for 1998-99 are projected to reach $21.41
billion, or $3.67 billion above the reported 1997-98 collection total. Total
business tax collections in 1998-99 are now projected to be $4.95 billion, $100
million less than received in the prior fiscal year. Receipts from user taxes
and fees are projected to total $7.14 billion, an increase of $107 million from
reported collections in the prior year. Other tax receipts are projected to
total $1.02 billion--$75 million below last year's amount. Total miscellaneous
receipts are projected to reach $1.40 billion, down almost $200 million from the
prior year. Transfers from other funds are expected to total $1.8 billion, or
$222 million less than total receipts from this category during 1997-98.
General Fund disbursements in 1998-99, including transfers to support
capital projects, debt service and other funds are estimated at $36.78 billion.
This represents an increase of $2.43 billion or 7.1 percent from 1997-98. Nearly
one-half of the growth is for educational purposes, reflecting increased support
for public schools, special education programs and the State and City university
systems. The remaining increase is primarily for Medicaid, mental hygiene, and
other health and social welfare programs, including children and family
services. The 1998-99 Financial Plan also includes funds for the current
negotiated salary increases for State employees, as well as increased transfers
for debt service. Grants to local
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governments is the largest category of General Fund disbursements and includes
financial assistance to local governments and not-for-profit corporations, as
well as entitlement benefits to individuals. The 1998-99 Financial Plan projects
spending of $25.14 billion in this category, an increase of $1.88 billion or 8.1
percent over the prior year. The largest annual increases are for educational
programs, Medicaid, other health and social welfare programs, and community
projects grants. The 1998-99 budget provides $9.65 billion in support of public
schools. The year-to-year increase of $769 million is comprised of partial
funding for a 1998-99 school year increase of $847 million as well as the
remainder of the 1997-98 school year increase that occurs in State fiscal year
1998-99. Spending for all other educational programs, which includes the State
and City university systems, the Tuition Assistance Program, and handicapped
programs, is estimated at $3.00 billion, an increase of $270 million over
1997-98 levels. Medicaid costs are estimated at $5.60 billion, an increase of
$144 million from the prior year.
The 1998-99 Financial Plan projects a closing fund balance in the General
Fund of $1.67 billion. This fund balance is composed of a reserve of $1.01
billion available for future needs, a $400 million balance in the Tax
Stabilization Reserve Fund ("TSRF"), a $158 million in the Community Projects
Fund ("CPF"), and a balance of $100 million in the Contingency Reserve Fund
("CRF") after a projected deposit of $32 million in 1998-99.
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 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. As a result, there
can be no assurance that the State economy will not experience results in the
current fiscal year that are worse than predicted, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.
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, 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's projections of receipts and disbursements.
THE STATE. Owing to the factors mentioned above and other factors, the State
may, in future years, face substantial potential budget gaps resulting from a
significant disparity between tax revenues projected from a lower recurring
receipts base and the future costs of maintaining State programs at current
levels.
Total General Fund receipts in 1998-99 are projected to be $37.81 billion,
an increase of $3.26 billion from the $34.55 billion recorded in 1997-98. This
total included $34.36 billion in tax receipts, $1.40 billion in miscellaneous
receipts, and $1.80 billion in transfers from other funds. However, many complex
political, social and economic forces influence the State's economy and
finances, which may in turn affect the State's Financial Plan. These forces may
affect the State unpredictably from fiscal year to fiscal year and are
influenced by governments, institutions, and organizations that are not subject
to the State's
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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. Because of the uncertainty and unpredictability of changes
in these factors, their impact cannot be fully included in the assumptions
underlying the State's projections.
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.
REVENUE BASE. The State's principal revenue sources are economically
sensitive, and include the personal income tax, user taxes and fees and business
taxes. The 1998-99 Financial Plan projects General Fund receipts (including
transfers from other funds) of $37.56 billion, an increase of over 3 billion
from the $34.55 billion recorded in 1997-98. This total includes $34.36 billion
in tax receipts, $1.40 billion in miscellaneous receipts, and $1.80 billion in
transfers from other funds.
The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the "real" growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998-99 and the impact of
statutes earmarking certain tax receipts to other funds work to depress apparent
growth below the underlying growth in receipts attributable to expansion of the
State's economy. On an adjusted basis, State tax revenues in the 1998-99 fiscal
year are projected to grow at approximately 7.5 percent, following an adjusted
growth of roughly nine percent in the 1997-98 fiscal year.
The PERSONAL INCOME TAX is imposed on the income of individuals, estates and
trusts and is based on federal definitions of income and deductions with certain
modifications. This tax continues to account for over half of the State's
General Fund receipts base. Net personal income tax collections are projected to
reach $21.41 billion, nearly $3.67 billion above the reported 1997-98 collection
total. Since 1997 represented the completion of the 20 percent income tax
reduction program enacted in 1995, growth from 1997 to 1998 will be unaffected
by major income tax reductions. Adding to the projected annual growth is the net
impact of the transfer of the surplus from 1997-98 to the current year which
affects reported collections by over $2.4 billion on a year-over-year basis, as
partially offset by the diversion of slightly over $700 million in income tax
receipts to the STAR fund to finance the initial year of the school tax
reduction program. The STAR program was enacted in 1997 to increase the State
share of school funding and reduce residential school taxes. Adjusted for these
transactions, the growth in net income tax receipts is roughly $1.7 billion, an
increase of over 9 percent. This growth is largely a function of over 8 percent
growth in income tax liability projected for 1998 as well as the impact of the
1997 tax year settlement on 1998-99 net collections.
USER TAXES AND FEES comprised of three quarters of the State four percent
sales and use tax (the balance, one percent, flows to support Government
Assistance Corporation ("LGAC") debt service requirements), cigarette, alcoholic
beverage container, and auto rental taxes, and a portion of the motor fuel
excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage
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license fees. A portion of the motor fuel tax and motor vehicle registration
fees and all of the highway use tax are earmarked for dedicated transportation
funds.
Receipts from user taxes and fees receipts are projected to total $7.14
billion, an increase of $107 million from reported collections in the prior
year. The sales tax component of this category accounts for all of the 1998-99
growth, as receipts from all other sources decline $100 million. The growth in
yield of the sales tax in 1998-99, after adjusting for tax law and other
changes, is projected at 4.7 percent. The yields of most of the excise taxes in
this category show a long-term declining trend, particularly cigarette and
alcoholic beverage taxes. These General Fund declines are exacerbated in 1998-99
by revenue losses from scheduled and newly enacted tax reductions, and by an
increase in earmarking of motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.
BUSINESS TAXES include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross receipt
taxes on utilities and galling-based petroleum business taxes. Beginning in
1994, a 15 percent surcharge on these levies began to be phased out and, for
most taxpayers, there is no surcharge liability for taxable periods ending in
1997 and thereafter.
Total business tax collections in 1998-99 are now projected to be $4.95
billion, $100 million less than received in the prior fiscal year. The category
includes receipts from the largely income-based levies on general business
corporations, banks and insurance companies, gross receipts taxes on energy and
telecommunication service providers and a per-gallon imposition on petroleum
business. The year-over-year decline in projected receipts in this category is
largely attributable to statutory changes between the two years. These include
the first year of utility-tax rate cuts and the Power for Jobs tax reduction
program for energy providers, and the scheduled additional diversion of General
Fund petroleum business and utility tax receipts to other funds. In addition,
profit growth is also expected to slow in 1998.
OTHER TAXES include estate, gift and real estate transfer taxes, a tax on
gains from the sale or transfer of certain real estate (this tax was repealed in
1996), a pari-mutuel tax and other minor levies. They are now projected to total
$1.02 billion--$75 million below last year's amount. Two factors account for a
significant part of the expected decline in collections from this category.
First, the effects of the elimination of the real property gains tax
collections; second, a decline in estate tax receipts, following the explosive
growth recorded in 1997-98, when receipts expanded by over 16 percent.
MISCELLANEOUS RECEIPTS include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are projected to reach $1.40 billion, down almost $200
million from the prior year, reflecting the loss of non-recurring receipts in
1997-98 and the growing effects of the phase-out of the medical provider
assessments.
TRANSFERS FROM OTHER FUNDS to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one percent
sales tax used to support payments to LGAC. Transfers from other funds are
expected to total $1.8 billion, or $222 million less than total receipts from
this category during 1997-98. Total transfers of sales taxes in excess of LGAC
debt service requirements are expected to increase by approximately $51 million,
while transfers from all other funds are expected to fall by $273 million,
primarily reflecting the absence, in 1998-99, of a one-time transfer of nearly
$200 million for retroactive reimbursement of certain social services claims
from the federal government.
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STATE DEBT. General Fund disbursements in 1998-99, including transfers to
support capital projects, debt service and other funds are estimated at $36.78
billion. This represents an increase of $2.43 billion or 7.1 percent from
1997-98. Nearly one-half of the growth is for educational purposes, reflecting
increased support for public schools, special education programs and the State
and City university systems. The remaining increase is primarily for Medicaid,
mental hygiene and other health and social welfare programs, including children
and family services. The 1998-99 Financial Plan also includes funds for the
current negotiated salary increase for State employees, as well as increased
transfers for debt service.
NONRECURRING SOURCES. The Division of the Budget estimates that the 1998-99
State Financial Plan contains actions that provide nonrecurring resources of
savings totaling approximately $64 million, the largest of which is a
retroactive reimbursement of federal welfare claims.
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 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 a 2000-01 gap of $3.7 billion. 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.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1999-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The STAR program, which dedicates a portion of
personal income tax receipts to fund school tax reductions, has a significant
impact on General Fund receipts. STAR is projected to reduce personal income tax
revenues available to the General Fund by an estimated $1.3 billion in 2000-01.
Measured from the 1998-99 base, scheduled reductions to estate and gift, sales
and other taxes, reflecting tax cuts enacted in 1997-98 and 1998-99, will lower
General Fund taxes and fees by an estimated $1.8 billion in 2000-01.
Disbursement projections for the outyears currently assume additional outlays
for school aid, Medicaid, welfare reform, mental health community reinvestment,
and other multi-year spending commitments in law.
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LABOR COSTS. The State government workforce is mostly unionized, subject to
the Taylor-Law which authorizes collective bargaining and prohibits (but has
not, historically, prevented) strikes and work slowdowns. Costs for employee
health benefits have increased substantially, and can be expected to further
increase. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund investment return
assumptions to reduce current contribution requirements. If such investment
earnings assumptions are not sustained by actual results, additional State
contributions will be required in future years to meet the State's contractual
obligations. The State's change in actuarial method from the aggregate cost
method to a modified projected unit credit in FY1990-91 created a substantial
surplus that was amortized and applied to offset the State's contribution
through FY1993-94. This change in actuarial method was ruled unconstitutional by
the State's highest court and the State returned to the aggregate cost method in
FY1994-95 using a four year phase in. Employer contributions, including the
State's, are expected to increase over the next five to ten years. Since January
1995, the State's workforce has been reduced by about 10 percent, and is
projected to remain at its current level of approximately 191,000 persons in
1998-99 year. 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.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels.
The law abolished the federal Aid to Families with Dependent Children program
(AFDC), and created a new Temporary Assistance to Needy Families with Dependent
Children program (TANF) funded with a fixed federal block grant to states. The
law also imposed (with certain exceptions) a five era durational limit on TANF
recipients, required that virtually all recipients be engaged in work or
community service activities within two years of receipt benefits, and limited
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
Proposed legislation that includes both provisions necessary to implement
the State's TANF plan to conform with federal law and implement the Governor's
welfare reform proposal is still pending before the Legislature. There can be no
assurances of timely enactment of certain conforming provisions required under
the federal law. Further delay increases the risk that the State could incur
fiscal penalties for failure to comply with federal law.
MEDICAID. New York participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides a substantial portion of eligible program costs, with the
remainder shared by the State and its counties (including the City). Basic
program eligibility and benefits are determined by federal guidelines, but the
State provides a number of optional benefits and expanded eligibility. Program
costs have increased substantially in recent years, and account for a rising
share of the State budget. Federal law requires that the State adopt
reimbursement rates for hospitals and nursing homes that are reasonable and
adequate to meet the costs that must be incurred by efficiently and economically
operated facilities in providing patient care, a standard that has led to past
litigation by hospitals and nursing homes seeking higher reimbursement from the
State. General Fund payments for Medicaid are projected to be $5.60 billion, an
increase of $144 million from
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the prior year. After adjusting 1997-98 for the $116 million prepayment of an
additional Medicaid cycle, Medicaid spending is projected to increase $260
million or 4.9 percent. Disbursements for all other health and social welfare
programs are projected to total $3.63 billion, an increase of $131 million from
1997-98. This includes an increase in support for children and families and
local public health programs, offset by a decline in welfare spending of $75
million that reflects continuing State and local efforts to reduce welfare
fraud, declining caseloads, and the impact of State and federal welfare reform
legislation.
YEAR 2000 COMPLIANCE. New York State is currently addressing "Year 2000"
data processing compliance issues. The Year 2000 compliance issue ("Y2K") arises
because most computer software programs allocate two digits to the data field
for "year" on the assumption that the first two digits will be "19". Such
programs will thus interpret the year 2000 as the year 1900 absent
reprogramming. Y2K could impact both the ability to enter data into computer
programs and the ability of such programs to correctly process data.
In 1996, the State created the Office for Technology (OFT) to help address
statewide technology issues, including the Year 2000 issue. OFT has estimated
that investments of at least $140 million will be required to bring
approximately 350 State mission-critical and high-priority computer systems not
otherwise scheduled for replacement into Year 2000 compliance, and the State is
planning to spend $100 million in the 1998-99 fiscal year for this purpose.
Mission-critical computer applications are those which impact the health, safety
and welfare of the State and its citizens, and for which failure to be in Y2K
compliance could have a material and adverse impact upon State operations.
High-priority computer applications are those that are critical for a State
agency to fulfill its mission and deliver services, but for which there are
manual alternatives. Work has been completed on roughly 20 percent of these
systems. All remaining unfinished mission-critical and high-priority systems
have at least 40 percent or more of the work completed. Contingency planning is
underway for those systems which may be non-compliant prior to failure dates.
The enacted budget also continues funding for major systems scheduled for
replacement, including the State payroll, civil service, tax and finance and
welfare management systems, for which Year 2000 compliance is included as a part
of the project.
OFT is monitoring compliance on a quarterly basis and is providing
assistance and assigning resources to accelerate compliance for mission critical
systems, with most compliance testing expected to be completed by mid-1999.
There can be no guarantee, however, that all of the State's mission-critical and
high-priority computer systems will be Year 2000 compliant and that there will
not be an adverse impact upon State operations or State finances as a result.
THE STATE AUTHORITIES. The fiscal stability of the State is related in part
to the fiscal stability of its public 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 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.
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls
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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. 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 appropriations to pay for the
operating costs of certain of their programs. 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
Queen Counties, as part of an estimated $7 billion financing plan.
METROPOLITAN TRANSPORTATION AUTHORITY. 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 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, Triborough Bridge and Tunnel Authority and Transit Authority 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 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 financed through assistance from the State, the federal government,
and 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
the 1995-99 Capital Program or 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
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revenues may decline, which could, among other things, impair the MTA's ability
to meet its operating expenses without additional assistance.
THE CITY. 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 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.
However, in the early 1970s, the City incurred substantial operating deficits,
and its financial controls, accounting practices and disclosure policies were
widely criticized. In response to the City's fiscal crisis in 1975, the State
took action to assist the City in returning to fiscal stability. Among these
actions, the State established the Municipal Assistance Corporation For The City
of New York ("MAC") to provide financing assistance for 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 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.
The City provides services usually undertaken by counties, school districts
or special districts in other large urban areas, including the provision of
social services such as day care, foster care, health care, family planning,
services for the elderly and special employment services for needy individuals
and families who qualify for such assistance. State law requires the City to
allocate a large portion of its total budget to Board of Education operations,
and mandates that the City assume the local share of public assistance and
Medicaid costs. For each of the 1981 through 1996 fiscal years, the City
achieved balanced operating results as reported in accordance with then
applicable generally accepted accounting principles ("GAAP"). The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional reductions in City
services or entitlement programs, which could adversely affect the City's
economic base.
Pursuant to the New York State Financial Emergency Act for The City of New
York (the "Financial Emergency Act" or the "Act"), the City prepares a four year
annual financial plan, which is reviewed and revised on a quarterly basis and
which includes the City's capital, revenue and expense projections and outlines
proposed gap closing programs for years with projected budget gaps. The City's
projections set forth in the 1999-2002 Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget and to meet its annual cash flow and financing requirements.
Such assumptions and contingencies include the timing and pace of a regional and
local economic recovery, increases in tax revenues, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives which may require in certain cases the cooperation of the
28
<PAGE>
City's municipal unions, the ability of New York City Health and Hospitals
Corporation and the Board of Education to take actions to offset reduced
revenues, the ability to complete revenue generating transactions, provision of
State and federal aid and mandate relief, and the impact on City revenues of
proposals for federal and State welfare reform. No assurance can be given that
the assumptions used by the City in the 1999-2002 Financial Plan will be
realized. Due to the uncertainty existing on the federal and state levels, the
ultimate adoption of the State budget for FY 1997-98 may result in substantial
reductions in projected expenditures for social spending programs. Cost
containment assumptions contained in the 1997-2000 Financial Plan and the City
FY 1997-98 Budget may therefore be significantly adversely affected upon the
final adoption of the State budget for FY 1997-98. Furthermore, actions taken in
recent fiscal years to avert deficits may have reduced the City's flexibility in
responding to future budgetary imbalances, and have deferred certain
expenditures to later fiscal years.
The 1999-2002 Financial Plan released on June 26, 1998 projects revenues and
expenditures for the 1999 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.9 billion, $2.7 billion and $2.3 billion for the 2000, 2001
and 2002 fiscal years, respectively, after implementation of a gap closing
program to reduce agency expenditures by approximately $380 million in each of
fiscal years 2000 through 2002.
Changes since the June Financial Plan include: (i) an increase in projected
tax revenues of $1.3 billion, $1.1 billion, $955 million, $897 million and $1.7
billion in the 1998 through 2002 fiscal years, respectively; (ii) a reduction in
assumed State aid of $283 million in the 1998 fiscal year and of between $134
million and $142 million in each of the 1999 through 2002 fiscal years,
reflecting the adopted budget for the State's 1998 fiscal year; (iii) a delay in
the assumed collection of $350 million of projected rent payments for the City's
airports in the 1999 fiscal year to fiscal years 2000 through 2002; (iv) a
reduction in projected debt service expenditures totaling $197 million, $361
million, $204 million and $226 million in the 1998 through 2001 fiscal years,
respectively; (v) an increase in the Board of Education (the "BOE") spending of
$266 million, $26 million, $58 million and $193 million in the 1999 through 2002
fiscal years, respectively; (vi) an increase in expenditures for the City's
proposed drug initiatives totaling $68 million in the 1998 fiscal year and of
between $167 million and $193 million in each of the 1999 through 2002 fiscal
years; (vii) other agency net spending initiatives totaling $112 million, $443
million, $281 million, $273 million and $677 million in fiscal years 1998
through 2002, respectively; and (viii) reduced pension costs of $116 million,
$168 million and $404 million in fiscal years 2000 through 2002, respectively.
The Financial Plan also sets forth gap closing actions for the 1998 through 2002
fiscal years, which include: (i) additional agency actions totaling $176
million, $595 million, $516 million, $494 million and $552 million in fiscal
years 1998 through 2002, respectively, and (ii) assumed additional Federal and
State aid of $100 million in each of fiscal years 1999 through 2002.
The 1998 Modification and the 1999-2002 Financial Plan include a proposed
discretionary transfer in the 1998 fiscal year of approximately $2.0 billion to
pay debt service due in the 1999 fiscal year, and a proposed discretionary
transfer in the 1999 fiscal year of $416 million to pay debt service due in
fiscal year 2000, included in the Budget Stabilization Plan for the 1998 and
1999 fiscal years, respectively. In addition, the Financial Plan reflects
proposed tax reduction programs totaling $237 million, $537 million, $657
million and $666 million in fiscal years 1999 through 2002, respectively,
including the elimination of the City sales tax on all clothing as of December
1, 1999, a City funded acceleration of the State funded personal income tax
reduction for the 1999 through 2001 fiscal years, the extension of current tax
29
<PAGE>
reductions for owners of cooperative and condominium apartments starting in
fiscal year 2000 and a personal income tax credit for child care and for
residential holders of Subchapter S corporations, which are subject to State
legislative approval, and reduction of the commercial rent tax commencing in
fiscal year 2000.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1998 fiscal year, there can be no assurance that the gap closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
The City derives its revenues from a variety of local taxes, user charges
and miscellaneous revenues, as well as from Federal and State unrestricted and
categorical grants. State aid as a percentage of the City's revenues has
remained relatively constant over the period from 1980 to 1997, while
unrestricted Federal aid has been sharply reduced. The City projects that local
revenues will provide approximately 66.9% of total revenues in the 1998 fiscal
year while Federal aid, including categorical grants, will provide 13.2%, and
State aid, including unrestricted aid and categorical grants, will provide
19.7%.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short term obligations within their fiscal
year of issuance. The City has issued $1.075 billion of short term obligations
in fiscal year 1998 to finance the City's projected cash flow needs for the 1998
fiscal year. The City issued $2.4 billion of short term obligations in fiscal
year 1997. Seasonal financing requirements for the 1996 fiscal year increased to
$2.4 billion from $2.2 billion and $1.75 billion in the 1995 and 1994 fiscal
years, respectively. The delay in the adoption of the State's budget in certain
past fiscal years has required the city to issue short term notes in amounts
exceeding those expected early in such fiscal years.
The City makes substantial capital expenditures to reconstruct and
rehabilitate the city's infrastructure and physical assets, including City mass
transit facilities, sewers, streets, bridges and tunnels, and to make capital
investments that will improve productivity in City operations.
The City utilizes a three tiered capital planning process consisting of the
Ten Year Capital Strategy, the Four Year Capital Plan and the current year
Capital Budget. The Ten Year Capital Strategy is a long term planning tool
designed to reflect fundamental allocation choices and basic policy objectives.
The Four Year Capital Program translates mid-range policy goals into specific
projects. The Capital Budget defines specific projects and the timing of their
initiation, design, construction and completion.
This City's projection of its capital financing need pursuant to the Mayor's
Declaration of Need and Proposed Transitional Capital Plan of June 30, 1997
indicates additional projected debt and contract liabilities of approximately $3
billion for fiscal year 1998. To provide for the City's capital program, State
legislation was enacted which created the Finance Authority, the debt of which
is not subject to the general debt limit. Without the Finance Authority or other
legislative relief, new contractual commitments for the City's general
obligation financed capital program would have been virtually brought to a halt
during the Financial Plan period beginning early in the 1998 fiscal year. By
utilizing projected Finance Authority borrowing and including the Finance
Authority's projected borrowing as part of the total debt incurring
30
<PAGE>
power, the City's total debt incurring power has been increased. Even with the
increase, the City may reach the limit of its capacity to enter into new
contractual commitments in fiscal year 2000.
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
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.
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 State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Twenty-one
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1996.
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed with respect to a Fund without the affirmative vote of the lesser of (1)
more than 50% of the outstanding shares of the Fund or (2) 67% or more of the
shares present at a shareholders' meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from changing values of portfolio
securities or amount of total assets will not be considered a violation of any
of the following limitations.
Each Fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more
of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry,
except that this limitation does not apply to securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities
or to municipal securities or to certificates of deposit and bankers'
acceptances of domestic branches of U.S. banks.
31
<PAGE>
The following interpretations apply to, but are not a part of, this
fundamental limitation (a): With respect to this limitation, domestic
and foreign banking will be considered to be different industries: and
(b) asset-backed securities will be grouped in industries based upon
their underlying assets and not treated as constituting a single,
separate industry.
(2) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Fund's total
assets (including the amount of the senior securities issued but
reduced by any liabilities not constituting senior securities) at the
time of the issuance or borrowing, except that the Fund may borrow up
to an additional 5% of its total assets (not including the amount
borrowed) for temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt
securities or instruments or participations or other interests
therein and investments in government obligations, commercial paper,
certificates of deposit, bankers' acceptances or similar instruments
will not be considered the making of a loan.
The following interpretation applies to, but is not a part of, this
fundamental restriction: The Fund's investments in master notes, funding
agreements and similar instruments will not be considered to be the
making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter
under the federal securities laws in connection with its disposition
of portfolio securities.
(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other
instruments supported by interests in real estate are not subject to
this limitation, and except that the Fund may exercise rights under
agreements relating to such securities, including the right to
enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an
orderly manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase,
sell or enter into financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts
or derivative instruments.
Money Market Portfolio, U.S. Government Portfolio and Tax-Free Fund will
not:
(7) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that
issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Fund's
total assets may be invested without regard to this limitation, and
except that this limitation does not apply to securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities
or to securities issued by other investment companies.
32
<PAGE>
With respect to Money Market Portfolio and U.S. Government Portfolio, the
following interpretation applies to, but is not a part of, fundamental
limitation (7): Mortgage- and asset-backed securities will not be considered to
have been issued by the same issuer by reason of the securities having the same
sponsor, and mortgage- and asset-backed securities issued by a finance or other
special purpose subsidiary that are not guaranteed by the parent company will be
considered to be issued by a separate issuer from the parent company.
With respect to Tax-Free Fund, the following interpretation applies to, but
is not a part of, fundamental limitation (7): Each state, territory and
possession of the United States (including the District of Columbia and Puerto
Rico), each political subdivision, agency, instrumentality and authority
thereof, and each multi-state agency of which a state is a member is a separate
"issuer." When the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from the government creating the
subdivision and the security is backed only by the assets and revenues of the
subdivision, such subdivision would be deemed to be the sole issuer. Similarly,
in the case of an IDB or PAB, if that bond is backed only by the assets and
revenues of the non-governmental user, then that non-governmental user would be
deemed to be the sole issuer. However, if the creating government or another
entity guarantees a security, then to the extent that the value of all
securities issued or guaranteed by that government or entity and owned by the
Fund exceeds 10% of the Fund's total assets, the guarantee would be considered a
separate security and would be treated as issued by that government or entity.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS. The following investment
restrictions are not fundamental and may be changed by each board without
shareholder approval.
Each Fund will not:
(1) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that
the Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative
instruments.
(2) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b)
maintain short positions in connection with its use of financial
options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative
instruments.
(3) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation
does not apply to securities received or acquired as dividends,
through offers of exchange, or as a result of reorganization,
consolidation, or merger.
(4) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
(5) invest more than 10% of its net assets in illiquid securities.
33
<PAGE>
DIRECTORS/TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The directors and trustees (each also referred to as "board members") and
executive officers of the Corporations and the Trusts, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATIONS/TRUSTS OTHER DIRECTORSHIPS
- ------------------------------------ --------------------- ------------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Director/Trustee and Mrs. Alexander is president, chief executive officer
President and a director of Mitchell Hutchins (since January
1995) and an executive vice president and director
of PaineWebber (since March 1984). Mrs. Alexander is
president and a director or trustee of 32 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Richard Q. Armstrong; 63 Director/Trustee Mr. Armstrong is chairman and principal of RQA
R.Q.A. Enterprises Enterprises (management consulting firm) (since
One Old Church Road-Unit #6 April 1991 and principal occupation since March
Greenwich, CT 06830 1995). Mr. Armstrong was chairman of the board,
chief executive officer and co-owner of Adirondack
Beverages (producer and distributor of soft drinks
and sparkling/still waters) (October 1993-March
1995). He was a partner of the New England
Consulting Group (management consulting firm)
(December 1992-September 1993). He was managing
director of LVMH U.S. Corporation (U.S. subsidiary
of the French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits subsidiary,
Schieffelin & Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of 31 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
E. Garrett Bewkes, Jr.**; 71 Director/Trustee and Mr. Bewkes is a director of Paine Webber Group Inc.
Chairman of the ("PW Group") (holding company of PaineWebber and
Boards of Mitchell Hutchins). Prior to December 1995, he was a
Directors/Trustees consultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief executive
officer of American Bakeries Company. Mr. Bewkes is
a director of Interstate Bakeries Corporation. Mr.
Bewkes is a director or trustee of 32 investment
companies for which Mitchell
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATIONS/TRUSTS OTHER DIRECTORSHIPS
- ------------------------------------ --------------------- ------------------------------------------------------
<S> <C> <C>
Hutchins or PaineWebber serves as investment
adviser.
Richard R. Burt; 51 Director/Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Avenue, N.W. (international investments and consulting firm)
Washington, D.C. 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since 1991).
He is also a director of Archer-Daniels-Midland Co.
(agricultural commodities) Hollinger International
Co. (publishing), Homestake Mining Corp., Powerhouse
Technologies Inc. and Wierton Steel Corp. He was the
chief negotiator in the Strategic Arms Reduction
Talks with the former Soviet Union (1989-1991) and
the U.S. Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a director or
trustee of 31 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Mary C. Farrell**; 48 Director/Trustee Ms. Farrell is a managing director, senior investment
strategist, and member of the Investment Policy
Committee of PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a member of the
Financial Women's Association and Women's Economic
Roundtable, and appears as a regular panelist on
Wall $treet Week with Louis Rukeyser. She also
serves on the Board of Overseers of New York
University's Stern School of Business. Ms. Farrell
is a director or trustee of 31 investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Meyer Feldberg; 56 Director/Trustee Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of the
New York, New York 10027 Illinois Institute of Technology. Dean Feldberg is
also a director of Primedia Inc., Federated
Department Stores Inc. and Revlon, Inc. Dean
Feldberg is a director or trustee of 33 investment
companies for which Mitchell Hutchins, PaineWebber
or their affiliates serve as investment adviser.
George W. Gowen; 68 Director/Trustee Mr. Gowen is a partner in the law firm of Dunnington,
666 Third Avenue Bartholow & Miller. Prior to May 1994, he was a
New York, New York 10017 partner in the law firm of Fryer,
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATIONS/TRUSTS OTHER DIRECTORSHIPS
- ------------------------------------ --------------------- ------------------------------------------------------
<S> <C> <C>
Ross & Gowen. Mr. Gowen is a director or trustee of
31 investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Frederic V. Malek; 61 Director/Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Ave, N.W. (merchant bank). From January 1992 to November 1992,
Suite 350 he was campaign manager of Bush-Quayle '92. From
Washington, D.C. 20004 1990 to 1992, he was vice chairman and, from 1989 to
1990, he was president of Northwest Airlines Inc.,
NWA Inc. (holding company of Northwest Airlines
Inc.) and Wings Holdings Inc. (holding company of
NWA Inc.). Prior to 1989, he was employed by the
Marriott Corporation (hotels, restaurants, airline
catering and contract feeding), where he most
recently was an executive vice president and
president of Marriott Hotels and Resorts. Mr. Malek
is also a director of American Management Systems,
Inc. (management consulting and computer-related
services), Automatic Data Processing, Inc., CB
Commercial Group, Inc. (real estate services),
Choice Hotels International (hotel and hotel
franchising), FPL Group, Inc. (electric services),
Manor Care, Inc. (health care) and Northwest
Airlines Inc. Mr. Malek is a director or trustee of
31 investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Carl W. Schafer; 62 Director/Trustee Mr. Schafer is president of the Atlantic Foundation
66 Witherspoon Street #1100 (charitable foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and research). He is a
director of Base Ten Systems, Inc. (software)
Roadway Express, Inc. (trucking), The Guardian Group
of Mutual Funds, the Harding, Loevner Funds, Evans
Systems, Inc. (motor fuels, convenience store and
diversified company), Electronic Clearing House,
Inc. (financial transactions processing), Frontier
Oil Corporation and Nutraceutix, Inc. (biotechnology
company). Prior to January 1993, Mr. Schafer was
chairman of the Investment Advisory Committee of the
Howard Hughes Medical Institute. Mr. Schafer is a
director or trustee of 31 investment companies
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATIONS/TRUSTS OTHER DIRECTORSHIPS
- ------------------------------------ --------------------- ------------------------------------------------------
<S> <C> <C>
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Kimberly Brown; 31 Vice President (Money Ms. Brown is a vice president and a portfolio manager
Fund) of Mitchell Hutchins. She has been a portfolio
manager since March 1995 and has been with Mitchell
Hutchins since December 1992. Ms. Brown is vice
president of one investment company for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Prior to September 1997 he was an audit manager in
the financial services practice of Ernst & Young
LLP. Mr. Lee is a vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Dennis McCauley; 51 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was director of
fixed income investments of IBM Corporation. Mr.
McCauley is a vice president of 22 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Kevin P. McIntyre; 31 Vice President Mr. McIntyre is a vice president and a portfolio
(Municipal Money manager of Mitchell Hutchins. Mr. McIntyre is a vice
Market Series) president of one investment company for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Ms. Moran is a vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president and deputy
Secretary general counsel of Mitchell Hutchins. Ms. O'Donnell
is a vice president and secretary of 31 investment
companies and vice president and assistant secretary
of one investment company for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATIONS/TRUSTS OTHER DIRECTORSHIPS
- ------------------------------------ --------------------- ------------------------------------------------------
<S> <C> <C>
Emil Polito; 37 Vice President Mr. Polito is a senior vice president and director of
operations and control for Mitchell Hutchins. From
March 1991 to September 1993 he was director of the
mutual funds sales support and service center for
Mitchell Hutchins and PaineWebber. Mr. Polito is
vice president of 32 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Susan P. Ryan; 38 Vice President (Money Ms. Ryan is a senior vice president and a portfolio
Fund) manager of Mitchell Hutchins and has been with
Mitchell Hutchins since 1982. Ms. Ryan is a vice
president of five investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. Prior to May 1994, she
was a partner in the law firm of Arnold & Porter.
Ms. Schonfeld is a vice president of 31 investment
companies and vice president and secretary of one
investment company for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice president and the
Treasurer director of the mutual fund finance department of
Mitchell Hutchins. From August 1992 to August 1994,
he was a vice president of BlackRock Financial
Management, L.P. Mr. Schubert is a vice president
and treasurer of 32 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Barney A. Taglialatela; 37 Vice President and Mr. Taglialatela is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Prior to February 1995, he was a manager
of the mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr. Taglialatela is a
vice president and assistant treasurer of 32
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Debbie Vermann; 39 Vice President Ms. Vermann is a vice president and a portfolio
(Tax-Free Fund, manager of Mitchell Hutchins. Ms. Vermann is a vice
Managed Municipal president of three investment companies for which
Trust, and Municipal Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATIONS/TRUSTS OTHER DIRECTORSHIPS
- ------------------------------------ --------------------- ------------------------------------------------------
<S> <C> <C>
Money Market Series)
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and associate
Assistant Secretary general counsel of Mitchell Hutchins. Prior to May
1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary
of 31 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
- ------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of each
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
Each Corporation or Trust pays board members who are not "interested
persons" of the Corporation or Trust $1,000 annually for each series and $150
per series for each separate board meeting and each meeting of a board committee
(other than committee meetings held on the same day as a board meeting). Money
Fund, Tax-Free Fund, Managed Municipal Trust and Municipal Money Market Series
presently pay such directors and trustees $3,000, $1,000, $2,000 and $1,000
annually, respectively, plus any additional amounts due for board or committee
meetings. Each chairman of the audit and contract review committees of
individual funds within the PaineWebber fund complex receives additional
compensation aggregating $15,000 annually from the relevant funds. Board members
are reimbursed for any expenses incurred in attending meetings. Board members
and officers of the Corporations/Trusts own in the aggregate less than 1% of the
shares of each Fund. Because PaineWebber and Mitchell Hutchins perform
substantially all of the services necessary for the operation of the
Corporations/Trusts and the Funds, the Corporations and Trusts require no
employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
presently receives any compensation from the Corporations and Trusts for acting
as a board member or officer.
39
<PAGE>
The table below includes certain information relating to the compensation of
the current board members of the Corporations/Trusts who held office with one of
the Funds or with other PaineWebber funds during the fiscal year ended June 30,
1998.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION FROM COMPENSATION
--------------------------------------------------------- FROM THE
MUNICIPAL CORPORATIONS/TRUSTS
MONEY TAX-FREE MANAGED MONEY MARKET AND THE
NAME OF PERSONS, POSITION FUND* FUND* MUNICIPAL TRUST* SERIES* FUND COMPLEX**
- ------------------------------------------ ----------- ----------- ---------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Richard Q. Armstrong
Director/Trustee........................ $ 6,150 $ 2,050 $ 4,100 $ 2,050 $ 94,885
Richard R. Burt
Director/Trustee........................ 5,700 1,900 3,800 1,900 87,085
Meyer Feldberg,
Director/Trustee........................ 6,150 2,050 4,100 2,050 117,853
George W. Gowen,
Director/Trustee........................ 7,389 2,463 4,926 2,463 101,567
Frederic V. Malek,
Director/Trustee........................ 6,150 2,050 4,100 2,050 95,845
Carl W. Schafer
Director/Trustee........................ 6,150 2,050 4,100 2,050 94,885
</TABLE>
- ------------
+ Only independent board members are compensated by the Corporations or Trusts
and identified above; board members who are "interested persons" as defined
by the 1940 Act do not receive compensation.
* Represents fees paid to each board member during the fiscal years ended June
30, 1998.
** Represents total compensation paid to each board member during the calendar
year ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing, or retirement plan.
As of July 31, 1998, the Funds had no shareholders who owned of record 5% or
more of a Fund's shares, and no Fund is aware of any shareholder who is the
beneficial owner of 5% or more of its shares.
40
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. PaineWebber acts as
the Funds' investment adviser and administrator pursuant to separate contracts
dated March 23, 1989 with Money Fund, March 1, 1989 with Tax-Free Fund,
September 10, 1990 with Managed Municipal Trust and April 13, 1995 with
Municipal Money Market Series ("PaineWebber Contracts"). Under the PaineWebber
Contracts, each Fund pays PaineWebber an annual fee, computed daily and paid
monthly, according to the following schedule:
<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- --------------------------------------------------------------------------------- ---------
<S> <C>
MONEY MARKET PORTFOLIO:
All............................................................................ 0.50%
U.S. GOVERNMENT PORTFOLIO:
Up to $300 million............................................................. 0.50%
In excess of $300 million up to $750 million................................... 0.44%
Over $750 million.............................................................. 0.36%
TAX-FREE FUND:
Up to $1 billion............................................................... 0.50%
In excess of $1 billion up to $1.5 billion..................................... 0.44%
Over $1.5 billion.............................................................. 0.36%
CALIFORNIA MUNICIPAL MONEY FUND AND NEW YORK MUNICIPAL MONEY FUND:
Up to $300 million............................................................. 0.50%
In excess of $300 million up to $750 million................................... 0.44%
Over $750 million.............................................................. 0.36%
NEW JERSEY MUNICIPAL MONEY FUND:
All............................................................................ 0.50%
</TABLE>
For the periods indicated, the Funds paid (or accrued) to PaineWebber the
following fees.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Money Market Portfolio.................. $50,859,070 $40,972,909 $32,952,818
U.S. Government Portfolio............... 5,010,616 4,931,890 4,457,510
Tax-Free Fund........................... 10,111,111 9,479,630 9,012,871
California Municipal Money Fund......... 2,667,404 2,493,144 2,050,593
New York Municipal Money Fund........... 1,673,724 1,446,166 1,263,305
($5,113) ($292,698) ($46,118)
waived waived waived
</TABLE>
41
<PAGE>
For the periods indicated, New Jersey Municipal Money Fund paid (or accrued)
to PaineWebber and/ or Kidder Peabody Asset Management, Inc., the Fund's
predecessor manager and investment adviser, the following fees:
<TABLE>
<CAPTION>
FOR THE FISCAL
FOR THE FISCAL YEAR FOR THE FISCAL YEAR FOR THE EIGHT MONTHS YEAR ENDED
ENDED JUNE 30, 1998 ENDED JUNE 30, 1997 ENDED JUNE 30, 1996 OCTOBER 31, 1995
------------------- ------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
New Jersey Municipal Money Fund..... $294,352 $239,816 $138,224 $167,865
</TABLE>
During its fiscal year ended June 30, 1998, no Fund paid fees to PaineWebber
for its services as lending agent because no Fund engaged in any securities
lending activities during that period. Prior to August 1, 1997, PaineWebber
provided certain services to each Fund not otherwise provided by its transfer
agent. Pursuant to agreements between PaineWebber and each of the Funds relating
to these services, each Fund paid (or accrued) to PaineWebber the following
fees:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
--------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ------------ ------------
Money Market Portfolio.................................................... $ 156,077 $ 1,736,778 $ 1,391,745
U.S. Government Portfolio................................................. 12,249 148,113 144,758
Tax-Free Fund............................................................. 20,345 247,472 242,449
California Municipal Money Fund........................................... 4,546 54,029 50,117
New York Municipal Money Fund............................................. 3,402 39,481 36,019
</TABLE>
These agreements were reviewed annually by the appropriate boards. Effective
August 1, 1997, PaineWebber provides transfer agency related services to each
Fund pursuant to a delegation of authority from PFPC Inc. and is compensated for
these services by PFPC Inc., not the Funds.
Under separate contracts with PaineWebber dated March 23, 1989 with respect
to Money Fund, March 1, 1989 with respect to Tax-Free Fund, September 10, 1990
with respect to Managed Municipal Trust and April 13, 1995 with respect to
Municipal Money Market Series ("Mitchell Hutchins Contracts"), Mitchell Hutchins
serves as each Fund's sub-adviser and sub-administrator. Under the Mitchell
Hutchins Contracts, PaineWebber (not the Funds) pays Mitchell Hutchins fees,
computed daily and paid monthly, at an annual rate of 20% of the fee paid by
each Fund to PaineWebber under the PaineWebber Contracts.
For the periods indicated, PaineWebber paid (or accrued) to Mitchell
Hutchins the following fees.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Money Market Portfolio..................................................... $ 10,171,814 $ 8,194,582 $ 6,590,564
U.S. Government Portfolio.................................................. 1,002,123 986,378 891,502
Tax-Free Fund.............................................................. 2,022,222 1,895,926 1,802,574
California Municipal Money Fund............................................ 533,481 498,629 410,119
New York Municipal Money Fund.............................................. 333,722 347,773 252,661
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FISCAL YEAR FISCAL YEAR FOR THE FISCAL YEAR
ENDED ENDED EIGHT MONTHS ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 OCTOBER 31, 1995
---------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C>
New Jersey Municipal Money Fund...... $ 58,870 $ 47,963 $ 27,645 $ 18,580
</TABLE>
Under the terms of the PaineWebber Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by PaineWebber.
General expenses of a Corporation or Trust not readily identifiable as belonging
to a specific Fund or to any other series of the Corporation or Trust are
allocated among series by or under the direction of the Corporation's or Trust's
board in such manner as the board deems fair and equitable. Expenses borne by
the Funds include the following (or each Fund's share of the following): (1) the
cost (including brokerage commissions and other transaction costs, if any) of
securities purchased or sold by the Funds and any losses incurred in connection
therewith, (2) fees payable to and expenses incurred on behalf of the Funds by
PaineWebber, (3) organizational expenses, (4) filing fees and expenses relating
to the registration and qualification of the shares of the Funds under federal
and state securities laws and maintaining such registrations and qualifications,
(5) fees and salaries payable to the board members and officers who are not
interested persons of a Corporation or a Trust, or of PaineWebber, (6) all
expenses incurred in connection with the board members' services, including
travel expenses, (7) taxes (including any income or franchise taxes) and
governmental fees, (8) costs of any liability, uncollectable items of deposit
and other insurance or fidelity bonds, (9) any costs, expenses or losses arising
out of a liability of or claim for damages or other relief asserted against a
Corporation or Trust, or a Fund for violation of any law, (10) legal, accounting
and auditing expenses, including legal fees of special counsel for those board
members who are not interested persons of a Corporation or Trust, (11) charges
of custodians, transfer agents and other agents, (12) expenses of setting in
type and printing prospectuses and supplements thereto, reports and statements
to shareholders and proxy material for existing shareholders, (13) costs of
mailing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials to existing
shareholders, (14) any extraordinary expenses (including fees and disbursements
of counsel, costs of actions, suits or proceedings to which a Corporation or
Trust is a party and the expenses a Corporation or Trust may incur as a result
of its legal obligation to provide indemnification to its officers, board
members, agents and shareholders) incurred by a Fund, (15) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations, (16) costs of mailing and tabulating proxies
and costs of meetings of shareholders, the board and any committees thereof,
(17) the cost of investment company literature and other publications provided
to the board members and officers, and (18) costs of mailing, stationery and
communications equipment.
Under the PaineWebber and Mitchell Hutchins Contracts (collectively,
"Contracts"), PaineWebber or Mitchell Hutchins will not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund in connection
with the performance of the Contracts, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of PaineWebber or
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder.
The Contracts are terminable with respect to each Fund at any time without
penalty by vote of the applicable board or by vote of the holders of a majority
of the outstanding voting securities of that Fund on 60 days' written notice to
PaineWebber or Mitchell Hutchins, as the case may be. The PaineWebber Contracts
are also terminable without penalty by PaineWebber on 60 days' written notice to
the appropriate
43
<PAGE>
Corporation or Trust, and the Mitchell Hutchins Contracts are terminable without
penalty by PaineWebber or Mitchell Hutchins on 60 days' written notice to the
other party. The Contracts terminate automatically upon their assignment, and
each Mitchell Hutchins Contract also terminates automatically upon the
assignment of the applicable PaineWebber Contract.
The following table shows the approximate net assets as of July 31, 1998,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET
INVESTMENT CATEGORY ASSETS
- ------------------------------------------------------------- ---------
($ MIL)
<S> <C>
Domestic (excluding Money Market)............................ 7,867.8
Global....................................................... 3,938.0
Equity/Balanced.............................................. 6,516.6
Fixed Income (excluding Money Market)........................ 5,289.2
Taxable Fixed Income....................................... 3,709.5
Tax-Free Fixed Income...................................... 1,579.7
Money Market Funds........................................... 28,787.4
</TABLE>
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber mutual funds and other Mitchell Hutchins'
advisory accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by the PaineWebber mutual funds and
other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. PaineWebber acts as distributor of shares of the
Funds under separate distribution contracts with each Corporation or Trust
("Distribution Contracts") which require PaineWebber to use its best efforts,
consistent with its other business, to sell shares of the Funds. Shares of the
Funds are offered continuously. Payments by U.S. Government Portfolio, Tax-Free
Fund, California Municipal Money Fund, New Jersey Municipal Money Fund and New
York Municipal Money Fund to compensate or reimburse PaineWebber for certain
expenses incurred in connection with its activities in providing certain
shareholder and account maintenance services (and, for New Jersey Municipal
Money Fund, distributing its shares) are authorized under the Distribution
Contracts and made in accordance with related plans of distribution ("Plans")
adopted by each Corporation or Trust with respect to those Funds in the manner
prescribed by Rule 12b-1 under the 1940 Act. No such payments have been
authorized for Money Market Portfolio.
Among other things, each Plan provides that (1) PaineWebber will submit to
the board at least quarterly, and the board members will review, reports
regarding all amounts expended under the Plan and the purposes for which such
expenditures were made, (2) the Plan will continue in effect only so long as it
is approved at least annually, and any material amendment thereto is approved,
by the board, including those board members who are not "interested persons" of
the Corporation or Trust and who have no direct or indirect financial interest
in the operation of the Plan or any agreement related to the Plan, acting
44
<PAGE>
in person at a meeting called for that purpose, (3) payments by a Fund under the
Plan shall not be materially increased without the affirmative vote of the
holders of a majority of the affected Fund's outstanding shares and (4) while
the Plan remains in effect, the selection and nomination of board members who
are not "interested persons" of the Corporation or Trust shall be committed to
the discretion of the board members who are not "interested persons" of the
Corporation or Trust.
Under the applicable Plan, U.S. Government Portfolio, Tax-Free Fund,
California Municipal Money Fund and New York Municipal Money Fund each is
authorized to pay PaineWebber a service fee, computed daily and paid monthly, at
the annual rate of up to 0.15% of its average daily net assets. Each of these
Funds currently pays service fees to PaineWebber at the annual rate of 0.125% of
average daily net assets. Any increase from the current annual rate would
require prior approval of the board. Under the applicable Plan, New Jersey
Municipal Money Fund reimburses PaineWebber for certain service and distribution
expenses at an annual rate of up to 0.12% of its average daily net assets.
During their fiscal years ended June 30, 1998, U.S. Government Portfolio,
Tax-Free Fund, California Municipal Money Fund and New York Municipal Money Fund
paid or accrued to PaineWebber service fees of $1,151,934, $2,249,678, $553,196
and $332,649, respectively. For the same periods, PaineWebber estimates that it
incurred expenses of $628,002, $1,198,573, $326,863 and $215,234, respectively,
in servicing Fund shareholders. PaineWebber estimates that these expenses were
incurred for each of these Funds, respectively, as follows: (a) allocated costs
related to shareholder servicing--$46,000, $46,000, $46,500 and $46,250; and (b)
service fees to Investment Executives--$582,002, $1,152,573, $280,363 and
$168,984.
During the fiscal year ended June 30, 1998, New Jersey Municipal Money Fund
paid or accrued to PaineWebber 12b-1 fees of $70,644. For the same period,
PaineWebber estimates that it incurred expenses of $75,340 in distributing
shares of this Fund and servicing Fund shareholders. PaineWebber estimates that
these expenses were incurred for New Jersey Municipal Money Fund as follows: (a)
advertising and promotion--$27,500; (b) printing--$87; and (c) service fees to
Investment Executives--$47,753.
"Allocated costs" include various internal costs allocated by PaineWebber to
its efforts at providing certain shareholder and account maintenance services.
These internal costs encompass office rent, salaries and other overhead expenses
of various PaineWebber departments and areas of operations.
In approving the continuance of the Plan for each Fund, the applicable board
considered all features of the distribution system for the Fund, including (a)
PaineWebber's view that the payment of service fees (and distribution fees for
New Jersey Municipal Money Fund) at the annual rate of 0.02% of the average
daily net assets of the Fund held in shareholder accounts serviced by Investment
Executives and correspondent firms was attractive to such Investment Executives
and correspondent firms and would result in greater growth of the Fund than
might otherwise be the case, (b) the extent to which Fund shareholders might
benefit from economies of scale resulting from growth in the Fund's assets and
shareholder account size and the potential for continued growth, (c) the
services provided to the Fund and its shareholders by PaineWebber pursuant to
the applicable Distribution Contract, (d) PaineWebber's expenses and costs under
the Plan as described above and (e) the fact that the expense to the Fund of the
Plan could be offset if the Plan is successful by the lower advisory fee rates
that may be triggered as assets reach higher levels.
With respect to each Plan, the applicable board considered the benefits that
would accrue to PaineWebber under the Plan in that PaineWebber would receive
service and advisory fees that are calculated based upon a percentage of the
average net assets of the Fund, which fees would increase if the Plan is
successful and the Fund attains and maintains increased asset levels.
45
<PAGE>
PORTFOLIO TRANSACTIONS
The Funds purchase portfolio securities from dealers and underwriters as
well as from issuers. Securities are usually traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. Prices
paid to dealers in principal transactions generally include a "spread," which is
the difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. When securities are purchased directly
from an issuer, no commissions or discounts are paid. When securities are
purchased in underwritten offerings, they include a fixed amount of compensation
to the underwriter.
The Mitchell Hutchins Contracts authorize Mitchell Hutchins (with the
approval of each Corporation's or Trust's board) to select brokers and dealers
to execute purchases and sales of each Fund's portfolio securities. The
Contracts direct Mitchell Hutchins to use its best efforts to obtain the best
available price and most favorable execution with respect to all transactions
for the Funds. To the extent that the execution and price offered by more than
one dealer are comparable, Mitchell Hutchins may, in its discretion, effect
transactions in portfolio securities with dealers who provide the Funds with
research, analysis, advice and similar services. Although Mitchell Hutchins may
receive certain research or execution services in connection with these
transactions, Mitchell Hutchins will not purchase securities at a higher price
or sell securities at a lower price than would otherwise be paid if no weight
was attributed to the services provided by the executing dealer. Moreover,
Mitchell Hutchins will not enter into any explicit soft dollar arrangements
relating to principal transactions and will not receive in principal
transactions the types of services that could be purchased for hard dollars.
Research services furnished by the dealers through which or with which a Fund
effects securities transactions may be used by Mitchell Hutchins in advising
other funds or accounts and, conversely, research services furnished to Mitchell
Hutchins in connection with other funds or accounts that Mitchell Hutchins
advises may be used in advising the Fund. Information and research received from
dealers will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Mitchell Hutchins Contracts. During its
past three fiscal years, no Fund has paid any brokerage commissions; therefore,
none has allocated any brokerage transactions for research, analysis, advice and
similar services.
Mitchell Hutchins may engage in agency transactions in over-the-counter
equity and debt securities in return for research and execution services. These
transactions are entered into only in compliance with procedures ensuring that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide research
or execution services. These procedures include Mitchell Hutchins receiving
multiple quotes from dealers before executing the transactions on an agency
basis.
Investment decisions for each Fund and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for a Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s) as
to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned or upon
its ability to complete its entire order, in other cases it is believed that
coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
46
<PAGE>
HOLDINGS OF REGULAR BROKER-DEALERS
As of June 30, 1998, Money Market Portfolio owned commercial paper and other
short-term obligations issued by the following persons who are regular
broker-dealers for that Fund: Bear Stearns Companies Incorporated, $303,311,447;
Goldman Sachs Group LP, $98,173,665; Lehman Brothers Holdings Incorporated,
$507,944,575; Merrill Lynch & Co., Inc., $338,658,217; and Morgan Stanley, Dean
Witter & Discover Company, $267,579,733.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
Each Fund may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ("NYSE") is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for a Fund to dispose of securities owned by it or to determine
fairly the market value of its assets or (3) as the SEC may otherwise permit.
The redemption price may be more or less than the shareholder's cost, depending
on the market value of the Fund's portfolio at the time, although each Fund
seeks to maintain a constant net asset value of $1.00 per share.
If conditions exist that make cash payments undesirable, California
Municipal Money Fund and New York Municipal Money Fund each reserve the right to
honor any request for redemption by making payment in whole or in part in
securities chosen by the Fund and valued in the same way as they would be valued
for purposes of computing the Fund's net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting these
securities into cash. Managed Municipal Trust has elected, however, to be
governed by Rule 18f-1 under the 1940 Act, under which it is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of either Fund during any 90-day period for one shareholder. This election is
irrevocable unless the SEC permits its withdrawal.
Under normal circumstances, a Fund will redeem shares when so requested by a
shareholder's broker-dealer other than PaineWebber by telegram or telephone to
PaineWebber. Such a redemption order will be executed at the net asset value
next determined after the order is received by PaineWebber. Redemptions of Fund
shares effected through a broker-dealer other than PaineWebber may be subject to
a service charge by that broker-dealer.
VALUATION OF SHARES
Each Fund uses its best efforts to maintain its net asset value at $1.00 per
share. Each Fund's net asset value per share is determined by State Street Bank
and Trust Company ("State Street") as of 12:00 noon, Eastern time, on each
Business Day. As defined in the Prospectus, "Business Day" means any day on
which State Street's Boston offices, the New York City offices of PaineWebber
and PaineWebber's bank, The Bank of New York, are all open for business. One or
more of these institutions will be closed on the observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Patriot's Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day.
Each Fund values its portfolio securities in accordance with the amortized
cost method of valuation under Rule 2a-7 ("Rule") under 1940 Act. To use
amortized cost to value its portfolio securities, a Fund must adhere to certain
conditions under the Rule relating to the Fund's investments, some of which are
47
<PAGE>
discussed in the Prospectus and this Statement of Additional Information.
Amortized cost is an approximation of market value, whereby the difference
between acquisition cost and value at maturity of the instrument is amortized on
a straight-line basis over the remaining life of the instrument. The effect of
changes in the market value of a security as a result of fluctuating interest
rates is not taken into account, and thus the amortized cost method of valuation
may result in the value of a security being higher or lower than its actual
market value. If a large number of redemptions take place at a time when
interest rates have increased, a Fund might have to sell portfolio securities
prior to maturity and at a price that might not be desirable.
Each board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share, which include a review of the
extent of any deviation of net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. If that deviation exceeds
1/2 of 1% for any Fund, its board will promptly consider whether any action
should be initiated to eliminate or reduce material dilution or other unfair
results to shareholders. Such action may include redeeming shares in kind,
selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. Each Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and except as otherwise indicated herein
will not purchase any instrument with a remaining maturity greater than 13
months, will limit portfolio investments, including repurchase agreements, to
those U.S. dollar-denominated instruments that are of high quality and that
Mitchell Hutchins determines (pursuant to delegated authority from the
appropriate board) present minimal credit risks and will comply with certain
reporting and recordkeeping procedures. There is no assurance that constant net
asset value per share will be maintained. If amortized cost ceases to represent
fair value, the relevant board will take appropriate action.
In determining the approximate market value of portfolio investments, each
Fund may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula method not been used.
TAXES
FEDERAL TAXES. To continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code, each Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain, if any) plus, in the case of
each Municipal Fund, its net interest income excludable from gross income under
section 103(a) of the Internal Revenue Code, and must meet several additional
requirements. With respect to each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of securities and certain other
income; (2) at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. government securities and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets; and (3) at the close of each quarter of
the Fund's taxable year, not more
48
<PAGE>
than 25% of the value of its total assets may be invested in securities (other
than U.S. government securities) of any one issuer.
Dividends paid by a Municipal Fund will qualify as "exempt-interest
dividends," and thus will be excludable from gross income by its shareholders,
if it satisfies the additional requirement that, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under section
103(a). Each Municipal Fund intends to continue to satisfy this requirement. The
aggregate amount annually designated by a Municipal Fund as exempt-interest
dividends may not exceed its interest for the year that is excludable under
section 103(a) over certain amounts disallowed as deductions. The shareholders'
treatment of dividends from the Municipal Funds under state and local income tax
laws may differ from the treatment thereof under the Internal Revenue Code.
Tax-exempt interest attributable to certain PABs (including, in the case of
a Municipal Fund receiving interest on such bonds, a proportionate part of the
exempt-interest dividends paid by that Fund) is subject to the federal
alternative minimum tax. Exempt-interest dividends received by a corporate
shareholder also may be indirectly subject to that tax without regard to whether
a Municipal Fund's tax-exempt interest was attributable to those bonds. PABs are
issued by or on behalf of public authorities to finance various privately
operated facilities and are described in the Prospectus.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by IDBs or PABs should consult their
tax advisers before purchasing shares of a Municipal Fund because, for users of
certain of these facilities, the interest on those bonds is not exempt from
federal income tax. For these purposes, the term "substantial user" is defined
generally to include a "non-exempt person" who regularly uses in trade or
business a part of a facility financed from the proceeds of IDBs or PABs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as a Municipal Fund) plus 50% of their
benefits exceeds certain base amounts. Exempt-interest dividends from the
Municipal Funds still are tax-exempt to the extent described above and in the
Prospectus; they are only included in the calculation of whether a recipient's
income exceeds the established amounts.
If a Municipal Fund invests in any instruments that generate taxable income,
under the circumstances described in the Prospectus and in the discussion of
municipal market discount bonds below, the portion of any Fund dividend
attributable to the interest earned thereon will be taxable to that Fund's
shareholders as ordinary income to the extent of its earnings and profits and
only the remaining portion will qualify as an exempt-interest dividend. The
respective portions will be determined by the "actual earned" method, under
which the portion of any dividend that qualifies as an exempt-interest dividend
may vary, depending on the relative proportions of tax-exempt and taxable
interest earned during the dividend period. Moreover, if a Municipal Fund
realizes capital gain as a result of market transactions, any distribution of
that gain will be taxable to its shareholders.
Each Municipal Fund may invest in municipal bonds that are purchased,
generally not on their original issue, with market discount (that is, at a price
less than the principal amount of the bond or, in the case of a bond that was
issued with original issue discount, a price less than the amount of the issue
price plus accrued original issue discount) ("municipal market discount bonds").
If a bond's market discount is
49
<PAGE>
less than the product of (1) 0.25% of the redemption price at maturity times (2)
the number of complete years to maturity after the taxpayer acquired the bond,
then no market discount is considered to exist. Gain on the disposition of a
municipal market discount bond (other than a bond with a fixed maturity date
within one year from its issuance) generally is treated as ordinary (taxable)
income, rather than capital gain, to the extent of the bond's accrued market
discount at the time of disposition. Market discount on such a bond generally is
accrued ratably, on a daily basis, over the period from the acquisition date to
the date of maturity. In lieu of treating the disposition gain as above, a
Municipal Fund may elect to include market discount in its gross income
currently, for each taxable year to which it is attributable.
Dividends from investment company taxable income paid to a shareholder who,
as to the United States, is a nonresident alien individual, nonresident alien
fiduciary of a trust or estate, foreign corporation or foreign partnership
("foreign shareholder") generally are subject to a 30% withholding tax, unless
the applicable tax rate is reduced by a treaty between the United States and the
shareholder's country of residence. Withholding does not apply to a dividend
paid to a foreign shareholder that is "effectively connected with the
[shareholder's] conduct of a trade or business within the United States," in
which case the withholding requirements applicable to domestic taxpayers apply.
Exempt-interest dividends paid by the Municipal Funds are not subject to
withholding.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all its
ordinary (I.E., taxable) income for that year and any capital gain net income
for the one-year period ending October 31 of that year, plus certain other
amounts.
CALIFORNIA TAXES. In any year in which California Municipal Money Fund
qualifies as a RIC under the Internal Revenue Code and 50% or more of its assets
at the close of each quarter of its taxable year are invested in obligations the
interest on which is exempt from personal income taxation by the State of
California, the Fund will be qualified under California law to pay
"exempt-interest" dividends which will be exempt from the California personal
income tax.
Individual shareholders of California Municipal Money Fund who reside in
California will not be subject to California personal income tax on
distributions received from the Fund to the extent such distributions are
attributable to interest on tax-exempt obligations issued by the State of
California or a California local government (or interest earned on tax-exempt
obligations of U.S. possessions or territories), provided that the Fund
satisfies the requirement of California law that at least 50% of its assets at
the close of each quarter of its taxable year be invested in obligations the
interest on which is exempt from personal income taxation by the State of
California. Income distributions from the Fund that are attributable to sources
other than those described in the preceding sentence will generally be taxable
to such shareholders as ordinary income. However, distributions from the Fund,
if any, that are derived from interest on obligations of the U.S. government may
also be designated by the Fund and treated by its shareholders as exempt from
California personal income tax, provided that the foregoing 50% requirement is
satisfied. In addition, distributions to such shareholders other than
exempt-interest dividends will be includable in income subject to the California
alternative minimum tax.
Shareholders of California Municipal Money Fund who are subject to the
California corporate franchise tax will be required to include distributions of
investment income and capital gains in their taxable income for purposes of that
tax. In addition, such distributions may be includable in income subject to the
alternative minimum tax.
50
<PAGE>
Shares of California Municipal Money Fund will not be subject to the
California property tax.
The foregoing is a general, abbreviated summary of certain of the provisions
of the tax laws of the State of California presently in effect as they directly
govern the taxation of shareholders of California Municipal Money Fund. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Fund transactions.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning California tax matters.
NEW YORK TAXES. Individual shareholders of New York Municipal Money Fund
will not be required to include in their gross income for New York State and
City purposes any portion of distributions received from New York Municipal
Money Fund to the extent such distributions are directly attributable to
interest earned on tax-exempt obligations issued by New York State or any
political subdivisions thereof (including New York City) or interest earned on
obligations of U.S. possessions or territories to the extent interest on such
obligations is exempt from state taxation pursuant to federal law, provided that
New York Municipal Money Fund qualifies as a RIC under the Internal Revenue Code
and satisfies certain requirements, among others, that at least 50% of its
assets at the close of each quarter of its taxable year constitute obligations
which are tax-exempt for federal income tax purposes. Distributions from New
York Municipal Money Fund which are attributable to sources other than those
described in the preceding sentence (including interest on obligations of other
states and their political subdivisions) will generally be taxable to such
individual shareholders as ordinary income. Distributions to individual
shareholders by New York Municipal Money Fund which represents long-term capital
gains for federal income tax purposes will be treated as long-term capital gains
for New York State and City personal income tax purposes. (Certain undistributed
capital gains of New York Municipal Money Fund that are treated as (taxable)
long-term capital gains in the hands of shareholders will be treated as
long-term capital gains for New York State and City personal income taxes
purposes.)
Shareholders of New York Municipal Money Fund that are subject to the New
York State corporate franchise tax or the New York City general corporation tax
will be required to include exempt-interest dividends paid by New York Municipal
Money Fund in their "entire net income" for purposes of such taxes and will be
required to include their shares of New York Municipal Money Fund in their
investment capital for purposes of such taxes.
Shareholders of New York Municipal Money Fund will not be subject to the
unincorporated business taxation imposed by New York City solely by reason of
their ownership of shares in New York Municipal Money Fund. If a shareholder is
subject to the unincorporated business tax, income and gains distributed by New
York Municipal Money Fund will be subject to such tax except, in general, to the
extent such distributions are directly attributable to interest earned on
tax-exempt obligations issued by New York State or any political subdivision
thereof (including New York City).
Shares of New York Municipal Money Fund will not be subject to property
taxes imposed by New York State or City.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of New York Municipal Money Fund (and certain other expenses relating
thereto) generally will not be deductible for New York State or City personal
income tax purposes.
51
<PAGE>
Interest income of New York Municipal Money Fund which is distributed to
shareholders will generally not be taxable to New York Municipal Money Fund for
purposes of the New York State corporate franchise tax or City general
corporation tax.
New York Municipal Money Fund is subject to the corporate franchise (income)
tax measured by the entire net income base, the minimum taxable income base or
the fixed dollar minimum, whichever is greater. "Entire net income" of New York
Municipal Money Fund is federal "investment company taxable income" with certain
modifications. In addition, New York Municipal Money Fund is permitted to deduct
dividends paid to its shareholders in determining its federal taxable income.
The foregoing is a general summary of certain provisions of federal, New
York State and City tax laws currently in effect as they directly govern the
taxation of shareholders of New York Municipal Money Fund. Further, these
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to New York Municipal Money
Fund's transactions. Shareholders are advised to consult with their own tax
advisers for more detailed information concerning tax matters.
NEW JERSEY TAXES. New Jersey Municipal Money Fund anticipates that
substantially all dividends paid by it will not be subject to the New Jersey
gross income tax. In accordance with the provisions of New Jersey law as
currently in effect, distributions paid by a "qualified investment fund" will
not be subject to the New Jersey gross income tax to the extent the
distributions are attributable to income received as interest or gain from New
Jersey Municipal Securities or direct U.S. government obligations or certain
other specified obligations. To be classified as a qualified investment fund, at
least 80% of the Fund's investments must consist of such obligations.
Distributions by a qualified investment fund that are attributable to most other
sources will be subject to the New Jersey gross income tax. If the Fund
continues to qualify as a qualified investment fund, any gain on the redemption
of its shares will not be subject to the New Jersey gross income tax. To the
extent a shareholder of the Fund is obligated to pay state or local taxes
outside of New Jersey, dividends earned by such shareholder may represent
taxable income.
The shares of New Jersey Municipal Money Fund are not subject to property
taxation by New Jersey or its political subdivisions.
The foregoing is a general, abbreviated summary of certain of the applicable
provisions of New Jersey tax law presently in effect. These provisions are
subject to change by legislative, judicial or administrative action and any such
change may be either prospective or retroactive with respect to Fund
transactions. Shareholders are urged to consult with their own tax advisers for
more detailed information concerning New Jersey State tax matters.
TAX-FREE INCOME VS. TAXABLE INCOME--TAX-FREE FUND. Table I below
illustrates approximate equivalent taxable and tax-free yields at the 1998
federal individual income tax rates in effect on the date of this Statement of
Additional Information. For example, a couple with taxable income of $90,000 in
1998, or a single individual with taxable income of $55,000 in 1998, whose
investments earn a 3% tax-free yield, would have to earn a 4.17% taxable yield
to receive the same benefit.
52
<PAGE>
TABLE I. 1998 FEDERAL TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
- ----------------------------- -----------------------------------------------
SINGLE JOINT FEDERAL TAX 3.00% 4.00% 5.00% 6.00% 7.00%
RETURN RETURN BRACKET ------- ------- ------- ------- -------
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------- ------------- ------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 25.4 $ 0-- 42.4 15.00% 3.53% 4.71% 5.88% 7.06% 8.24 %
25.4-- 61.4 42.4--102.3 28.00 4.17 5.56 6.94 8.33 9.72
61.4--128.1 102.3--156.0 31.00 4.35 5.80 7.25 8.70 10.14
128.1--278.5 156.0--278.5 36.00 4.69 6.25 7.81 9.38 10.94
Over 278.5 Over 278.5 39.60 4.97 6.62 8.28 9.93 11.59
</TABLE>
- ---------
* The yields listed are for illustration only and are not necessarily
representative of the Fund's yield. The Fund invests primarily in
obligations the interest on which is exempt from federal income tax;
however, some of the Fund's investments may generate taxable income.
Effective tax rates shown are those in effect on the date of this Statement
of Additional Information; such rates might change after that date. Certain
simplifying assumptions have been made. Any particular taxpayer's rate may
differ. The effective rates reflect the highest tax bracket within each
range of income listed. The figures set forth above do not reflect the
federal alternative minimum tax, limitations on federal or state itemized
deductions and personal exemptions or any state or local taxes payable on
Fund distributions.
TAX-FREE INCOME VS. TAXABLE INCOME--CALIFORNIA MUNICIPAL MONEY FUND. Table
II below illustrates approximate equivalent taxable and tax-free yields at the
1998 federal individual and 1997 California personal gross income tax rates in
effect on the date of this Statement of Additional Information. For example, a
California couple with taxable income of $90,000 in 1998, or a single California
individual with taxable income of $55,000 in 1998, whose investments earn a 3%
tax-free yield, would have to earn a 4.59% taxable yield to receive the same
benefit.
TABLE II. 1998 FEDERAL AND 1997 CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
EFFECTIVE A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) CALIFORNIA ----------------------------------------------------
----------------------------- AND
SINGLE JOINT FEDERAL TAX 3.00% 4.00% 5.00% 6.00%
RETURN RETURN BRACKET ------- ------- ------- -------
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------- ------------- ------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 18.8-- 25.4 $ 37.5-- 42.4 20.10% 3.75% 5.01% 6.26% 7.51 %
25.4-- 26.1 42.4-- 52.1 32.32 4.43 5.91 7.39 8.87
26.1-- 32.9 52.1-- 65.8 33.76 4.53 6.04 7.55 9.06
32.9-- 61.4 65.8--102.3 34.70 4.59 6.13 7.66 9.19
61.4--128.1 102.3--156.0 37.42 4.79 6.39 7.99 9.59
128.1--278.5 156.0--278.5 41.95 5.17 6.89 8.61 10.34
Over 278.5 Over 278.5 45.22 5.48 7.30 9.13 10.95
</TABLE>
- ------------
* The yields listed are for illustration only and are not necessarily
representative of the Fund's yield. The Fund invests primarily in
obligations the interest on which is exempt from federal income tax and
California personal income tax; however, some of the Fund's investments may
generate taxable income. Effective tax rates shown are those in effect on
the date of this Statement of Additional Information; such rates might
change after that date. Certain simplifying assumptions have been made. Any
particular taxpayer's rate may differ. The effective rates reflect the
highest tax bracket
53
<PAGE>
within each range of income listed. However, a California, taxpayer within
the lowest income ranges shown may fall within a lower effective tax
bracket. The figures set forth above do not reflect the federal alternative
minimum tax, limitations on federal or state itemized deductions and
personal exemptions or any state or local taxes payable on Fund
distributions (other than California personal income taxes).
The rates shown reflect federal rates for 1998 and California rates for 1997 in
effect as of the date hereof. Inflation adjusted income brackets for 1998 for
California are not yet available, and the California rates thus are still
subject to change with retroactive effect for 1998.
TAX-FREE INCOME VS. TAXABLE INCOME--NEW YORK MUNICIPAL MONEY FUND. Table
III below illustrates approximate equivalent taxable and tax-free yields at the
federal individual, and New York State and New York City personal, income tax
rates in effect on the date of this Statement of Additional Information. For
example, a New York City couple with taxable income of $90,000 in 1998, or a
single individual with taxable income of $55,000 in 1998 who lives in New York
City, whose investments earn a 3% tax-free yield, would have to earn a 4.67%
taxable yield to receive the same benefit. A couple who lives in New York State
outside of New York City with taxable income of $90,000 in 1998, or a single
individual who lives in New York State outside of New York City with taxable
income of $55,000 in 1998, would have to earn a 4.47% taxable yield to realize a
benefit equal to a 3% tax-free yield.
TABLE III. 1998 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
TAXABLE INCOME (000'S) COMBINED A TAX-FREE YIELD OF
----------------------------- FEDERAL/ ----------------------------------------------------
SINGLE JOINT NYS/NYC 4.00% 5.00% 6.00%
RETURN RETURN TAX BRACKET 3.00% ------- ------- -------
-------
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------- ------------- ------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0-- 25.4 $ 0-- 42.4 24.10% 3.95% 5.27% 6.59% 7.91%
25.4-- 61.4 42.4--102.3 35.75 4.67 6.23 7.78 9.34
61.4--128.1 102.3--156.0 38.42 4.87 6.50 8.12 9.74
128.1--278.5 156.0--278.5 42.89 5.25 7.00 8.75 10.50
Over 278.5 Over 278.5 46.10 5.57 7.42 9.28 11.13
<CAPTION>
TAXABLE INCOME (000'S) COMBINED A TAX-FREE YIELD OF
----------------------------- FEDERAL/ ----------------------------------------------------
SINGLE JOINT NYS 4.00% 5.00% 6.00%
RETURN RETURN TAX BRACKET 3.00% ------- ------- -------
-------
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------- ------------- ------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0-- 25.4 $ 0-- 42.4 20.82% 3.79% 5.05% 6.31% 7.58%
25.4-- 61.4 42.4--102.3 32.93 4.47 5.96 7.46 8.95
61.4--128.1 102.3--156.0 35.73 4.67 6.22 7.78 9.34
128.1--278.5 156.0--278.5 40.38 5.03 6.71 8.39 10.06
Over 278.5 Over 278.5 43.74 5.33 7.11 8.89 10.66
</TABLE>
- ------------
* The yields listed are for illustration only and are not necessarily
representative of the Fund's yield. The Fund invests primarily in
obligations the interest on which is exempt from federal income tax and New
York State and New York City personal income taxes; however, some of the
Fund's investments may generate taxable income. Effective tax rates shown
are those in effect on the date of this Statement of Additional Information;
such rates might change after that date. Certain simplifying
54
<PAGE>
assumptions have been made. Any particular taxpayer's rate may differ. The
effective rates reflect the highest tax bracket within each range of income
listed. However, a New York taxpayer within the lowest income ranges shown
may fall within a lower effective tax bracket. The figures set forth above
do not reflect the federal alternative minimum tax, limitations on federal
or state itemized deductions and personal exemptions or any state or local
taxes payable on Fund distributions (other than New York State and New York
City personal income taxes).
TAX-FREE INCOME VS. TAXABLE INCOME--NEW JERSEY MUNICIPAL MONEY FUND. Table
IV below illustrates approximate equivalent taxable and tax-free yields at the
federal individual and New Jersey gross income tax rates in effect on the date
of this Statement of Additional Information. For example, a New Jersey couple
with taxable income of $90,000 in 1998, or a single New Jersey individual with
taxable income of $55,000 in 1998, whose investments earn a 3% tax-free yield,
would have to earn a 4.41% taxable yield to receive the same benefit.
TABLE IV. 1998 FEDERAL AND NEW JERSEY TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
EFFECTIVE A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) NEW JERSEY ----------------------------------------------------
----------------------------- AND
SINGLE JOINT FEDERAL TAX 3.00% 4.00% 5.00% 6.00%
RETURN RETURN BRACKET ------- ------- ------- -------
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------- ------------- ------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0-- 25.4 $ 0-- 42.4 16.49% 3.59% 4.79% 5.99% 7.18%
25.4-- 35.0 42.4-- 50.0 29.26 4.24 5.65 7.07 8.48
50.0-- 70.0 29.76 4.27 5.70 7.12 8.54
35.0-- 40.0 70.0-- 80.0 30.52 4.32 5.76 7.20 8.64
40.0-- 61.4 80.0--102.3 31.98 4.41 5.88 7.35 8.82
61.4-- 75.0 102.3--150.0 34.81 4.60 6.14 7.67 9.20
75.0--128.1 150.0--156.0 35.40 4.64 6.19 7.74 9.29
128.1--278.5 156.0--278.5 40.08 5.01 6.68 8.34 10.01
Over 278.5 Over 278.5 43.45 5.31 7.07 8.84 10.61
</TABLE>
- ------------
* The yields listed are for illustration only and are not necessarily
representative of the Fund's yield. The Fund invests primarily in
obligations the interest on which is exempt from federal income tax and New
Jersey gross income tax; however, some of the Fund's investments may
generate taxable income. Effective tax rates shown are those in effect on
the date of this Statement of Additional Information; such rates might
change after that date. Certain simplifying assumptions have been made. Any
particular taxpayer's rate may differ. The effective rates reflect the
highest tax bracket within each range of income listed. However, a New
Jersey taxpayer within the lowest income ranges shown may fall within a
lower effective tax bracket. The figures set forth above do not reflect the
federal alternative minimum tax, limitations on federal or state itemized
deductions and personal exemptions or any state or local taxes payable on
Fund distributions (other than New Jersey personal income taxes).
55
<PAGE>
CALCULATION OF YIELD
Each Fund computes its yield and effective yield quotations using
standardized methods required by the SEC. Each Fund from time to time advertises
(1) its current yield based on a recently ended seven-day period, computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from that
shareholder account, dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return and then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent; and (2) its effective
yield based on the same seven-day period by compounding the base period return
by adding 1, raising the sum to a power equal to (365/7), and subtracting 1 from
the result, according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1
Each Municipal Fund from time to time also advertises its tax-equivalent
yield and tax-equivalent effective yield, also based on a recently ended
seven-day period. These quotations are calculated by dividing that portion of
the Fund's yield (or effective yield, as the case may be) that is tax-exempt by
1 minus a stated income tax rate and adding the product to that portion, if any,
of the Fund's yield that is not tax-exempt, according to the following formula:
E
TAX-EQUIVALENT YIELD = ( ----- ) + t
1 - p
E = Tax exempt yield
p = stated income tax rate
t = taxable yield
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of each Fund fluctuates, it cannot be compared
with yields on savings accounts or other investment alternatives that provide an
agreed to or guaranteed fixed yield for a stated period of time. However, yield
information may be useful to an investor considering temporary investments in
money market instruments. In comparing the yield of one money market fund to
another, consideration should be given to each fund's investment policies,
including the types of investments made, the average maturity of the portfolio
securities and whether there are any special account charges that may reduce the
yield.
The following yields are for the seven-day period ended June 30, 1998:
<TABLE>
<CAPTION>
EFFECTIVE
YIELD YIELD
--------- -----------
<S> <C> <C>
Money Market Portfolio............................................... 5.05% 5.18%
U.S. Government Portfolio............................................ 4.81% 4.93%
Tax-Free Fund........................................................ 2.99% 3.03%
California Municipal Money Fund...................................... 2.69% 2.73%
New Jersey Municipal Money Fund...................................... 2.56% 2.60%
New York Municipal Money Fund........................................ 2.82% 2.86%
</TABLE>
56
<PAGE>
The following tax equivalent yields are based, in each case, on the maximum
individual tax rates:
<TABLE>
<CAPTION>
TAX-EQUIVALENT TAX-EQUIVALENT
YIELD EFFECTIVE YIELD
--------------- ---------------
<S> <C> <C>
Tax-Free Fund (assuming a federal tax rate of 39.6%)............................... 4.95% 5.02%
California Municipal Money Fund (assuming a combined federal and California State
tax rate of 45.22%).............................................................. 4.91% 4.98%
New Jersey Municipal Money Fund (assuming a combined federal and New Jersey State
tax rate of 43.45%).............................................................. 4.53% 4.60%
New York Municipal Money Fund (assuming a combined federal, New York State and New
York City tax rate of 46.43%).................................................... 5.26% 5.34%
New York Municipal Money Fund (assuming an effective combined federal and New York
State tax rate of 43.74%)........................................................ 5.01% 5.08%
</TABLE>
OTHER INFORMATION. The Funds' performance data quoted in advertising and
other promotional materials ("Performance Advertisements") represent past
performance and are not intended to predict or indicate future results. The
return on an investment in each Fund will fluctuate. In Performance
Advertisements, the Funds may compare their taxable or tax-free yields with data
published by Lipper Analytical Services, Inc. for money funds ("Lipper"), CDA
Investment Technologies, Inc. ("CDA"), IBC/ Donoghue's Money Market Fund Report
("Donoghue"), Wiesenberger Investment Companies Service ("Wiesenberger"),
Investment Company Data Inc. ("ICD") or Morningstar Mutual Funds
("Morningstar"), or with the performance of recognized stock and other indexes,
including the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Merrill Lynch Municipal Bond Indices, the Morgan Stanley
Capital World Index, the Lehman Brothers Treasury Bond Index, the Lehman
Brothers Government-Corporate Bond Index, the Salomon Brothers Government Bond
Index and the Consumer Price Index as published by the U.S. Department of
Commerce. The Funds also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper, CDA, Donoghue, Wiesenberger, ICD or Morningstar.
Performance Advertisements also may refer to discussions of the Funds and
comparative mutual fund data and ratings reported in independent periodicals,
including THE WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK,
FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE
WASHINGTON POST and THE KIPLINGER LETTERS.
Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends on a Fund investment are reinvested by being paid in
additional Fund shares, any future income of the Fund would increase the value,
not only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of a Fund investment would
increase more quickly than if dividends had been paid in cash.
Each Fund may also compare its performance with the performances of bank
certificates of deposit ("CDs") as measured by the CDA Certificate of Deposit
Index and the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquotes-Registered Trademark- Money Markets. In
comparing a Fund's performance to CD performance, investors should keep in mind
that bank CDs are insured in
57
<PAGE>
whole or in part by an agency of the U.S. government and offer fixed principal
and fixed or variable rates of interest and that bank CD yields may vary
depending on the financial institution offering the CD and prevailing interest
rates. Advertisements and other promotional materials for the Funds or for the
PaineWebber Resource Management Account ("RMA")-Registered Trademark- and
Business Services Account ("BSA")-SM- programs may compare features of the RMA
and BSA programs to those offered by bank checking accounts and other bank
accounts. Bank accounts are insured in whole or in part by an agency of the U.S.
government and may offer a fixed rate of return. Fund shares are not insured or
guaranteed by the U.S. government, and returns thereon will fluctuate. While
each Fund seeks to maintain a stable net asset value of $1.00 per share, there
can be no assurance that it will be able to do so.
OTHER INFORMATION
Each Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a Trust.
However, each Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each note, bond, contract, instrument, certificate or undertaking made or issued
by the trustees or by any officers or officer by or on behalf of that Trust, a
Fund, the trustees or any of them in connection with the Trust. Each Declaration
of Trust provides for indemnification from a Fund's property for all losses and
expenses of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which a Fund itself would
be unable to meet its obligations, a possibility which PaineWebber believes is
remote and not material. Upon payment of any liability incurred by a
shareholder, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Fund. The trustees intend to
conduct the operations of each Fund in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
Prior to February 28, 1996, Municipal Money Market Series was known as
PaineWebber/Kidder, Peabody Municipal Money Market Series. Prior to January 30,
1995, PaineWebber/Kidder, Peabody Municipal Money Market Series was known as
Kidder, Peabody Municipal Money Market Series. Prior to December 15, 1995, New
Jersey Municipal Money Fund was known as New Jersey Series.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036, serves as counsel to the Funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters. The law firm of Orrick, Herrington &
Sutcliffe LLP, 400 Sansome Street, San Francisco, CA 94111, serves as counsel to
California Municipal Money Fund with respect to California law. The law firm of
Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New York
10103-0001, serves as counsel to New York Municipal Money Fund with respect to
New York law and New Jersey Municipal Money Fund with respect to New Jersey law.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Funds.
58
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FINANCIAL STATEMENTS
The Annual Reports to Shareholders for the Funds' fiscal years ended June
30, 1998 are separate documents supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and reports of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
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<PAGE>
APPENDIX A
SERVICES AVAILABLE THROUGH THE RMA PROGRAM TO RMA ACCOUNTHOLDERS
Shares of the Funds are available primarily to investors who are
Participants in the Resource Management Account (RMA) program offered by
PaineWebber and its correspondent firms. The following is a summary of some of
the services available to RMA Participants. For more complete information,
investors should refer to separate materials their Investment Executive can
provide them.
THE PAINEWEBBER RMA PREMIER STATEMENT. RMA Participants receive a monthly
Premier account statement, which provides consolidated information to assist
with portfolio management decisions and personal financial planning. The Premier
account statement summarizes securities transactions, card transactions and
checks (if applicable) and provides cost basis information and calculations of
unrealized and realized gains and losses on most investments. A "Summary of
Accounts" statement and a menu of customized statement options is available to
make the monthly reporting even more comprehensive.
PRELIMINARY AND YEAR-END SUMMARIES. RMA Participants receive preliminary
and year-end summary account statements that provide a comprehensive overview of
tax-related activity in the account during the year to help investors with tax
planning.
CHOICE OF MONEY MARKET FUNDS AND AUTOMATIC SWEEP OF UNINVESTED CASH. As
described more fully in the Prospectus under the heading "Purchases--The RMA and
BSA Programs," RMA Participants select a money market fund as a primary fund
from a variety of taxable and tax-free money funds into which uninvested cash is
automatically swept on a daily basis. By automatically investing cash balances
into a money market fund, this sweep feature minimizes the extent to which an
investor's assets remain idle while held in the account pending investment.
CHECK WRITING. RMA Participants have ready access to the assets held in
their RMA through the check writing feature. There are no minimum check amounts
or per check charges. The RMA checks include an expense coding system that
enables the investor to track types of expenses for tax and financial planning.
DIRECT DEPOSIT. Regular payroll, pension, social security or other payments
may be eligible for electronic deposit into RMA Participants' accounts.
ELECTRONIC FUNDS TRANSFER/BILL PAYMENT SERVICE. RMA Participants can
electronically transfer money between their RMA and other financial
institutions, transfer funds to and from other PaineWebber accounts and pay
bills. A Bill Payment Service is available for an additional charge.
GOLD MASTERCARD-REGISTERED TRADEMARK-. RMA Participants can elect to
receive with a complementary Gold MasterCard debit card that makes account
assets easily accessible. The Gold MasterCard is accepted by merchants both in
the U.S. and abroad, and can be used to obtain cash advances at thousands of
automated teller machines. Through MasterCard's enhanced
MasterAssist-Registered Trademark- and MasterPurchase-Registered Trademark-
programs, investors can obtain other benefits, including rental car insurance,
emergency medical and travel assistance, legal services and purchase protection.
EXTENDED ACCOUNT PROTECTION. Securities held in an RMA Account by
PaineWebber or one of its correspondent firms are protected for up to the net
equity through private insurance in the event of the
A-1
<PAGE>
liquidation or failure of the firm. This protection is in addition to the
$500,000 in protection provided to accountholders by the Securities Investor
Protection Corporation ("SIPC"). Neither the SIPC protection nor the additional
account protection insurance applies to shares of the Funds because such shares
are registered directly in the name of the shareholder, and not in the name of
PaineWebber or one of its correspondent firms.
RESOURCE ACCUMULATION PLAN-SM-. The Resource Accumulation Plan is an
automatic mutual fund investment program that provides participants the ability
to purchase shares of select mutual funds on a regular, periodic basis. The
minimum purchase in the program is $100 per investment; however, initial minimum
purchase requirements of the designated mutual fund(s) must be met before an
investor can participate in this program. The participant must receive a
prospectus, which contains more complete information (including charges and
expenses), for each fund before the application form to participate in the
Resource Accumulation Plan is submitted.
FINANCIAL SERVICES CENTER AND RESOURCELINE-REGISTERED TRADEMARK-. RMA
Participants have around the clock access to information concerning their RMA.
This service is available by calling (800) RMA-1000. RMA representatives are
available at the Financial Services Center from 7:30 a.m. to 8:00 p.m. (Eastern
time) weekdays, and from 8:00 a.m. to 4:00 p.m. (Eastern time) weekends, to
answer inquiries from Participants regarding their accounts, and ResourceLine,
an automated voice response system, provides 24 hour account information.
MARGIN. RMA Participants may choose to have a margin feature as part of
their RMA.
A-2
<PAGE>
APPENDIX B
SERVICES AVAILABLE THROUGH THE BSA PROGRAM FOR BSA ACCOUNTHOLDERS
Shares of the Funds are available to investors who are Participants in the
Business Services Account ("BSA")-Registered Trademark- program. The following
is a summary of some of the services that are available to BSA Participants. For
more complete information, investors should refer to separate materials their
Investment Executives can provide them.
PREMIER BUSINESS SERVICES ACCOUNT STATEMENT--BSA Participants receive a
monthly Premier statement, which provides consolidated information to assist
with portfolio management decisions and business finances. The Premier statement
summarizes securities transactions, card transactions, and checks in
chronological order with running cash and money fund balances. The "Portfolio
Management" feature provides cost basis information where available as well as
calculations of gains and losses on most investments. A menu of customized
statement options is now available to make the monthly reporting more
comprehensive.
PRELIMINARY AND YEAR-END SUMMARIES STATEMENT--BSA Participants receive
preliminary and year-end summary information statements that provide a
comprehensive overview of tax-related activity in the account during the year to
help investors plan.
CHOICE OF MONEY MARKET FUNDS AND AUTOMATIC SWEEP OF UNINVESTED CASH--As
described more fully in the Prospectus under the heading "Purchases--The RMA and
BSA Programs," BSA Participants select a money market fund as a primary fund
from a variety of taxable and tax-free money funds into which uninvested cash is
automatically swept on a daily basis. By automatically investing cash balances
into a money market fund, this sweep feature minimizes the extent to which an
investor's assets remain idle while held in the account pending investment.
CHECK WRITING--BSA Participants have ready access to the assets held in
their BSA through the check writing feature. There are no minimum check amounts.
Participants can order from a number of business check styles to suit their
check writing needs. The BSA checks also include an expense code system that
enables investors to track business expense types for tax and financial
planning.
MASTERCARD BUSINESSCARD-REGISTERED TRADEMARK---BSA Participants can elect to
receive a complementary MasterCard BusinessCard debit card for easy access to
account assets. The MasterCard BusinessCard is accepted worldwide, and can be
used to obtain cash at thousands of automated teller machines. Through
MasterCard's enhanced MasterAssist-Registered Trademark- and
MasterPurchase-Registered Trademark- programs, investors can obtain other
benefits including full value primary rental car insurance, emergency medical
and travel assistance, legal services and purchase protection.
MARGIN--BSA Participants may choose to have a margin feature as part of
their BSA.
EXTENDED ACCOUNT PROTECTION--Securities held in a BSA by PaineWebber or one
of its correspondent firms are protected for up to the net equity through
private insurance in the event of the liquidation or failure of the firm. This
protection is in addition to the $500,000 in protection provided to
accountholders by the Securities Investor Protection Corporation ("SIPC").
Neither the SIPC protection nor the additional account protection insurance
applies to shares of the Funds because such shares are registered directly in
the name of the shareholder, and not in the name of PaineWebber or one of its
correspondent firms.
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<PAGE>
FINANCIAL SERVICES CENTER AND RESOURCELINE-REGISTERED TRADEMARK---BSA
Participants can call the Financial Services Center at (800) BSA-0140 from 7:30
a.m. to 8:00 p.m. (Eastern time) weekdays, and from 8:00 a.m. to 4:00 p.m.
(Eastern time) weekends, and speak to a PaineWebber representative to make any
inquiries about their accounts. The automated ResourceLine voice response system
provides basic account information through a touch-tone phone and is available
24 hours a day by calling (800) 762-1000.
ELECTRONIC FUNDS TRANSFER/PAYMENT SERVICE--BSA Participants have the option
to initiate transfers of funds to and from their accounts, pay bills and vendors
through an electronic fund transfer service. Unlimited transfers to the BSA from
other financial institutions and 20 free transfers/payments out of the BSA are
permitted monthly with nominal fees thereafter. Participants send regular or
variable payments simply by calling an 800 number.
CARD RECEIVABLES PROCESSING--BSA account holders that transact business with
their clients using credit cards and debit cards, can have these receipts
automatically deposited into their BSA where their funds will be swept into
their primary sweep Fund thereby continuously earning dividends. Working through
your current merchant processor, or a PaineWebber referral, this service is a
simple way to enhance earnings on your business's cash flow.
LETTERS OF CREDIT--BSA Participants can have Standby Letters of Credit
issued on their behalf through PaineWebber at competitive rates and backed by
securities in their account.
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No person has been authorized to give any information or to make any
representations not contained in the Prospectus or in this Statement of
Additional Information in connection with the offering made by the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Funds or their distributor. The
Prospectus and this Statement of Additional Information do not constitute an
offering by the Funds or by the distributor in any jurisdiction in which such
offering may not lawfully be made.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions........... 2
Directors/Trustees and Officers; Principal
Holders of Securities........................ 34
Investment Advisory, Administration and
Distribution Arrangements.................... 41
Portfolio Transactions......................... 46
Additional Information Regarding Redemptions... 47
Valuation of Shares............................ 47
Taxes.......................................... 48
Calculation of Yield........................... 56
Other Information.............................. 58
Financial Statements........................... 59
Appendix A..................................... A-1
Appendix B..................................... B-1
</TABLE>
PAINEWEBBER RMA
MONEY MARKET PORTFOLIO
U.S. GOVERNMENT PORTFOLIO
TAX-FREE FUND
CALIFORNIA MUNICIPAL
MONEY FUND
NEW JERSEY MUNICIPAL
MONEY FUND
NEW YORK MUNICIPAL
MONEY FUND
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Statement of Additional Information
August 29, 1998
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- -C-1998 PaineWebber Incorporated
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