As filed with the Securities and Exchange
Commission on October 27, 2000
File Nos. 2-79807
811-3586
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 43 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 41 X
ALLIANCE MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:
(800) 221-5672
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York 10105
(Name and address of agent for service)
Copies of communications to:
Thomas G. MacDonald, Esq.
Seward & Kissel LLP
One Battery Park Plaza
New York, New York 10004
It is proposed that this filing will become effective (Check
appropriate line)
immediately upon filing pursuant to paragraph (b)
X on November 1, 2000 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of Rule 485.
(LOGO) ALLIANCE MUNICIPAL TRUST
____________________________________________________________
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
____________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
November 1, 2000
____________________________________________________________
TABLE OF CONTENTS
Page
Investment Objectives and Policies.........................
Investment Restrictions....................................
Management.................................................
Purchases and Redemption of Shares.........................
Additional Information.....................................
Daily Dividends-Determination of Net Asset Value...........
Taxes......................................................
General Information........................................
Financial Statements and Report of Independent Accountants.
Appendix A-Description of Municipal Securities............. A-1
Appendix B-Description of Securities Ratings............... B-1
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the Fund's current Prospectus dated November 1, 2000. A copy of
the Prospectus may be obtained by contacting the Fund at the
address or telephone number shown above.
__________________________
(R) This registered service mark used under license from the
owner, Alliance Capital Management L.P.
___________________________________________________________
INVESTMENT OBJECTIVES AND POLICIES
___________________________________________________________
Alliance Municipal Trust (the "Fund") is an open-end
management investment company. The Fund was reorganized as a
Massachusetts business trust in April 1985, having previously
been a Maryland corporation since formation in January 1983. The
Fund consists of nine distinct Portfolios, the General Portfolio,
the New York Portfolio, the California Portfolio, the Connecticut
Portfolio, the New Jersey Portfolio, the Virginia Portfolio, the
Florida Portfolio, the Massachusetts Portfolio and the
Pennsylvania Portfolio (each a "Portfolio"), each of which is, in
effect, a separate fund issuing a separate class of shares. The
investment objectives of each Portfolio are safety of principal,
liquidity and, to the extent consistent with these objectives,
maximum current income that is exempt from income taxation to the
extent described below. As a matter of fundamental policy, each
Portfolio, except the Florida and Massachusetts Portfolios,
pursues its objectives by investing in high-quality municipal
securities having remaining maturities of one year (397 days with
respect to the New Jersey and Virginia Portfolios), or less,
which maturities may extend to 397 days and, except when a
Portfolio assumes a temporary defensive position, at least 80% of
each such Portfolio's total assets will be so invested. The
Florida, Massachusetts and Pennsylvania Portfolios pursue their
objectives by investing in high quality municipal securities
having remaining maturities of 397 days or less (which maturities
may extend to such greater length of time as may be permitted
from time to time pursuant to Rule 2a-7 under the Investment
Company Act of 1940, as amended (the "Act"), and, except when
such a Portfolio assumes a temporary defensive position, as a
matter of fundamental policy, at least 80% of each Portfolio's
total assets will be invested in municipal securities. While no
Portfolio may change any "fundamental" policy without shareholder
approval, the other investment policies set forth in this
Statement of Additional Information may be changed by a Portfolio
upon notice but without such approval. The Fund may in the
future establish additional portfolios which may have different
investment objectives. There can be no assurance, as is true
with all investment companies, that any Portfolio will achieve
its investment objectives.
Although the Portfolios may invest up to 20% of their
total assets in taxable money market securities, substantially
all of each Portfolio's income normally will be tax-exempt. Each
Portfolio investing in a particular state may purchase municipal
securities issued by other states if Alliance Capital Management
L.P. (the "Adviser" or "Alliance") believes that suitable
municipal securities of that state are not available for
2
investment. To the extent of its investments in other states'
municipal securities, a portfolio's income will be exempt only
from Federal income tax, not state personal income tax or other
state tax.
General Portfolio. To the extent consistent with its
other investment objectives, the General Portfolio seeks maximum
current income that is exempt from Federal income taxes by
investing principally in a diversified portfolio of high-quality
municipal securities. Such income may be subject to state or
local income taxes.
New York Portfolio. To the extent consistent with its
other investment objectives, the New York Portfolio seeks maximum
current income that is exempt from Federal, New York State and
New York City personal income taxes by investing principally in a
non-diversified portfolio of high-quality municipal securities
issued by New York State or its political subdivisions. Except
when the New York Portfolio assumes a temporary defensive
position, at least 65% of its total assets will, as a matter of
fundamental policy, be so invested. Shares of the New York
Portfolio are offered only to New York State residents.
California Portfolio. To the extent consistent with its
other investment objectives, the California Portfolio seeks
maximum current income that is exempt from both Federal income
taxes and California personal income tax by investing principally
in a non-diversified portfolio of high-quality municipal
securities issued by the State of California or its political
subdivisions. Except when the California Portfolio assumes a
temporary defensive position, at least 65% of its total assets
will, as a matter of fundamental policy, be so invested. Shares
of the California Portfolio are available only to California
residents.
Connecticut Portfolio. To the extent consistent with
its other investment objectives, the Connecticut Portfolio seeks
maximum current income that is exempt from Federal and
Connecticut personal income taxes by investing principally in a
non-diversified portfolio of high-quality municipal securities
issued by Connecticut or its political subdivisions. Except when
the Portfolio assumes a temporary defensive position, at least
65% of its total assets will, as a matter of fundamental policy,
be so invested. Shares of the Connecticut Portfolio are offered
only to Connecticut residents.
New Jersey Portfolio. To the extent consistent with its
other investment objectives, the Portfolio seeks maximum current
income that is exempt from Federal and New Jersey State personal
income taxes by investing principally in a non-diversified
portfolio of high-quality municipal securities issued by the
3
State of New Jersey or its political subdivisions. Except when
the Portfolio assumes a temporary defensive position, at least
65% of its total assets will, as a matter of fundamental policy,
be so invested. The Portfolio will invest not less than 80% of
its net assets in securities the interest on which is exempt from
New Jersey personal income taxes i.e. New Jersey municipal
securities and obligations of the U.S. Government, its agencies
and instrumentalities ("U.S. Government Securities"). Shares of
the New Jersey Portfolio are offered only to New Jersey
residents.
Virginia Portfolio. To the extent consistent with its
other investment objectives, the Virginia Portfolio seeks maximum
current income that is exempt from both Federal income taxes and
Virginia personal income tax by investing principally in a non-
diversified portfolio of high-quality municipal securities issued
by the State of Virginia or its political subdivisions. Except
when the Virginia Portfolio assumes a temporary defensive
position, at least 65% of its total assets will, as a matter of
fundamental policy, be so invested. Shares of the Virginia
Portfolio are available only to Virginia residents.
Florida Portfolio. To the extent consistent with its
other investment objectives, the Florida Portfolio seeks maximum
current income that is exempt from both Federal income taxes and
State of Florida intangible tax by investing principally in a
non-diversified portfolio of high-quality municipal securities
issued by the State of Florida or its political subdivisions.
Except when the Portfolio assumes a temporary defensive position,
at least 65% of its total assets will be so invested. Shares of
the Florida Portfolio are available only to Florida residents.
Massachusetts Portfolio. To the extent consistent with
its other investment objectives, the Massachusetts Portfolio
seeks maximum current income that is exempt from both Federal
income taxes and Commonwealth of Massachusetts tax by investing
principally in a non-diversified portfolio of high quality
municipal securities issued by the Commonwealth of Massachusetts
or its political subdivisions. The Massachusetts Portfolio may
invest in restricted securities that are determined by the
Adviser to be liquid in accordance with procedures adopted by the
Trustees, including securities eligible for resale under Rule
144A under the Securities Act of 1933 (the "Securities Act").
Restricted securities are securities subject to contractual or
legal restrictions on resale, such as those arising from an
issuer's reliance upon certain exemptions from registration under
the Securities Act. Shares of the Massachusetts Portfolio are
offered only to Massachusetts residents.
Pennsylvania Portfolio. To the extent consistent with
its other investment objectives, the Pennsylvania Portfolio seeks
4
maximum current income that is exempt from both Federal income
taxes and Commonwealth of Pennsylvania tax by investing
principally in a non-diversified portfolio of high quality
municipal securities issued by the Commonwealth of Pennsylvania
or its political subdivisions. The Pennsylvania Portfolio may
invest in restricted securities. Those restricted securities
that are determined by the Adviser to be liquid in accordance
with procedures adopted by the Trustees, including securities
eligible for resale under Rule 144A under the Securities Act,
will not be treated as illiquid securities. Restricted
securities are securities subject to contractual or legal
restrictions on resale, such as those arising from an issuer's
reliance upon certain exemptions from registration under the
Securities Act. Shares of the Pennsylvania Portfolio are offered
only to Pennsylvania residents.
New York, California, Connecticut, New Jersey, Virginia,
Florida, Massachusetts and Pennsylvania Portfolios. Apart from
the risks associated with investment in any money market fund
seeking tax-exempt income, such as default by municipal issuers
and fluctuation in short-term interest rates, investors in the
New York, California, Connecticut, New Jersey, Virginia, Florida,
Massachusetts and Pennsylvania Portfolios should consider the
greater risks of each Portfolio's concentration versus the safety
that comes with a less concentrated investment portfolio and
should compare yields available on portfolios of New York,
California, Connecticut, New Jersey, Virginia, Florida,
Massachusetts and Pennsylvania issues, respectively, with those
of more diversified portfolios, including other states' issues,
before making an investment decision. Each of such Portfolios is
a non-diversified investment company and, accordingly, the
permitted concentration of investments may present greater risks
than in the case of a diversified investment company. (See below
"Special Risk Factors of Concentration in a Single State.")
No Portfolio will invest 25% or more of its total assets
in the securities of non-governmental issuers conducting their
principal business activities in any one industry.
To the extent suitable New York, California,
Connecticut, New Jersey, Virginia, Florida, Massachusetts and
Pennsylvania municipal securities, as applicable, are not
available for investment by the respective Portfolio, the
respective Portfolio may purchase municipal securities issued by
other states and political subdivisions. The dividends
designated as derived from interest income on such municipal
securities generally will be exempt from Federal income taxes
but, with respect to: (i) non-New York municipal securities owned
by the New York Portfolio, will be subject to New York State and
New York City personal income taxes; (ii) non-California
municipal securities owned by the California Portfolio, will be
5
subject to California personal income taxes; (iii) non-
Connecticut municipal securities owned by the Connecticut
Portfolio, will be subject to Connecticut personal income taxes;
(iv) non-New Jersey municipal securities owned by the New Jersey
Portfolio, will be subject to New Jersey personal income taxes;
(v) non-Virginia municipal securities owned by the Virginia
Portfolio, will be subject to Virginia personal income taxes;
(vi) non-Florida municipal securities owned by the Florida
Portfolio, will be subject to Florida income and intangible
taxes; (vii) non-Massachusetts municipal securities owned by the
Massachusetts Portfolio, will be subject to Massachusetts
personal income taxes; and (viii) non-Pennsylvania municipal
securities owned by the Pennsylvania Portfolio will be subject to
Pennsylvania income tax.
Municipal Securities
The term "municipal securities," as used in the
Prospectus and this Statement of Additional Information, means
obligations issued by or on behalf of states, territories, and
possessions of the United States or their political subdivisions,
agencies and instrumentalities, the interest from which is exempt
(subject to the alternative minimum tax) from Federal income
taxes. The municipal securities in which the Fund invests are
limited to those obligations which at the time of purchase:
1. are backed by the full faith and credit of the
United States; or
2. are municipal notes, municipal bonds or other types
of municipal securities rated in the two highest
rating categories by the requisite nationally
recognized statistical rating organizations
("NRSROs") such as Moody's Investors Services, Inc.
or Standard and Poor's Corporation, or judged by
the Adviser to be of comparable quality. (See
Appendix A for a description of municipal
securities and Appendix B for a description of
these ratings.)
Rule 2a-7 under the Act
Each Portfolio of the Fund will comply with Rule 2a-7
under the Act, as amended from time to time, including the
diversification, quality and maturity limitations imposed by the
Rule. To the extent that the Fund's limitations are more
permissive than Rule 2a-7, the Fund will comply with the more
restrictive provisions of the Rule.
Currently, pursuant to Rule 2a-7, each Portfolio of the
Fund may invest only in U.S. dollar-denominated "Eligible
6
Securities" (as that term is defined in the Rule) that have been
determined by the Adviser to present minimal credit risks
pursuant to procedures approved by the Trustees. Generally, an
Eligible Security is a security that (i) has a remaining maturity
of 397 days or less and (ii) is rated, or is issued by an issuer
with short-term debt outstanding that is rated, in one of the two
highest rating categories by two nationally recognized
statistical rating organizations ("NRSROs") or, if only one NRSRO
has issued a rating, by that NRSRO (the "requisite NRSROs").
Unrated securities may also be Eligible Securities if the Adviser
determines that they are of comparable quality to a rated
Eligible Security pursuant to guidelines approved by the
Trustees. A description of the ratings of some NRSROs appears in
Appendix B attached hereto.
Under Rule 2a-7 the General Portfolio may not invest
more than five percent of its assets in the securities of any one
issuer other than the United States Government, its agencies and
instrumentalities. The remaining Portfolios of the Fund are
subject to this restriction with respect to 75% of their assets.
Government securities are considered to be first tier securities.
In addition, the Portfolios may not invest in a conduit security
that has received, or is deemed comparable in quality to a
conduit security that has received, the second highest rating by
the requisite number of NRSROs (a "second tier security") if
immediately after the acquisition thereof the Portfolio would
have invested more than (A) the greater of one percent of its
total assets or one million dollars in securities issued by that
issuer which are second tier securities, or (B) five percent of
its total assets in second tier securities (the "second tier
security restriction"). A conduit security for purposes of Rule
2a-7 is a security nominally issued by a municipality, but
dependent for principal and interest payments on non-municipal
issuer's revenues from a non-municipal project.
Alternative Minimum Tax
Each Portfolio of the Fund may invest without limitation
in tax-exempt municipal securities subject to the alternative
minimum tax (the "AMT"). Under current Federal income tax law,
(1) interest on tax-exempt municipal securities issued after
August 7, 1986 which are "specified private activity bonds," and
the proportionate share of any exempt-interest dividend paid by a
regulated investment company which receives interest from such
specified private activity bonds, will be treated as an item of
tax preference for purposes of the AMT imposed on individuals and
corporations, though for regular Federal income tax purposes such
interest will remain fully tax-exempt, and (2) interest on all
tax-exempt obligations will be included in "adjusted current
earnings" of corporations for AMT purposes. Such private
activity bonds ("AMT-Subject Bonds") have provided, and may
7
continue to provide, somewhat higher yields than other comparable
municipal securities.
Investors should consider that, in most instances, no
state, municipality or other governmental unit with taxing power
will be obligated with respect to AMT-Subject Bonds. AMT-Subject
Bonds are in most cases revenue bonds and do not generally have
the pledge of the credit or the taxing power, if any, of the
issuer of such bonds. AMT-Subject Bonds are generally limited
obligations of the issuer supported by payments from private
business entities and not by the full faith and credit of a state
or any governmental subdivision. Typically the obligation of the
issuer of an AMT-Subject Bond is to make payments to bond holders
only out of and to the extent of, payments made by the private
business entity for whose benefit the AMT-Subject Bonds were
issued. Payment of the principal and interest on such revenue
bonds depends solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. It is not possible to provide
specific detail on each of these obligations in which Fund assets
may be invested.
Taxable Securities And Temporary Defensive Position
Although each Portfolio of the Fund is, and expects to
be, largely invested in municipal securities, each Portfolio may
elect to invest up to 20% of its total assets in taxable money
market securities when such action is deemed to be in the best
interests of shareholders. For temporary defensive purposes,
when, in the judgment of the Adviser, financial, economic, and/or
market conditions warrant, each Portfolio may invest any amount
of its total assets in taxable money market securities. When the
Portfolios are investing for temporary defensive purposes, they
may not achieve their investment objectives. Such taxable money
market securities also are limited to remaining maturities of 397
days or less at the time of a Portfolio's investment, and such
Portfolio's municipal and taxable securities are maintained at a
dollar-weighted average of 90 days or less. Taxable money market
securities purchased by a Portfolio include those described
below:
1. marketable obligations of, or guaranteed by, the
United States Government, its agencies or
instrumentalities; or
2. certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having
total assets of more than $1 billion and which are
members of the Federal Deposit Insurance
Corporation; or
8
3. commercial paper of prime quality rated in the two
highest rating categories by the requisite NRSROs
or, if not rated, issued by companies which have an
outstanding debt issue rated in the two highest
rating categories by the requisite NRSROs. (See
Appendix B for a description of these ratings.)
Repurchase Agreements
Each Portfolio may also enter into repurchase agreements
pertaining to the types of securities in which it may invest. A
repurchase agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an agreed-
upon future date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an
agreed-upon market rate which is effective for the period of time
the buyer's money is invested in the security and which is not
related to the coupon rate on the purchased security. Each
Portfolio requires continuous maintenance of collateral in an
amount equal to, or in excess of, the market value of the
securities which are the subject of the agreement. In the event
that a counterparty defaulted on its repurchase obligation, a
Portfolio might suffer a loss to the extent that the proceeds
from the sale of the collateral were less than the repurchase
price. If the counterparty became bankrupt, the Portfolio might
be delayed in selling the collateral. Repurchase agreements are
currently entered into with counterparties deemed to be
creditworthy by the Adviser, including broker-dealers, member
banks of the Federal Reserve System or "primary dealers" (as
designated by the Federal Reserve Bank of New York) in U.S.
Government securities or with State Street Bank and Trust Company
("State Street Bank"), the Fund's Custodian. It is each
Portfolio's current practice to enter into repurchase agreements
only with such primary dealers and its Custodian, and the Fund
has adopted procedures for monitoring the creditworthiness of
such organizations. Pursuant to Rule 2a-7, a repurchase
agreement is deemed to be an acquisition of the underlying
securities provided that the obligation of the seller to
repurchase the securities from the money market fund is
collateralized fully (as defined in such Rule). Accordingly, the
counterparty of a fully collateralized repurchase agreement is
deemed to be the issuer of the underlying securities.
Reverse Repurchase Agreements
Each Portfolio may enter into reverse repurchase
agreements, which involve the sale of securities held by such
Portfolio with an agreement to repurchase the securities at an
agreed upon price, date and interest payment, although no
Portfolio has entered into, nor has any plans to enter into, such
agreements.
9
Adjustable Rate Obligations
The interest rate payable on certain municipal
securities in which a Portfolio may invest, called "adjustable"
obligations, is not fixed and may fluctuate based upon changes in
market rates. The interest rate payable on a adjustable rate
municipal security is adjusted either at pre-designated periodic
intervals or whenever there is a change in the market rate to
which the security's interest rate is tied. Other features may
include the right of a Portfolio to demand prepayment of the
principal amount of the obligation prior to its stated maturity
and the right of the issuer to prepay the principal amount prior
to maturity. The main benefit of an adjustable rate municipal
security is that the interest rate adjustment minimizes changes
in the market value of the obligation. As a result, the purchase
of adjustable rate municipal securities enhances the ability of a
Portfolio to maintain a stable net asset value per share and to
sell an obligation prior to maturity at a price approximating the
full principal amount. The payment of principal and interest by
issuers of certain municipal securities purchased by a Portfolio
may be guaranteed by letters of credit or other credit facilities
offered by banks or other financial institutions. Such
guarantees will be considered in determining whether a municipal
security meets a Portfolio's investment quality requirements.
Adjustable rate obligations purchased by a Portfolio may
include participation interests in variable rate industrial
development bonds that are backed by irrevocable letters of
credit or guarantees of banks that meet the criteria for banks
described above in "Taxable Securities." Purchase of a
participation interest gives a Portfolio an undivided interest in
certain such bonds. A Portfolio can exercise the right, on not
more than 30 days' notice, to sell such an instrument back to the
bank from which it purchased the instrument and draw on the
letter of credit for all or any part of the principal amount of
such Portfolio's participation interest in the instrument, plus
accrued interest, but will do so only (i) as required to provide
liquidity to such Portfolio, (ii) to maintain a high quality
investment portfolio, or (iii) upon a default under the terms of
the demand instrument. Banks retain portions of the interest
paid on such adjustable rate industrial development bonds as
their fees for servicing such instruments and the issuance of
related letters of credit and repurchase commitments. Each
Portfolio will comply with Rule 2a-7 with respect to its
investments in adjustable rate obligations supported by letters
of credit. A Portfolio will not purchase participation interests
in adjustable rate industrial development bonds unless it
receives an opinion of counsel or a ruling of the Internal
Revenue Service that interest earned by such Portfolio from the
bonds in which it holds participation interests is exempt from
Federal income taxes. The Adviser will monitor the pricing,
10
quality and liquidity of variable rate demand obligations and
participation interests therein held by such Portfolio on the
basis of published financial agency reports and other research
services to which the Adviser may subscribe.
Standby Commitments
The acquisition of a standby commitment does not affect
the valuation or maturity of the underlying municipal securities
which continue to be valued in accordance with the amortized cost
method. Standby commitments acquired by a Portfolio are valued
at zero in determining net asset value. Where a Portfolio pays
directly or indirectly for a standby commitment, its cost is
reflected as unrealized depreciation for the period during which
the commitment is held. Standby commitments do not affect the
average weighted maturity of a Portfolio's portfolio of
securities.
When-Issued Securities
Municipal securities are frequently offered on a "when-
issued" basis. When so offered, the price, which is generally
expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement
date occurs within one month after the purchase of municipal
bonds and notes. During the period between purchase and
settlement, no payment is made by a Portfolio to the issuer and,
thus, no interest accrues to such Portfolio from the transaction.
When-issued securities may be sold prior to the settlement date,
but a Portfolio makes when-issued commitments only with the
intention of actually acquiring the securities. To facilitate
such acquisitions, the Fund's Custodian will maintain, in a
separate account of each Portfolio, cash, U.S. Government or
other liquid high-grade debt securities, having value equal to,
or greater than, such commitments. Similarly, a separate account
will be maintained to meet obligations in respect of reverse
repurchase agreements. On delivery dates for such transactions,
a Portfolio will meet its obligations from maturities or sales of
the securities held in the separate account and/or from the
available cash flow. If a Portfolio, however, chooses to dispose
of the right to acquire a when-issued security prior to its
acquisition, it can incur a gain or loss. At the time a
Portfolio makes the commitment to purchase a municipal security
on a when-issued basis, it records the transaction and reflects
the value of the security in determining its net asset value. No
when-issued commitments will be made if, as a result, more than
15% of a Portfolio's net assets would be so committed.
11
Illiquid Securities
No Portfolio of the Fund will invest more than 10% of
its net assets in illiquid securities (including illiquid
restricted securities with respect to the Massachusetts
Portfolio.) As to these securities, a Portfolio is subject to a
risk that should the Portfolio desire to sell them when a ready
buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net
assets could be adversely affected. Illiquid securities may
include securities that are not readily marketable and, with
respect to the Massachusetts Portfolio, securities subject to
legal or contractual restrictions on resale. With respect to the
Massachusetts Portfolio, which may invest in restricted
securities, restricted securities determined by the Adviser to be
liquid will not be treated as "illiquid" for purposes of the
restriction on illiquid securities.
Senior Securities
None of the Portfolios will issue senior securities
except as permitted by the Act or the rules, regulations, or
interpretations thereof.
General
Yields on municipal securities are dependent on a
variety of factors, including the general condition of the money
market and of the municipal bond and municipal note market, the
size of a particular offering, the maturity of the obligation and
the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally
subject to greater price movements than obligations with shorter
maturities. (An increase in interest rates will generally reduce
the market value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio
investments. There can be no assurance, as is true with all
investment companies, that a Portfolio's objectives will be
achieved. The achievement of a Portfolio's investment objectives
is dependent in part on the continuing ability of the issuers of
municipal securities in which a Portfolio invests to meet their
obligations for the payment of principal and interest when due.
Municipal securities historically have not been subject to
registration with the Securities and Exchange Commission,
although there have been proposals which would require
registration in the future. Each Portfolio generally will hold
securities to maturity rather than follow a practice of trading.
However, a Portfolio may seek to improve portfolio income by
selling certain portfolio securities prior to maturity in order
to take advantage of yield disparities that occur in securities
markets.)
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Obligations of issuers of municipal securities are
subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the
Bankruptcy Code. In addition, the obligations of such issuers
may become subject to laws enacted in the future by Congress,
state legislatures, or referenda extending the time for payment
of principal and/or interest, or imposing other constraints upon
enforcement of such obligations or upon the ability of
municipalities to levy taxes. There is also the possibility
that, as a result of litigation or other conditions, the ability
of any issuer to pay, when due, the principal of, and interest
on, its municipal securities may be materially affected.
Except as otherwise provided above, each Portfolio's
investment objectives and policies are not designated
"fundamental policies" within the meaning of the Act and may,
therefore, be changed without a shareholder vote. However, the
Portfolio will not change its investment policies without
contemporaneous written notice to shareholders.
Effective November 1, 1991, the Fund's former name of
Alliance Tax-Exempt Reserves was changed to Alliance Municipal
Trust.
MASSACHUSETTS AND PENNSYLVANIA PORTFOLIOS. THE FOLLOWING
POLICIES RELATE TO THE MASSACHUSETTS AND PENNSYLVANIA
PORTFOLIOS.
Restricted Securities. The Massachusetts and
Pennsylvania Portfolios may also purchase restricted securities,
including restricted securities determined by the Adviser to be
liquid in accordance with procedures adopted by the Trustees,
such as securities eligible for resale under Rule 144A of the
Securities Act. Restricted securities are securities subject to
contractual or legal restrictions on resale, such as those
arising from an issuer's reliance upon certain exemptions from
registration under the Securities Act.
In recent years, a large institutional market has
developed for certain types of restricted securities including,
among others, private placements, repurchase agreements,
commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because
they are sold in transactions not requiring registration. For
example, commercial paper issues include, among others,
securities issued by major corporations without registration
under the Securities Act in reliance on the exemption from
registration afforded by Section 3(a)(3) of such Act and
commercial paper issued in reliance on the private placement
exemption from registration which is afforded by Section 4(2) of
the Securities Act ("Section 4(2) paper"). Section 4(2) paper is
13
restricted as to disposition under the Federal securities laws in
that any resale must also be made in an exempt transaction.
Section 4(2) paper is normally resold to other institutional
investors through or with the assistance of investment dealers
who make a market in Section 4(2) paper, thus providing
liquidity. Institutional investors, rather than selling these
instruments to the general public, often depend on an efficient
institutional market in which such restricted securities can be
readily resold in transactions not involving a public offering.
In many instances, therefore, the existence of contractual or
legal restrictions on resale to the general public does not, in
practice, impair the liquidity of such investments from the
perspective of institutional holders. In recognition of this
fact, the Staff of the Securities and Exchange Commission (the
"Commission") has stated that Section 4(2) paper may be
determined to be liquid by the Trustees, so long as certain
conditions, which are described below, are met.
Rule 144A under the Securities Act establishes a safe
harbor from the Securities Act's registration requirements for
resale of certain restricted securities to qualified
institutional buyers. Pursuant to Rule 144A, the institutional
restricted securities markets may provide both readily
ascertainable values for restricted securities and the ability to
liquidate an investment in order to satisfy share redemption
orders on a timely basis. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Massachusetts or Pennsylvania Portfolio,
however, could affect adversely the marketability of such
portfolio securities and the Massachusetts or Pennsylvania
Portfolio might be unable to dispose of such securities promptly
or at reasonable prices.
The Trustees have the ultimate responsibility for
determining whether specific securities are liquid or illiquid.
The Trustees have delegated the function of making day-to-day
determinations of liquidity to the Adviser, pursuant to
guidelines approved by the Trustees.
The Adviser takes into account a number of factors in
determining whether a restricted security being considered for
purchase is liquid, including at least the following:
(i) the frequency of trades and quotations for the
security;
(ii) the number of dealers making quotations to
purchase or sell the security;
(iii) the number of other potential purchasers of the
security;
14
(iv) the number of dealers undertaking to make a market
in the security;
(v) the nature of the security (including its
unregistered nature) and the nature of the
marketplace for the security (e.g., the time
needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer);
and
(vi) any applicable Commission interpretation or
position with respect to such types of securities.
To make the determination that an issue of Section 4(2)
paper is liquid, the Adviser must conclude that the following
conditions have been met:
(i) the Section 4(2) paper must not be traded flat or
in default as to principal or interest; and
(ii) the Section 4(2) paper must be rated in one of the
two highest rating categories by at least two
NRSROs, or if only one NRSRO rates the security,
by that NRSRO; if the security is unrated, the
Adviser must determine that the security is of
equivalent quality.
The Adviser must also consider the trading market for
the specific security, taking into account all relevant factors.
Following the purchase of a restricted security by the
Massachusetts or Pennsylvania Portfolio, the Adviser monitors
continuously the liquidity of such security and reports to the
Trustees regarding purchases of liquid restricted securities.
Asset-Backed Securities
The Massachusetts and Pennsylvania Portfolios may invest
in asset-backed securities that meet its existing
diversification, quality and maturity criteria. Asset-backed
securities are securities issued by special purpose entities
whose primary assets consist of a pool of loans or accounts
receivable. The securities may be in the form of a beneficial
interest in a special purpose trust, limited partnership
interest, or commercial paper or other debt securities issued by
a special purpose corporation. Although the securities may have
some form of credit or liquidity enhancement, payments on the
securities depend predominately upon collection of the loans and
receivables held by the issuer.
15
Special Risk Factors of Concentration in a Single State
The primary purpose of investing in a portfolio of a
single state's municipal securities is the special tax treatment
accorded that state's resident individual investors. However,
payment of interest and preservation of principal is dependent
upon the continuing ability of the state's issuers and/or
obligors of its state, municipal and public authority debt
obligations to meet their obligations thereunder. Investors
should consider the greater risk of the concentration of the New
York, California, Connecticut, New Jersey, Virginia, Florida
Massachusetts or Pennsylvania Portfolio (individually, a "State
Portfolio") versus the safety that comes with a less concentrated
investment portfolio and should compare yields available on
portfolios of the relevant state's issues with those of more
diversified portfolios, including other states' issues, before
making an investment decision. The Adviser believes that by
maintaining each State Portfolio's investment portfolio in
liquid, short-term, high-quality investments, including the
participation interests and other variable rate obligations that
have credit support such as letters of credit from major
financial institutions, the State Portfolio is largely insulated
from the credit risks that exist on long-term municipal
securities of the relevant state.
The following summaries are included for the purpose of
providing a general description of credit and financial
conditions of New York, California, Connecticut, New Jersey,
Virginia, Florida Massachusetts and Pennsylvania and are based on
information from official statements (described more fully below)
made available in connection with the issuance of certain
securities in such states. The summaries are not intended to
provide a complete description of such states. While the Fund
has not undertaken to independently verify such information, it
has no reason to believe that such information is not correct in
all material aspects. These summaries do not provide specific
information regarding all securities in which the Fund is
permitted to invest and in particular do not provide specific
information on the private business entities whose obligations
support the payments on AMT-Subject Bonds.
NEW YORK PORTFOLIO
The following is based on information obtained from an
Official Statement, dated July 15, 2000, relating to $108,225,000
of the State of New York General Obligation Bonds, Series 2000D
Tax-Exempt Bonds,the Annual Information Statement of the State of
New York dated , May 31, 2000 and an Official Statement, dated
September 21, 2000, relating to $488,420,000 of the City of New
York General Obligation Bonds, Fiscal 2001 Series B and C.
16
Debt Reform Act of 2000
The Debt Reform Act of 2000 (Debt Reform Act) implements
statutory initiatives intended to improve the State's borrowing
practices. The Debt Reform Act applies to all new State-
supported debt issued on and after April 1, 2000 and includes the
following provisions: (a) a phased-in cap on new State-supported
debt outstanding of 4 percent of personal income (the existing
State-supported debt level is 6 percent of personal income);
(b) a phased-in cap on new State-supported debt service costs of
5 percent of total governmental funds receipts (the existing
State-supported debt service costs are 5 percent of total
governmental receipts); (c) a limit on the use of debt to capital
works and purposes only; and (d) a limit on the maximum term of
new State-supported debt to 30 years.
The cap on new State-supported debt outstanding begins
at 0.75 percent of personal income in 2000-01 and is gradually
increased until it is fully phased in at 4 percent of personal
income in 2010-11. Similarly, the phased-in cap on new State-
supported debt service costs begins at 0.75 percent of total
governmental funds receipts and is gradually increased until it
is fully phased in at 5 percent in 2013-14. State-supported bond
issuances during the 2000-01 borrowing plan are projected by the
Division of the Budget ("DOB") to be within the Debt Reform Act's
statutory caps.
The Debt Reform Act requires the limitations on the
issuance of State-supported debt and debt service costs to be
calculated by October 31 of each year and reported in the
quarterly Financial Plan Update most proximate to October 31st of
each year. If the calculations for new State-supported debt
outstanding and debt service costs are less than the State-
supported debt outstanding and debt service costs permitted under
the Debt Reform Act, new State-supported debt may continue to be
issued. However, if either the debt outstanding or the debt
service cap is met or exceeded, the State would be precluded from
contracting new State-supported debt until the next annual cap
calculation is made and State-supported debt is found to be
within the appropriate limitations. The DOB expects that the
prohibition on issuing new State-supported debt if the caps are
met or exceeded will provide an incentive to treat the debt caps
as absolute limits that should not be reached, and therefore DOB
intends to manage subsequent capital plans and issuance schedules
under these limits.
New York Local Government Assistance Corporation
In 1990, as part of a New York State (the "State")
fiscal reform program, legislation was enacted creating the New
York Local Government Assistance Corporation (the "LGAC"), a
17
public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal
borrowing. The legislation authorized LGAC to issue its bonds
and notes in an amount not in excess of $4.7 billion (exclusive
of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal
borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt
service on these bonds. The legislation imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net
proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the
legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it
is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. This provision capping
the seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to
provide net proceeds of $4.7 billion completing the program. The
impact of LGAC's borrowing is that the State is able to meet its
cash flow needs throughout the fiscal year without relying on
short-term seasonal borrowings.
Recent Developments
The national economy has experienced a robust rate of
growth during the past six months as the longest U.S. expansion
on record continues. Growth in real Gross Domestic Product (GDP)
for 2000 is expected to be 4.2 percent falling to 3.0 percent in
2001. Growth is expected to moderate over the course of the year
and into 2001. Growth in real GDP will exceed 4 percent in 2000
largely because of the extremely strong growth in the fourth
quarter of 1999, which raises the base upon which 2000 GDP growth
is calculated.
Various factors are expected to lead to slower growth in
the quarters ahead: higher interest rates, as the Federal Reserve
Board tightens monetary policy to restrain inflation; softer
stock prices, which may gradually restrain consumer spending;
weaker consumer confidence, which is expected to fall from
exceptionally high levels; and slower investment spending in the
residential sector as the cost of borrowing rises.
Inflation, as measured by the Consumer Price Index, is
projected to be 2.7 percent. Inflation is expected to moderate
18
to 2.5 percent in 2001 if, as expected, the Federal Reserve
remains vigilant in controlling any acceleration in consumer
prices. Employment growth, which is expected to grow at the rate
of 2.0 percent in 2000, will slow to 1.6 percent in 2001.
Personal income and wages are estimated to increase by 5.9
percent and 6.5 percent respectively in 2000.
The economic forecast of the DOB contains some
uncertainties. Stronger-than-expected gains in employment and
wages or in stock market prices could lead to stronger growth in
consumer spending. The inflation rate may differ significantly
from expectations due to the conflicting impacts of a tight labor
market and improved productivity growth as well as the future
direction of commodity prices such as petroleum products.
Stronger-than-expected inflation could lead the Federal Reserve
to increase interest rates more aggressively, which could lead to
slower economic growth than currently anticipated.
The forecast of the State's economy shows continued
expansion throughout 2000. Most major sectors recorded
significant employment gains for the first quarter of 2000, with
the services sector accounting for most of the increase. Much of
this increase occurred in business services. The employment
growth rate in 2000 is expected to be 2.1 percent, which,
although lower than 1999's 2.6 percent, represents another strong
year relative to recent historical performance. The unemployment
rate is expected to be 4.9 percent in 2000, down from 5.1 percent
in 1999.
Personal income is expected to rise 6.1 percent in 2000,
with a 7.5 percent increase in wages. Two major factors are
working to produce this impressive growth in wages. One is the
overall tightness in the labor market, and the other is strong
growth in financial sector bonus payments.
Given the importance of the securities industry in the
New York State economy, a significant change in stock market
performance during the forecast horizon could result in financial
sector profits and bonuses that are significantly different from
those embodied in the forecast. Any actions by the Federal
Reserve Board to moderate inflation by increasing interest rates
more than anticipated may have an adverse impact in New York
given the sensitivity of financial markets to interest rate
shifts and the prominence of these markets in the New York
economy. In addition, there is a possibility that greater-than-
anticipated mergers, downsizing, and relocation of firms caused
by deregulation and global competition may have a significant
adverse effect on employment growth.
19
1999-2000 Fiscal Year
The State ended its 1999-2000 fiscal year in balance on
a cash basis, with a General Fund cash-basis surplus of $1.51
billion as reported by DOB. As in recent years, strong growth in
receipts above forecasted amounts produced most of the year-end
surplus. Spending was also modestly below projections, further
adding to the surplus.
The State reported a closing balance of $1.17 billion in
the General Fund, an increase of $275 million over the closing
balance from the prior year. The balance was held in four
accounts within the General Fund: the Tax Stabilization Reserve
Fund (TSRF), the Contingency Reserve Fund (CRF), the Debt
Reduction Reserve Fund (DRRF) and the Community Projects Fund
(CPF) which is used to finance legislative initiatives. The
balance is comprised of $547 million in the TSRF after a deposit
of $74 million in 1999-2000; $107 million in the CRF; $250
million in the DRRF; and $263 million in the CPF.
The closing fund balance excludes $3.97 billion that the
State deposited into the tax refund reserve account at the close
of 1999-2000 to pay for tax refunds in 2000-01 of which $521
million was made available as a result of the Local Government
Assistance Corporation (LGAC) financing program and was required
to be on deposit as of March 31, 2000. The tax refund reserve
account transaction has the effect of decreasing reported
personal income tax receipts in 1999-2000, while increasing
reported receipts in 2000-01.
General Fund receipts and transfers from other funds
(net of tax refund reserve account activity) for the 1999-2000
fiscal year totaled $37.40 billion, an increase of 1.6 percent
over 1998-99. General Fund disbursements and transfers to other
funds totaled $37.17 billion, an increase of 1.6 percent from the
prior fiscal year.
1998-1999 Fiscal Year
The State ended its 1998-99 fiscal year on March 31,
1999 in balance on a cash basis, with a General Fund cash surplus
as reported by the DOB of $1.82 billion. The cash surplus was
derived primarily from higher-than-projected tax collections as a
result of continued economic growth, particularly in the
financial markets and the securities industries.
The State reported a General Fund closing cash balance
of $892 million, an increase of $254 million from the prior
fiscal year. The balance is held in three accounts within the
General Fund: the Tax Stabilization Reserve Fund (TSRF), The
Contingency Reserve Fund (CRF) and the Community Projects Fund
20
(CPF). The TSRF closing balance was $107 million, following a
deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of
$312 million.
The closing fund balance excludes $2.31 billion that the
State deposited into the tax refund reserve account at the close
of 1998-99 to pay for tax refunds in 1999-2000 of which $521
million was made available as a result of the Local Government
Assistance Corporation (LGAC) financing program and was required
to be on deposit as of March 31, 1999. The tax refund reserve
account transaction has the effect of decreasing reported
personal income tax receipts in 1998-99, while increasing
reported receipts in 1999-2000.
General Fund receipts and transfers from other funds for
the 1998-99 fiscal year totaled $36.74 billion, an increase of
6.34 percent from 1997-98 levels. General Fund disbursements and
transfers to other funds totaled $36.49 billion for the 1998-99
fiscal year, an increase of 6.23 percent from 1997-98 levels.
1997-98 Fiscal Year
The State ended its 1997-98 fiscal year in balance on a
cash basis, with a General Fund cash surplus as reported by DOB
of approximately $2.04 billion. The cash surplus was derived
primarily from higher-than-anticipated receipts and lower
spending on welfare, Medicaid, and other entitlement programs.
The General Fund had a closing balance of $638 million,
an increase of $205 million from the prior fiscal year. The
balance is held in three accounts within the General Fund: the
Tax Stabilization Reserve Fund ("TSRF"), the Contingency Reserve
Fund ("CRF") and the Community Projects Fund ("CPF"). The TSRF
closing balance was $400 million, following a required deposit of
$15 million (repaying a transfer made in 1991-92) and an
extraordinary deposit of $68 million made from the 1997-98
surplus. The CRF closing balance was $68 million, following a
$27 million deposit from the surplus. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of
$170 million, an increase of $95 million. The General Fund
closing balance did not include $2.39 billion in the tax refund
reserve account, of which $521 million was made available as a
result of the LGAC financing program and was required to be on
deposit on March 31, 1998.
General Fund receipts and transfers from other funds for
the 1997-98 fiscal year (including net tax refund reserve account
activity) totaled $34.55 billion, an annual increase of
$1.51 billion, or 4.57 percent over 1996-97. General Fund
21
disbursements and transfers to other funds were $34.35 billion,
an annual increase of $1.45 or 4.41 percent.
State Financial Practices: GAAP Basis
Historically, the State has accounted for, reported and
budgeted its operations on a cash basis. The State currently
formulates a financial plan which includes all funds required by
generally accepted accounting principles ("GAAP"). The State, as
required by law, continues to prepare its financial plan and
financial reports on the cash basis of accounting as well.
1999-2000 Fiscal Year
The State reported a General Fund operating surplus of
$2.229 billion for the 1999-2000 fiscal year, as compared to an
operating surplus of $1.078 billion for the 1998-99 fiscal year.
As a result, the State reported an accumulated fund balance of
$3.925 billion in the General Fund. Without the benefit of $4.7
billion of LGAC net bond proceeds between 1991 and 1995, and the
decision to use $300 million of Dormitory Authority bond proceeds
in 1996, these would have been a General Fund accumulated deficit
of $401 million.
Revenues increased $4.801 billion (6.6 percent) over the
prior fiscal year with increases in personal income, consumption
and use and other taxes, and miscellaneous revenues. Personal
income taxes grew $2.588 billion, an increase of 12.3 percent.
The increase in personal income taxes was caused by strong
employment and wage growth and the continued strong performance
by the financial markets during 1999. Consumption and use taxes
increased $546 million, or 5.4 percent, due to increased consumer
confidence. Other taxes increased $23 million, or 1.6 percent.
Miscellaneous revenues increased $742 million, a 14.1 percent
increase, primarily because of the receipt and recognition of
over $500 million in tobacco settlement revenues. Business taxes
decreased nearly $254 million, or 4.0 percent.
Expenditures increased $3.391 billion (4.9 percent) from
the prior fiscal year, with the largest increases occurring in
State aid for education, and health and environment. Education
expenditures grew $1.399 billion (8.7 percent) due mainly to
additional support of public schools and increases in the STAR
program. Health and environment expenditures grew $404 million
(25.1 percent). Net other financing sources decreased $634
million (12.32 percent).
An operating surplus of $665 million was reported for
the Special Revenue Funds for the 1999-2000 fiscal year which
increased the accumulated fund balance to $2.143 billion.
Revenues increased $4.463 billion over the prior fiscal year
22
(15.3 percent). Expenditures increased $2.906 billion (11.2
percent). Net other financing uses increased $775 million (23.9
percent).
Debt Service Funds ended the 1999-2000 fiscal year with
an operating surplus of $38.1 million and, as a result, the
accumulated fund balance increased to $2.055 billion. Revenues
increased $200.4 million (7.0 percent). Debt Service
expenditures increased $434 million (15.1 percent). Net other
financing sources increased $63 million (17.4 percent).
An operating surplus of $98.4 million was reported in
the Capital Projects Funds for the State's 1999-2000 fiscal year
and, as a result, the accumulated deficit fund balance decreased
to $129.2 million. Revenues increased $92.6 million (3.7
percent). Expenditures increased $84 million (2.3 percent). Net
other financing sources decreased by $63 million (4.6
percent).
1998-99 Fiscal Year
The State reported a General Fund operating surplus of
$1.078 billion for the 1998-99 fiscal year, as compared to an
operating surplus of $1.562 billion for the 1997-98 fiscal year.
As a result, the State reported an accumulated fund balance of
$1.645 billion in the General Fund. The 1998-99 fiscal year
operating surplus resulted, in part, from an increase in taxes
receivable of $516 million, a decrease in payables to local
government of $262 million, a decrease in accrued liabilities of
$129 million and a decrease in deferred revenues of $69 million.
These gains were partially offset by a decrease in other assets
of $117 million and an increase in tax refunds payable of $102
million.
Revenues increased $1.969 billion (5.7 percent) over the
prior fiscal year with increases in personal income, consumption
and use and other taxes, and miscellaneous revenues. Business
tax revenues fell from the prior fiscal year. Personnel income
taxes grew $1.733 billion, an increase of nearly 9.3 percent.
The increase in personal income taxes was caused by strong
employment and wage growth and the continued strong performance
by the financial markets during 1998. Consumption and use taxes
increased $269 million, or 3.8 percent, due to increased consumer
confidence. Other taxes increased $73 million, or 6.9 percent.
Miscellaneous revenues increased $145 million, a 5.6 percent
increase, primarily because of an increase in reimbursement from
regulated industries (e.g., banking and insurance) to fund the
State's administrative costs. Business taxes decreased nearly
$252 million, or 4.9 percent, because of prior year refunds and
carry forwards which were applied against the current year (1998
liabilities).
23
Expenditures increased $1.826 billion (5.5 percent) from
the prior fiscal year, with the largest increases occurring in
State aid for education and general purpose aid spending.
Education expenditures grew $1.014 billion (9.1 percent) due
mainly to an increase in spending for support for public schools,
handicapped pupil education and municipal and community colleges.
General purpose aid increased nearly $329 million (56.5 percent)
due to statutory changes in the payment schedule. Personal
service and fringe benefit costs increased due to increases in
wages and continuing fringe benefits required by collective
bargaining agreements.
Net other financing sources decreased $626 million
(159.3 percent) primarily because appropriated transfers from the
Special Revenue Funds declined by over $230 million with
increases of $265 million in appropriated transfers to Special
Revenue, Debt Service and College and University Funds. In
addition, transfers to public benefit corporations increased over
$170 million primarily because of a change in reporting for
Roswell Park Cancer Institute.
An operating deficit of $117 million was reported for
the Special Revenue Funds for the 1998-99 fiscal year which
decreased the accumulated fund balance to $464 million. Revenues
increased $1.108 billion over the prior fiscal year (4.0 percent)
as a result of increases in tax and federal grants revenues.
Expenditures increased $1.308 billion (5.3 percent) as a result
of increased costs for local assistance grants. Net other
financing uses increased $34 million (.10 percent).
Debt Service Funds ended the 1998-99 fiscal year with an
operating surplus of $209 million and, as a result, the
accumulated fund balance increased to $2.07 billion. Revenues
increased $160 million (6.3 percent) primarily because of
increases in dedicated taxes. Debt service expenditures
increased $162 million (6.0 percent). Net other financing
sources increased $253 million (227.4 percent) due primarily to
increases in transfers from the General Fund, patient revenue
transfers and the establishment of the Debt Reduction Reserve
Fund.
An operating surplus of $154 million was reported in the
Capital Projects Funds for the State's 1998-99 fiscal year and,
as a result, the accumulated deficit fund balance decreased to
$228 million. Revenues increased $242 million (10.6 percent)
primarily because tax revenues increased $101 million and federal
grant revenues increased $94 million for transportation projects.
Expenditures increased $355 million (10.5 percent) primarily
because of increased capital construction spending for
transportation and correctional services projects. Net other
financing sources increased by $35 million.
24
1997-98 Fiscal Year
The State completed its 1997-98 fiscal year with a
combined Governmental Funds operating surplus of $1.80 billion,
which included an operating surplus in the General Fund of
$1.56 billion, in Capital Projects Funds of $232 million and in
Special Revenue Funds of $49 million, offset in part by an
operating deficit of $43 million in Debt Service Funds.
The State reported a General Fund operating surplus of
$1.56 billion for the 1997-98 fiscal year, as compared to an
operating surplus of $1.93 billion for the 1996-97 fiscal year.
As a result, the State reported an accumulated surplus of
$567 million in the General Fund for the first time since it
began reporting its operations on a GAAP-basis. The 1997-98
fiscal year operating surplus reflects several major factors,
including the cash-basis operating surplus resulting from the
higher-than-anticipated personal income tax receipts, an increase
in taxes receivable of $681 million, an increase in other assets
of $195 million and a decrease in pension liabilities of
$144 million. This was partially offset by an increase in
payables to local governments of $270 million and tax refunds
payable of $147 million.
Revenues increased $617 million (1.8 percent) over the
prior fiscal year, with increases in personal income, consumption
and use, and business taxes, and decreases reported for other
taxes, federal grants and miscellaneous revenues. Personal
income taxes grew $746 million, an increase of nearly 4.2
percent. The increase in personal income taxes resulted from
strong employment and wage growth and the strong performance by
the financial markets during 1997. Consumption and use taxes
increased $334 million or 5.0 percent as a result of increased
consumer confidence. Business taxes grew $28 million, an increase
of 0.5 percent. Other taxes fell primarily because revenues for
estate and gift taxes decreased. Miscellaneous revenues decreased
$380 million, or 12.7 percent, due to a decline in receipts from
the Medical Malpractice Insurance Association and medical
provider assessments.
Expenditures increased $137 million (0.4 percent) from
the prior fiscal year, with the largest increases occurring in
State aid for education and social services spending. Education
expenditures grew $391 million (3.6 percent) due mainly to an
increase in spending for support for public schools. This growth
was offset, in part, by a reduction in spending for municipal and
community colleges. Social services expenditures increased
$233 million (2.6 percent) due mainly to program growth.
Increases in other State aid spending were offset by a decline in
general purpose aid of $235 million (27.8 percent) due to
statutory changes in the payment schedule. Increases in personal
25
and non-personal service costs were offset by a decrease in
pension contribution of $660 million, a result of the refinancing
of the State's pension amortization that occurred in 1997.
Net other financing sources decreased $841 million (68.2
percent) due to the nonrecurring use of bond proceeds
($769 million) provided by the Dormitory Authority of the State
of New York to pay the outstanding pension amortization liability
incurred in 1997.
An operating surplus of $49 million was reported for the
Special Revenue Funds for the 1997-98 fiscal year, which
increased the accumulated fund balance to $581 million. Revenues
rose by $884 million over the prior fiscal year (3.3 percent) as
a result of increases in tax and federal grant revenues.
Expenditures increased $795 million (3.3 percent) as a result of
increased costs for local assistance grants. Net other financing
uses decreased $105 million (3.3 percent).
Debt Service Funds ended the 1997-98 fiscal year with an
operating deficit of $43 million and, as a result, the
accumulated fund balance declined to $1.86 billion. Revenues
increased $246 million (10.6 percent) as a result of increases in
dedicated taxes. Debt service expenditures increased
$341 million (14.4 percent). Net other financing sources
increased $89 million (401.3 percent) due primarily to savings
achieved through advance refundings of outstanding bonds.
An operating surplus of $232 million was reported in the
Capital Projects Funds for the State's 1997-98 fiscal year and,
as a result, the accumulated deficit in this fund type decreased
to $381 million. Revenues increased $180 million (8.6 percent)
primarily as a result of a $54 million increase in dedicated tax
revenues and an increase of $101 million in federal grants for
transportation and local waste water treatment projects.
Expenditures increased $146 million (4.5 percent) primarily as a
result of increased capital construction spending for
transportation and local waste water treatment projects. Net
other financing sources increased by $100 million primarily as a
result of a decrease in transfers to certain public benefit
corporations engaged in housing programs.
Economic Overview
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
26
it an important link in international commerce. Travel and
tourism constitute an important part of the economy. Like the
rest of the nation, the State has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion
engaged in service industries.
The services sector, which includes entertainment,
personal services, such as health care and auto repairs, and
business-related services, such as information processing, law
and accounting, is the State's leading economic sector. The
service sector accounts for more than three of every ten
nonagricultural jobs in New York and has a higher proportion of
total jobs than does the rest of the nation.
Manufacturing employment continues to decline in
importance in New York, as in most other states, and New York's
economy is less reliant on this sector than is the nation. The
principal manufacturing industries in recent years produced
printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products,
electronic and other electric equipment, food and related
products, chemicals and allied products, and fabricated metal
products.
Wholesale and retail trade is the second largest sector
in terms of nonagricultural jobs in New York but is considerably
smaller when measured by income share. Trade consists of
wholesale businesses and retail businesses, such as department
stores and eating and drinking establishments.
New York City is the nation's leading center of banking
and finance, and, as a result, this is a far more important
sector in the State than in the nation as a whole. Although this
sector accounts for under one-tenth of all nonagricultural jobs
in the State, it contributes over one-sixth of all nonfarm labor
and proprietors' income.
Farming is an important part of the economy of large
regions of the State, although it constitutes a very minor part
of total State output. Principal agricultural products of the
State include milk and dairy products, greenhouse and nursery
products, apples and other fruits, and fresh vegetables. New
York ranks among the nation's leaders in the production of these
commodities.
Federal, State and local government together are the
third largest sector in terms of nonagricultural jobs, with the
bulk of the employment accounted for by local governments.
Public education is the source of nearly one-half of total state
and local government employment.
27
The State is likely to be less affected than the nation
as a whole during an economic recession that is concentrated in
manufacturing and construction, but likely to be more affected
during a recession that is concentrated more in the services
sector.
In the calendar years 1987 through 1998, the State's
rate of economic growth was somewhat slower than that of the
nation. In particular, during the 1990-91 recession and post-
recession period, the economy of the State, and that of the rest
of the Northeast, was more heavily damaged than that of the
nation as a whole and has been slower to recover. The total
employment growth rate in the State has been below the national
average since 1987. The unemployment rate in the State dipped
below the national rate in the second half of 1981 and remained
lower until 1991; since then, it has been higher. According to
data published by the U.S. Bureau of Economic Analysis, total
personal income in the State has risen more slowly than the
national average since 1988 than personal income for the nation
as a whole, although preliminary data suggests that, in 1998, the
State personal income rose more rapidly.
State per capita personal income has historically been
significantly higher than the national average, although the
ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates
the relative importance of the State to the national economy and
the size of the base to which State taxation applies.
State Authorities
The fiscal stability of the State is related, in part,
to the fiscal stability of its public benefit corporations (the
"Authorities"). Authorities, which have responsibility for
financing, constructing and operating revenue providing public
facilities, 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 as otherwise
restricted by, their legislative authorizations. The State's
access to the public credit markets could be impaired, and the
market price of its outstanding debt may be materially adversely
affected, if any of its Authorities were to default on their
respective obligations, particularly those using State-supported
or State-related financing techniques. As of December 31, 1999,
there were 17 Authorities that had outstanding debt of
$100 million or more, and the aggregate outstanding debt,
including refunding bonds, of all State Authorities was
$95 billion, only a portion of which constitutes State-supported
or State-related debt.
28
Moral obligation financing generally involves the
issuance of debt by an Authority to finance a revenue-producing
project or other activity. The debt is secured by project
revenues and includes statutory provisions requiring the State,
subject to appropriation by the Legislature, to make up any
deficiencies which may occur in the issuer's debt service reserve
fund. There has never been a default on any moral obligation
debt of any public authority. The State does not intend to
increase statutory authorizations for moral obligation bond
programs. From 1976 through 1987, the State was called upon to
appropriate and make payments totaling $162.8 million to make up
deficiencies in the debt service reserve funds of the Housing
Finance Agency pursuant to moral obligation provisions. In the
same period, the State also expended additional funds to assist
the Project Finance Agency, the New York State Urban Development
Corporation and other public authorities which had moral
obligation debt outstanding. The State has not been called upon
to make any payments pursuant to any moral obligations since the
1986-87 fiscal year and no such requirements are anticipated
during the 2000-2001 fiscal year.
In addition to the moral obligation financing
arrangements described above, State law provides for the creation
of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities.
The Municipal Assistance Corporation For The City of New York
("NYC MAC") was created in 1975 to provide financing assistance
to the City. To enable NYC MAC to pay debt service on its
obligations, NYC MAC receives, subject to annual appropriation by
the Legislature, receipts from the 4 percent New York State sales
tax for the benefit of the City, the State-imposed stock transfer
tax and, subject to certain prior liens, certain local assistance
payments otherwise payable to the City. The legislation creating
NYC MAC also includes a moral obligation provision. Under its
enabling legislation, NYC MAC's authority to issue moral
obligation bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984. In 1995, the State created the
Municipal Assistance Corporation for the City of Troy
("Troy MAC"). The bonds issued by Troy MAC do not include the
moral obligation provisions.
The State also provides for contingent contractual-
obligation financing for the Secured Hospital Program pursuant to
legislation enacted in 1985. Under this financing method, the
State entered into service contracts which obligate the State to
pay debt service, subject to annual appropriations, on bonds
issued by the New York State Medical Care Facilities Finance
Agency and now included as debt of the Dormitory Authority of the
State of New York in the event there are shortfalls of revenues
from other sources. The State has never been required to make
any payments pursuant to this financing arrangement, nor does it
29
anticipate being required to do so during the 2000-2001 fiscal
year. The legislative authorization to issue bonds under this
program expired on March 1, 1998.
Authorities' operating expenses and debt service costs
are generally paid by revenues generated by the projects financed
or operated, such as tolls charged for the use of highways,
bridges or tunnels, 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
Authorities. Also, there are statutory arrangements providing
for State local assistance payments, otherwise payable to
localities, to be made under certain circumstances to
Authorities. Although the State has no obligation to provide
additional assistance to localities whose local assistance
payments have been paid to Authorities under these arrangements,
if local assistance payments are so diverted, the affected
localities could seek additional State assistance. Some
Authorities also receive moneys from State appropriations to pay
for the operating costs of certain of their programs.
The Metropolitan Transportation Authority (the "MTA")
oversees the City's subway and bus lines by its affiliates, the
New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the "TA").
The MTA operates certain commuter rail and bus lines in the New
York metropolitan area through the MTA's subsidiaries, the Long
Island Rail Road Company, the Metro-North Commuter Railroad
Company and the Metropolitan Suburban Bus Authority. In
addition, the Staten Island Rapid Transit Operating Authority, an
MTA subsidiary, operates a rapid transit line on Staten Island.
Through its affiliated-agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll
bridges and tunnels. Because fare revenues are not sufficient to
finance the mass transit portion of these operations, the MTA has
depended and will continue to depend on operating support from
the State, local government and TBTA, including loans, grants and
subsidies. If current revenue projections are not realized
and/or operating expenses exceed current projections, the TA or
commuter railroads may be required to seek additional state
assistance, raise fares or take other actions.
Since 1980, the State has enacted several
taxes--including a surcharge on the profits of banks, insurance
corporations and general business corporations doing business in
the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use
tax--that provide revenues for mass transit purposes, including
assistance to the MTA. In addition, since 1987, state law has
required that the proceeds of a one-quarter of 1 percent mortgage
30
recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for
operating or capital expenses. Further, in 1993, the State
dedicated a portion of the State petroleum business tax receipts
to fund operating or capital assistance to the MTA. For the
2000-2001 enacted budget State assistance to the MTA is estimated
at approximately $1.35 billion, and initiates a five-year State
transportation plan that includes nearly $2.2 billion in
dedicated revenue support for the MTA's 2000-2004 Capital
Program. This includes an additional $800 million of newly
dedicated State petroleum tax revenues, motor vehicle fees, and
motor fuel taxes not previously dedicated to the MTA.
State legislation accompanying the 2000-01 enacted State
budget increased the aggregate bond cap for the MTA, TBTA and TA
to $16.5 billion in order to finance a portion of the $17.1
billion MTA capital plan for the 2000 through 2004 calendar years
(the "2000-04 Capital Program"). On May 4, 2000, the Capital
Program Review Board approved the MTA's $17.1 billion capital
program for transit purposes for 2000 through 2004. The 2000-04
Capital Program is the fifth 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 new rolling
stock, maintaining replacement schedules for existing assets,
bringing the MTA system into a state of good repair, and making
major investments in system expansion projects such as Second
Avenue Subway project and the East Side Access project.
The currently approved 2000-04 Capital Program assumes
the issuance of an estimated $8.9 billion in new money bonds.
The remainder of the plan is projected to be financed with
assistance from the Federal Government, the State, the City of
New York, and from various other revenues generated from actions
taken by the MTA. In addition, $1.6 billion in State support is
projected to be financed using proceeds from State general
obligation bonds under the proposed $3.8 billion Transportation
Infrastructure Bond Act of 2000, if approved by the voters in the
November 2000 general election. Further, the enacted State
budget authorized the MTA to undertake a major debt restructuring
initiative which will enable the MTA to refund approximately
$13.7 billion in bonds, consolidate its credit sources, and
obviate the need for debt service reserves. The authorization
for debt restructuring includes outstanding bonds secured by
service contracts with the State.
There can be no assurance that all necessary
governmental actions for future capital programs will be taken,
that funding sources currently identified will not be decreased
or eliminated, that the Transportation Infrastructure Bond Act
will be approved by voters or that the 2000-04 Capital Program
31
(or parts thereof) will not be delayed or reduced. Should the
Transportation Infrastructure Bond Act be defeated, the State
could come under pressure to provide additional funding to the
MTA. Should funding levels fall below current projections, the
MTA would have to revise its 2000-04 Capital Program accordingly.
If the 2000-04 Capital Program is delayed or reduced, ridership
and fare revenues may decline, which could impair the MTA's
ability to meet its operating expenses without additional State
assistance.
Certificates of Participation
The State also participates in the issuance of
certificates of participation ("COPs") in a pool of leases
entered into by the State's Office of General Services on behalf
of several State departments and agencies interested in acquiring
operational equipment, or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and
centralized State control, through the Comptroller and the
Director of the Budget, over the issuance of COPs representing
the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to
make installment or lease-purchase payments for the State's
acquisition of such equipment or real property.
New York City
The fiscal health of the State may also be affected by
the fiscal health of the City, which continues to require
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
City to market their securities successfully in the public credit
markets. The City has achieved balanced operating results from
each of its fiscal years since 1981 as reported in accordance
with the then-applicable GAAP standards.
In response to the City's fiscal crisis in 1975, the
State took action to assist the City in returning to fiscal
stability. Among those actions, the State established the
NYC MAC to provide financing assistance to the City; the New York
State Financial Control Board (the "Control Board") to oversee
the City's financial affairs; 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,
32
or "substantial likelihood and imminence" of the occurrence, of
certain events, including, but not limited to, a City operating
budget deficit of more than $100 million or impaired access to
the public credit markets.
Currently, the City and its Covered Organizations (i.e.,
those which receive or may receive moneys from the City directly,
indirectly or contingently) operate under a four-year financial
plan (the "Financial Plan") which the City prepares annually and
periodically updates. The City's Financial Plan summarizes its
capital, revenue and expense projections and outlines proposed
gap-closing programs for years with projected budget gaps. The
City's projections set forth in the Financial Plan are based on
various assumptions and contingencies, some of which are
uncertain and may not materialize. Unforeseen developments and
changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and
to meet its annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City
and certain entities issuing debt for the benefit of the City
must market their securities successfully. The City issues
securities to finance, refinance and rehabilitate infrastructure
and other capital needs, as well as for seasonal financing needs.
In 1997, the State created the New York City Transitional Finance
Authority ("TFA") to finance a portion of the City's capital
program because the City was approaching its State Constitutional
general debt limit. Without the additional financial capacity of
the TFA, projected contracts for City capital projects would have
exceeded the City's debt limit during City fiscal year 1997-98.
In addition, in 1999, the City created TSASC, Inc., a not-for-
profit corporation empowered to issue tax-exempt debt backed by
tobacco settlement revenues. Despite these actions, the City, in
order to continue its capital program, will need additional
financing capacity beginning in City fiscal year 2000-01, which
could be provided through increasing the borrowing authority of
the TFA or amending the State constitutional debt limit for City
fiscal year 2001-02 and thereafter.
OSDC and Control Board Reports
The staffs of the Control Board, OSDC and the City
Comptroller issue periodic reports on the City's Financial Plans.
The reports analyze the City's forecasts of revenues and
expenditures, cash flow, and debt service requirements, as well
as evaluate compliance by the City and its Covered Organizations
with the Financial Plan. According to recent staff reports,
while economic growth in New York City has been slower than in
other regions of the country, a surge in Wall Street
profitability resulted in increased tax revenues and generated a
substantial surplus for the City in the City fiscal years 1996-
33
97, 1997-98 and 1998-99. Recent staff reports also indicate
that the City projects surplus for City fiscal year 1999-2000.
Although several sectors of the City's economy have expanded
recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the
course of the national economy. In addition, the size of recent
tax reductions has increased to over $2 billion in City fiscal
year 1999-2000 through the expiration of a personal income tax
surcharge, the repeal of the non-resident earnings tax and the
elimination of the sales tax on clothing items costing less than
$110. The Mayor has proposed additional tax reductions that
would raise the total worth of recent tax cuts to $3.5 billion by
City fiscal year 2003-2004. Staff reports have indicated that
recent City budgets have been balanced in part through the use of
non-recurring resources and that the City's Financial Plan tends
to rely in part on actions outside its direct control. These
reports have also indicated that the City has not yet brought its
long-term expenditure growth in line with recurring revenue
growth and that the City is likely to continue to face
substantial gaps between forecast revenues and expenditures in
future years that must be closed with reduced expenditures and/or
increased revenues.
Financing Requirements
The City requires significant amounts of financing for
seasonal and capital purposes. Since 1981, the City has fully
satisfied its seasonal financing needs in the public credit
markets, repaying all short-term obligations within their fiscal
year of issuance. The Financial Plan currently provides for $750
million of seasonal financing in fiscal year 2001. The City
issued $750 million of short-term obligations in fiscal year 2000
to finance the City's projected cash flow needs for the 2000
fiscal year. The City issued $500 million of short-term
obligations in fiscal year 1999. 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. City funded
commitments are projected to reach $4.2 billion in 2000 and City
funded expenditures are forecast at $4.3 billion in the 2000
fiscal year.
In connection with the Financial Plan, the City has
outlined a gap-closing program for the fiscal years 2002 through
34
2004 to eliminate the $2.6 billion, $2.7 billion and $2.7 billion
projected budget gaps for each such fiscal year. This program,
which is not specified in detail, assumes for the 2002 through
2004 fiscal years, respectively, additional agency programs to
reduce expenditures or increase revenues by $1.5 billion, $1.6
billion and $1.6 billion; additional State actions of $550
million; additional Federal actions of $450 million; and the
availability of $100 million of the General Reserve.
The City's projected budget gaps for the 2003 and 2004
fiscal years do not reflect the savings expected to result from
the prior years' programs to close the gaps set forth in the
Financial Plan. Thus, for example, recurring savings anticipated
from the actions which the City proposes to take to balance the
fiscal year 2002 budget are not taken into account in projecting
the budget gaps for the 2003 and 2004 fiscal years.
Although the City has maintained balanced budgets in
each of its last 19 fiscal years and is projected to achieve
balanced operating results for the 2000 and 2001 fiscal years,
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.
Other Localities
Certain localities outside the City have experienced
financial problems and have requested and received additional
State assistance during the last several State fiscal years. The
potential impact on the State of any future requests by
localities for additional oversight or financial assistance is
not included in the projections of the State's receipts and
disbursements for the State's 2000-2001 fiscal year.
The State has provided extraordinary financial
assistance to select municipalities, primarily cities, since the
1996-97 fiscal year. Funding has essentially been continued or
increased in each subsequent fiscal year. Such funding in 2000-
2001 totals $200.4 million. In 2000-2001, the State increased
General Purpose State Aid for local government by $11 million to
$562 million, and has continued funding at this new level since
that date.
While the distribution of General Purpose State Aid for
local governments was originally based on a statutory formula, in
recent years both the total amount appropriated and the shares
appropriated to specific localities have been determined by the
35
Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid
failed to agree on any recommendations for a new formula.
Certain Municipal Indebtedness
Counties, cities, towns, villages and school districts
have engaged in substantial short-term and long-term borrowings.
In 1998, the total indebtedness of all localities in the State,
other than New York City, was approximately $20.3 billion. A
small portion (approximately $80 million) of that indebtedness
represented borrowing to finance budgetary deficits and was
issued pursuant to enabling State legislation. State law
requires the Comptroller to review and make recommendations
concerning the budgets of those local government units (other
than New York City) authorized by State law to issue debt to
finance deficits during the period that such deficit financing is
outstanding. Twenty-three localities had outstanding
indebtedness for deficit financing at the close of their fiscal
year ending in 1998.
Like the State, local governments must respond to
changing political, economic and financial influences over which
they have little or no control. Such changes may adversely
affect the financial condition of certain local governments. For
example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn,
may require local governments to fund these expenditures from
their own resources. It is also possible that the State, the
City, Nassau County or any of their respective public authorities
may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely
affect the marketability of notes and bonds issued by localities
within the State. Localities may also face unanticipated
problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Other large scale
potential problems, such as declining urban populations,
increasing expenditures, and the loss of skilled manufacturing
jobs, may also adversely affect localities and necessitate State
assistance.
Litigation
The State is a defendant in legal proceedings involving
State finances, State programs and miscellaneous civil rights,
tort, real property and contract claims where the monetary
damages sought are substantial, generally in excess of
$100 million. These proceedings could affect adversely the
financial condition of the State in the 2000-2001 fiscal year or
thereafter.
36
Adverse developments in these proceedings or the
initiation of new proceedings could affect the ability of the
State to maintain a balanced 2000-2001 State Financial Plan. The
State believes that the proposed 2000-2001 State Financial Plan
includes sufficient reserves for the payment of judgments that
may be required during the 2000-2001 fiscal year. There can be
no assurance, however, that an adverse decision in any of these
proceedings would not exceed the amount of all potential 2000-
2001 State Financial Plan resources available for the payment of
judgments, and could therefore affect the ability of the State to
maintain a balanced 2000-2001 State Financial Plan.
Although other litigation is pending against the State,
no current litigation involves the State's authority, as a matter
of law, to contract indebtedness, issue its obligations, or pay
such indebtedness when it matures, or affects the State's power
or ability, as a matter of law, to impose or collect significant
amounts of taxes and revenues.
CALIFORNIA PORTFOLIO
The following is based on information obtained from a
Preliminary Official Statement, dated October 1, 2000, relating
to $850,000,000 State of California General Obligation Bonds and
$148,000,000 General Obligation Refunding Bonds.
Constitutional Limits on Spending and Taxes
Certain California (the "State") constitutional
amendments, legislative measures, executive orders, civil actions
and voter initiatives could adversely affect the ability of
issuers of the State's municipal securities to pay interest and
principal on municipal securities.
Article XIII B. On November 6, 1979, the State's voters
approved Proposition 4, which added Article XIII B to the State
Constitution. Pursuant to Article XIII B, the State is subject
to an annual appropriations limit (the "Appropriations Limit").
Article XIII B was modified substantially by
Propositions 98 and 111 in 1988 and 1990, respectively. (See
"Proposition 98" below.) "Appropriations subject to limitation,"
with respect to the State, 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
reasonably borne by the entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state
subsidies to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such
37
as reasonable user charges or fees, and certain other non-tax
funds.
Not included in the Appropriations Limit are
appropriations for the debt service costs of bonds existing or
authorized by January 1, 1979, or subsequently authorized by the
voters, appropriations required to comply with mandates of courts
or the federal government, appropriations for qualified capital
outlay projects, most state subventions to local governments,
appropriations for tax refunds, appropriations of revenues
derived from any increase in gasoline taxes and motor vehicle
weight fees above January 1, 1990 levels, and appropriation of
certain special taxes imposed by initiative (e.g., cigarette and
tobacco taxes). The Appropriations Limit may also be exceeded in
cases of emergency.
The State's yearly Appropriations Limit is based on the
limit for the prior year with annual adjustments for changes in
California per capita personal income and population and any
transfers of financial responsibility for providing services to
or from another unit of government.
As originally enacted in 1979, the Appropriations Limit
was based on 1978-79 fiscal year authorizations to expend
proceeds of taxes and was adjusted annually to reflect changes in
cost of living and population (using different definitions, which
were modified by Proposition 111). Starting in the 1991-92
Fiscal Year, the Appropriations Limit was recalculated by taking
the actual 1986-87 limit and applying the annual adjustments as
if Proposition 111 had been in effect.
Proposition 98. On November 8, 1988, voters approved
Proposition 98, a combined initiative constitutional amendment
and statute called the "Classroom Instructional Improvement and
Accountability Act." Proposition 98 changed State funding of
public education below the university level, and the operation of
the State Appropriations Limit, primarily by guaranteeing local
schools and community colleges ("K-14 schools") a minimum share
of General Fund revenues. Under Proposition 98 (as modified by
"Proposition 111" which was enacted on June 5, 1990), K-14
schools are guaranteed the greater of (a) in general, a fixed
percent of General Fund revenues (the "first test"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted
for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment
(the "second test"), or (c) a third test, which would replace the
second test in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one
percent is less than the percentage growth in State per capita
personal income. Under the third test, schools would receive the
amount appropriated in the prior year adjusted for changes in
38
enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If the third test is used in
any year, the difference between the third test and the second
test would become a "credit" to schools which would be the basis
of payments in future years when per capita General Fund revenue
growth exceeds per capita personal income growth. Legislation
adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee
under the first test to be 40.3 percent of the General Fund Tax
revenues, based on 1986-87 appropriations. However, that amount
has been adjusted to 35 percent to account for a subsequent
redirection of local property taxes, since such redirection
directly affects the share of General Fund revenues to schools.
During the recession in the early 1990s, General Fund
revenues for several years were less than originally projected,
so that the original Proposition 98 appropriations turned out to
be higher than the minimum percentage provided in the law. The
Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from
future years' entitlements. By implementing these actions, per-
pupil funding from Proposition 98 sources stayed almost constant
at approximately $4,200 from Fiscal Year 1991-92 to Fiscal Year
1993-94.
In 1992, a lawsuit was filed, called California
Teachers' Association v. Gould, which challenged the validity of
these off-budget loans. As part of the negotiations leading to
the 1995-96 Budget Act, an oral agreement was reached to settle
this case. The settlement required adoption of legislation
satisfactory to the parties to implement its terms, which has
occurred. The court gave final approval of the settlement in
late July, 1996.
The settlement provides, among other things, that both
the State and K-14 schools share in the repayment of prior years'
emergency loans to schools. Of the total $1.76 billion in loans,
the State will repay $935 million by forgiveness of the amount
owed, while schools will repay $825 million. The State share of
the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of
the repayment will count as appropriations that count toward
satisfying the Proposition 98 guarantee, or from "below" the
current base. Repayments are spread over the eight-year period of
1994-95 through 2001-02 to mitigate any adverse fiscal impact.
State Indebtedness
As part of its cash management program, the State has
regularly issued short-term obligations to meet cash flow needs.
Between spring 1992 and summer 1994, the State had depended upon
39
external borrowing, including borrowings extending into the
subsequent fiscal year, to meet its cash needs, including
repayment of maturing Notes and Warrants. The State has not had
to resort to such cross-year borrowing since the 1994-95 Fiscal
Year. The State issued $1.0 billion of revenue anticipation
notes for the 1999-2000 Fiscal Year, which matured on June 30,
2000.
As of September 1, 2000, the State had outstanding
$20,951,541,000 aggregate principal amount of long-term general
obligation bonds, and unused voter authorizations for the future
issuance of $14,464,314,000 of long-term general obligation
bonds. This latter figure consists of $6,884,434,000 of
authorized commercial paper notes (of which $1,383,545,000 was
outstanding), which had not yet been refunded by general
obligation bonds, and $7,579,880,000 of other authorized but
unissued general obligation debt.
The State has always paid the principal of and interest
on its general obligation bonds, general obligation commercial
paper, lease-purchase debt, and short-term obligations, including
revenue anticipation notes and revenue anticipation warrants,
when due.
1997-98 Fiscal Year
On January 9, 1997, the Governor released his proposed
budget for the 1997-98 Fiscal Year (the"Governor's Budget"). The
Governor's Budget projected General Fund revenues and transfers
of $50.7 billion, and expenditures of $50.3 billion.
The Budget Act, signed by the Governor, anticipated
General Fund revenues and transfers of $52.5 billion (a 6.8
percent increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0 percent increase from the 1996-97
levels). The Budget Act also included Special Fund expenditures
of $14.4 billion (as against estimated Special Fund revenues of
$14.0 billion), and $2.1 billion of expenditures from various
Bond Funds. Following enactment of the Budget Act, the State
implemented its normal annual cash flow borrowing program,
issuing $3.0 billion of notes which matured on June 30, 1998.
Among the major features of the 1997-98 Budget Act were
the following:
1. For the second year in a row, the Budget contained
a large increase in funding for K-14 education under Proposition
98, reflecting strong revenues which exceeded initial budgeted
amounts. Part of the nearly $1.75 billion in increased spending
was allocated to prior fiscal years. Funds were provided to fully
40
pay for the cost-of-living component of Proposition 98, and to
extend the class size reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension
case judgment payment, and brought funding of the State's pension
contribution back to the quarterly basis which existed prior to
the deferral actions which were invalidated by the courts.
3. Funding from the General Fund for the University of
California and California State University was increased by about
6 percent ($121 million and $107 million, respectively), and
there was no increase in student fees.
4. Unlike prior years, the Budget Act did not depend
on uncertain federal budget actions. About $300 million in
federal funds, already included in the federal Fiscal Year 1997
and 1998 budgets, was included in the Budget Act, to offset
incarceration costs for illegal aliens.
5. The Budget Act contained no tax increases, and no
tax reductions. The Renters Tax Credit was suspended for another
year, saving approximately $500 million.
The Department of Finance released updated estimates for
the 1997-98 Fiscal Year Budget Proposal. Total revenues and
transfers were projected at $52.9 billion, up approximately $360
million from the Budget Act projection. Expenditures for the
fiscal year were expected to rise approximately $200 million
above the original Budget Act, to $53.0 billion. The balance in
the budget reserve, the SFEU, was projected to be $329 million on
June 30, 1998, compared to $461 million on June 30, 1997.
1998-1999 Fiscal Years
When the Governor released his proposed 1998-99 Fiscal
Year Budget in January, 1998, he projected General Fund revenues
for the 1998-99 Fiscal Year of $55.4 billion, and proposed
expenditures in the same amount. By the time the Governor
released the May Revision to the 1998-99 Budget ("1998 May
Revision") on May 14, 1998, the Administration projected that
revenues for the 1997-98 and 1998-99 Fiscal Years combined would
be more than $4.2 billion higher than was projected in January,
1998. The Governor proposed that most of this increased revenue
be dedicated to fund a 75 percent cut in the Vehicle License Fee
("VLF").
The Legislature passed the 1998-99 Budget Bill on August
11, 1998, and the Governor signed it on August 21, 1998. In
signing the Budget Bill, the Governor used his line-item veto
power to reduce expenditures by $1.360 billion from the General
Fund, and $160 million from special funds. Of this total, the
41
Governor indicated that about $250 million of vetoed funds were
"set aside" to fund programs for education. Vetoed items
included education funds, salary increases and many individual
resources and capital projects.
The 1998-99 Budget Act was based on projected General
Fund revenues and transfers of $57.0 billion (after giving effect
to various tax reductions enacted in 1997 and 1998), a 4.2
percent increase from the then revised 1997-98 figures. Special
Fund revenues were estimated at $14.3 billion. The revenue
projections were based on the 1998 May Revision.
After giving effect to the Governor's vetoes, the Budget
Act provided authority for expenditures of $57.3 billion from the
General Fund (a 7.3 percent increase from 1997-98), $14.7 billion
from Special Funds, and $3.4 billion from bond funds. The Budget
Act projected a balance in the SFEU at June 30, 1999 (but without
including the "set aside" veto amount) of $1.255 billion, a
little more than 2 percent of General Fund revenue. The Budget
Act assumed the State will carry out its normal intra-year cash
flow borrowing in the amount of $1.7 billion of revenue
anticipation notes, which were issued on October 1, 1998.
The most significant feature of the 1998-99 budget was
agreement on a total of $1.4 billion of tax cuts. The central
element was a bill which provided for a phased-in reduction of
the VLF. Since the VLF was transferred to cities and counties
under then-existing law, the bill provided for the General Fund
to replace the lost revenues. Started on January 1, 1999, the
VLF has been reduced by 25 percent, at a cost to the General Fund
of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget
included both temporary and permanent increases in the personal
income tax dependent credit ($612 million General Fund cost in
1998-99, but less in future years), a nonrefundable renters tax
credit ($133 million), and various targeted business tax credits
($106 million).
Other significant elements of the revised 1998-99 Budget
were as follows:
1. Proposition 98 funding for K-12 schools was
increased by $2.2. billion in General Fund moneys over revised
1997-98 levels, over $1 billion higher than the minimum
Proposition 98 guarantee.
2. Funding for higher education increased
substantially above the actual 1997-98 level. General Fund
support was increased by $339 million (15.6 percent) for the
42
University of California and $271 million (14.5 percent) for the
California State University system. In addition, Community
Colleges increased by $183 million (9.0 percent).
3. The Budget included increased funding for health,
welfare and social services programs. A 4.9 percent grant
increase was included in the basic welfare grants, the first
increase in those grants in 9 years.
4. Funding for the judiciary and criminal justice
programs increased by about 15 percent over 1997-98, primarily to
reflect increased State support for local trial courts and rising
prison population.
5. Various other highlights of the revised Budget
included new funding for resources projects, dedication of $240
million of General Fund moneys for capital outlay projects,
funding of a state employee salary increase, funding of 2,000 new
Department of Transportation positions to accelerate
transportation construction projects, and funding of the
Infrastructure and Economic Development Bank ($50 million).
6. The State received approximately $167 million of
federal reimbursements to offset costs related to the
incarceration of undocumented alien felons for federal fiscal
year 1997. The State anticipated receiving approximately $173
million in federal reimbursements for federal year 1998.
The May Revision to the 1999-2000 Governor's Budget
released on May 14, 1999 (the "1999 May Revision"), reported that
stronger than expected economic conditions in the State for the
latter part of 1998 and into 1999 would produce total 1998-99
General Fund revenues of about $57.9 billion, almost $1 billion
above the Budget Act estimates, and $1.6 billion above the
initial estimates in the January Governor's Budget. The 1999 May
Revision projects 1998-99 General Fund expenditures of $58.6
billion, about $400 million higher than the January Governor's
Budget estimate. Some of this additional revenue will be
directed to K-14 schools pursuant to Proposition 98. The 1999
May Revision projected a balance in the SFEU at June 30, 1999 of
almost $1.9 billion, $1.3 billion higher than estimated in
January.
1999-00 Fiscal Year
On January 8, 1999, the Governor released his proposed
budget for Fiscal Year 1999-00 (the "1999 Governor's Budget").
The 1999 Governor's Budget generally reported that General Fund
revenues for 1998-99 and 1999-00 would be lower than earlier
projections (primarily due to weaker overseas economic conditions
43
perceived in late 1998), while some caseloads would be higher
than earlier projections.
The 1999 Governor's Budget proposed $60.5 billion of
expenditures in 1999-00, with a $415 million SFEU reserve at June
30, 2000. The proposal contained some education funding
initiatives and certain limited initiatives in other areas, but
was overall relatively limited by the expectation of small
revenue gains. The 1999 May Revision projected over $4.3 billion
of additional revenues for the 1998-99 and 1999-00 Fiscal Years
and called for additional General Fund expenditures of $63.2
billion in 1999-00. The 1999 Budget Act was signed by the
Governor on June 29, 1999, the first time in six years that the
budget had been enacted in time.
The principal features of the 1999 Budget Act included
the following:
1. Proposition 98 funding for K-12 schools was
increased by $1.6 billion in General Fund moneys over revised
1998-99 levels, $108.6 million higher than the minimum
Proposition 98 guarantee.
2. Funding for higher education increased
substantially above the actual 1998-99 level.
3. Increased funding of nearly $600 million for health
and human services.
4. About $800 million from the General Fund was
directed toward infrastructure costs, including $425 million in
additional funding for the Infrastructure Bank, initial planning
costs for a new prison in the Central Valley, additional
equipment for train and ferry service, and payment of deferred
maintenance for state parks.
5. The Legislature enacted a one-year additional
reduction of 10 percent of the Vehicle License Fee ("VLF") for
calendar year 2000, at a General Fund cost of about $250 million
in each of fiscal years 1999-00 and 2000-01 to make up lost
funding to local governments. Several other targeted tax cuts,
primarily for businesses, were also approved, at a cost of $54
million in 1999-00.
6. A one-time appropriation of $150 million, split
between cities and counties, was made to offset property tax
shifts during the early 1990s.
The combination of resurging exports, a strong stock
market, and a rapidly-growing economy in 1999 and early 2000
resulted in unprecedented growth in General Fund revenues during
44
fiscal year 1999-00. The latest estimates from the Department of
Finance indicate revenues of about $71.2 billion, an increase of
over 20 percent over final 1998-99 revenues and $8.2 billion
higher than projected for the 1999 Budget Act. The latest
estimates indicate expenditures of $67.2 billion in 1999-2000, a
$3.5 billion increase over the 1999 Budget Act, but the result
still left a record balance in the Special Fund for Economic
Uncertainties at June 30, 2000 of over $7.2 billion.
2000-01 Budget
On January 10, 2000, the Governor released his proposed
budget for fiscal year 2000-01. The 2000-01 Governor's Budget
("2000 Governor's Budget") generally reflected an estimate that
General Fund revenues for fiscal year 1999-2000 would be higher
than projections made at the time of the 1999 Budget Act. Even
these positive estimates proved to be greatly understated as
continuing economic growth and stock market gains resulted in a
surge of revenues. The Administration estimated in the 2000 May
Revision that General Fund revenues would total $70.9 billion in
1999-2000, and $73.8 billion in 2000-01, a two-year increase of
$12.3 billion above the 2000 Governor's Budget revenue estimates.
The latest estimates for 1999-2000 are even higher, with revenues
now estimated at $71.2 billion.
The 2000 Budget Act was signed by the Governor on June
30, 2000, the second consecutive year the State's Budget was
enacted on time. The spending plan assumes General Fund revenues
and transfers of $73.9 billion, an increase of 3.8 percent above
the estimates for 1999-2000. The 2000 Budget Act appropriates
$78.8 billion from the General Fund, an increase of 17.3 percent
over 1999-2000, and reflects the use of $5.5 billion from the
Special Fund for Economic Uncertainties. In order not to place
undue pressure on future budget years, about $7.0 billion of the
increased spending in 2000-01 will be for one-time expenditures
and investments.
Some of the major features of the 2000 Budget Act were
the following:
1. Proposition 98 funding for K-12 schools was
increased by $3.0 billion in General Fund moneys over revised
1999-2000 levels, $1.4 billion higher than the minimum
Proposition 98 guarantee.
2. Funding for higher education increased
substantially above the revised 1999-2000 level.
3. Increased funding of $2.7 billion General Fund for
health and human services.
45
4. Significant moneys were devoted for capital outlay.
A total of $2.0 billion of General Fund money was appropriated
for transportation improvements, supplementing gasoline tax
revenues normally used for that purpose.
5. A total of about $1.5 billion of tax relief was
enacted as part of the budget process.
6. A one-time appropriation of $200 million, to be
split between cities and counties, was made to offset property
tax shifts during the early 1990s.
Economic Overview
California's economy, the largest among the 50 states
and one of the largest in the world, has major components in high
technology, trade, entertainment, agriculture, manufacturing,
tourism, construction and services. Since 1994, California's
economy has been performing strongly after suffering a deep
recession between 1990-93.
Fuel and other energy prices have risen sharply in
recent months, but the State Department of Finance does not
believe this will have a major impact on the State's economy,
although some dampening effect may occur. The Department notes
that the State and national economies are much more energy-
efficient than during the energy crises of the 1970's and early
1980's, and that, adjusted for inflation, motor fuel prices are
still 20% below the 1981 level.
Because of capacity constraints in electric generation
and transmission, California electric utilities have been forced
to purchase wholesale power at high prices this past summer.
Under current deregulation rules for the electric industry
enacted in 1996, two of the State's large investor-owned utility
("IOU") companies are not allowed to charge customers the full
cost, while rates in a third IOU's service area were cut back
after rising sharply to cover wholesale costs. Legislation was
enacted to streamline the process for siting new power plants,
but it will be several years until a significant number of new
suppliers will enter the California market. While the
Administration, the Legislature, the State Public Utilities
Commission and the Federal Energy Regulatory Commission all are
considering further actions to deal with shortcomings in the
State's deregulated energy market, it is not possible to predict
at this time what the long-term impact of these developments will
be on California's economy.
The State's July 1, 1999 population of over 34 million
represented over 12 percent of the total United States
population.
46
The three largest non-agricultural employment sectors in
California in 1999 were services, with 31.3 percent of payroll
employment, wholesale and retail trade, with 22.9 percent, and
state/local government, with 14.1 percent. California's
unemployment rate in 1999 was 5.2 percent, compared to 4.2
percent for the United States at large. Personal income in 1999
rose by 7.4 percent and represented 12.7 percent of the personal
income of the United States at large.
Litigation
The State is presently involved in certain legal
proceedings that, if decided against the State, may require the
State to make significant future expenditures or may impair
future revenue sources. Following are the more significant
lawsuits pending against the State as of October 1, 2000:
Northern California 1997 Flood Litigation: In January
of 1997, California experienced major flooding with current
estimates of property damage to be approximately $1.6 to $2
billion. To date, three lawsuits have been filed. No trial date
has been set.
In Ceridian Corporation v. Franchise Tax Board, the
validity of two sections of the California Tax laws is
challenged. The first relates to deduction from corporate taxes
for dividends received from insurance companies to the extent the
insurance companies have California activities. The second
relates to corporate deduction of dividends to the extent the
earnings of the dividend-paying corporation have already been
included in the measure of their California tax. On August 13,
1998, the court issued a judgment against the Franchise Tax Board
on both issues. The Franchise Tax Board has appealed the
judgment. If both sections of the California Tax law are
invalidated, and all dividends become deductible, then the
General Fund can become liable for approximately $200-$250
million annually.
In Hayes v. Commission on State Mandates, the State was
appealing an order to reimburse local school districts for
special education programs. The potential liability to the State
has been estimated at more than $1.5 billion. The Commission on
State Mandates issued a decision in December 1998 determining
that a portion, but not all, of the claims constituted state
mandated local costs. On June 5, 2000 the Commission adopted
parameters and guidelines for reimbursement. The Department of
Finance has not yet determined whether to seek judicial review of
the Commission's decision.
In State v. Stringfellow, the State is seeking recovery
for cleanup costs of a toxic waste site presently owned by the
47
State. The defendants, however, have filed a counterclaim
against the State for alleged negligent acts, resulting in
significant findings of liability against the State as owner,
operator, and generator of wastes taken to the site. The State
has appealed the rulings. Present estimates of the cleanup range
from $400 million to $600 million. The trial is expected to
begin in late 2001, at the earliest.
The State is a defendant in a coordinated action
involving 3,000 plaintiffs seeking recovery for damages caused by
the Yuba River flood of 1986. The trial court has found liability
in inverse condemnation and awarded damages of $500,000 to a
sample of plaintiffs. The State's potential liability to the
remaining plaintiffs ranges from $800 million to $1.5 billion.
The trial court's judgment was overturned in August 1999 and a
retrial on the inverse condemnation cause of action is set to
commence on January 15, 2001.
In Professional Engineers in California Government v.
Wilson, the petitioners challenged transfers of funds from the
State Highway Account and the Motor Vehicle Account to the
General Fund. The Superior Court ruled in December 1998 that
$30.7 million of the $258.2 million transferred from the State
Highway Account to the General Fund violated the California
Constitution. The court also invalidated $130.9 million
transferred from the Motor Vehicle Account to the General Fund.
The court ordered further briefing on the $130 million transfer
from the State Highway Account to the Motor Vehicle Account. On
April 30, 1999, the court found that the $130 million transfer
from the State Highway Account to the Motor Vehicle Account also
violated the California Constitution. The State will determine
whether to appeal the ruling after a judgment has been issued.
In Just Say No To Tobacco Dough Campaign v. State of
California, the petitioners challenge certain appropriations from
the Cigarette and Tobacco Products Surtax Fund. If the State
loses, the General Fund would be used to reimburse the Surtax
Fund for approximately $166 million. The superior court issued
an order in December 1998, granting the State's demurrer to the
entire action and dismissing the case. The superior court
thereafter reconsidered its ruling and allowed plaintiffs to
amend their complaint. The State has demurred to the amended
complaint and is awaiting the hearing before the court.
In Emily Q., et al. v. Belshe, et al., the plaintiffs
are seeking a change in early screening procedures for children
with mental health needs. The lawsuit is limited to Los Angeles
County. The government has filed an answer in this case. An
adverse outcome is possible with the potential liability of $500
million per year.
48
On December 24, 1997, a consortium of California
counties filed a test claim with the Commission on State Mandates
(the "Commission") asking the Commission to determine whether the
property tax shift from counties to school districts beginning in
1993-94, is a reimbursable state mandated cost. The test claim
was heard on October 29, 1998, and the Commission found in favor
of the State. In March, 1999, Sonoma County filed suit in the
Superior Court to overturn the Commission's decision. The State
is contesting this lawsuit. Should the courts find in favor of
the counties, the impact to the State General Fund could be as
high as $10.0 billion with an annual Proposition 98 General Fund
cost of at least $3.6 billion. This cost would grow in
accordance with the annual assessed value growth rate.
In Howard Jarvis Taxpayers Association et al. v.
Kathleen Connell, plaintiffs filed a compliant for certain
declaratory and injunctive relief challenging the authority of
the State Controller to make payments from the State Treasury in
the absence of a state budget. On July 21, 1998, the trial court
issued a preliminary injunction prohibiting the State Controller
from paying moneys from the State Treasury for fiscal year 1998-
99, with certain limited exceptions, in the absence of a state
budget. The preliminary injunction, among other things,
prohibited the State Controller from making any payments pursuant
to any continuing appropriation. Immediately thereafter, the
Legislature enacted an emergency appropriations bill that allowed
continued payment of various State obligations. The matters are
now pending before the Court of Appeals. The injunction has been
stayed pending appeal. Briefs are being submitted; no date has
yet been set for oral argument.
In Capitola Land v. Anderson and other related state and
federal cases, plaintiffs sought payments from the State under
the AFDC-Foster Care program. Judgment was rendered against the
State in Capitola, which the State appealed and lost. The State
then filed a state plan amendment with the federal Department of
Health and Human Services to enable the State to comply with the
Capitola ruling and receive federal funding. The DHHS denied the
state plan amendment, and the State has filed suit against DHHS.
The Legislature also enacted a statute which required federal
funding in order to comply with the Capitola judgment. The State
then refused to implement the Capitola judgment based on the new
statute. Certain plaintiffs moved for an order of contempt
against the State, which was granted by the trial court, but was
stayed and annulled by the Court of Appeal. The plaintiffs are
petitioning the California Supreme Court for review. If as a
result of this litigation, compliance with the Capitola judgment
is required and the judgment is applied retroactively, liability
to the State could exceed $200 million.
49
CONNECTICUT PORTFOLIO
The following is based on information obtained from an
Official Statement, dated June 15, 2000, relating to $450,000,000
State of Connecticut General Obligation Bonds (2000 Series B),
the Information Supplement to the Annual Information Statement of
the State of Connecticut dated June 21, 2000, and the Annual
Information Statement of the State of Connecticut dated February
1, 2000.
General Fund Budgets
1996-97 Operations The Comptroller's August 29, 1997
annual report indicated a 1996-97 General Fund surplus of over
$262 million. State spending ended the year $150.3 million over
budget; however, the higher than anticipated expenditures were
more than offset by strong revenue receipts. State income tax
receipts ended the year $261.9 million over budget despite income
tax reductions that became effective during the fiscal year and
total tax refunds were $91.5 million under original budget
projections owing to large capital gains that reduced or
eliminated anticipated refunds. $166.7 million of the fiscal
1996-97 surplus shall be deemed to be appropriated to the
Economic Recovery Fund, thereby retiring the principal and
interest debt on the Economic Recovery Notes. The remaining
$95.9 million of the surplus has been reserved for transfer to
the Budget Reserve Fund which, with these additional monies, will
total $336.9 million. No assurances can be given that an audit
will not indicate changes in the actual 1996-97 General Fund
result as reported by the Comptroller.
1997-98 Operations Per Section 3-115 of the Connecticut
General Statutes, the Comptroller must submit on an annual basis
a budgetary report for the previous fiscal year.
The Report of the State Comptroller for the Fiscal Year
ended June 30, 1998 indicated that under the state's current
modified cash basis of accounting, the General Fund posted a net
Fiscal Year 1998 surplus of $312,911,356, the highest dollar
surplus since Fiscal Year 1987. Fiscal Year 1998 General Fund
expenditures inclusive of federal and other grant accounts
increased by 5.6% over the prior fiscal year. This increase is
more than three times the rate of general inflation and,
therefore, represents a historically high level of adjusted
spending growth. During Fiscal Year 1998, General Fund
appropriations rose $487,462,994 above the budget plan. The
higher than anticipated General Fund expenditures were more than
offset by revenues that were 6.4% above the prior fiscal year's
receipts. The higher revenues were led by a 15.6% rise in gross
income tax receipts and a 6.2% increase in the sales tax
receipts. The income tax finished Fiscal Year 1998 $461.1
50
million over budget expectations. The sales tax was $77.6
million over budget. These two tax sources contributed 63% of
all General Fund revenue. A strong economy explains the
phenomenal growth in revenues.
1998 - 1999 Operations The adopted budget for fiscal
year 1998 - 1999 anticipated General Fund expenditures of
$9,972.1 million, General Fund revenues of $9,992.0 million and
an estimated General Fund surplus of $19.9 million. As of May
31, 1999, the Office of Policy and Management estimates 1998-1999
fiscal year General Fund revenues of $10,593.1 million, General
Fund expenditures of $10,562.1 million and an estimated revenue
operating surplus of $31.0 million. The estimates, as modified
due to legislative action, have been revised upward by $601.1
million from the enacted budget plan and estimated expenditures
have been revised upward by $590.0 million.
1999-2000 Operations The adopted budget for fiscal year
1999-2000 anticipated General Fund revenues of $10,646.0 million.
For fiscal year 2000-01, the adopted budget anticipated General
fund revenues of $11,090.0 million and General Fund expenditures
of $11,085.2 million for a surplus of $4.8 million. The adopted
budget is within the expenditure limits prescribed by Article
XXVIII of the Amendments to the Constitution of the State of
Connecticut in conjunction with Section 2-33a of the General
Statures, $68.5 million below the cap in fiscal year 1999-2000
and $59.3 million below the cap in fiscal year 2000-01.
The adopted budget made several modifications to the
State's tax law. These changes total approximately $105 million
in fiscal year 1999-2000 and $170 million in fiscal year 2000-01.
Over the biennium the most significant change is the increase in
the income tax credit for property taxes paid from the current
$350 per filer to $425 per filer in income year 1999 and $500 per
filer in income year 2000. Other major changes include a
reduction in taxes paid by hospitals and the exemption of various
items from the sales tax. Finally, the adopted budget
anticipated that a portion of the proceeds from the tobacco case
settlement will be deposited into the General Fund. Over the
biennium, the State's anticipated receipts from the settlement
are projected to total approximately $300 million of which $78.0
million will be deposited into the General Fund in fiscal year
1999-2000 and $150.3 million will be deposited into the General
Fund in fiscal year 2000-01.
2000-2001 Operations Per Section 4-71 of the
Connecticut General Statutes, the Governor is required to submit
a status report to the General Assembly on the biennial budget
enacted in the previous year. The status report shall include
any recommendations for adjustments and revisions to the enacted
budget. On February 9, 2000, the Governor submitted to the
51
General Assembly a status report including detailed projections
of expenditures and revenues and proposed Midterm Budget
Adjustments for the 1999-2000 and 2000-2001 fiscal years.
Special Act No. 00-13 containing the General Assembly's Midterm
Budget Adjustments for fiscal years 1999-2000 and 2000-01 was
passed by both Houses, and was signed into law by the Governor on
May 5, 2000.
Midterm Budget Adjustments for the 1999-2000 fiscal year
anticipate General Fund expenditures of $11,280.8 million,
General Fund revenues of $11,281.3 million and an estimated
General Fund surplus of $0.5 million. Pursuant to Article XXVIII
of the Amendments to the Constitution of the State of Connecticut
and Section 2-33a of the Connecticut General Statutes, the
Midterm Budget Adjustments would result in a fiscal 2000-01
budget that remains within the limits imposed by the expenditure
cap. For fiscal 2000-01, permitted growth in capped expenditures
is estimated at 5.48%. The proposed Midterm Budget Adjustments
would result in a fiscal 2000-01 budget that is $50.9 million
below the expenditure cap.
Economic Overview
Connecticut's economic performance is measured by
personal income which has been and is expected to remain among
the highest in the nation; gross state product (the value of all
final goods and services produced by labor and property located
within the State) which demonstrated stronger output growth than
the nation in general during the 1980s and lower growth in the
1990s; and employment which although rising, still remains below
the levels achieved in the late 1980s as manufacturing employment
has declined and non-manufacturing employment has only recently
surpassed the employment levels of the late 1980s.
For 1999, Connecticut experienced a 1.50 percent growth
rate in its non-agricultural employment compared with a 2.07
percent growth rate for the nation. The fastest growing private
industries are services, and wholesale and retail trade. Small
business is fueling much of the growth in these industries.
During 1999, Connecticut added an estimated net total of 24,600
nonfarm jobs. During 1999, the unemployment rate in the state
was 3.0 percent compared to 4.2 percent for the nation. However,
there are still areas of very high unemployment throughout the
state, especially in the larger urban centers.
Connecticut has a high level of personal income.
Historically, its average per capita income has been among the
highest in the nation. For 1999, Connecticut's average per
capita income was 44.7 percent higher than the national average.
According to projections made by the U.S. Department of Commerce
through the year 2045, Connecticut is expected to continue to
52
rank first in the nation in state per capita income throughout
the projected period.
Connecticut forecasts project continued moderate growth
for the State's economy through 2000.
State Indebtedness
There can be no assurance that general economic
difficulties or the financial circumstances of Connecticut or its
towns and cities will not adversely affect the market value of
its obligations or the ability of Connecticut issuers or obligors
of state, municipal and public authority debt obligations to meet
their obligations thereunder.
The State has established various statewide authorities
and two regional water authorities, one of which has since become
independent, to finance revenue-producing projects, five of which
statewide authorities have the power to incur, under certain
circumstances, indebtedness for which the State has contingent
or, in limited cases, direct liability. In addition, recent
State statutes have been enacted and implemented with respect to
certain bonds issued by the City of Bridgeport for which the
State has contingent liability and by the City of West Haven for
which the State has direct guarantee liability.
Connecticut has no constitutional limit on its power to
issue obligations or incur indebtedness other than that it may
only borrow for public purposes. In general, Connecticut has
borrowed money through the issuance of general obligation bonds
for the payment of which the full faith and credit of the State
are pledged. There are no express statutory provisions
establishing any priorities in favor of general obligation
bondholders over other valid claims against Connecticut.
Connecticut is a high debt state. Net state bonded debt
increased to $9.4 billion at the end of Fiscal Year 1999. This
represented a .6 percent or $56 million increase over the
previous year. Per capita net bonded debt has now reached
$2,857. In addition to debt on bonds, the state has unfunded
pension obligations, unfunded payments to employees for
compensated absences, unfunded workers compensation payments, and
capital leases. These additional long-term obligations bring
total state debt to $17.2 billion, a $553 million increase over
the previous year.
Litigation
The State, its officers and employees, are defendants in
numerous lawsuits. The Attorney General's Office has reviewed
the status of pending lawsuits and reports that an adverse
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decision in certain cases could materially affect the State's
financial position.
NEW JERSEY PORTFOLIO
The following is based on information obtained from an
Official Statement, dated August 1, 2000, relating to $29,000,000
State of New Jersey Building Authority State Building Revenue
Bonds, 2000 Series A.
Economic Climate
New Jersey is the ninth largest state in population and
the fifth smallest in land area. With an average of 1,098
persons per square mile, it is the most densely populated of all
the states. Between 1980 and 1990 the annual population growth
rate was 0.51 percent and between 1990 and 1999 the growth rate
accelerated to .55 percent. While this rate of growth compared
favorably with other Middle Atlantic States, it was less than the
national rate of increase. New Jersey is located at the center
of the megalopolis which extends from Boston to Washington, and
which includes over one-fifth of the country's population. 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. This central location in
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. A number of Fortune Magazine's top 500 companies
maintain headquarters or major facilities in New Jersey, and many
foreign-owned firms have located facilities in the State.
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. Since 1976, casino gambling in Atlantic City has
been an important State tourist attraction.
During 1999 a continuation of the national business
expansion, a strong business climate in New Jersey and positive
developments in surrounding metropolitan areas were major sources
of State economic growth -- the second strongest year for
economic growth since 1988.
Average employment in 1999 increased by 65 thousand jobs
compared to 1998. Job gains were primarily spread across the
service producing industries with particularly strong growth in
wholesale and retail trade (20,500) and business services
(20,200).
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For the last decade, New Jersey's job growth has been
concentrated in five clusters of economic activity -- high
technology, health, financial, entertainment and logistics. One
of every three of the State's workers are in these sectors, and
as a whole these sectors accounted for a 19 percent increase in
employment over the past decade compared to a four percent
employment growth for all other State industries.
Personal income in New Jersey, spurred by strong labor
markets, increased by 5.6 percent in 1999, a rate comparable to
the national rate of increase. As a result, retail sales rose by
an estimated 7.0 percent. Low inflation, approximately 2
percent, continues to benefit New Jersey consumers and businesses
and low interest rates boost housing and consumer durable
expenditures. In 1999, home building had its best year since
1988.
Joblessness fell in terms of both its absolute level and
its rate, and by the end of 1999, New Jersey's unemployment rate
was at or below that of the nation.
The outlook for 2000-2001 is for continued, although
more moderate economic growth. Job gains in the State,
reflecting a slowing national economy and labor shortages in
skilled technical areas, will be approximately 58,000 and
personal income growth will slow to an average of 6.2% in 2000
and 5.9% in 2001.
A slower growing national economy and the national
election year campaign make it increasing unlikely that any
changes in national economic or fiscal policy will be implemented
that will impact the State's economy significantly in the
forecast period. However, uncertainties in the international
economy are likely to remain due to oil price and currency
issues.
Other areas of concern include volatility in the stock
market, possible significant shifts in consumer and investor
confidence, unstable and potentially deflationary international
economic conditions, and the prospect of leaner profits for U.S.
corporations. In addition, the restructuring of major industry
will continue spurred by the imperative of cost containment,
globalization of competition, and deregulation. Thus, the
forecasts for 2000-2001 contain more risk than the recent past,
but the momentum and measures of the State's economic health are
favorable.
The New Jersey outlook is based largely on expected
national economic performance and on recent State strategic
policy actions aimed at infrastructure improvements, effective
education and training of the workforce, and maintaining a
55
competitive business climate. Investments in each of these
policy areas are seen as vital to maintaining the long-term
health of the State's economy.
Financial Condition
The State Constitution provides, in part, that no money
may be drawn from the State Treasury except for appropriations
made by law and that no law appropriating money for any State
purpose shall 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.
Should it appear that revenues will be less than the
amount anticipated in the budget for a fiscal year, the Governor
may take steps to reduce State expenditures. The State
Constitution additionally provides that 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.
For the fiscal year ended June 30, 2000, the
undesignated fund balances for all funds were projected to be
$1.18 billion, a decrease of $92 million from fiscal year 1999.
The undesignated fund balances for all funds are estimated to be
$870 million for fiscal year 2001. Revenues for the General
Fund, in which the largest part of the financial operations of
the state is accounted for, were estimated to be $19.79 billion
for fiscal year 2000 and are estimated to be $21.13 billion in
fiscal year 2001.
State Indebtedness
The New Jersey Sports and Exposition Authority (the
"Sports Authority") has issued State guaranteed bonds of which
$86,070,000 were outstanding as of June 30, 2000. The State
believes that the revenue of the Sports Authority will be
sufficient to provide for the payment of debt service on these
obligations without recourse to the State's guarantee.
Legislation enacted in 1992 by the State authorizes the
Sports Authority to issue bonds for various purposes payable from
State appropriations. Pursuant to this legislation, the Sports
Authority and the State Treasurer have entered into an agreement
(the "State Contract") pursuant to which the Sports Authority
will undertake certain projects, including the refunding of
certain outstanding bonds of the Sports Authority, and the State
Treasurer will credit to the Sports Authority amounts from the
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General Fund sufficient to pay debt service and other costs
related to the bonds. The payment of all amounts under the State
Contract is subject to and dependent upon appropriations being
made by the State Legislature. As of June 30, 2000 there were
approximately $686,705,000 aggregate principal amount of Sports
Authority bonds outstanding, the debt service on which is payable
from amounts credited to the Sports Authority Fund pursuant to
the State Contract.
In July 1984, the State created the New Jersey
Transportation Trust Fund Authority (the "TTFA"), an
instrumentality of the State organized and existing under the New
Jersey Transportation Trust Fund Authority Act of 1984, as
amended (the "TTFA Act") for the purpose of funding a portion of
the State's share of the cost of improvements to the State's
transportation system. Pursuant to the TTFA Act, as amended in
July 2000, the principal amount of the TTFA's bonds, notes or
other obligations which may be issued in any fiscal year
generally may not exceed $650 million plus amounts carried over
from prior fiscal years. These bonds are special obligations of
the TTFA payable from the payments made by the State pursuant to
a contract between the TTFA, the State Treasurer and the
Commissioner of Transportation. As of June 30, 2000, there were
approximately $4,495,245,000 aggregate principal amount of TTFA
issues outstanding including $333,875,000 grant anticipation
notes issued by the New Jersey Transit Corporation ("NJT"). To
the extent these notes are not paid by NJT, these notes are
payable by the TTFA pursuant to a Standby Deficiency Agreement
entered into by the TTFA and the Trustee for the notes. The
Standby Deficiency Agreement was issued on a parity with all
bonds issued by the TTFA.
Pursuant to legislation, the New Jersey Economic
Development Authority (the "EDA") has been authorized to issue
Economic Recovery Bonds, State Pension Funding Bonds and Market
Transition Facility Bonds. The Economic Recovery Bonds have been
issued pursuant to legislation enacted in 1992 to finance various
economic development purposes. Pursuant to that legislation, EDA
and the State Treasurer have entered into an agreement (the "ERF
Contract") through which EDA has agreed to undertake the
financing of certain projects and the State Treasurer has agreed
to credit to the Economic Recovery Fund from the General Fund
amounts equivalent to payments due to the State under an
agreement with the port Authority of New York and New Jersey.
The payment of all amounts under the ERF Contract is subject to
and dependent upon appropriations being made by the State
Legislature. As of June 30, 2000 there were approximately
$222,547,868 aggregate principal amount of Economic Recovery Fund
Bonds outstanding.
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Legislation enacted in June 1997 authorizes the EDA to
issue bonds to pay a portion of the State's unfunded accrued
pension liability for the State's retirement systems (the
"Unfunded Accrued Pension Liability"), which, together with
amounts derived from the revaluation of pension assets pursuant
to companion legislation enacted at the same time, will be
sufficient to fully fund the Unfunded Accrued Pension Liability.
The Unfunded Accrued Pension Liability represents pension
benefits earned in prior years which, pursuant to standard
actuarial practices, are not yet fully funded. On June 30, 1999,
the EDA issued $2,797,004,765 aggregate principal amount of State
Pension Funding Bonds. The EDA and the State Treasurer have
entered into an agreement which provides for the payment to the
EDA of monies sufficient to pay debt service on the bonds. Such
payments are subject to and dependent upon appropriations being
made by the State Legislature.
The Market Transition Facility Bonds have been issued
pursuant to legislation enacted June 1994 to pay the current and
anticipated liabilities and expenses of the market transition
facility, which issued private passenger automobile insurance
policies for drivers who could not be insured by private
insurance companies on a voluntary basis. As of June 30, 2000,
there were approximately $604,020,000 aggregate principal amount
of Market Transition Bonds outstanding.
The authorizing legislation for certain State entities
provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such
legislation, a designated official is required to certify any
deficiency in a debt service reserve fund maintained to meet
payments of principal of and interest on the obligations, and a
State appropriation in the amount of the deficiency is to be
made. However, the State legislature is not legally bound to
make such an appropriation. Bonds issued pursuant to authorizing
legislation of this type are sometimes referred to as "moral
obligation" bonds. There is no statutory limitation on the
amount of "moral obligation" bonds which may be issued by
eligible State entities. "Moral obligation" bonded indebtedness
issued by State entities as of June 30, 1999 stood at an
aggregate principal amount of $689,355,315. Of this total,
$363,315,315 was issued by the New Jersey Housing and Mortgage
Finance Agency. This Agency has never had a deficiency in a
debt service reserve fund that required the State to appropriate
funds to meet its "moral obligation," and it is anticipated to
earn sufficient revenues to cover debt service on its bonds.
The Higher Education Assistance Authority and the South Jersey
Port Corporation issued moral obligation indebtedness in
aggregate principal amounts of $248,080,000 and $77,960,000,
respectively. It is anticipated that the Higher Education
Assistance Authority's revenues will be sufficient to cover debt
58
service on its bonds. However, the State has periodically
provided the South Jersey Port Corporation with funds to cover
all debt service and property tax requirements, when earned
revenues are anticipated to be insufficient to cover these
obligations.
Litigation
At any given time, there are various numbers of claims
and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are
primarily paid out of the fund created pursuant to the New Jersey
Claims Act. The State does not formally estimate its reserve
representing potential exposure for these claims and cases. The
State is unable to estimate its exposure for these claims and
cases and intends to defend these suits vigorously. Among them
are suits challenging: (a) the State's compliance with the Clear
Water Act and Resource Conservation Act at Liberty State Park;
(b) the constitutionality of annual A-901 hazard and solid waste
licensure renewals fees collected by the Department of
Environmental Protection and Energy; (c) the State's compliance
with the court order in Abbot v. Burke to close the spending gap
between poor urban and wealthy school districts; (d) the
constitutionality of the State's system of funding for its
schools; (e) the use of monies collected under the Fair
Automobile Insurance Reform Act of 1990 through assessments on
insurers licensed or admitted to write property and casualty
insurance in the State; (f) violations of the Americans with
Disabilities Act of 1990 and discrimination charges against the
State Department of Corrections; (g) the spousal impoverishment
provisions of the Medicare Catastrophic Coverage Act; (h)
Medicaid hospital reimbursement since 1995; (i) efforts to
revitalize Atlantic City through the design and construction of a
highway and tunnel; (j) the funding mechanisms, including the
gross receipts tax, the parking tax and the Atlantic City fund,
for the Casino Reinvestment Development Authority; (k) nonpayment
of Medicare co-insurance and deductibles by the State Medicaid
program from 1988 to February 10, 1995; (l) the Camden country
solid waste procurement process; (m) the constitutionality, under
the State constitution, of the "family cap" provisions of the
State Work First New Jersey; (n) the $10 per adjusted hospital
admission charges imposed by New Jersey law; (o) the practices of
the Division of Youth and Family Services; (p) illegal taking of
property of the City of Cape May; and (q) discrimination in the
administration of the Police & Fireman Retirement System.
VIRGINIA PORTFOLIO
The following is based on information obtained from an
Official Statement, dated June 1, 2000, relating to $60,900,000
59
Virginia College Building Authority, Educational Facilities
Revenue Bonds, Series 2000.
Economic Climate
The Commonwealth's 1998 population of 6,791,300 was 2.5
percent of the United States' total. Among the 50 states, it
ranked twelfth in population. With 39,598 square miles of land
area, its 1997 population density was 170 persons per square
mile, compared with 73 persons per square mile for the United
States.
The Commonwealth is divided into five distinct regions-
-a coastal plain cut into peninsulas by four large tidal rivers,
a piedmont plateau of rolling farms and woodlands, the Blue Ridge
Mountains, the fertile Shenandoah Valley and the Appalachian
plateau extending over the southwest corner of the Commonwealth.
Approximately one-third of all land in Virginia is used for
farming and other agricultural services. This variety of
terrain, the location of the Commonwealth on the Atlantic
Seaboard at the southern extremity of the northeast population
corridor and its close proximity to the nation's capital have had
a significant influence on the development of the present
economic structure of the Commonwealth.
The largest metropolitan area is the Northern Virginia
portion of the Washington, D.C. metropolitan area. This is the
fastest growing metropolitan area in the Commonwealth and had a
1998 population of 2,041,900. Northern Virginia has long been
characterized by the large number of people employed in both
civilian and military work with the federal government. However,
it is also one of the nation's leading high-technology centers
for computer software and telecommunications.
According to the U.S. Department of Commerce, Virginians
received over $187 billion in personal income in 1998. This
represents a 76.8 percent increase over 1988 while the nation as
a whole experienced a gain of 75.9 percent for the same period.
In 1998, Virginia had per capita income of $27,489, the highest
of the Southeast region and greater than the national average of
$26,482. Virginia's per capita income rose from 94 percent to
103 percent of the national average from 1970 to 1998. From 1988
to 1998, Virginia's 5.3 percent average rate of growth in
personal per capita income was slightly less than the national
rate of growth. Much of Virginia's per capita income gain in
these years has been due to the continued strength of the
manufacturing sectors, rapid growth of high-technology
industries, basic business services, corporate headquarters and
regional offices and the attainment of parity with the nation in
labor force participation rates.
60
More than 3 million residents of the Commonwealth are in
the civilian labor force, which includes agricultural and
nonagricultural employment, the unemployed, the self-employed and
residents who commute to jobs in other states. Services, the
largest employment sector, accounted for 30.9 percent of
nonagricultural employment in 1998, and has increased by 23.3
percent from 1994-1998, making it the fastest growing sector in
the Commonwealth. Manufacturing is also a significant employment
sector, accounting for 12.2 percent of nonagricultural employment
in 1998. The industries with the greatest manufacturing
employment are transportation equipment, textiles, food
processing, printing, electric and electronic equipment, apparel,
chemicals, lumber and wood products and machinery. Employment in
the manufacturing sector increased 0.2% from 1994 to 1998.
Virginia generally has one of the lowest unemployment
rates in the nation, according to statistics published by the
U.S. Department of Labor. During 1998, an average of 2.9 percent
of Virginia's citizens were unemployed as compared with the
national average which was 4.5 percent.
Virginia is one of twenty states with a Right-to-Work
Law and has a record of good labor management relations. Its
favorable business climate is reflected in the relatively small
number of strikes and other work stoppages it experiences.
Virginia is one of the least unionized of the more
industrialized states. Three major reasons for this situation
are the Right-to-Work Law, the importance of manufacturing
industries such as textiles, apparel, electric and electronic
equipment and lumber which are not highly organized in Virginia
and the importance of federal civilian and military employment.
Typically the percentage of nonagricultural employees who belong
to unions in the Commonwealth has been approximately half the
U.S. average.
Financial Condition
The Constitution of Virginia limits the ability of the
Commonwealth to create debt. The Constitution requires the
Governor to ensure that expenses do not exceed total revenues
anticipated plus fund balances during the period of two years and
six months following the end of the General Assembly session in
which the appropriations are made. An amendment to the
Constitution, effective January 1, 1993, established the Revenue
Stabilization Fund. The Revenue Stabilization Fund is used to
offset, in part, anticipated shortfalls in revenues in years when
appropriations, based on previous forecasts, exceed expected
revenues in subsequent forecasts. As of June 30, 1999,
$361,471,000 was on deposit in the Revenue Stabilization Fund.
In addition, $194,135,000 of the General Fund balance on June 30,
61
1998 was reserved for deposit in the Revenue Stabilization
Fund.
Tax-supported debt of Virginia includes both general
obligation debt and debt of agencies, institutions, boards and
authorities for which debt service is expected to be made in
whole or in part from appropriations of tax revenues. Certain
bonds issued by certain authorities that are designed to be self-
supporting from their individual loan programs are secured in
part by a moral obligation pledge of Virginia. Virginia may fund
deficiencies that may occur in debt service reserves for moral
obligation debt. To date, these authorities have not requested
that the Commonwealth fund reserve deficiencies for this debt.
There are also several authorities and institutions of the
Commonwealth that issue debt for which debt service is not paid
through appropriations of state tax revenues and for which there
is no moral obligation pledge to consider funding debt service or
reserve fund deficiencies.
On December 19, 1997, the outgoing Governor presented to
the General Assembly the 1998-2000 Budget Bill for the 1998-2000
biennium. The 1998-2000 Budget Bill presented by the Governor
provided about $2,242.1 million in operating increases from the
general fund above fiscal year 1998 appropriation levels. Of
this amount $211.4 million was for deposit to the Revenue
Stabilization Fund. The remainder provided for increases in K-12
education ($874.2 million), higher education ($345.5 million),
public safety, economic development, health and human resources
and natural resources. The 1998-2000 Budget Bill also provided
$350 million in funding for tax reductions, including $260
million for the first installment of a proposal to eliminate the
personal property tax on the personal use vehicles valued up to
$20,000 and a proposal to eliminate the sales tax on non-
prescription drugs. In addition to increases to operating funds,
the 1998-2000 Budget Bill provided $532.8 million in pay-as-you-
go funding for capital projects.
On January 26, 1998, the incoming Governor submitted
amendments to the introduced 1998-2000 Budget Bill to fund his
commitments to provide additional teachers in K-12 classrooms
($35.1 million) and to eliminate the personal property tax on
personal use vehicles valued up to $20,000 ($233.2 million). His
amendment also made minor adjustments, many of them based on
updated information available since the 1998-2000 Budget Bill was
introduced. Revenue adjustments included a revised estimate of
general fund revenue, a revised accounting for interest earnings,
and elimination of a Lottery Special Reserve Fund.
The 1998-2000 Budget Bill enacted by the 1998 General
Assembly in its 60-day Session, which began January 14, 1998,
included $447 million for personal property tax relief and $80.8
62
million for local school construction and repair. The Governor
signed the 1998-2000 Budget Bill into law on April 14, 1998. The
1998-2000 Budget Bill became the 1998-2000 Appropriation Act and
its provisions went into effect on July 1, 1998.
On December 18, 1998, the Governor presented to the
General Assembly amendments to the 1998-2000 Appropriation Act,
as amended (the "1999 Budget Bill"). The amendment represented
an aggregate increase of $868.8 million in general fund
appropriations above the amounts appropriated for the 1998-2000
biennium in the amended 1998-2000 Appropriation Act. The 1999
Budget Bill provided for continued tax relief for Virginians,
with the continuation of the phased-in car tax relief, a first
step toward reducing the sales tax on food for home consumption,
and a military pay exclusion from state income tax of up to
$15,000 of basic pay. The 1999 Budget Bill became law on
April 7, 1999.
On December 18, 1999, the Governor presented to the
General Assembly amendments to the 1999 Appropriation Act
affecting the remainder of the 1998-2000 biennium (the "2000
Amendments to the 1999 Appropriation Act"). The amendments
represented an aggregate increase of $683.8 million to general
fund revenues available for appropriation and also contained
additional spending proposals in the amount of $176.0 million
from the general fund and $129.3 million in nongeneral funds.
The 2000 Amendments to the 1999 Appropriation Act became
effective on May 19, 2000.
Litigation
The Commonwealth, its officials and employees are named
as defendants in legal proceedings which occur in the normal
course of governmental operations, some involving substantial
amounts. It is not possible at the present time to estimate the
ultimate outcome or liability, if any, of the Commonwealth with
respect to these lawsuits. However, the ultimate liability
resulting from these suits is not expected to have a material,
adverse effect on the financial condition of the Commonwealth.
In Davis v. Michigan (decided March 28, 1989), the
United States Supreme Court ruled unconstitutional states'
exempting from state income tax the retirement benefits paid by
the state or local governments without exempting retirement
benefits paid by the federal government. At that time, Virginia
exempted state and local retirement benefits but not federal
retirement benefits. At a Special Session held in April 1989,
the General Assembly repealed the exemption of state and local
retirement benefits.
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In Harper v. Department of Taxation, commenced in 1989,
federal retirees sought refunds of state income taxes during
1985-1988. In a Special Session in 1994, the General Assembly
passed emergency legislation to provide payments in five annual
installments to federal retirees in settlement of their claims
for overpaid taxes. In 1995 and 1996, the General Assembly
passed legislation allowing more retirees to participate in the
settlement. As of June 30, 1997, the estimated total cost to the
Commonwealth for the settlement was approximately $316.2 million.
On September 15, 1995, the Virginia Supreme Court
rendered its decision in Harper, reversed the judgment of the
trial court, entered final judgment in favor of the plaintiff
retirees who elected not to settle, and directed that the amounts
unlawfully collected be refunded with statutory interest. The
total cost of refunding all Virginia income taxes paid on federal
pensions on account of the settlement (approximately $316.2
million) and the judgment ($78.7 million) is approximately $394.9
million, of which $329 million ($250.2 in respect of the
settlement and the entire $78.7 million in respect of the
judgment) has been paid, leaving $66 million payable in respect
of the settlement. This final payment was originally scheduled
to be paid on March 31, 1999. During the 1998 Session of the
General Assembly, legislation was approved providing for the
early payment of the remaining balance on September 20, 1998,
(subject to appropriation) and providing that the undesignated
and unreserved general fund balance is met on August 15, 1998.
Since such balances were not met, a special installment payment
of 52.8592 percent of the remaining balance (approximately $34.88
million) was made on September 30, 1998 with payment of the final
balance ($31.1 million) made on March 31, 1999.
FLORIDA PORTFOLIO
The following is based on information obtained from an
Official Statement, dated August 1, 2000, relating to
$200,000,000 State of Florida, State Board of Education, Public
Education Capital Outlay Bonds, 2000 Series A.
Economic Climate
As of April 1, 1998, Florida is the fourth most populous
state in the nation with an estimated population of 15.0 million.
Strong population growth is the fundamental reason why Florida's
economy has typically performed better than the nation as a
whole. Since 1990, U.S. population has increased about 1.0%
annually, while Florida's population has averaged a 1.9% annual
increase. Florida has been and continues to be one of the
fastest growing of the largest states.
64
Many of the nation's senior citizens choose Florida as
their place of retirement. The State, however, is also
recognized as attracting a significant number of working age
people. In recent years, the prime working age population (18-
64) has grown at an average annual rate of more than 2.0%.
Florida's economic assets, such as competitive wages and low per
capital taxes, have attracted new businesses and created many new
job opportunities.
Over the years, Florida's total personal income has
grown at a strong pace and outperformed both the U.S. and other
southeastern states. The increase in Florida's total personal
income directly reflects the State's population increase.
Florida's per capital personal income has been closely tracking
the national average for many years. From 1992 to 1998,
Florida's total personal income grew by 43.4% and per capital
income expanded approximately 29.8%. For the nation, total and
per capital personal income increased by 36.3% and 28.5%,
respectively.
Sources of personal income differ in Florida from that
of the nation and the southeast. Because Florida has an older
and proportionally larger retirement population, property income
(dividends, interest, and rent) and transfer payments (social
security, retirement, disability, unemployment insurance,
workers' compensation, veterans and miscellaneous) are a
relatively more important source of income. A positive aspect of
greater reliance on property income and transfer payments is that
they are less sensitive to the business cycle and act as a
stabilizing force in weak economic periods.
Since 1992, Florida's population increased 11.7%, while
the number of employed persons increased 15.0%. In spite of
Florida's rapid population growth, employment has grown even
faster. The nonfarm job creation rate for Florida's nonfarm jobs
has increased by 24.6% while U.S. nonfarm jobs increased only
15.9%. Contributing to Florida's rapid rate of growth in
employment and income are international trade and structural
changes to the economy. The State is gradually becoming less
dependent on employment related to construction, agriculture, and
manufacturing, and more dependent on employment related to trade
and services. Presently, services constitute 35.2% and trade
25.7% of the State's total nonfarm jobs.
Fiscal Matters
On November 8, 1994 a constitutional amendment was
ratified by the voters which limits the growth in state revenues
in a given fiscal year to no more than the average annual growth
rate in Florida personal income over the previous five years.
Revenues collected in excess of the limitation are to be
65
deposited into the Budget Stabilization Fund unless 2/3 of the
members of both houses of the legislature vote to raise the
limit. The limit is based on actual revenues from the prior
fiscal year. State revenues are defined as taxes, licenses,
fees, charges for services imposed by the Legislature on
individuals, business or agencies outside of state government and
revenue from the sale of lottery tickets.
Florida prepares an annual budget which is formulated
each year and presented to the Governor and Legislature. Under
current law, the State budget as a whole, and each separate fund
within the State budget, must be kept in balance from currently
available revenues each State fiscal Year.
The financial needs of the State are addressed by
legislative appropriations through the use of three fund types:
the General Revenue Fund, trust funds, and the Working Capital
Fund. In addition, Article III of the Florida Constitution
establishes a fourth fund type known as the Budget Stabilization
Fund. The trust funds received by the state consist of monies
which are designated for an authorized purpose. New trust funds
may not be created without the approval of three-fifths of the
membership of each house of the Legislature; and all trust funds,
with limited exceptions, terminate after four years unless
reenacted. Revenues in the General Revenue Fund, which are in
excess of the amount needed to meet appropriations, may be
transferred to the Working Capital Fund.
In fiscal year 1996-1997, Florida derived an estimated
67 percent of its total direct revenues from State taxes and
fees. Federal funds and other special revenues accounted for the
remaining revenues. Florida does not currently impose an
individual income tax. The greatest single source of tax receipts
in Florida is the sales and use tax, accounting for 68 percent of
general revenue funds available. For the fiscal year 1998,
receipts from this source were $11,829 million.
In fiscal year 1996-97, the estimated General Revenue
plus Working Capital and Budget Stabilization Funds available
totalled $16,617.4 million, a 6.7 percent increase from fiscal
year 1995-96. The $15,568.7 million in Estimated Revenues
represents a 6.3 percent increase from the analogous figures in
1995-96. With combined General Revenue, Working Capital Fund and
Budget Stabilization Fund appropriations at $15,537.2 million
unencumbered reserves at the end of 1996-97 were estimated at
$1,080.2 million.
For fiscal year 1997-98, the General Revenue plus
Working Capital and Budget Stabilization Funds available total
$17,553.9 million, a 5.6 percent increase over 1996-97. The
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$16,321.6 million in Estimated Revenues represented a 4.8 percent
increase over the analogous figure in 1996-97.
For fiscal year 1998-99, the estimated General Revenue
plus Working Capital and Budget Stabilization funds available
total $19,481.8 million, a 5.2% increase over 1997-98. The
$17,779.5 million in Estimated Revenues represent a 5.0% increase
over the analogous figure in 1997-98. With combined General
Revenue, Working Capital Fund, and Budget Stabilization Fund
appropriations at $18,222.0 million, including a $100.9 million
transfer to the Budget Stabilization Fund, unencumbered reserves
at the end of 1998-99 are estimated at $1,360.7 million.
For fiscal year 1999-00, the estimated General Revenue
plus Working Capital and Budget Stabilization funds available
total $20,133.9 million, a 3.3% increase over 1998-99. The
$18,555.2 million in Estimated Revenues represent a 4.4% increase
over the analogous figure in 1998-99.
For fiscal year 2000-2001, the estimated General Revenue
plus Working Capital and Budget Stabilization funds available
total $21,359.0 million, a 3.7% increase over 1999-2000. The
$19,320.7 million in Estimated Revenues represent a 3.1% increase
over the analogous figure in 1999-2000.
The Florida Constitution places limitations on the ad
valorem taxation of real estate and tangible personal property
for all county, municipal or school purposes, and for water
management districts. Counties, school districts and
municipalities are authorized by law, and special districts may
be authorized by law, to levy ad valorem taxes. The State does
not levy ad valorem taxes on real property or tangible personal
property. These limitations do not apply to taxes levied for
payment of bonds and taxes levied for periods not longer than two
years when authorized by a vote of the electors. The Florida
Constitution and the Florida Statutes provide for the exemption
of homesteads from all taxation, except for assessments for
special benefits, up to the assessed valuation of $5,000. For
every person who is entitled to the foregoing exemption, the
exemption is increased to a total of $25,000 of assessed
valuation for taxes levied by governing bodies.
MASSACHUSETTS PORTFOLIO
The following was obtained from an Official Statement,
dated September 7, 2000, relating to $400,000,000 General
Obligation Bond Anticipation Notes, 2000 Series A, and The
Commonwealth of Massachusetts, Information Statement dated March
3, 2000, as supplemented August 29, 2000.
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Economic Climate
Massachusetts is a densely populated state with a well-
educated population, comparatively high income levels, low rates
of unemployment, and a relatively diversified economy. While the
total population of Massachusetts has remained fairly stable in
the last twenty years, significant changes have occurred in the
age distribution of the population: dramatic growth in residents
between the ages of 20 and 44 since 1980 is expected to lead to a
population distributed more heavily in the 65 and over-age group
in 2015 and 2025. Just as the working-age population has
increased, income levels in Massachusetts since 1980 have grown
significantly more than the national average, and a variety of
measures of income show that Massachusetts residents have
significantly higher rates of annual income than the national
average. These high levels of income have been accompanied by a
significantly lower poverty rate and, with the exception of the
recession of the early 1990s, considerably lower unemployment
rates in Massachusetts than in the United States since 1980.
While economic growth in Massachusetts slowed considerably during
the recession of 1990-1991, indicators such as retail sales,
housing permits, construction, and employment levels suggest a
strong and continued economic recovery.
Per capita personal income for Massachusetts residents
was $35,551 in 1999, as compared to the national average of
$28,542. While per capita personal income is, on a relative
scale, higher in Massachusetts than in the United States as a
whole, this is offset to some extent by the higher cost of living
in Massachusetts.
The Massachusetts services sector, with 36.0 percent of
the non-agricultural work force in December 1999, is the largest
sector in the Massachusetts economy. Government employment
represents 12.8 percent of total non-agricultural employment in
Massachusetts. While total employment in construction,
manufacturing, trade, government, services, and finance,
insurance and real estate declined between 1988 and 1992, the
economic recovery that began in 1993 has been accompanied by
increased employment levels. Since 1994, total employment levels
in Massachusetts have increased at yearly rates of approximately
2.0 percent. Total non-agricultural employment in Massachusetts
grew at a rate of 1.9 percent in 1999.
While the Massachusetts Unemployment Rate was
significantly lower than the national average between 1979 and
1989, the economic recession of the early 1990s caused
unemployment rates in Massachusetts to rise significantly above
the national average. However, the economic recovery that began
in 1993 has caused unemployment rates in Massachusetts to decline
faster than the national average. As a result, since 1994 the
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unemployment rate in Massachusetts has been below the national
average. The unemployment rate in Massachusetts during 1999 was
3.2 percent, compared to 4.2 percent for the nation.
Between 1982 and 1988, the economies of Massachusetts
and New England were among the strongest performers in the
nation, with growth rates considerably higher than those for the
national economy as a whole. Between 1989 and 1992, however,
both Massachusetts and New England experienced growth rates
significantly below the national average. Since then, the growth
rates in Massachusetts and New England have improved relative to
the nation. In 1995 and 1996, the economies of both
Massachusetts and New England grew at a faster pace than the
nation as a whole. For 1997, Massachusetts Gross State Product
increased by 4.4 percent compared to 4.3 percent for the nation
as a whole.
The economy of Massachusetts remains diversified among
several industrial and non-industrial sectors. In 1997, the
private services producing industries (transportation and public
utilities; wholesale and retail trade; finance, insurance and
real estate; and "services") contributed 72.3 percent of the
total Massachusetts Gross State Product.
The downside risks for Massachusetts include the
shortage of skilled labor, low net population growth which will
further constrain job creation, and the prominence of the
financial services industry in the economy coupled with a
relatively high proportion of non-wage income, both of which are
sensitive to the performance of the financial markets.
Financial Condition
Under its constitution, the Commonwealth may borrow
money (a) for defense or in anticipation of receipts from taxes
or other sources, any such loan to be paid out of the revenue of
the year in which the loan is made, or (b) by a two-thirds vote
of the members of each house of the Legislature present and
voting thereon.
Certain independent authorities and agencies within the
Commonwealth are statutorily authorized to issue bonds and notes
for which the Commonwealth is either directly, in whole or in
part, or indirectly liable. The Commonwealth's liabilities with
respect to these bonds and notes are classified as either
(a) Commonwealth-supported debt, (b) Commonwealth-guaranteed debt
or (c) indirect obligations.
Debt service expenditures of the Commonwealth in Fiscal
Year 1992 totaled $898.3 million, representing a 4.7 percent
decrease from Fiscal Year 1991. Debt service expenditures for
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Fiscal Year 1995, Fiscal Year 1996, Fiscal Year 1997, Fiscal Year
1998 and Fiscal Year 1999 were $953.0 million, $905.1 million,
$997.6 million, $1,079.3 million and $1,173.8 million,
respectively, and are projected to be $1,196.7 million for Fiscal
Year 2000. In January 1990, legislation was enacted which
imposes a 10 percent limit on the total appropriations in any
fiscal year that may be expended for payment of interest on
general obligation debt (excluding Fiscal Recovery Bonds) of
Massachusetts.
In Fiscal Year 1998, legislation was approved to
construct a new convention center in Boston and to expand
existing facilities in Worcester and Springfield. The projects
will be furnished with increases in certain taxes on hotels and
vehicle rentals, and the dedication of state taxes on new
businesses in Boston's Convention Center Finance District. These
new revenue sources will be sufficient to pay the interest on the
general obligation notes that will be sold to finance
construction. The notes will be permanently financed with
special obligation revenue bonds when construction of the new
facility is completed, probably in 2002.
In Fiscal Year 1990, Massachusetts had a GAAP basis
budget deficit of nearly $1.9 billion. That deficit margin
steadily decreased and in 1995, the Commonwealth ended the year
with a GAAP basis budget surplus of $287.4 million. In 1996, the
GAAP basis budget surplus was $709.2 million and the statutory
basis surplus was $1.1 billion.
In Fiscal Year 1996, the Commonwealth Stabilization Fund
was funded to its statutory limit of $543.3 million. An
additional $232 million was available for deposit into the Fund
but, because it had reached its statutory ceiling, these funds
flowed into the Tax Reduction Fund, triggering a $150 million
income tax cut for Tax Year 1996 and an $84 million tax cut for
Tax Year 1997.
Actual Tax revenues for Fiscal Year 1997 totaled
approximately $12.865 billion, a 6.8 percent increase, over
Fiscal Year 1996. The Executive Office for Administration and
Finance believes that much of the unanticipated growth in
revenues was caused by stronger than expected economic growth and
the increase in capital gains resulting from the strong stock
market in calendar year 1996.
The Fiscal Year 1998 budget was enacted based on a joint
tax revenue estimate of $12.85 billion. The Secretary of
Administration and Finance revised the fiscal 1998 tax revenue
forecast to $13.06 billion on July 30, 1997, to $13.2 billion on
October 15, 1997, to $13.154 billion on January 16, 1998 and to
$13.3 billion on May 5, 1998. The January 16, 1998 estimate
70
included an aggregate $6 million downward adjustment reflecting
tax law changes enacted after October 15, 1997 and a $140 million
downward adjustment reflecting a one-time change in the sales tax
payment schedule. Final Fiscal Year 1998 revenues totaled
$14.025 billion.
The Fiscal Year 1999 budget was enacted on the basis of
a consensus tax revenue forecast of $14.4 billion, as agreed by
both houses of the legislative and the Secretary of
Administration and Finance in May 1998. The tax cuts
incorporated into the budget, valued by the Department of Revenue
at $990 million in fiscal 1999, had the effect of rechecking the
consensus forecast to $13.41 billion. On August 19, 1998, the
Executive Office of Administration and Finance raised the fiscal
1999 tax estimate by $200 million to approximately $13.61
billion. The Fiscal Year 1999 tax estimate was raised again in
the Governor's budget submission filed on January 27, 1999, to
$14.0 billion.
On January 27, 1999 the Governor filed his Fiscal Year
2000 budget recommendations with the House of Representatives.
The proposal calls for budgeted expenditures of approximately
$20.391 billion and total Fiscal Year 2000 spending of $20.556
billion after adjusting for shifts to and from off-budget
accounts. The proposed Fiscal Year 2000 spending level
represents a $405.2 million, or 2.0%, increase over projected
total Fiscal Year 1999 expenditures of $20.151 billion. Budget
revenues for Fiscal 2000 are projected to be a $20.241 billion,
or 3.2%, increase over the $19.699 billion forecast for Fiscal
Year 1999. The Governor's proposal projects a Fiscal Year 2000
ending balance in the budgeted funds of approximately $1.625
billion, including a Stabilization Fund balance of approximately
$1.390 billion.
The fiscal 2000 budget was enacted in November, 1999 on
the basis of a consensus tax revenue forecast of $14,850 billion,
as agreed by both houses of the Legislature and the Secretary of
Administration and Finance in late April, 1999. The tax cuts
incorporated into the budget, valued by the Department of Revenue
at $145 million in fiscal 2000, had the effect of reducing the
consensus forecast to $14.705 billion. The fiscal 2000 tax
estimate was raised to $15.288 billion in the Governor's fiscal
2001 budget submission, filed on January 26, 2000.
The fiscal 2000 budget contained several tax law
changes, three of which are anticipated to reduce tax revenues in
fiscal 2000. The budget reduced the income tax rate from 5.95%
to 5.75% over three years, with a 5.85% rate effective January 1,
2000, a 5.80% rate effective January 1, 2001 and a 5.75% rate
effective January 1, 2002. The Department of Revenue estimates
that the budgetary cost of these provisions will be approximately
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$65 million in fiscal 2000, $166 million in fiscal 2001, $244
million in fiscal 2002 and $293 million in fiscal 2003 and
annually thereafter. A second set of provisions that is expected
to affect revenue collections in fiscal 2000 allows taxpayers,
retroactively to 1996, to use capital losses more comprehensively
to offset capital gains and interest and dividend income. The
fiscal 2000 budget also provided for the elimination of the "pay-
to-play" provisions of Massachusetts tax law, whereby a taxpayer
is required to pay a state tax assessment before appealing the
rules to the Appellate Tax Board or the courts.
On January 26, 2000, the Governor filed his fiscal 2001
budget recommendations with the House of Representations. The
proposal calls for budgeted expenditures of approximately $21.346
billion. The proposed fiscal 2001 spending level represents the
transfer off budget of $645 million of sales tax revenues (and
approximately $632 million of spending) as a result of the
forward funding of the Massachusetts Bay Transportation
Authority. After accounting for this shift, the Governor's
budget represents a $596 million, or 2.8%, increase over
estimated total fiscal 2000 expenditures of $21.382 billion.
Budgeted revenues for fiscal 2001 are estimated to be $21.315
billion. After accounting for the revenue shift off budget, the
Governor's budget submission represents a $599 million, or 2.8%,
increase over the $21.360 billion forecast for fiscal 2000. The
Governor's proposal projects a fiscal 2001 ending balance in the
budgeted funds of $1.979 bullion, including a Stabilization Fund
balance of $1.599 billion.
The Governor's budget recommendation is based on a tax
revenue estimate of $14,903 billion. After accounting for the
revenue shift off budget, this represents a $260 million, or
1.7%, increase over fiscal 2000 estimated tax revenues of $15.288
billion. The estimate reflects $135 million in income tax cuts,
including a reduction of the personal income tax rate from 5.95%
to 5% over three years.
In November 1980, voters in the Commonwealth approved a
state-wide tax limitation initiative petition, commonly known as
Proposition 2 1/2, to constrain levels of property taxation and
to limit the charges and fees imposed on cities and towns by
certain government entities, including county governments. The
law is not a constitutional provision and accordingly is subject
to amendment or repeal by the Legislature. Proposition 2 1/2
limits the property taxes that a Massachusetts city or town may
assess in any fiscal year to the lesser of (i) 2.5 percent of the
full and fair cash value of real estate and personal property
therein and (ii) 2.5 percent over the previous fiscal year's levy
limit plus any growth in the base from certain new construction
and parcel subdivisions. In addition, Proposition 2 1/2 limits
any increase in the charges and fees assessed by certain
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governmental entities, including county governments, on cities
and towns to the sum of (i) 2.5 percent of the total charges and
fees imposed in the preceding fiscal year, and (ii) any increase
in charges for services customarily provided locally or services
obtained by the city or town. The law contains certain override
provisions and, in addition, permits certain debt servicings and
expenditures for identified capital projects to be excluded from
the limits by a majority vote, in a general or special election.
During the 1980's, Massachusetts increased payments to
its cities, towns and regional school districts ("Local Aid") to
mitigate the impact of Proposition 2 1/2 on local programs and
services. In Fiscal Year 1999, approximately 21.5 percent of
Massachusetts' budget is estimated to have been allocated to
Local Aid. Local Aid payments to cities, towns and regional
school districts take the form of both direct and indirect
assistance. Direct Local Aid consists of general revenue sharing
funds and specific program funds sent directly to local
governments and regional school districts as reported on the so-
called "cherry street" prepared by the Department of Revenue,
excluding certain person funds and nonappropriated funds.
During Fiscal Years 1995, 1996, 1997, 1998 and 1999,
Medicaid expenditures of the Commonwealth were $3.398 billion,
$3.416 billion, $3.456 billion, $3.666 billion and $3.856
billion, respectively. The average annual growth rate from
Fiscal Year 1995 to Fiscal Year 1999 was 3.3 percent. The
Executive Office for Administration and Finance estimates that
Fiscal Year 2000 Medicaid expenditures will be approximately
$4.092 billion, an increase of 6.1% from fiscal year 1999.
The Division of Medical Assistance has implemented a
number of savings and cost control initiatives including managed
care, utilization review and the identification of third party
liabilities. In spite of increasing caseloads, Massachusetts has
managed to keep annual growth in per capital expenditures low.
From fiscal 1995 through fiscal 1999, per capita costs have
increased an average 2.0% annually. Beginning in fiscal 1999,
the state expanded eligibility for the Medicaid program,
resulting in a total of 943,395 members at the end of fiscal 1999
or a 19.4% increase over the case load at fiscal 1998.
The Legislature passed health care reform bills in July,
1996 and July, 1997 which authorized the Division of Medical
Assistance to expand eligibility for health care coverage by
increasing the Medicaid benefits income cutoff to 133% of the
federal poverty level for teenagers and adults, and by increasing
the Medicaid benefits income cutoff to 200% of the federal
poverty level for children up to the age 18 and pregnant women.
These changes resulted in an additional 240,000 people becoming
enrolled in a Medicaid benefits plan by the end of fiscal 1999.
73
In addition, pharmacy assistance eligibility was expanded by
increasing the Medicaid benefits income cutoff to 150% of the
federal poverty level to cover an estimated 25,000 senior
citizens. In Fiscal Year 1999, the Governor filed for
approximately $45.4 million in supplemental funds for the health
reform expansion accounts. This deficiency is the result of
increased enrollment and higher program costs than anticipated.
However, the programs remain budget neutral over the course of
the Commonwealth's five year waiver period, as required by
Federal regulations. These program expansions take advantage of
a federally provided waiver and resulting federal financial
participation, additional tobacco tax revenue and new federal
funding available under recently passed Title XXI of the federal
Social Security Act. The legislation also requires that any
program expansion be neutral in its impact on the state
budget.
PENNSYLVANIA
The following summary is included for the purpose of
providing a general description of credit and financial
conditions of Pennsylvania and is based on information from the
official statement (described more fully below) made available in
connection with the issuance of certain securities in
Pennsylvania. The summary is not intended to provide a complete
description of Pennsylvania. While the Fund has not undertaken
to independently verify such information, it has no reason to
believe that such information is not correct in all material
aspects. The summary does not provide specific information
regarding all securities in which the Portfolio is permitted to
invest and in particular does not provide specific information on
the private business entities whose obligations support the
payments on AMT-Subject Bonds.
The following was obtained from an Official Statement,
dated January 15, 2000, relating to the issuance of $192,000,000
Commonwealth of Pennsylvania General Obligation Bonds, First
Series of 2000.
Economic Climate
The Commonwealth of Pennsylvania is one of the most
populous states, ranking fifth behind California, New York, Texas
and Florida. Pennsylvania is an established yet growing state
with a diversified economy. It is the headquarters for many
major corporations. Pennsylvania had been historically
identified as a heavy industry state. That reputation has
changed over the last thirty years as the coal, steel and
railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified economic
base. This economic readjustment was a direct result of a long-
74
term shift in jobs, investment, and workers away from the
northeast part of the nation. Currently, the major sources of
growth in Pennsylvania are in the service sector, including
trade, medical and health services, education and financial
institutions.
Pennsylvania's agricultural industries remain an
important component of the Commonwealth's economic structure,
accounting for more than $3.6 billion in crop and livestock
products annually. Agribusiness and food related industries
support $39 billion in economic activity annually. Over 51,000
farms form the backbone of the State's agricultural economy.
Farmland in Pennsylvania includes over four million acres of
harvested cropland and four million acres of pasture and farm
woodlands - nearly one-third of the Commonwealth's total land
area. Agricultural diversity in the Commonwealth is demonstrated
by the fact that Pennsylvania ranks among the top ten states in
the production of a number of agricultural products.
Pennsylvania's natural resources include major deposits
of coal, petroleum, natural gas and cement. Extensive public and
private forests provide a vast source of material for the
lumber/wood products industry and the related furniture industry.
Additionally, the Commonwealth derives a good water supply from
underground sources, abundant rainfall, and a large number of
rivers, streams, natural and man-made lakes.
Human resources are plentiful in Pennsylvania. The
workforce is estimated at 5.9 million people, ranking as the
sixth largest labor pool in the nation. The high level of
education embodied in the Commonwealth's work force fosters a
wide variety of employment capabilities. Pennsylvania's basic
and higher education statistics compare favorably with other
states in the nation.
Pennsylvania is a Middle Atlantic state within easy
reach of the populous eastern seaboard and, as such, is a gateway
to the Midwest. The Commonwealth's strategic geographic position
is enhanced by a comprehensive transportation grid. The
Commonwealth's water systems afford the unique feature of triple
port coverage, a deep water port at Philadelphia, a Great Lakes
port at Erie and an inland water port at Pittsburgh.
The Commonwealth is highly urbanized. Of the
Commonwealth's 1990 census population, 79 percent resided in the
15 Metropolitan Statistical Areas ("MSAs") of the Commonwealth.
The largest MSAs in the Commonwealth are those which include the
cities of Philadelphia and Pittsburgh, which together contain
almost 44 percent of the State's total population. The
population of Pennsylvania, 11.99 million people in 1999,
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according to U.S. Bureau of the Census, represents a slight
increase from the 1990 population of 11.89 million.
Non-agricultural employment in Pennsylvania over the ten
years ending in 1998 increased at an annual rate of 0.75 percent.
This rate compares to a 0.29 percent rate for the Middle Atlantic
region and 1.72 percent for the U.S. during the period 1989
through 1998. For the five years ending with 1998, employment in
the Commonwealth has increased 7.0 percent. The growth in
employment experienced in Pennsylvania during this period is
higher than the 2.7 percent growth in the Middle Atlantic region.
Non-manufacturing employment in Pennsylvania has
increased in recent years to 82.8 percent of total employment in
1998. Consequently, manufacturing employment constitutes a
diminished share of total employment within the Commonwealth.
Manufacturing, contributing 17.2 percent of 1998 non-
agricultural employment, has fallen behind both the services
sector and the trade sector as the largest single source of
employment within the Commonwealth. In 1998, the services sector
accounted for 32.3 percent of all non-agricultural employment
while the trade sector accounted for 22.4 percent.
Within the manufacturing sector of Pennsylvania's
economy, which now accounts for less than one-fifth of total non-
agricultural employment in Pennsylvania, the non-electrical
machinery industries employed the largest number of workers.
Employment in the non-electrical machinery industries was 11.3
percent of Pennsylvania manufacturing employment but only 2.0
percent of total Pennsylvania non-agricultural employment in
1998.
Pennsylvania's annual average unemployment rate was
equivalent to the national average throughout the 1990's. Slower
economic growth caused the unemployment rate in the Commonwealth
to rise to 7.0 percent in 1991 and 7.6 percent in 1992. The
resumption of faster economic growth resulted in an annual
decrease in the Commonwealth's unemployment rate to 4.3 percent
in 1999. From 1994 through 1998, Pennsylvania's annual average
unemployment rate was below the Middle Atlantic Region's average,
but slightly higher than that of the United States. As of
December 1999, the most recent month for which data is available,
the seasonally adjusted unemployment rate for the Commonwealth
was 4.1 percent, equal to that of the United States.
Personal income in the Commonwealth for 1998 was $321.5
billion, an increase of 4.1 percent over the previous year.
During the same period, national personal income increased at a
rate of 5.0 percent. Based on the 1998 personal income
estimates, per capita income for 1996 was at $26,792 in the
76
Commonwealth compared to per capita income in the United States
of $26,412.
The Commonwealth's 1998 average hourly wage rate of
$14.07 compares favorably to the national average of $13.49 for
1998.
Financial Condition
The Commonwealth utilizes the fund method of accounting.
The General Fund, the Commonwealth's largest fund, receives all
tax revenues, non-tax revenues and federal grants and
entitlements that are not specified by law to be deposited
elsewhere. The majority of the Commonwealth's operating and
administrative expenses are payable from the General Fund. Debt
service on all obligations, except that issued for highway
purposes or for the benefit of other special revenue funds, is
payable from the General Fund.
Financial information for the General Fund is maintained
on a budgetary basis of accounting. The Commonwealth also
prepares annual financial statements in accordance with generally
accepted accounting principles ("GAAP").
The five-year period ending with fiscal 1999 was a time
of economic growth with modest rates of growth at the beginning
of the period and larger increases during the most recent years.
Throughout the period, inflation has remained relatively low,
helping to restrain expenditure growth. Favorable economic
conditions have helped total revenues and other sources rise at
an average annual rate of 5.8 percent during the five-year
period. Taxes, the largest revenue source, increased at an
average annual rate of 4.3 percent during the five-year period.
License and tee revenues rose at a 7.1 percent average annual
rate, largely because of various motor vehicle fee increases
effective for fiscal 1998. Other revenues, mostly charges for
sales and services and investment income, increased at an average
annual rate of 20.3 percent during the period. Expenditure and
other uses during the fiscal 1995 through fiscal 1999 period rose
at a 4.8 percent average annual rate, led by a 9.6 percent
average annual increase for protection of person and property
costs. Though still high, the growth rate for this program has
declined from previous year's rates as the increased costs to
acquire, staff and operate expanded prison facilities becomes
part of the expenditure base. Public health and welfare
programs, the largest single category of expenditures, have
experienced a 5.8 percent average annual increase for
expenditures, slightly above the average for total expenditures-
Capital outlay has increased by an annual average rate of 20.8
percent during the five-year period. Increased amounts committed
to community and economic development projects through the
77
capital budget are largely responsible for the growth rate. The
decline of expenditures in fiscal 1996 for the conservation of
natural resources category is due to a departmental restructuring
in fiscal 1996 that resulted in a re-categorization of
expenditures to other categories.
Fiscal 2000 Budget (Budgetary Basis)
The General Fund budget for the 2000 fiscal year was
approved by the General Assembly in May 1999. The budget as
adopted at the time included appropriation from Commonwealth
revenues of $19,061.5 million and estimated revenues (net of
estimated tax refunds and enacted tax changes) of $18,699.9
million. A partial draw down of the fiscal 1999 year-end balance
is intended to fund the $361.6 million difference between
estimated revenues and projected spending. The level of proposed
spending in the budget as originally enacted represents an
increase of 3.8 percent over the spending authorized for fiscal
1999 of $18,367.5 million. Enacted tax changes effective for
fiscal 2000 total a net reduction of $380.2 million for the
General Fund.
The estimate of Commonwealth revenues for fiscal 1999 is
based on an economic forecast for real gross domestic product to
grow at a 1.4 percent rate from the second quarter of 1999 to the
second quarter of 2000. Growth of real gross domestic product is
expected to be restrained by a slowing of the rate of consumer
spending to a level consistent with personal income gains and by
smaller gains in business investment in response to falling
capacity utilization and profits. Slowing economic growth is
expected to cause the unemployment rate to rise through the
fiscal year but inflation is expected to remain quite moderate.
Trends for the Pennsylvania economy are expected to maintain
their close association with national economic trends. Personal
income growth is anticipated to remain slightly below that of the
U.S. while the Pennsylvania unemployment rate is anticipated to
be very close to the national rate.
Commonwealth revenues (excluding the estimated cost of
enacted tax reductions) are projected to increase by 2.8 percent
over fiscal 1999 receipts. Tax revenues are expected to rise by
3.2 percent, led by a 11 percent increase in the gross receipts
tax. This large increase represents the receipt of the revenue
neutral reconciliation charge enacted as a part of the electric
deregulation legislation in 1996 that is intended to cover tax
revenue losses to Pennsylvania from electricity deregulation.
The structure of the revenue neutral reconciliation charge causes
it to recover revenue losses with an approximate one year lag.
Projected increases for the sales and use tax and the personal
income tax are estimated at 3.2 percent and 3.3 percent
respectively. Non-tax Commonwealth revenues are estimated to
78
total $324 million, a 17.4 percent reduction from fiscal 1999.
The largest items accounting for the reduction are lower receipts
from sale of state property and lower investment earnings.
Appropriations from Commonwealth funds increase by 3.8
percent over fiscal 1999 appropriations. Program areas that have
been proposed to receive funding increases above the 2.9 percent
average include corrections (4 percent), basic education (3
percent), special education (6.2 percent), and medical assistance
(6.1 percent).
The fiscal 2000 budget continues the Governor's emphasis
on tax cuts targeted to making Pennsylvania competitive for
attracting new employment opportunities and retaining existing
jobs. Enacted tax cuts for fiscal 2000 total an estimated $380.2
million in the General Fund. The major components of the tax
reductions and their estimated fiscal 2000 General Fund cost are:
(i) reduce the tax rate for the capital stock and franchise taxes
by one mill to 10.99 mills ($91.6 million); (ii) repeal the gross
receipts tax on regulated gas companies ($78.4 million); (iii)
lower the current $300 minimum capital stock and franchise tax to
$200 ($16.2 million); (iv) raise the annual cap on net operating
loss credits per taxpayer from $1 million to $2 million ($35.5
million); (v) increase the weighting from 50 percent to 60
percent of the sales factor used in the apportionment formula to
calculate Pennsylvania taxable income for corporate net income
purposes ($31.5 million); and (vi) restructure the public utility
realty tax ($54.6 million); and (vii) expand the income limit to
qualify for personal income tax forgiveness by $500 to $6,500 per
dependent ($7.5 million). Most major changes are effective
January 1, 1999 except for the repeal of gross receipts tax on
natural gas companies which is to be effective when the state gas
utility industry is deregulated. The retroactive nature of tax
reductions did not affect fiscal 1999 revenues, but is expected
to result in a fiscal 2000 revenue reduction that is expected to
be higher than that estimated to occur in fiscal 2001 from these
tax changes.
Fiscal 1999 Financial Results (Budgetary Basis)
The 1999 fiscal year ended with an unappropriated
surplus (prior to the transfer to the Tax Stabilization Reserve
Fund) of $702.9 million, an increase of $214.2 million from June
30, 1998. Transfers to the Tax Stabilization Reserve Fund total
$255.4 million for fiscal year 1999 consisting of $105.4 million
representing the statutory 15 percent of the fiscal year-end
unappropriated surplus and an additional $150 million from the
unappropriated surplus authorized by the General Assembly. The
$447.5 million balance of the unappropriated surplus was carried
over to fiscal year 2000, The higher unappropriated surplus was
generated by tax revenues that were $712.0 million (3.9 percent)
79
above estimate and $61.0 million of non-tax revenue (18.4
percent) above estimate. Higher than anticipated appropriation
lapses also contributed to the higher surplus. A portion of the
higher revenues and appropriation lapses were used for
supplemental fiscal 1999 appropriations totaling $357.8 million.
Of this amount, $200 million was appropriated for general
obligation debt service above current needs; $59 million to
accrue the fourth quarterly Commonwealth contribution to the
School Employees' Retirement System; and $90 million to the
Public Welfare department to pay additional medical assistance
costs estimated to occur in the 1999 fiscal year. These
supplemental appropriations represent expected one-time
obligations. Including the supplemental appropriations and net
of appropriation lapses, expenditures for fiscal 1999 totaled
$18,144.9 million, a 5.9 percent increase over expenditures
during fiscal 1998.
Revenues from taxes for the fiscal year rose 3.9 percent
after tax reductions enacted with the 1999 fiscal year budget
that were estimated to be $241.0 million for the fiscal year.
The sales and use tax represented the largest portion of the
above-estimate of revenues. Receipts from this tax were $331.3
million, or 5.3 percent above the estimated and final taxpayer
filings, boosted receipts $299.5 million, or 4.7 percent above
estimate for the fiscal year. Taxes paid through employee
withholding were slightly below estimate. For the fiscal year,
personal income tax receipts were 7.2 percent above those of the
prior fiscal year. Among the taxes paid by corporations, only
capital stock and franchise tax receipts exceeded estimates.
Revenues from this tax were $144.5 million (15.1 percent) over
estimate. The corporate net income tax and the various selective
business taxes all recorded receipts below estimate. In
aggregate, they were a net $68.5 million below estimate. Non-tax
revenues, led by interest earnings due to higher investable
balances, were $61.0 million (18.4 percent) above estimate. The
major components of the enacted tax reductions and their
estimated fiscal 1999 cost were: (i) reduce the capital stock
and franchise tax rate from 12.75 mills to 11.99 mills ($72.5
million); (ii) increase the eligibility income limit for
qualification for personal income tax forgiveness ($57.1
million); (iii) eliminate personal income tax on gains from the
sale of an individual's residence ($30.0 million); (iv) extend
the time period from three to ten years over which net operating
loss deductions may be taken for the corporate net income tax
($17.8 million); (v) expand various sales tax exemptions ($40.4
million); and (vi) reduce various other miscellaneous items
($23.2 million).
Appropriations enacted for fiscal 1999 when the budget
was originally adopted were 4.1 percent ($713.2 million) above
the appropriations enacted for fiscal 1998 (including
80
supplemental appropriations). Major increases in expenditures
budgeted for fiscal 1999 at that time included: (i) $249.5
million in direct support of local school district education
costs (local school districts will also benefit from an estimated
$104 million of reduced contributions by school districts to
their worker's retirement costs from a reduced employer
contribution rate); (ii) $60.4 million for higher education,
including scholarship grants; (iii) $56.5 million to fund the
correctional system, including $21 million to operate a new
correctional facility; (iv) $121.1 million for long-term care
medical assistance costs; (v) $14.4 million for technology and
Year 2000 investments; (vi) $55.9 million to fund the first
year's cost of a July 1, 1998 annuitant cost of living increase
for state and school district employees; and (vii) $20 million to
replace bond funding for equipment loans for volunteer fire and
rescue companies. The balance of the increase is spread over
many departments and program operations. In May 1999, along with
the adoption of the fiscal 2000 budget, supplemental fiscal 1999
appropriations totaling $357.8 million were enacted. With these
additional amounts, total appropriations for fiscal 1999
represent a 6.2 percent increase over fiscal 1998 appropriations.
Appropriation lapses of $222.6 million and additional
Commonwealth revenues above budget estimates provided the funding
for the additional appropriations. Appropriation lapses in
fiscal 1998 and 1997 were $161.8 million and $200.6 million
respectively.
Reserves for tax refunds for fiscal 1999 were raised
during the fiscal year to $644.0 million, a $39.2 million
increase over the budget as enacted. Reserves for tax refunds
for fiscal 1999 are $266.0 million below the reserve established
for fiscal 1998.
Fiscal 1998 Financial Results (Budgetary Basis)
Operations during the 1998 fiscal year increased the
unappropriated balance of Commonwealth revenues during that
period by $86.4 million to $488.7 million at June 30, 1998 (prior
to reserves for transfer to the Tax Stabilization Reserve Fund).
Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and slightly lower expenditures than
budgeted were responsible for the increase. Transfers to the Tax
Stabilization Reserve Fund for fiscal 1998 operations will total
$223.3 million consisting of $73.3 million representing the
required transfer of fifteen percent of the ending unappropriated
million surplus balance, plus an additional $150 million
authorized by the General Assembly when it enacted the fiscal
1999 budget. With these transfers, the balance in the Tax
Stabilization Reserve Fund will exceed $664 million and represent
3.7 percent of fiscal 1998 revenue.
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Commonwealth revenues (prior to tax refunds) during the
fiscal year totaled $13,123.2 million, $676.1 million (3.9
percent) above the estimate made at the time the budget was
enacted. Tax revenue received in fiscal 1998 grew 4.8 percent
over tax revenues received during fiscal 1997. This rate of
increase includes the effect of legislated tax reductions that
affected receipts during both fiscal years and therefore
understates the actual underlying rate of growth of tax revenue
during fiscal 1998. Receipts from the personal income tax
produced the largest single component of higher revenues during
fiscal 1998. Personal income tax collections were $416.6 million
over estimate representing an 8.5 percent increase over fiscal
1997 receipts. Receipts of the sales and use tax were $6.2
million over estimate representing a 1.9 percent increase
although receipts from non-motor vehicle sales were 0.7 percent
below estimate. Sales tax receipts on motor vehicle sales were
above estimate and offset the shortfall in non-motor vehicle
sales tax receipts. Collections of all corporate taxes exceeded
their estimate for the fiscal year, led by the capital stock and
franchise tax and the corporate net income tax, which were over
estimate by 7.8 percent and 2.7 percent respectively. Receipts
from the utility property tax, a state corporate tax, were below
estimate by $102.3 million or 30.8 percent. This shortfall was
due in large part to the recent deregulation of the electric
industry in Pennsylvania. Utility property revenues support in
lieu of property tax payments to school districts and local
municipalities in Pennsylvania. Non-tax revenues were $27.5
million (8.6 percent) over estimate, mostly due to greater than
anticipated interest earnings for the fiscal year.
Reserves established during fiscal 1998 for tax refunds
totaled $910 million. This amount is a $370 million increase
over tax refund reserves for fiscal 1997 representing an increase
of 68.5 percent. The fiscal 1998 amount includes a one-time
addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999.
Expenditures from all fiscal 1998 appropriations of
Commonwealth revenues totaled $17,229.8 million (excluding pooled
financing expenditures and net of current year lapses). This
amount represents an increase of 4.5 percent over fiscal 1997
appropriation expenditures. Lapses of appropriation authority
during the fiscal year totaled $161.8 million including $58.8
million from fiscal 1998 appropriations. These appropriation
lapses were used to fund $120.5 million of supplemental fiscal
1998 appropriations. Of the total fiscal 1998 supplemental
appropriations, an amount of $111.6 million was made to the
Department of Public Welfare, mostly for the medical assistance
program.
82
City of Philadelphia
Philadelphia is the largest city in the Commonwealth
with an estimated population of 1,585,577 according to the 1990
Census.
The Pennsylvania Intergovernmental Cooperation Authority
("PICA") was created by Commonwealth legislation in 1991 to
assist Philadelphia, the Commonwealth's largest city, in
remedying its fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make
factual findings and recommendations to Philadelphia concerning
its budgetary and fiscal affairs. This financial assistance has
included the refunding of certain city general obligation bonds,
funding of capital projects and the liquidation of the cumulative
general fund balance deficit of Philadelphia as of June 30, 1992,
of $224.9 million. At this time, Philadelphia is operating under
a five-year fiscal plan approved by PICA on June 15, 1999.
No further bonds are to be issued by PICA for the
purpose of financing a capital project or deficit as the
authority for such bond sales expired December 31, 1994. PICA'S
authority to issue debt for the purpose of financing a cash flow
deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,014.1
million in special revenue bonds outstanding as of June 30, 1999.
Neither the taxing power nor the credit of the Commonwealth is
pledged to pay debt service on PICA's bonds.
Commonwealth Debt
The Constitution permits the Commonwealth to incur
following types of debt: (i) debt to suppress insurrection or
rehabilitate areas affected by disaster, (ii) electorate approved
debt, (iii) debt for capital projects subject to an aggregate
debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years, and (iv) tax anticipation notes
payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular
amounts.
Net outstanding general obligation debt totaled $4,924.5
million at June 30, 1999, an increase of $197.0 million from June
30, 1998. Over the 10-year period ending June 30, 1999, total
outstanding general obligation debt increased at an annual rate
of 0.5 percent. Within the most recent 5-year period,
outstanding general obligation debt has decreased at an annual
rate of 0.6 percent.
Certain state-created organizations have statutory
authorization to issue debt for which state appropriations to pay
83
debt service thereon are not required. The debt of these
organizations is funded by assets of, or revenues derived from
the various projects financed and is not a statutory or moral
obligation of the Commonwealth. However, some of these
organizations are indirectly dependent upon Commonwealth
operating appropriations. In addition, the Commonwealth may
choose to take action to financially assist these organizations.
Litigation
In 1978, the General Assembly approved a limited waiver
of sovereign immunity. Damages for any loss are limited to
$250,000 for each person and $1,000,000 for each accident. The
Supreme Court of Pennsylvania has held that this limitation is
constitutional. Approximately 3,500 suits against the
Commonwealth remain open. Tort claim payments for the
departments and agencies, other than the Department of
Transportation, are paid from departmental and agency operating
and program appropriations. Tort claim payments for the
Department of Transportation are paid from an appropriation from
the Motor License Fund. The Motor License Fund tort claim
appropriation for fiscal 2000 is $20.0 million.
Dom Giordano v. Tom Ridge, Governor, et. al.
In February 1999, Dom Giordano, a taxpayer of the
Commonwealth of Pennsylvania, filed a petition for review
requesting that the Commonwealth Court of Pennsylvania declare
that Chapter 5 (relating to sports facilities financing) of the
Capital Facilities Debt Enabling Act (enacted by Act 1999-1)
violates Article VIII, Sec. 7 & 8, of the Pennsylvania
Constitution. The Commonwealth Court dismissed the petitioner's
action with prejudice. The petitioner has appealed the
Commonwealth Court's ruling to the Supreme Court.
Powell v. Ridge
In March 1998, several residents of the City of
Philadelphia on behalf of themselves and their school-aged
children, along with the School District of Philadelphia, the
Philadelphia Superintendent of Schools, the chairman of the
Philadelphia Board of Education, the City of Philadelphia, the
Mayor of Philadelphia, and several membership organizations
interested in the Philadelphia public schools, brought suit in
the United States District Court for the Eastern District of
Pennsylvania against the Governor, the Secretary of Education,
the chairman of the State Board of Education, and the State
Treasurer. The plaintiffs claim that the Commonwealth's system
for funding public schools has the effect of discriminating on
the basis of race and violates Title VI of the Civil Rights Act
of 1964.
84
The plaintiffs have asked the court to declare the
funding system to be illegal, to enjoin the defendants from
violating the regulation in the future and to award counsel fees
and costs.
The District Court allowed two groups of petitioners to
intervene. The Philadelphia Federation of Teachers intervened on
the side of the plaintiffs, while several leaders of the
Pennsylvania General Assembly intervened on the side of the
defendants. In addition, the U.S. Department of Justice
intervened to defend against a claim made by the legislator
intervenors that a statute waiving states' immunity under the
Eleventh Amendment to the U.S. Constitution for Title VI claims
is unconstitutional.
The District Court found that the plaintiffs had failed
to state a claim under the Title VI regulation at issue or under
42 U.S.C. Sec. 1983 and dismissed the action in its entirety with
prejudice. The plaintiffs appealed. In August 1999, the U.S.
Court of Appeals for the Third Circuit reversed the District
Court's dismissal of the action and remanded the case for further
proceedings including the filing of an answer. The defendants
and legislator intervenors filed petitions for writ of certiorari
with the U.S. Supreme Court. In December 1999, the Supreme Court
denied the petitions.
In the District Court, the parties are beginning the
process of discovery and the development of a case management
plan, including deadlines for the filing of motions for summary
judgment.
County of Allegheny v. Commonwealth of Pennsylvania
In December 1987, the Supreme Court of Pennsylvania held
in County of Allegheny v. Commonwealth of Pennsylvania, that the
statutory scheme for county funding of the judicial system is in
conflict with the Pennsylvania Constitution. However, the
Supreme Court of Pennsylvania stayed its judgment to afford the
General Assembly an opportunity to enact appropriate funding
legislation consistent with its opinion and ordered that the
prior system of county funding shall remain in place until this
is done.
The Court appointed retired Justice Frank J.
Montemuro, Jr. as special master to devise and submit a plan for
implementation. The Interim Report of the Master recommended a
four phase transition to state funding of a unified judicial
system, during each of which specified court employees would
transfer into the state payroll system. Phase I recommended that
the General Assembly provide for an administrative structure of
local court administrators to be employed by the Administrative
85
office of Pennsylvania Courts, a state agency. Numbering
approximately 165 people statewide, local court administrators
are employees of the counties in which they work. On June 22,
1999, the Governor approved Act 1999-12 under which approximately
165 county-level court administrators are to become employees of
the Commonwealth. Act 12 also triggered the release of
appropriations that had been made for this purpose in 1998 and
1999.
Pennsylvania Association of Rural and
Small Schools (PARSS) v. Ridge
In 1991, an association of rural and small schools,
several individual school districts, and a group of parents and
students, filed suit against the Governor and the Secretary of
Education. The litigation challenges the constitutionality of
the Commonwealth's system for funding local school districts.
The litigation consists of two parallel cases, one in the
Commonwealth Court, and one in the United States District Court
for the Middle District of Pennsylvania. The federal court case
has been stayed indefinitely, pending resolution of the state
court case.
Commonwealth Court held that Pennsylvania's system for
funding public schools is constitutional under both the education
clause and the equal protection clause of the Pennsylvania
Constitution. On October 1, 1999, the Supreme Court of
Pennsylvania affirmed the Commonwealth Court's decision. In
December 1999, the Supreme Court denied the petitioners' motion
for reconsideration. The parallel federal action remains
pending.
Ridge v. State Employees' Retirement Board
In 1993 and in 1995, Joseph H. Ridge, former judge of
the Allegheny Court of Common Pleas filed suit in the
Commonwealth Court alleging that the State Employees' Retirement
Board's use of gender distinct actuarial factors for benefits
based upon his pre-August 1, 1993 service violates Article 1,
Section 26 (equal protection) and Article 1, Section 28 (equal
rights) of the Pennsylvania Constitution. He seeks "topped up"
benefits equal to those that a similarly situated female would be
receiving. Due to the constitutional nature of the claim, it is
possible that a decision adverse to the State Employees'
Retirement Board would be applicable to other members of the
State Employees' Retirement System and Public School Employees'
Retirement System who accrued service between the effective date
of the state constitutional provisions and before August 1, 1983,
and who have received, are receiving, or will receive benefits
less than those received by other members of the systems because
of their sex or the sex of their survivor annuitants.
86
The Commonwealth Court granted the State Employees'
Retirement Board's preliminary objections to Judge Ridge's claims
for punitive damages, attorneys' fees and compensatory damages
other than a recalculation of his pension benefits should he
prevail. In 1996, the Commonwealth Court heard oral argument en
banc on Judge Ridge's motion for judgment of the pleadings. In
February 1997, the Commonwealth Court, after oral argument en
banc, denied Judge Ridge's motion for judgment an the pleadings.
The case is currently in discovery.
PPG Industries, Inc. v. Commonwealth of Pennsylvania
PPG Industries challenged the Department of Revenue's
application of the manufacturing exemption from the capital
stock/franchise tax to PPG's headquarters in Pittsburgh, which
allowed the exemption only for that portion of PPG's headquarters
property and payroll attributable to manufacturing in the
Commonwealth. PPG argued that it is entitled to the exemption
for all of its headquarters property and payroll attributable to
manufacturing, regardless of where the manufacturing takes place.
The Commonwealth successfully defended PPG's challenge in the
Commonwealth Court.
On PPG's appeal, however, the Pennsylvania Supreme Court
reversed Commonwealth Court, holding that the manufacturing
exemption was applied by the Department consistent with the
statute, but that the statute facially discriminates against
interstate commerce. The Supreme Court remanded the case to
Commonwealth Court to determine whether the capital
stock/franchise tax is a "compensatory tax" justifying the
discrimination, or, failing that, to recommend to the Supreme
Court a remedy for the discrimination.
Following briefing and argument by the parties, the
Commonwealth Court issued its determination November 30, 1999.
After taking judicial notice that the General Assembly is
considering legislation to deal with this issue, the Court
recommended the following to the Supreme Court: (1) for the
duration of the contested period, invalidate the exemption's
"within the state" restriction, but only in the limited
"headquarters context," and (2) prospectively, invalidate the
exemption in its entirety, leaving to the General Assembly the
task of amending the statute to restore any exemption it chooses
to adopt in a constitutional manner.
The General Assembly subsequently enacted amendments to
the Tax Reform Code of 1971, which essentially provide that for
taxable years January 1, 1999 through December 31, 2000, the
manufacturing exemption will apply to both in-State and out-of-
State property and payroll, with no exemption for sales
attributable to manufacturing.
87
In response to the Commonwealth Court's recommendation,
the Supreme Court has set up a briefing schedule requiring PPG's
brief on or before January 10, 2000 and the Commonwealth's brief
thirty days after service of PPG's brief.
_________________________________________________________________
INVESTMENT RESTRICTIONS
_________________________________________________________________
Unless specified to the contrary, and except with
respect to paragraph number 1 below, which does not set forth a
"fundamental" policy of the Florida Portfolio, the following
restrictions apply to each Portfolio (except the Massachusetts
and Pennsylvania Portfolios) and are fundamental policies which
may not be changed with respect to each Portfolio without the
affirmative vote of the holders of a majority of such Portfolio's
outstanding voting securities, which means with respect to any
Portfolio (1) 67% or more of the shares represented at a meeting
at which more than 50% of the outstanding shares are present in
person or by proxy or (2) more than 50% of the outstanding
shares, whichever is less. If a percentage restriction is
adhered to at the time of an investment, a later increase or
decrease in percentage resulting from a change in values of
portfolio securities or in the amount of a Portfolio's assets
will not constitute a violation of that restriction.
A Portfolio (applies to all Portfolios except the
Massachusetts and Pennsylvania Portfolios):
1. May not purchase any security which has a maturity
date more than one year1 (397 days in the case of
the New Jersey and Virginia Portfolios) from the
date of such Portfolio's purchase;
2. May not invest more than 25% of its total assets in
the securities of issuers conducting their
principal business activities in any one industry,
provided that for purposes of this policy (a) there
is no limitation with respect to investments in
municipal securities (including industrial
development bonds), securities issued or guaranteed
by the U.S. Government, its agencies or
instrumentalities, certificates of deposit,
bankers' acceptances and interest-bearing savings
deposits, and (b) consumer finance companies,
____________________
1. Which maturity, pursuant to the Rule 2a-7, may extend to 397
days or such greater length of time as may be permitted from
time to time pursuant to Rule 2a-7.
88
industrial finance companies and gas, electric,
water and telephone utility companies are each
considered to be separate industries. For purposes
of this restriction and those set forth in
restrictions 4 and 5 below, a Portfolio will regard
the entity which has the primary responsibility for
the payment of interest and principal as the
issuer;
3. May not invest more than 25% of its total assets in
municipal securities (a) whose issuers are located
in the same state, or (b) the interest upon which
is paid from revenues of similar-type projects,
except that subsection (a) of this restriction 3
applies only to the General Portfolio;
4. May not invest more than 5% of its total assets in
the securities of any one issuer (other than
securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities)
except that with respect to 25% of its total assets
(50% in the case of the New York Portfolio, the
California Portfolio, the Connecticut Portfolio,
the New Jersey Portfolio, the Virginia Portfolio
and the Florida Portfolio), (i) the General
Portfolio may invest not more than 10% of such
total assets in the securities of any one issuer
and (ii) each of the New York, California,
Connecticut, New Jersey, Virginia, Florida
Portfolios may invest in the securities of as few
as four issuers (provided that no more than 25% of
the respective Portfolio's total assets are
invested in the securities of any one issuer). For
purposes of such 5% and 10% limitations, the issuer
of the letter of credit or other guarantee backing
a participation interest in a variable rate
industrial development bond is deemed to be the
issuer of such participation interest;2
____________________
2. To the extent that these restrictions are more permissive
than the provisions of Rule 2a-7 as it may be amended from
time to time, the Portfolio will comply with the more
restrictive provisions of Rule 2a-7. As a matter of
operating policy, pursuant to Rule 2a-7, The General
Portfolio will invest no more than 5% of its assets in the
securities of any one issuer, except that under Rule 2a-7, a
Fund may invest up to 25% (subject, with respect to the
General Portfolio, to not investing more than 10% per issuer)
of its total assets in the first tier securities of a single
issuer for a period of up to three business days. Each
(Footnote continued)
89
5. May not purchase more than 10% of any class of the
voting securities of any one issuer except
securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
6. May not borrow money except from banks on a
temporary basis or via entering into reverse
repurchase agreements for extraordinary or
emergency purposes in an aggregate amount not to
exceed 15% of a Portfolio's total assets. Such
borrowings may be used, for example, to facilitate
the orderly maturation and sale of portfolio
securities during periods of abnormally heavy
redemption requests, if they should occur, such
borrowings may not be used to purchase investments
and such Portfolio will not purchase any investment
while any such borrowings exist;
7. May not pledge, hypothecate, mortgage or otherwise
encumber its assets except to secure borrowings,
including reverse repurchase agreements, effected
within the limitations set forth in restriction 6.
To meet the requirements of regulations in certain
states, a Portfolio, as a matter of operating
policy, will limit any such pledging, hypothecating
or mortgaging to 10% of its total assets, valued at
market, so long as shares of such Portfolio are
being sold in those states;
8. May not make loans of money or securities except by
the purchase of debt obligations in which a
Portfolio may invest consistent with its investment
objectives and policies and by investment in
repurchase agreements;
9. May not enter into repurchase agreements (i) not
terminable within seven days if, as a result
thereof, more than 10% of a Portfolio's total
assets would be committed to such repurchase
____________________
(Footnote continued)
remaining Portfolio may, with respect to 75% of its assets,
invest no more than 5% of its assets in the securities of any
one issuer; the remaining 25% of each such Portfolio's assets
may be invested in securities of one or more issuers provided
that they are first tier securities. Fundamental policy
(i) described herein with respect to the General Portfolio
and (ii) with respect to all other Portfolios, would give the
Portfolios the investment latitude described therein only in
the event Rule 2a-7 is further amended in the future.
90
agreements (whether or not illiquid) or other
illiquid investments,3 or (ii) with a particular
vendor if immediately thereafter more than 5% of
such Portfolio's assets would be committed to
repurchase agreements entered into with such
vendor; or
10. May not (a) make investments for the purpose of
exercising control; (b) purchase securities of
other investment companies, except in connection
with a merger, consolidation, acquisition or
reorganization; (c) invest in real estate (other
than securities secured by real estate or interests
therein or securities issued by companies which
invest in real estate or interests therein),
commodities or commodity contracts; (d) purchase
any restricted securities or securities on margin;
(e) make short sales of securities or maintain a
short position or write, purchase or sell puts
(except for standby commitments as described in the
Prospectus and above), calls, straddles, spreads or
combinations thereof; (f) invest in securities of
issuers (other than agencies and instrumentalities
of the United States Government) having a record,
together with predecessors, of less than three
years of continuous operation if more than 5% of a
Portfolio's assets would be invested in such
securities; (g) purchase or retain securities of
any issuer if those officers and trustees of the
Fund and officers and directors of the Adviser who
own individually more than 1/2 of 1% of the
outstanding securities of such issuer together own
more than 5% of the securities of such issuer; or
(h) act as an underwriter of securities.
MASSACHUSETTS AND PENNSYLVANIA PORTFOLIOS
THE FOLLOWING RESTRICTIONS ARE FUNDAMENTAL POLICIES OF
THE MASSACHUSETTS AND PENNSYLVANIA PORTFOLIOS:
Each Portfolio:
1. May not invest more than 25% of its total assets in
the securities of issuers conducting their principal business
activities in any one industry, provided that for purposes of
this policy (a) there is no limitation with respect to
____________________
3. As a matter of operating policy, each Portfolio will limit
its investment in illiquid securities to 10% of its net
assets.
91
investments in municipal securities (including industrial
development bonds), securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of
deposit, bankers' acceptances and interest-bearing savings
deposits, and (b) consumer finance companies, industrial finance
companies and gas, electric, water and telephone utility
companies are each considered to be separate industries. For
purposes of this restriction, the Portfolio will regard the
entity which has the primary responsibility for the payment of
interest and principal as the issuer;
2. May not borrow money except from banks on a
temporary basis or via entering into reverse repurchase
agreements for extraordinary or emergency purposes in an
aggregate amount not to exceed 15% of the Portfolio's total
assets. Such borrowings may be used, for example, to facilitate
the orderly maturation and sale of portfolio securities during
periods of abnormally heavy redemption requests, if they should
occur, such borrowings may not be used to purchase investments
and the Portfolio will not purchase any investment while any such
borrowings exist;
3. May not pledge, hypothecate, mortgage or otherwise
encumber its assets except to secure borrowings, including
reverse repurchase agreements, effected within the limitations
set forth in restriction 2;
4. May not make loans of money or securities except by
the purchase of debt obligations in which the Portfolio may
invest consistent with its investment objectives and policies and
by investment in repurchase agreements;
5. May not invest in real estate (other than
securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or
interests therein), commodities or commodity contracts; and
6. May not act as an underwriter of securities.
In addition, the Pennsylvania Portfolio may not issue
senior securities except to the extent permitted by the 1940
Act.
NON-FUNDAMENTAL POLICIES (MASSACHUSETTS
AND PENNSYLVANIA PORTFOLIOS)
The following policies are not fundamental and may be
changed by the Trustees without shareholder approval. The
Portfolio:
92
1. May not invest more than 5% of its total assets in
the securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities), except that with respect to 50% of the
Portfolio's total assets the Portfolio may invest in the
securities of as few as four issuers (provided that no more than
25% of the Portfolio's total assets are invested in the
securities of any one issuer).4 For purposes of this
limitation, the issuer of the letter of credit or other guarantee
backing a participation interest in a variable rate industrial
development bond is deemed to be the issuer of such participation
interest;
2. May not purchase more than 10% of any class of the
voting securities of any one issuer except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities;
3. May not invest more than 25% of its total assets in
municipal securities the interest upon which is paid from
revenues of similar-type projects;
4. May not enter into repurchase agreements not
terminable within seven days if, as a result thereof, more than
10% of the Portfolio's net assets would be committed to such
repurchase agreements;
5. May not purchase any securities on margin;
6. May not make short sales of securities or maintain
a short position or write, purchase or sell puts (except for
standby commitments as described in the Prospectus and above),
calls, straddles, spreads or combinations thereof; and
7. May not invest more than 10% of its net assets in
illiquid securities.
____________________
4. As a matter of operating policy, pursuant to Rule 2a-7,
each Portfolio may, with respect to 75% of its assets, invest
no more than 5% of its assets in the securities of any one
issuer; the remaining 25% of the Portfolio's assets may be
invested in securities of one or more issuers provided that
they are first tier securities. Non-fundamental policy #1
described herein would give the Portfolio the investment
latitude described therein only in the event Rule 2a-7 is
further amended in the future.
93
_________________________________________________________________
MANAGEMENT
_________________________________________________________________
Trustees and Officers
The business and affairs of the Fund are managed under
the direction of the Board of Trustees. The Trustees and
principal officers of the Fund and their principal occupations
during the past five years are set forth below. Unless
otherwise specified, the address of each such person is 1345
Avenue of the Americas, New York, NY 10105. Those Trustees whose
names are followed by a footnote are "interested persons" of the
Trust as defined under the Act. Each Trustee and officer is also
a director, trustee or officer of other registered investment
companies sponsored by the Adviser.
Trustees
DAVE H. WILLIAMS5 , 68, Chairman, is Chairman of the
Board of Directors of Alliance Capital Management Corporation
("ACMC")6 sole general partner of the Adviser with which he has
been associated since prior to 1995.
JOHN D. CARIFA5, 55, is the President, Chief Operating
Officer, and a Director of ACMC with which he has been associated
since prior to 1995.
SAM Y. CROSS, 73, was, since prior to 1995, Executive
Vice President of The Federal Reserve Bank of New York and
manager for foreign operations for The Federal Reserve System.
He is Executive-In-Residence at the School of International and
Public Affairs, Columbia University. He is also a director of
Fuji Bank and Trust Co. His address is 200 East 66th Street, New
York, New York 10021.
CHARLES H. P. DUELL, 62, is President of Middleton Place
Foundation with which he has been associated since prior to 1995.
He is also a Trustee Emeritus of the National Trust for Historic
Preservation and serves as Chairman of the Board of Architectural
Review, City of Charleston. His address is Middleton Place
____________________
5. An "interested person" of the Fund as defined in the Act.
6. For purposes of this Statement of Additional Information,
ACMC refers to Alliance Capital Management Corporation, the
sole general partner of the Adviser, and to the predecessor
general partner of the Adviser of the same name.
94
Foundation, 4300 Ashley River Road, Charleston, South Carolina
29414.
WILLIAM H. FOULK, JR., 68, is an Investment Adviser and
an Independent Consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1995. He was
formerly Deputy Comptroller of the State of New York and, prior
thereto, Chief Investment Officer of the New York Bank for
Savings. His address is 2 Greenwich Plaza, Suite 100, Greenwich,
CT 06830.
DAVID K. STORRS, 56, is President and Chief Executive
Officer of Alternative Investment Group, LLC (an investment
firm). He was formerly President of The Common Fund (investment
management for educational institutions) with which he had been
associated since prior to 1995. His address is 65 South Gate
Lane, Southport, Connecticut 06490.
SHELBY WHITE, 62, is an author and financial journalist.
Her address is One Sutton Place South, New York, New York 10022.
Officers
RONALD M. WHITEHILL - President, 62, is a Senior Vice
President of ACMC and President and Chief Executive Officer of
Alliance Cash Management Services with which he has been
associated since prior to 1995.
KATHLEEN A. CORBET - Senior Vice President, 40, is an
Executive Vice President of ACMC with which she has been
associated since prior to 1995.
DREW A. BIEGEL - Senior Vice President, 49, is a Vice
President of Alliance Fund Distributors ("AFD") with which he has
been associated since prior to 1995.
JOHN R. BONCZEK - Senior Vice President, 40, is a Senior
Vice President of AFD with which he has been associated since
prior to 1995.
DORIS T. CILIBERTI - Senior Vice President, 36, is a
Vice President of AFD with which she has been associated since
prior to 1995.
ROBERT I. KURZWEIL - Senior Vice President, 49, is a
Vice President of AFD with which he has been associated since
prior to 1995.
95
WAYNE D. LYSKI - Senior Vice President, 59, is an
Executive Vice President of ACMC with which he has been
associated since prior to 1995.
WILLIAM E. OLIVER - Senior Vice President, 51, is a
Senior Vice President of ACMC with which he has been associated
since prior to 1995.
PATRICIA ITTNER - Senior Vice President, 49, is a Vice
President of AFD with which she has been associated since prior
to 1995.
RAYMOND J. PAPERA - Senior Vice President, 44, is a
Senior Vice President of ACMC with which he has been associated
since prior to 1995.
FRANCES M. DUNN - Vice President, 30, is a Vice
President of ACMC with which she has been associated since prior
to 1995.
WILLIAM J. FAGAN - Vice President, 38, is an Assistant
Vice President of AFD with which he has been associated since
prior to 1995.
LINDA N. KELLEY - Vice President, 40, is an Assistant
Vice President of AFD with which she has been associated since
prior to 1995.
JOSEPH R. LASPINA - Vice President, 40, is an Assistant
Vice President of AFD with which he has been associated since
prior to 1995.
EILEEN M. MURPHY - Vice President, 29, is a Vice
President of ACMC with which she has been associated since prior
to 1995.
MARIA C. SAZON - Vice President, 34, is a Vice President
of ACMC with which she has been associated since 1997. Prior
thereto she was a municipal bond analyst at Financial Guaranty
Insurance Company since prior to 1995.
EDMUND P. BERGAN, Jr. - Secretary, 50, is a Senior Vice
President and the General Counsel of AFDand Alliance Fund
Services, Inc. ("AFS") with which he has been associated since
prior to 1995.
MARK D. GERSTEN - Treasurer and Chief Financial Officer,
50, is a Senior Vice President of AFS and a Vice President of AFD
with which he has been associated since prior to 1995.
96
VINCENT S. NOTO - Controller, 35, is a Vice President of
AFS with which he has been associated since prior to 1995.
ANDREW L. GANGOLF - Assistant Secretary, 46, is a Senior
Vice President and Assistant General Counsel of AFD with which he
has been associated since prior to 1995.
DOMENICK PUGLIESE - Assistant Secretary, 39, is a Senior
Vice President and Assistant General Counsel of AFD with which he
has been associated since prior to 1995.
As of October 6, 2000, the Trustees and officers as a
group owned less than 1% of the shares of each Portfolio. The
Fund does not pay any fees to, or reimburse expenses of, its
Trustees who are considered "interested persons" of the Fund. The
aggregate compensation paid by the Fund to each of the Trustees
during its fiscal year ended June 30, 2000, the aggregate
compensation paid to each of the Trustees during calendar year
1999 by all of the funds to which the Adviser provides investment
advisory services (collectively, the "Alliance Fund Complex") and
the total number of registered investment companies (and separate
investment portfolios within those companies) in the Alliance
Fund Complex with respect to which each of the Trustees serves as
a director or trustee, are set forth below. Neither the Fund nor
any other fund in the Alliance Fund Complex provides compensation
in the form of pension or retirement benefits to any of its
directors or trustees.
Total Number Total Number
of Funds in of Investment
the Alliance Portfolios
Total Fund Complex, Within the Funds,
Compensation Including the Including the
From the Fund, as to Fund, as to
Alliance Fund which the which the
Name of Aggregate Complex, Trustee is a Trustee is a
Trustee Compensation Including the Director or Director or
of the Fund From the Fund Fund Trustee Trustee
___________ ____________ ______________ _____________ _______________
Dave H. Williams $-0- $-0- 6 16
John D. Carifa $-0- $-0- 49 107
Sam Y. Cross $4,602 $ 15,750 3 14
Charles H.P. Duell $4,602 $ 15,000 3 14
William H. Foulk, Jr. $4,524 $246,413 45 102
David K. Storrs $4,602 $ 15,000 3 14
Shelby White $4,602 $ 15,750 3 14
97
The Adviser
The Fund's investment adviser is Alliance Capital
Management L.P., 1345 Avenue of the Americas, New York, New York
10105. The Adviser is a leading international adviser managing
client accounts with assets as of June 30, 2000 totaling more
than $388 billion (of which more than $185 billion represented
assets of investment companies). As of June 30, 2000, the
Adviser managed retirement assets for many of the largest public
and private employee benefit plans (including 29 of the nation's
FORTUNE 100 companies), for public employee retirement funds in
33 out of the 50 states, for investment companies, and for
foundations, endowments, banks and insurance companies worldwide.
The 52 registered investment companies managed by the Adviser,
comprising 122 separate investment portfolios, currently have
approximately 6.1 million shareholder accounts.
Alliance Capital Management Corporation ("ACMC") is the
general partner of the Adviser and a wholly owned subsidiary of
the The Equitable Life Assurance Society of the United States
("Equitable"). Equitable, one of the largest life insurance
companies in the United States, is the beneficial owner of an
approximately 55.4% partnership interest in the Adviser.
Alliance Capital Management Holding L.P. ("Alliance Holding")
owns an approximately 41.9% partnership interest in the Adviser.7
Equity interests in Alliance Holding are traded on the New York
Stock Exchange in the form of units. Approximately 98% of such
interests are owned by the public and management or employees of
the Adviser and approximately 2% are owned by Equitable.
Equitable is a wholly owned subsidiary of AXA Financial, Inc.
("AXA Financial"), a Delaware corporation whose shares are traded
on the New York Stock Exchange. AXA Financial serves as the
holding company for the Adviser, Equitable and Donaldson, Lufkin
& Jenrette, Inc., an integrated investment and merchant bank. As
of June 30, 1999, AXA, a French insurance holding company, owned
approximately 58.2% of the issued and outstanding shares of
common stock of AXA Financial.
____________________
7. Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
Holding reorganized by transferring its business to the
Adviser. Prior thereto, the Adviser had no material business
operations. One result of the reorganization was that the
Advisory Agreement, then between the Fund and Alliance
Holding, was transferred to the Adviser by means of a
technical assignment, and ownership of Alliance Fund
Distributors, Inc. and Alliance Fund Services, Inc., the
Fund's principal underwriter and transfer agent,
respectively, also was transferred to the Advisers.
98
Under the Advisory Agreement, the Adviser provides
investment advisory services and order placement facilities for
each Portfolio of the Fund and pays all compensation of Trustees
of the Fund who are affiliated persons of the Adviser. The
Adviser or its affiliates also furnish the Fund, without charge,
with management supervision and assistance and office facilities.
Under the Advisory Agreement, each of the Portfolios pays an
advisory fee at the annual rate of .50 of 1% up to $1.25 billion
of the average daily value of its net assets, .49 of 1% of the
next $.25 billion of such assets, .48 of 1% of the next $.25
billion of such assets, .47 of 1% of the next $.25 billion of
such assets, .46 of 1% of the next $1 billion of such assets and
.45 of 1% of the average daily net assets of the respective
Portfolio in excess of $3 billion. The fee is accrued daily and
paid monthly. Pursuant to the Advisory Agreement the Adviser
will reimburse a Portfolio to the extent that its net expenses
(excluding taxes, brokerage, interest and extraordinary expenses)
exceed 1% of its average daily net assets for any fiscal year.
For the fiscal years ended June 30, 1998, 1999 and 2000
the Adviser received from the General Portfolio an advisory fee
of $5,958,295, $6,583,961 and $6,536,878, respectively.
For the fiscal year ended June 30, 1998, the Adviser
received from the New York Portfolio an advisory fee of
$2,107,793 (net of $130,250 of voluntary expense reimbursement
for expenses exceeding .85 of 1% of its average daily net assets
for the period July 1, 1997 to November 19, 1997, and for
expenses exceeding .93 of 1% of average daily net assets for the
period November 20, 1997 to January 5, 1998). For the fiscal
year ended June 30, 1999, the Adviser received from the New York
Portfolio an advisory fee of $2,630,694 (net of $227,602 of
expense reimbursement for expenses exceeding 1.00% of its average
daily net assets) for the year. For the fiscal year ended
June 30, 2000, the Adviser received from the New York Portfolio
an advisory fee of $3,196,404 (net of $126,125 of expense
reimbursement for expenses exceeding 1.00% of its average daily
net assets) for the year.
For the fiscal years ended June 30, 1998, 1999 and 2000
the Adviser received from the California Portfolio an advisory
fee of $2,016,456, $2,590,077 and $4,417,425, respectively.
For the fiscal year ended June 30, 1998, the Adviser
received from the Connecticut Portfolio an advisory fee of
$485,224 (net of $104,471 voluntary expense reimbursements for
the period July 1, 1997 to October 26, 1997 for expenses
exceeding .80% of its average daily net assets and from October
27, 1997 to November 19, 1997 for expenses exceeding .85% of its
average daily net assets). For the fiscal year ended June 30,
1999, the Adviser received from the Connecticut Portfolio an
99
advisory fee of $651,094 (net of $114,669 of expense
reimbursement for expenses exceeding 1.00% of its average daily
net assets) for the year. For the fiscal year ended June 30,
2000, the Adviser received from the Connecticut Portfolio an
advisory fee of $714,864 (net of $112,692 of expense
reimbursement for expenses exceeding 1.00% of its average daily
net assets) for the year.
For the fiscal year ended June 30, 1998, the Adviser
received from the New Jersey Portfolio an advisory fee of
$575,645 (net of $133,545 of voluntary expense reimbursement for
expenses exceeding .85% of its average daily net assets for the
period July 1, 1997 to November 19, 1997). For the fiscal year
ended June 30, 1999, the Adviser received from the New Jersey
Portfolio an advisory fee of $831,173 (net of $178,102 of expense
reimbursement for expenses exceeding 1.00% of its average daily
net assets) for the year. For the fiscal year ended June 30,
2000, the Adviser received from the New Jersey Portfolio an
advisory fee of $1,057,894 (net of $185,664 of expense
reimbursement for expenses exceeding 1.00% of its average daily
net assets) for the year.
For the fiscal year ended June 30, 1998, the Adviser
received from the Virginia Portfolio an advisory fee of $483,177
(net of $63,064 for voluntary expense reimbursements for the
period July 1, 1997 to October 15, 1997 for expenses exceeding
.80% of its average daily net assets, from October 16, 1997 to
October 26, 1997 for expenses exceeding .85% of its average daily
net assets, from October 27, 1997 to November 19, 1997 for
expenses exceeding .90% of its average daily net assets and from
November 20, 1997 to January 5, 1998 for expenses exceeding .95%
of its average daily net assets. For the fiscal year ended
June 30, 1999, the Adviser received from the Virginia Portfolio
an advisory fee of $547,767 (net of $92,640 of expense
reimbursement for expenses exceeding 1.00% of its average daily
net assets) for the year. For the fiscal year ended June 30,
2000, the Adviser received from the Virginia Portfolio an
advisory fee of $581,332 (net of $97,926 of expense reimbursement
for expenses exceeding 1.00% of its average daily net assets) for
the year.
For the fiscal year ended June 30, 1998, the Adviser
received from the Florida Portfolio an advisory fee of $450,598
(net of $112,733 of voluntary expense reimbursements for the
period from July 1, 1997 to July 31, 1997 for expenses exceeding
.75% of its average daily net assets, from August 1, 1997 to
October 26, 1997 for expenses exceeding .80% of its average daily
net assets and from October 27, 1997 to November 19, 1997 for
expenses exceeding .85% of its average daily net assets). For
the fiscal year ended June 30, 1999, the Adviser received from
the Florida Portfolio an advisory fee of $605,698 (net of
100
$116,738 of expense reimbursement for expenses exceeding 1.00% of
its average daily net assets) for the year. For the fiscal year
ended June 30, 2000, the Adviser received from the Florida
Portfolio an advisory fee of $813,484 (net of $154,360 of expense
reimbursement for expenses exceeding 1.00% of its average daily
net assets) for the year.
For the fiscal year ended June 30, 1998, the Adviser
received from the Massachusetts Portfolio an advisory fee of
$21,408 (net of $105,068 of voluntary expense reimbursements for
the period from July 1, 1997 to August 31, 1997 for expenses
exceeding .50% of its average daily net assets, from September 1,
1997 to September 30, 1997 for expenses exceeding .60% of its
average daily net assets, from October 1, 1997 to October 26,
1997 for expenses exceeding .70% of its average daily net assets,
from October 27, 1997 to November 19, 1997 for expenses exceeding
.80% of its average daily net assets and from November 20, 1997
to January 5, 1998 for expenses exceeding .90% of its average
daily net assets). For the fiscal year ended June 30, 1999, the
Adviser received from the Massachusetts Portfolio an advisory fee
of $10,417 (net of $188,046 of expense reimbursement for expenses
exceeding 1.00% of its average daily net assets) for the year.
For the fiscal year ended June 30, 2000, the Adviser received
from the Massachusetts Portfolio an advisory fee of $270,972 (net
of $155,015 of expense reimbursement for expenses exceeding 1.00%
of its average daily net assets) for the year.
In accordance with the Distribution Services Agreement
described below, the Fund may pay a portion of advertising and
promotional expenses in connection with the sale of shares of the
Fund. The Fund also pays for printing of prospectuses and other
reports to shareholders and all expenses and fees related to
registration and filing with the Commission and with state
regulatory authorities. The Fund pays all other expenses
incurred in its operations, including the Adviser's management
fees; custody, transfer and dividend disbursing expenses; legal
and auditing costs; clerical, accounting, administrative and
other office costs; fees and expenses of Trustees who are not
affiliated with the Adviser; costs of maintenance of the Fund's
existence; and interest charges, taxes, brokerage fees, and
commissions. As to the obtaining of clerical and accounting
services not required to be provided to the Fund by the Adviser
under the Advisory Agreement, the Fund may employ its own
personnel. For such services, it also may utilize personnel
employed by the Adviser or its affiliates; if so done, the
services are provided to the Fund at cost and the payments
therefore must be specifically approved in advance by the Fund's
Trustees. In respect of the Adviser's services to the Portfolios
for the fiscal years ended June 30, 1998, 1999 and 2000, the
Adviser received $107,500, $108,000 and $111,000, respectively,
from the General Portfolio; $94,500, 95,000 and $98,000,
101
respectively, from the New York Portfolio; $94,500, $95,000 and
$98,000, respectively, from the California Portfolio; $91,500,
$92,000 and $95,000, respectively, from the Connecticut
Portfolio; $91,500, $92,000, and $95,000, respectively, from the
New Jersey Portfolio; $91,000, $92,000 and $95,000, respectively,
from the Virginia Portfolio; $92,000, $92,000 and $95,000,
respectively, from the Florida Portfolio; and $46,000, $92,000
and $95,000, respectively from the Massachusetts Portfolio. The
Pennsylvania Portfolio had not yet commenced operations.
The Fund has made arrangements with certain broker-
dealers, including Pershing, Division of Donaldson, Lufkin &
Jenrette Securities Corporation ("Pershing"), an affiliate of the
Adviser, whose customers are Fund shareholders pursuant to which
payments are made to such broker-dealers performing recordkeeping
and shareholder servicing functions. Such functions may include
opening new shareholder accounts, processing purchase and
redemption transactions, and responding to inquiries regarding
the Fund's current yield and the status of shareholder accounts.
The Fund pays fully disclosed and omnibus broker dealers
(including Pershing) for such services. The Fund may also pay
for the electronic communications equipment maintained at the
broker-dealers' offices that permits access to the Fund's
computer files and, in addition, reimburses fully-disclosed
broker-dealers at cost for personnel expenses involved in
providing such services. All such payments must be approved or
ratified by the Trustees. For the fiscal years ended June 30,
1998, 1999 and 2000, broker-dealers were reimbursed $1,125,764,
$1,986,518 and $1,956,064, respectively, by the General
Portfolio; $298,242, $772,574 and $883,652, respectively, by the
New York Portfolio; $345,752, $668,086 and $1,117,525,
respectively, by the California Portfolio; $88,878, $207,668 and
$228,239, respectively, by the Connecticut Portfolio; $96,775,
$322,872 and $415,151, respectively, by the New Jersey Portfolio;
$74,646, $145,278 and $150,548, respectively, by the Virginia
Portfolio; $95,751, $199,802 and $269,804, respectively, by the
Florida Portfolio; and $16,224, $54,000 and $114,486,
respectively, by the Massachusetts Portfolio. A substantial
portion of these fees were paid to affiliates. The Pennsylvania
Portfolio had not yet commenced operations.
The Advisory Agreement became effective on July 22,
1992. Continuance of the Advisory Agreement for an additional
annual term was approved by the vote, cast in person by all the
Trustees of the Trust who neither were interested persons of the
Trust nor had any direct or indirect financial interest in the
Agreement or any related agreement, at a meeting called for that
purpose on June 5, 2000.
The Advisory Agreement remains in effect from year to
year provided that such continuance is specifically approved at
102
least annually by a vote of a majority of the outstanding shares
of the Fund or by the Fund's Trustees, including in either case
approval by a majority of the Trustees who are not parties to the
Agreement, or interested persons as defined in the Act. The
Advisory Agreement may be terminated without penalty on 60 days'
written notice at the option of either party or by a vote of the
outstanding voting securities of the Fund; it will automatically
terminate in the event of assignment. The Adviser is not liable
for any action or inaction with regard to its obligations under
the Advisory Agreement as long as it does not exhibit willful
misfeasance, bad faith, gross negligence, or reckless disregard
of its obligations.
Distribution Services Agreement
Rule 12b-1 under the Act permits an investment company
to directly or indirectly pay expenses associated with the
distribution of its shares in accordance with a duly adopted and
approved plan. The Fund has entered into a Distribution Services
Agreement (the "Agreement") which includes a plan adopted
pursuant to Rule 12b-1 (the "Plan"), with Alliance Fund
Distributors, Inc. (the "Distributor"), which applies to all
Series of the Trust. Pursuant to the Plan, the Fund makes
payments each month to AFD in an amount that will not exceed, on
an annualized basis, .25 of 1% of the Fund's aggregate average
daily net assets. In addition, under the Agreement the
Distributor makes payments for distribution assistance and for
administrative, accounting and other services from its own
resources which may include the management fee paid by the Fund.
Payments under the Agreement are used in their entirety
for (i) payments to broker-dealers and other financial
intermediaries, including the Distributor and Donaldson, Lufkin &
Jenrette Securities Corporation and its Pershing Division,
affiliates of the Adviser, for distribution assistance and to
banks and other depository institutions for administrative and
accounting services, and (ii) otherwise promoting the sale of
shares of the Fund such as by paying for the preparation,
printing and distribution of prospectuses and other promotional
materials sent to existing and prospective shareholders and by
directly or indirectly purchasing radio, television, newspaper
and other advertising. In approving the Agreement, the Trustees
determined that there was a reasonable likelihood that the
Agreement would benefit the Fund and its shareholders.
During the fiscal year ended June 30, 2000, the General
Portfolio made payments to the Adviser for expenditures under the
Agreement in amounts aggregating $3,271,367 which constituted .25
of 1% of such Portfolio's average daily net assets during the
year, and the Adviser made payments from its own resources as
described above aggregating $3,585,278. Of the $6,856,645 paid
103
by the General Portfolio and the Adviser under the Agreement,
$38,000 was spent on the printing and mailing of prospectuses for
persons other than current shareholders (the Portfolio's pro rata
share was approximately $18,130) and $6,818,644 for compensation
to dealers (the Portfolio's pro rata share was approximately
$3,253,237).
During the fiscal year ended June 30, 2000 the New York
Portfolio made payments to the Adviser for expenditures under the
Agreement in amounts aggregating $1,661,264 which constituted .25
of 1% of such Portfolio's average daily net assets during the
year, and the Adviser made payments from its own resources as
described above aggregating $1,783,684. Of the $3,444,948 paid
by the New York Portfolio and the Adviser under the Agreement,
$47,000 was spent on the printing and mailing of prospectuses for
persons other than current shareholders (the Portfolio's pro rata
share was approximately $22,665) and $3,397,948 for compensation
to dealers (the Portfolio's pro rata share was approximately
$1,638,599.
During the fiscal year ended June 30, 2000 the
California Portfolio made payments to the Adviser for
expenditures under the Agreement in amounts aggregating
$2,208,713 which constituted .25 of 1% of such Portfolio's
average daily net assets during the year, and the Adviser made
payments from its own resources as described above aggregating
$2,354,988. Of the $4,563,701 paid by the California Portfolio
and the Adviser under the Agreement, $54,000 was spent on the
printing and mailing of prospectuses for persons other than
current shareholders (the Portfolio's pro rata share was
approximately $26,135) and $4,509,701 for compensation to dealers
(the Portfolio's pro rata share was approximately
$4,536,566).
During the fiscal year ended June 30, 2000, the
Connecticut Portfolio made payments to the Adviser for
expenditures under the Agreement in amounts aggregating $413,778
which constituted .25 of 1% of such Portfolio's average daily net
assets during the period, and the Adviser made payments from its
own resources as described above aggregating $423,782. Of the
$837,560 paid by the Connecticut Portfolio and the Adviser under
the Agreement, $7,000 was spent on printing and mailing of
prospectuses for persons other than current shareholders (the
Portfolio's pro rata share was approximately $3,458) and $830,560
for compensation of dealers (the Portfolio's pro rata share was
approximately $410,320).
During the fiscal year ended June 30, 2000, the New
Jersey Portfolio made payments to the Adviser for expenditures
under the Agreement in amounts aggregating $621,779 which
constituted .25 of 1% of such Portfolio's average daily net
104
assets during the period, and the Adviser made payments from its
own resources as described above aggregating $705,305. Of the
$1,327,084 paid by the New Jersey Portfolio and the Adviser under
the Agreement, $17,000 was spent on printing and mailing of
prospectuses for persons other than current shareholders (the
Portfolio's pro rata share was approximately $7,965) and
$1,310,084 for compensation of dealers (the Portfolio's pro rata
share was approximately $613,814).
During the fiscal year ended June 30, 2000, the Virginia
Portfolio made payments to the Adviser for expenditures under the
Agreement in amounts aggregating $339,629 which constituted .25
of 1% of such Portfolio's average daily net assets during the
period, and the Adviser made payments from its own resources as
described above aggregating $355,553. Of the $695,182 paid by
the Virginia Portfolio and the Adviser under the Agreement,
$4,000 was spent on printing and mailing of prospectuses for
persons other than current shareholders (the Portfolio's pro rata
share was approximately $1,954) and $691,182 for compensation of
dealers (the Portfolio's pro rata share was approximately
$337,675).
For the fiscal year ended June 30, 2000 the Florida
Portfolio made payments to the Adviser for expenditures under the
Agreement in amounts aggregating $483,922 which constituted .25
of 1% of such Portfolio's average daily net assets during the
period, and the Adviser made payments from its own resources as
described above aggregating $697,426. Of the $1,181,348 paid by
the Florida Portfolio and the Adviser under the Agreement, $6,000
was spent on printing and mailing of prospectuses for persons
other than current shareholders (the Portfolio's pro rata share
was approximately $2,458) and $1,175,348 for compensation of
dealers (the Portfolio's pro rata share was approximately
$481,464).
For the fiscal year ended June 30, 2000 the
Massachusetts Portfolio made payments to the Adviser for
expenditures under the Agreement in amounts aggregating $212,994
which constituted .25 of 1% of such Portfolio's average daily net
assets during the period, and the Adviser made payments from its
own resources as described above aggregating $256,615. Of the
$469,609 paid by the Florida Portfolio and the Adviser under the
Agreement, $3,000 was spent on printing and mailing of
prospectuses for persons other than current shareholders (the
Portfolio's pro rata share was approximately $1,361) and $466,609
for compensation of dealers (the Portfolio's pro rata share was
approximately $211,633).
The administrative and accounting services provided by
broker-dealers, depository institutions and other financial
institutions may include, but are not limited to, establishing
105
and maintaining shareholder accounts, sub-accounting, processing
of purchase and redemption orders, sending confirmations of
transactions, forwarding financial reports and other
communications to shareholders and responding to shareholder
inquiries regarding the Fund. As interpreted by courts and
administrative agencies, certain laws and regulations limit the
ability of a bank or other depository institution to become an
underwriter or distributor of securities. However, in the
opinion of the Fund's management based on the advice of counsel,
these laws and regulations do not prohibit such depository
institutions from providing other services for investment
companies such as the administrative and accounting services
described above. The Trustees will consider appropriate
modifications to the Fund's operations, including discontinuance
of payments under the Agreement to banks and other depository
institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to
provide the above-mentioned services.
The Treasurer of the Fund reports the amounts expended
under the Agreement and the purposes for which such expenditures
were made to the Trustees on a quarterly basis. Also, the
Agreement provides that the selection and nomination of
disinterested Trustees (as defined in the Act) are committed to
the discretion of the disinterested Trustees then in office.
The Agreement for the Fund became effective on July 22,
1992. Continuance of the Agreement for an additional annual term
was approved by the vote, cast in person by all the Trustees of
the Fund who neither were interested persons of the Fund nor had
any direct or indirect financial interest in the Agreement or any
related agreement, at a meeting called for that purpose on
June 5, 2000. The Agreement may be continued annually thereafter
if approved by a majority vote of the Trustees who neither are
interested persons of the Fund nor have any direct or indirect
financial interest in the Agreement or in any related agreement,
cast in person at a meeting called for that purpose.
All material amendments to the Agreement must be
approved by a vote of the Trustees, including a majority of the
disinterested Trustees, cast in person at a meeting called for
that purpose, and the Agreement may not be amended in order to
increase materially the costs which the Fund may bear pursuant to
the Agreement without the approval of a majority of the
outstanding shares of the Fund. The Agreement may also be
terminated at any time by a majority vote of the disinterested
Trustees, or by a majority of the outstanding shares of the Fund
or by the Distributor. Any agreement with a qualifying broker-
dealer or other financial intermediary may be terminated without
penalty on not more than 60 days' written notice by a vote of the
majority of non-party Trustees, by a vote of a majority of the
106
outstanding shares of the Fund, or by the Distributor and will
terminate automatically in the event of its assignment.
The Agreement is in compliance with rules of the
National Association of Securities Dealers, Inc. (the "NASD")
which became effective July 7, 1993 and which limit the annual
asset-based sales charges and service fees that a mutual fund may
impose to .75% and .25%, respectively, of average annual net
assets.
_________________________________________________________________
PURCHASES AND REDEMPTION OF SHARES
_________________________________________________________________
The Fund may refuse any order for the purchase of
shares. The Fund reserves the right to suspend the sale of its
shares to the public in response to conditions in the securities
markets or for other reasons.
Accounts Not Maintained Through Financial Intermediaries
Opening Accounts-New Investments
A. When Funds are Sent by Wire (the wire method permits
immediate credit)
1) Telephone the Fund toll-free at (800) 824-1916.
The Fund will ask for the name of the account as
you wish it to be registered, address of the
account, and taxpayer identification number (social
security number for an individual). The Fund will
then provide you with an account number.
2) Instruct your bank to wire Federal funds (minimum
$1,000) exactly as follows:
ABA 0110 00028
State Street Bank and Trust Company
Boston, MA 02101
Alliance Municipal Trust
DDA 9903-279-9
Your account name as registered with the Fund
Your account number as registered with the Fund
3) Mail a completed Application Form to:
Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, New Jersey 07096-1520
107
B. When Funds are Sent by Check
1) Fill out an Application Form.
2) Mail the completed Application Form along with your
check or negotiable bank draft (minimum $1,000),
payable to "Alliance Municipal Trust," to Alliance
Fund Services, Inc. as in A(3) above.
Subsequent Investments
A. Investments by Wire (to obtain immediate credit)
Instruct your bank to wire Federal funds (minimum $100)
to State Street Bank and Trust Company ("State Street Bank") as
in A(2) above.
B. Investments by Check
Mail your check or negotiable bank draft (minimum $100),
payable to "Alliance Municipal Trust," to Alliance Fund Services,
Inc. as in A(3) above.
Include with the check or draft the "next investment"
stub from one of your previous monthly or interim account
statements. For added identification, place your Fund account
number on the check or draft.
Investments Made by Check
Money transmitted by a check drawn on a member of the
Federal Reserve System is converted to Federal funds in one
business day following receipt and, thus, is then invested in the
Fund. Checks drawn on banks which are not members of the Federal
Reserve System may take longer to be converted and invested. All
payments must be in United States dollars.
PROCEEDS FROM ANY SUBSEQUENT REDEMPTION BY YOU OF FUND
SHARES THAT WERE PURCHASED BY CHECK OR ELECTRONIC FUNDS TRANSFER
WILL NOT BE FORWARDED TO YOU UNTIL THE FUND IS REASONABLY ASSURED
THAT YOUR CHECK OR ELECTRONIC FUNDS TRANSFER HAS CLEARED, UP TO
FIFTEEN DAYS FOLLOWING THE PURCHASE DATE. If the redemption
request during such period is in the form of a Fund check, the
check will be marked "insufficient funds" and be returned unpaid
to the presenting bank.
108
Redemptions
A. By Telephone
You may withdraw any amount from your account on any
Fund business day (i.e., any weekday exclusive of days on which
the New York Stock Exchange or State Street Bank is closed) via
orders given to AFS by telephone toll-free (800) 824-1916. Such
redemption orders must include your account name as registered
with the Fund and the account number.
If your telephone redemption order is received by AFS
prior to 12:00 Noon (Eastern time), we will send the proceeds in
Federal funds by wire to your designated bank account that day.
The minimum amount for a wire is $1,000. If your telephone
redemption order is received by AFS after 12:00 Noon and before
4:00 p.m., we will wire the proceeds the next business day. You
also may request that proceeds be sent by check to your
designated bank. Redemptions are made without any charge to you.
During periods of drastic economic or market
developments, such as the market break of October 1987, it is
possible that shareholders would have difficulty in reaching AFS
by telephone (although no such difficulty was apparent at any
time in connection with the 1987 market break). If a shareholder
were to experience such difficulty, the shareholder should issue
written instructions to AFS at the address shown on the cover of
this Statement of Additional Information. The Fund reserves the
right to suspend or terminate its telephone redemption service at
any time without notice. Telephone redemption is not available
with respect to shares (i) for which certificates have been
issued, (ii) held by a shareholder who has changed his or her
address of record within the preceding 30 calendar days or (iii)
held in any retirement plan account. Neither the Fund nor the
Adviser, nor AFS will be responsible for the authenticity of
telephone requests for redemptions that the Fund reasonably
believes to be genuine. The Fund will employ reasonable
procedures in order to verify that telephone requests for
redemptions are genuine, including among others, recording such
telephone instructions and causing written confirmations of the
resulting transactions to be sent to shareholders. If the Fund
did not employ such procedures, it could be liable for losses
arising from unauthorized or fraudulent telephone instructions.
Selected dealers or agents may charge a commission for handling
telephone requests for redemptions.
B. By Checkwriting
With this service, you may write checks made payable to
any payee. Checks cannot be written for more than the principal
balance (not including any accrued dividends) in your account.
109
First, you must fill out the Signature Card which is with the
Application Form. If you wish to establish this checkwriting
service subsequent to the opening of your Fund account, contact
the Fund by telephone or mail. There is no separate charge for
the checkwriting service, except that State Street Bank may
impose charges for checks which are returned unpaid because of
insufficient funds or for checks upon which you have placed a
stop order. There is currently a $7.50 charge for check
reorders.
The checkwriting service enables you to receive the
daily dividends declared on the shares to be redeemed until the
day that your check is presented to State Street Bank for
payment.
C. By Mail
You may withdraw any amount from your account at any
time by mail. Written orders for withdrawal, accompanied by
duly endorsed certificates, if issued, should be mailed to
Alliance Fund Services, Inc., P.O. Box 1520, Secaucus, New Jersey
07096-1520. Such orders must include the account name as
registered with the Fund and the account number. All written
orders for redemption, and accompanying certificates, if any,
must be signed by all owners of the account with the signatures
guaranteed by an institution which is an "eligible guarantor" as
defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended.
_________________________________________________________________
ADDITIONAL INFORMATION
_________________________________________________________________
Automatic Investment Program. A shareholder may
purchase shares of the Fund through an automatic investment
program through a bank that is a member of the National
Automated Clearing House Association. Purchases can be made on a
Fund business day each month designated by the shareholder.
Shareholders wishing to establish an automatic investment program
should write or telephone the Fund or AFS at (800) 221-5672.
Shareholders maintaining Fund accounts through brokerage
firms and other institutions should be aware that such
institutions necessarily set deadlines for receipt of transaction
orders from their clients that are earlier than the transaction
times of the Fund itself so that the institutions may properly
process such orders prior to their transmittal to State Street
Bank and Trust Company ("State Street Bank"). Should an investor
place a transaction order with such an institution after its
deadline, the institution may not effect the order with the Fund
110
until the next business day. Accordingly, an investor should
familiarize himself or herself with the deadlines set by his or
her institution. For example, the Fund's Distributor accepts
purchase orders from its customers up to 2:15 p.m. (Eastern time)
for issuance at the 4:00 p.m. (Eastern time) transaction time and
price. A brokerage firm acting on behalf of a customer in
connection with transactions in Fund shares is subject to the
same legal obligations imposed on it generally in connection with
transactions in securities for a customer, including the
obligation to act promptly and accurately.
Orders for the purchase of Fund shares become effective
at the next transaction time after Federal funds or bank wire
monies become available to State Street Bank for a shareholder's
investment. Federal funds are a bank's deposits in a Federal
Reserve Bank. These funds can be transferred by Federal Reserve
wire from the account of one member bank to that of another
member bank on the same day and are considered to be immediately
available funds; similar immediate availability is accorded
monies received at State Street Bank by bank wire. Money
transmitted by a check drawn on a member of the Federal Reserve
System is converted to Federal funds in one business day
following receipt. Checks drawn on banks which are not members
of the Federal Reserve System may take longer. All payments
(including checks from individual investors) must be in United
States dollars.
All shares purchased are confirmed to each shareholder
and are credited to his or her account at the net asset value.
To avoid unnecessary expense to the Fund and to facilitate the
immediate redemption of shares, share certificates, for which no
charge is made, are not issued except upon the written request of
a shareholder. Certificates are not issued for fractional
shares. Shares for which certificates have been issued are not
eligible for any of the optional methods of withdrawal; namely,
the telephone, telegraph, checkwriting or periodic redemption
procedures. The Fund reserves the right to reject any purchase
order.
Arrangements for Telephone Redemptions. If you wish to
use the telephone redemption procedure, indicate this on your
Application Form and designate a bank and account number to
receive the proceeds of your withdrawals. If you decide later
that you wish to use this procedure, or to change instructions
already given, send a written notice to Alliance Fund Services,
Inc., P.O. Box 1520, Secaucus, New Jersey 07096-1520, with your
signature guaranteed by an institution which is an eligible
guarantor. For joint accounts, all owners must sign and have
their signatures guaranteed.
111
Retirement Plans. The Fund's objectives of safety of
principal, excellent liquidity and maximum current income to the
extent consistent with the first two objectives may make it a
suitable investment vehicle for part or all of the assets held in
various tax-deferred retirement plans. The Fund has available
forms of individual retirement account (IRA), simplified employee
pension plans (SEP), 403(b)(7) plans and employer-sponsored
retirement plans (Keogh or HR10 Plan). Certain services
described in this prospectus may not be available to retirement
accounts and plans. Persons desiring information concerning
these plans should write or telephone the Fund or AFS at
(800) 221-5672.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of The Equitable Life Assurance Society of the United
States, is the custodian under these plans. The custodian
charges a nominal account establishment fee and a nominal annual
maintenance fee. A portion of such fees is remitted to AFS to
compensate that organization for services rendered to retirement
plan accounts maintained with the Fund.
Periodic Distribution Plans. Without affecting your
right to use any of the methods of redemption described above, by
checking the appropriate boxes on the Application Form, you may
elect to participate additionally in the following plans without
any separate charge. Under the Income Distribution Plan you
receive monthly payments of all the income earned in your Fund
account, with payments forwarded by check or electronically via
the Automated Clearing House ("ACH") network shortly after the
close of the month. Under the Systematic Withdrawal Plan, you
may request payments by check or electronically via the ACH
network in any specified amount of $50 or more each month or in
any intermittent pattern of months. If desired, you can order,
via a signature-guaranteed letter to the Fund, such periodic
payments to be sent to another person. Shareholders wishing
either of the above plans electronically through the ACH network
should write or telephone the Fund or AFS at (800) 221-5672.
The Fund has the right to close out an account if it has
a zero balance on December 31 and no account activity for the
first six months of the subsequent year. Therefore, unless this
has occurred, a shareholder with a zero balance, when
reinvesting, should continue to use his account number.
Otherwise, the account should be re-opened pursuant to procedures
described above or through instructions given to a financial
intermediary.
A "business day," during which purchases and redemptions
of Fund shares can become effective and the transmittal of
redemption proceeds can occur, is considered for Fund purposes as
any weekday exclusive of New Year's Day, Martin Luther King, Jr.
112
Day, President's Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and
Christmas Day; if one of these holidays falls on a Saturday or
Sunday, purchases and redemptions will likewise not be processed
on the preceding Friday or the following Monday, respectively.
On any such day that is an official bank holiday in
Massachusetts, neither purchases nor wired redemptions can become
effective because Federal funds cannot be received or sent by
State Street Bank. On such days, therefore, the Fund can only
accept redemption orders for which shareholders desire remittance
by check. The right of redemption may be suspended or the date
of a redemption payment postponed for any period during which the
New York Stock Exchange is closed (other than customary weekend
and holiday closings), when trading on the New York Stock
Exchange is restricted, or an emergency (as determined by the
Commission) exists, or the Commission has ordered such a
suspension for the protection of shareholders. The value of a
shareholder's investment at the time of redemption may be more or
less than his or her cost, depending on the market value of the
securities held by the Fund at such time and the income earned.
_________________________________________________________________
DAILY DIVIDENDS - DETERMINATION OF NET ASSET VALUE
_________________________________________________________________
All net income of each Portfolio is determined after the
close of each business day, currently 4:00 p.m. Eastern time (and
at such other times as the Trustees may determine) and is paid
immediately thereafter pro rata to shareholders of record of that
Portfolio via automatic investment in additional full and
fractional shares in each shareholder's account at the rate of
one share for each dollar distributed. As such additional shares
are entitled to dividends on following days, a compounding growth
of income occurs.
A Portfolio's net income consists of all accrued
interest income on Portfolio assets less expenses allocable to
that Portfolio (including accrued expenses and fees payable to
the Adviser) applicable to that dividend period. Realized gains
and losses are reflected in a Portfolio's net asset value and are
not included in net income. Net asset value per share of each
Portfolio is expected to remain constant at $1.00 since all net
income of each Portfolio is declared as a dividend each time net
income is determined and net realized gains and losses are
expected to be relatively small.
The valuation of the Fund's portfolio securities is
based upon their amortized cost which does not take into account
unrealized securities gains or losses as measured by market
valuations. The amortized cost method involves valuing an
113
instrument at its cost and thereafter applying a constant
amortization to maturity of any discount or premium, regardless
of the impact of fluctuating interest rates on the market value
of the instrument. During periods of declining interest rates,
the daily yield on shares of the Fund may be higher than that of
a fund with identical investments utilizing a method of valuation
based upon market prices for its portfolio instruments; the
converse would apply in a period of rising interest rates.
Pursuant to Rule 2a-7 the Fund currently treats a
municipal security which has a variable or floating rate of
interest as having a maturity equal to the period prescribed by
such rule. The Fund maintains procedures designed to maintain,
to the extent reasonably possible, the price per share of each
Portfolio as computed for the purpose of sales and redemptions at
$1.00. Such procedures include review of the Fund's portfolio
holdings by the Trustees to the extent required by Rule 2a-7
under the Act at such intervals as they deem appropriate to
determine whether and to what extent the net asset value of each
Portfolio calculated by using available market quotations or
market equivalents deviates from net asset value based on
amortized cost. There can be no assurance, however, that the
Fund's net asset value per share will remain constant at $1.00.
The net asset value of the shares of each Portfolio is
determined each business day (and on such other days as the
Trustees deem necessary) at 12:00 Noon and 4:00 p.m. Eastern
time. The net asset value per share of a Portfolio is calculated
by taking the sum of the value of that Portfolio's investments
and any cash or other assets, subtracting liabilities, and
dividing by the total number of shares of that Portfolio
outstanding. All expenses, including the fees payable to the
Adviser, are accrued daily.
_________________________________________________________________
TAXES
_________________________________________________________________
Federal Income Tax Considerations
Each of the Fund's Portfolios has qualified for each
fiscal year to date and intends to qualify in each future year to
be taxed as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code") and, as such, will
not be liable for Federal income and excise taxes on the net
income and capital gains distributed to its shareholders. Since
each Portfolio of the Fund distributes all of its net income and
capital gains, each Portfolio should thereby avoid all Federal
income and excise taxes.
114
For shareholders' Federal income tax purposes,
distributions to shareholders out of tax-exempt interest income
earned by each Portfolio of the Fund generally are not subject to
Federal income tax. See, however, "Investment Objectives and
Policies-Alternative Minimum Tax" above.
Distributions out of taxable interest income, other
investment income, and short-term capital gains are taxable to
shareholders as ordinary income. Since each Portfolio's
investment income is derived from interest rather than dividends,
no portion of such distributions is eligible for the dividends-
received deduction available to corporations. Long-term capital
gains, if any, distributed by a Portfolio to a shareholder are
taxable to the shareholder as long-term capital gain,
irrespective of the length of time he may have held his shares.
Distributions of short and long-term capital gains, if any, are
normally made once each year near calendar year-end, although
such distributions may be made more frequently if necessary in
order to maintain a Portfolio's net asset value at $1.00 per
share.
Interest on indebtedness incurred by shareholders to
purchase or carry shares of a Portfolio of the Fund is not
deductible for Federal income tax purposes. Under rules of the
Internal Revenue Service for determining when borrowed funds are
used for purchasing or carrying particular assets, shares may be
considered to have been purchased or carried with borrowed funds
even though those funds are not directly linked to the shares.
Further, persons who are "substantial users" (or related persons)
of facilities financed by private activity bonds (within the
meaning of Section 147(a) of the Code) should consult their tax
advisers before purchasing shares of any Portfolio.
Substantially all of the dividends paid by each
Portfolio are anticipated to be exempt from Federal income taxes.
Shortly after the close of each calendar year, a notice is sent
to each shareholder advising him of the total dividends paid into
his account for the year and the portion of such total that is
exempt from Federal income taxes. This portion is determined by
the ratio of the tax-exempt income to total income for the entire
year and, thus, is an annual average rather than a day-by-day
determination for each shareholder.
State Income Tax Considerations
General Portfolio. Shareholders of the General Portfolio may be
subject to state and local taxes on distributions from the
General Portfolio, including distributions which are exempt from
Federal income taxes. Each investor should consult his own tax
adviser to determine the tax status of distributions from the
General Portfolio in his particular state and locality.
115
New York Portfolio. Shareholders of the New York Portfolio who
are individual residents of New York are not subject to the New
York State or New York City personal income taxes on
distributions from the New York Portfolio which are designated as
derived from municipal securities issued by the State of New York
or its political subdivisions. Distributions from the New York
Portfolio are, however, subject to the New York Corporate
Franchise Tax payable by corporate shareholders.
California Portfolio. Shareholders of the California Portfolio
who are individual residents of California are not subject to the
California personal income tax on distributions from the
California Portfolio which are designated as derived from
municipal securities issued by the State of California or its
political subdivisions. Distributions from the California
Portfolio are, however, subject to the California Corporate
Franchise Tax payable by corporate shareholders.
Connecticut Portfolio. Shareholders of the Connecticut Portfolio
who are individual residents of Connecticut are not subject to
Connecticut personal income taxes on distributions from the
Connecticut Portfolio which are designated as derived from
municipal securities issued by the State of Connecticut or its
political subdivisions. Distributions from the Connecticut
Portfolio are, however, subject to the Connecticut Corporation
Business Tax payable by corporate shareholders.
New Jersey Portfolio. Shareholders of the Portfolio who are
individual residents of New Jersey are not subject to the New
Jersey personal income tax on distributions from the Portfolio
which are designated as derived from municipal securities issued
by the State of New Jersey or its political subdivisions.
Distributions from the Portfolio are, however, subject to the New
Jersey Corporation Business (Franchise) Tax and the New Jersey
Corporation Income Tax payable by corporate shareholders.
Virginia Portfolio. Shareholders of the Virginia Portfolio who
are individual residents of Virginia are not subject to the
Virginia personal income tax on distributions from the Portfolio
which are designated as derived from municipal securities issued
by the Commonwealth of Virginia or its political subdivisions.
Florida Portfolio. Dividends paid by the Portfolio to individual
Florida shareholders will not be subject to Florida income tax,
which is imposed only on corporations. However, Florida
currently imposes an "intangible tax" at the rate of $2.00 per
$1,000 taxable value of certain securities, such as shares of the
Portfolio, and other intangible assets owned by Florida
residents. U.S. Government Securities and Florida municipal
securities are exempt from this intangible tax. It is
anticipated that the Portfolio's shares will qualify for
116
exemption from the Florida intangible tax. In order to so
qualify, the Portfolio must, among other things, have its entire
portfolio invested in U.S. Government Securities and Florida
municipal securities on December 31 of any year. Exempt-interest
dividends paid by the Portfolio to corporate shareholders will be
subject to Florida corporate income tax.
Massachusetts Portfolio. Individual and other noncorporate
shareholders of the Portfolio will not be subject to
Massachusetts personal income tax on distributions by the
Portfolio to the extent such distributions are derived from
interest on Massachusetts obligations. Further, such
shareholders will not be subject to Massachusetts personal income
tax on long-term capital gains distributions made by the
Portfolio to the extent such distributions are derived from gains
on Massachusetts municipal obligations which were issued under
specific legislation exempting gain on such obligations from
Massachusetts personal income taxation. Distributions by the
Portfolio will not be excluded from the net income of
corporations and shares of the Portfolio will not be excluded
from the net worth of intangible property corporations in
determining the Massachusetts excise tax on corporations. Shares
of the Portfolio will not be subject to Massachusetts local
property taxes.
Pennsylvania Portfolio. Substantially all of the dividends paid
by the Portfolio will be exempt from Pennsylvania personal and
fiduciary income taxes, the Philadelphia School District
investment net income tax and the Pennsylvania corporate net
income tax. Dividends will be exempt from such taxes to the
extent attributable to interest received from the Portfolio's
investments in Pennsylvania municipal securities and U.S.
Government securities. Distributions of capital gain from the
Portfolio are subject to Pennsylvania individual, fiduciary and
corporate income taxes, but are not taxable for purposes of the
Philadelphia School District income tax. Portfolio shares are
included for purposes of determining a corporation's capital
stock value subject to the Pennsylvania capital stock/franchise
tax.
_________________________________________________________________
GENERAL INFORMATION
_________________________________________________________________
Portfolio Transactions. Subject to the general
supervision of the Trustees of the Fund, the Adviser is
responsible for the investment decisions and the placing of the
orders for portfolio transactions for the Fund. Because the Fund
invests in securities with short maturities, there is a
relatively high portfolio turnover rate. However, the turnover
117
rate does not have an adverse effect upon the net yield and net
asset value of the Fund's shares since the Fund's portfolio
transactions occur primarily with issuers, underwriters or major
dealers in money market instruments acting as principals. Such
transactions are normally on a net basis which do not involve
payment of brokerage commissions. The cost of securities
purchased from an underwriter usually includes a commission paid
by the issuer to the underwriters; transactions with dealers
normally reflect the spread between bid and asked prices.
The Fund has no obligations to enter into transactions
in portfolio securities with any dealer, issuer, underwriter or
other entity. In placing orders, it is the policy of the Fund to
obtain the best price and execution for its transactions. Where
best price and execution may be obtained from more than one
dealer, the Adviser may, in its discretion, purchase and sell
securities through dealers who provide research, statistical and
other information to the Adviser. Such services may be used by
the Adviser for all of its investment advisory accounts and,
accordingly, not all such services may be used by the Adviser in
connection with the Fund. The supplemental information received
from a dealer is in addition to the services required to be
performed by the Adviser under the Advisory Agreement, and the
expenses of the Adviser will not necessarily be reduced as a
result of the receipt of such information. During the fiscal
years ended June 30, 1998, 1999 and 2000, the Fund paid no
brokerage commissions.
Capitalization. All shares of the Fund, when issued,
are fully paid and non-assessable. The Trustees are authorized
to reclassify and issue any unissued shares to any number of
additional classes or series without shareholder approval.
Accordingly, the Trustees in the future, for reasons such as the
desire to establish one or more additional portfolios with
different investment objectives, policies or restrictions, may
create additional classes or series of shares. Any issuance of
shares of another class would be governed by the Investment
Company Act of 1940 and the law of the Commonwealth of
Massachusetts. Shares of each Portfolio are normally entitled to
one vote for all purposes. Generally, shares of all Portfolios
vote as a single series for the election of Trustees and on any
other matter affecting all Portfolios in substantially the same
manner. As to matters affecting each Portfolio differently, such
as approval of the Advisory Agreement and changes in investment
policy, shares of each Portfolio vote as separate classes.
Certain procedures for the removal by shareholders of trustees of
investment trusts, such as the Fund, are set forth in Section
16(c) of the Act.
At October 6, 2000, there were 4,134,220,895 shares of
beneficial interest of the Fund outstanding. Of this amount
118
1,380,173,888 were for the General Portfolio; 850,667,313 were
for the New York Portfolio; 891,522,634 were for the California
Portfolio; 175,606,642 were for the Connecticut Portfolio;
301,436,570 were for the New Jersey Portfolio; 140,774,308 were
for the Virginia Portfolio; 212,869,914 were for the Florida
Portfolio; 100,807,704 were for the Massachusetts Portfolio and
80,361,922 were for the Pennsylvania Portfolio. To the knowledge
of the Fund the following persons owned of record and
beneficially, 5% or more of the outstanding shares of the
Portfolio as of October 6, 2000.
No. of % of
Shares Class
General Portfolio
Pershing As Agent 844,055,971 61%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
Janney Montgomery Scott 101,404,334 7.36%
As Agent Omnibus A/C For
Exclusive Benefit of Customers
1801 Market Street
Philadelphia, PA 19103
Robertson Stephens & Co. 84,478,554 6.13%
Attn: Money Fund Desk
555 California Street #2600
San Francisco, CA 94104
New York Portfolio
U.S. Clearing Corp/Omnibus Acct 81,702,281 9.63%
FBO Customers
26 Broadway 12th Floor
New York, NY 10004-1801
Pershing As Agent 495,055,322 58.32%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
119
Morgan Stanley Dean Witter Online 51,527,277 6.07%
As Agent Omnibus A/C For
Exclusive Benefit of Customers
280 W 10200 S
Sandy, UT 84070
California Portfolio
Robertson Stephens & Co. 231,402,453 26.00%
555 California Street #2600
San Francisco, CA 94104-1502
Morgan Stanley Dean Witter Online 76,960,165 8.65%
As Agent Omnibus A/C For
Exclusive Benefit of Customers
280 W 10200 S
Sandy, UT 84070
U.S. Clearing Corp/Omnibus Acct 52,643,748 5.91%
FBO Customers
26 Broadway 12th Floor
New York, NY 10004-1801
Pershing As Agent 331,547,713 37.25%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
Connecticut Portfolio
U.S. Clearing Corp/Omnibus Acct 24,952,926 14.24%
FBO Customers
26 Broadway 12th Floor
New York, NY 10004-1801
Pershing As Agent 85,165,516 48.60%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
New Jersey Portfolio
U.S. Clearing Corp/Omnibus Acct 18,077,780 6.01%
FBO Customers
26 Broadway 12th Floor
New York, NY 10004-1801
120
Pershing As Agent 210,483,519 69.96%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
Janney Montgomery Scott 18,186,184 6.04%
As Agent Omnibus A/C For
Exclusive Benefit of Customers
1801 Market Street
Philadelphia, PA 19103
Virginia Portfolio
Davenport & Co of Virginia Inc 91,528,979 65.16%
As Agent Omnibus A/C for Exclusive
Benefit of Customers
One James Center
901 E. Cary Street
Richmond, VA 23219-4057
Pershing As Agent 27,883,387 19.85%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
Florida Portfolio
U.S. Clearing Corp/Omnibus Acct 69,374,894 32.66%
FBO Customers
26 Broadway 12th Floor
New York, NY 10004-1801
Pershing As Agent 99,782,861 46.98%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
Massachusetts Portfolio
U.S. Clearing Corp/Omnibus Acct 23,749,157 23.61%
FBO Customer
26 Broadway 12th Floor
New York, NY 10004-1801
121
Pershing As Agent 31,688,022 31.50%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
Robertson Stephens & Co. 23,638,528 23.50%
Attn: Money Fund Desk
555 California Street #2600
San Francisco, CA 94104
Janney Montgomery Scott 75,026,920 93.56%
As Agent Omnibus A/C For
Exclusive Benefit of Customers
1801 Market Street
Philadelphia, PA 19103
Pershing As Agent 4,491,139 5.60%
Omnibus Account
For Exclusive Benefit of Customers
1 Pershing Plaza
Jersey City, NJ 07399-0022
Shareholder Liability. Under Massachusetts law,
shareholders could, under certain circumstances, be held
personally liable for the obligations of the Fund. However, the
Agreement and Declaration of Trust disclaims shareholder
liability for acts or obligations of the Fund and requires that
the Trustees use their best efforts to ensure that notice of such
disclaimer be given in each note, bond, contract, instrument,
certificate or undertaking made or issued by the trustees or
officers of the Fund. The Agreement and Declaration of Trust
provides for indemnification out of the property of the Fund for
all loss and expense of any shareholder of the Fund held
personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the
Fund would be unable to meet its obligations. In the view of the
Adviser, such risk is not material.
Legal Matters. The legality of the shares offered
hereby has been passed upon by Seward & Kissel LLP, New York, New
York, counsel for the Fund and the Adviser. Seward & Kissel LLP
has relied upon the opinion of Sullivan & Worcester, Boston,
Massachusetts, for matters relating to Massachusetts law.
Accountants. The Fund's independent accountants for the
fiscal year ending June 30, 2001 are PricewaterhouseCoopers LLP.
Prior to June 30, 2000 the accountants were McGladrey & Pullen
LLP.
122
Yield Quotations. Advertisements containing yield
quotations for one or more Portfolios for the Fund may from time
to time be sent to investors or placed in newspapers, magazines
or other media on behalf of the Fund. These advertisements may
quote performance rankings, ratings or data from independent
organizations or financial publications such as Lipper Analytical
Services, Inc., Morningstar, Inc., IBC's Money Fund Report, IBC's
Money Market Insight or Bank Rate Monitor or compare the Fund's
performance to bank money market deposit accounts, certificates
of deposit or various indices. Such yield quotations are
calculated in accordance with the standardized method referred to
in Rule 482 under the Securities Act of 1933.
Yield quotations for a Portfolio are thus determined by
(i) computing the net change over a seven-day period, exclusive
of the capital changes, in the value of a hypothetical pre-
existing account having a balance of one share of such Portfolio
at the beginning of such period, (ii) dividing the net change in
account value by the value of the account at the beginning of the
base period to obtain the base period return, and
(iii) multiplying the base period return by (365/7) with the
resulting yield figure carried to the nearest hundredth of one
percent. A Portfolio's effective annual yield represents a
compounding of the annualized yield according to the formula:
effective yield = [(base period return + 1) 365/7] - 1.
Reports. You will receive semi-annual and annual
reports of the Fund as well as a monthly summary of your account.
You can arrange for a copy of each of your account statements to
be sent to other parties.
Additional Information. This Statement of Additional
Information does not contain all the information set forth in the
Registration Statement filed by the Fund with the Commission
under the Securities Act of 1933. Copies of the Registration
Statement may be obtained at a reasonable charge from the
Commission or may be examined, without charge, at the
Commission's offices in Washington, D.C.
123
_______________________________________________________________
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS
______________________________________________________________
The financial statements and the report of
PricewaterhouseCoopers LLP of Alliance Municipal Trust are
incorporated herein by reference to its annual report filing made
with the SEC pursuant to Section 30(b) of the Act and Rule 30b2-1
thereunder. The annual report is dated June 30, 2000 and was
filed on August 31, 2000. It is available without charge upon
request by calling Alliance Fund Services, Inc. at
(800) 227-4618. The Fund's financial statements include the
financial statements of each of the Fund's portfolios.
124
_________________________________________________________________
APPENDIX A
DESCRIPTION OF MUNICIPAL SECURITIES
_________________________________________________________________
Municipal Notes generally are used to provide for short-
term capital needs and usually have maturities of one year or
less. They include the following:
1. Project Notes, which carry a U.S. Government
guarantee, are issued by public bodies (called "local issuing
agencies") created under the laws of a state, territory, or U.S.
possession. They have maturities that range up to one year from
the date of issuance. Project Notes are backed by an agreement
between the local issuing agency and the Federal Department of
Housing and Urban Development. These Notes provide financing for
a wide range of financial assistance programs for housing,
redevelopment, and related needs (such as low-income housing
programs and renewal programs).
2. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are
issued in anticipation of various seasonal tax revenues, such as
income, sales, use and business taxes, and are payable from these
specific future taxes.
3. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenues, such as
Federal revenues available under the Federal Revenue Sharing
Programs.
4. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In
most cases, the long-term bonds then provide the money for the
repayment of the Notes.
5. Construction Loan Notes are sold to provide
construction financing. After successful completion and
acceptance, many projects receive permanent financing through the
Federal Housing Administration under the Federal National
Mortgage Association or the Government National Mortgage
Association.
6. Tax-Exempt Commercial Paper is a short-term
obligation with a stated maturity of 365 days or less. It is
issued by agencies of state and local governments to finance
seasonal working capital needs or as short-term financing in
anticipation of longer term financing.
A-1
Municipal Bonds, which meet longer term capital needs
and generally have maturities of more than one year when issued,
have three principal classifications:
1. General Obligation Bonds are issued by such
entities as states, counties, cities, towns, and regional
districts. The proceeds of these obligations are used to fund a
wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer
systems. The basic security behind General Obligation Bonds is
the issuer's pledge of its full faith and credit and taxing power
for the payment of principal and interest. The taxes that can be
levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
2. Revenue Bonds generally are secured by the net
revenues derived from a particular facility, group of facilities,
or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue Bonds are issued to finance a
wide variety of capital projects including electric, gas, water
and sewer systems; highways, bridges, and tunnels; port and
airport facilities; colleges and universities; and hospitals.
Many of these Bonds provide additional security in the form of a
debt service reserve fund to be used to make principal and
interest payments. Housing authorities have a wide range of
security, including partially or fully insured mortgages, rent
subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. Some authorities
provide further security in the form of a state's ability
(without obligation) to make up deficiencies in the debt service
reserve fund.
3. Industrial Development Bonds are considered
municipal bonds if the interest paid thereon is exempt from
Federal income tax and are issued by or on behalf of public
authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing, sports, and
pollution control. These Bonds are also used to finance public
facilities such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on such Bonds
is dependent solely on the ability of the facility's user to meet
its financial obligations and the pledge, if any, of real and
personal property as security for such payment.
A-2
_________________________________________________________________
APPENDIX B
DESCRIPTION OF SECURITIES RATING
_________________________________________________________________
Municipal and Corporate Bonds and Municipal Loans
The two highest ratings of Moody's Investors Service,
Inc. ("Moody's") for municipal and corporate bonds are Aaa and
Aa. Bonds rated Aaa are judged by Moody's to be of the best
quality. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. Moody's states that Aa
bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat
larger than Aaa securities. The generic rating Aa may be
modified by the addition of the numerals 1, 2 or 3. The modifier
1 indicates that the security ranks in the higher end of the Aa
rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower
end of such rating category.
The two highest ratings of Standard & Poor's Corporation
("Standard & Poor's") for municipal and corporate bonds are AAA
and AA. Bonds rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest
and repay principal is extremely strong. Bonds rated AA have a
very strong capacity to pay interest and repay principal and
differ from the highest rated issues only in a small degree. The
AA rating may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within that rating category.
Short-Term Municipal Loans
Moody's highest rating for short-term municipal loans is
MIG-1/VMIG-1. Moody's states that short-term municipal
securities rated MIG-1/VMIG-1 are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the MIG-2/VMIG-2
designation are of high quality, with margins of protection ample
although not so large as in the MIG-1/VMIG-1 group.
Standard & Poor's highest rating for short-term
municipal loans is SP-1. Standard & Poor's states that short-
term municipal securities bearing the SP-1 designation have very
strong or strong capacity to pay principal and interest. Those
issues rated SP-1 which are determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
B-1
Issues rated SP-2 have satisfactory capacity to pay principal and
interest.
Other Municipal Securities and Commercial Paper
"Prime-1" is the highest rating assigned by Moody's for
other short-term municipal securities and commercial paper, and
"A-1+" and "A-1" are the two highest ratings for commercial paper
assigned by Standard & Poor's (Standard & Poor's does not rate
short-term tax-free obligations). Moody's uses the numbers 1, 2
and 3 to denote relative strength within its highest
classification of "Prime", while Standard & Poor's uses the
number 1+, 1, 2 and 3 to denote relative strength within its
highest classification of "A". Issuers rated "Prime" by Moody's
have the following characteristics: their short-term debt
obligations carry the smallest degree of investment risk, margins
of support for current indebtedness are large or stable with cash
flow and asset protection well assured, current liquidity
provides ample coverage of near-term liabilities and unused
alternative financing arrangements are generally available.
While protective elements may change over the intermediate or
longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations.
Commercial paper issuers rated "A" by Standard & Poor's have the
following characteristics: liquidity ratios are better than
industry average, long-term debt rating is A or better, the
issuer has access to at least two additional channels of
borrowing, and basic earnings and cash flow are in an upward
trend. Typically, the issuer is a strong company in a well-
established industry and has superior management.
B-2
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) (1) Agreement and Declaration of Trust of the
Registrant - Incorporated by reference to Exhibit
No. 1(a) to Post-Effective Amendment No. 35 of
Registrant's Registration Statement on Form N-1A
(File Nos. 2-79807 and 811-3586) filed with the
Securities and Exchange Commission on October 30,
1997.
(2) Certificate of Amendment of the Agreement and
Declaration of Trust of the Registrant dated
October 31, 1991 - Incorporated by reference to
Exhibit No. 1(b) to Post-Effective Amendment No. 35
of Registrant's Registration Statement on Form N-1A
(File Nos. 2-79807 and 811-3586) filed with the
Securities and Exchange Commission on October 30,
1997.
(3) Certificate of Designation dated January 26, 1994 -
Incorporated by reference to Exhibit (a)(3) to
Post-Effective Amendment No. 40 of the Registrant's
Registration Statement (Filed Nos. 2-79807 and 811-
3586) filed with the Securities and Exchange
Commission on June 23, 2000.
(4) Certificate of Designation dated September 9, 1994
- Incorporated by reference to Exhibit (a)(4) to
Post-Effective Amendment No. 40 of the Registrant's
Registration Statement (Filed Nos. 2-79807 and 811-
3586) filed with the Securities and Exchange
Commission on June 23, 2000.
(5) Certificate of Designation dated June 12, 1995 -
Incorporated by reference to Exhibit (a)(5) to
Post-Effective Amendment No. 40 of the Registrant's
Registration Statement (Filed Nos. 2-79807 and 811-
3586) filed with the Securities and Exchange
Commission on June 23, 2000.
(6) Certificate of Designation dated April 14, 1997 -
Incorporated by reference to Exhibit (a)(6) to
Post-Effective Amendment No. 40 of the Registrant's
Registration Statement (Filed Nos. 2-79807 and 811-
3586) filed with the Securities and Exchange
Commission on June 23, 2000.
C-1
(7) Certificate of Designation dated June 13, 2000 -
Incorporated by reference to Exhibit (a)(7) to
Post-Effective Amendment No. 40 of the Registrant's
Registration Statement (File Nos. 2-79807 and 811-
3586) filed with the Securities and Exchange
Commission on June 23, 2000.
(8) Certificate of Designation dated October 25, 2000 -
Incorporated by reference to Exhibit (a)8 to
Post-Effective Amendment No. 42 of the Registrants
Registration Statement (File Nos. 2-79807 and
811-3586) filed with the Securities and Exchange
Commission on October 27, 2000.
(b) By-Laws of the Registrant - Incorporated by reference to
Exhibit No. 2 to Post-Effective Amendment No. 35 of
Registrant's Registration Statement on Form N-1A (File
Nos. 2-79807 and 811-3586) filed with the Securities and
Exchange Commission on October 30, 1997.
(c) Not applicable.
(d) Advisory Agreement between the Registrant and Alliance
Capital Management L.P. - Incorporated by reference to
Exhibit No. 5 to Post-Effective Amendment No. 35 of
Registrant's Registration Statement on Form N-1A (File
Nos. 2-79807 and 811-3586) filed with the Securities and
Exchange Commission on October 30, 1997.
(e) Distribution Services Agreement between the Registrant
and Alliance Fund Distributors, Inc., amended as of
January 1, 1998 - Incorporated by reference to Exhibit
No. 6 to Post-Effective Amendment No. 36 of Registrant's
Registration Statement on Form N-1A (File Nos. 2-79807
and 811-3586) filed with the Securities and Exchange
Commission on October 29, 1998.
(f) Not applicable.
(g) (1) Custodian Contract between the Registrant and
Street Bank and Trust Company - Incorporated by
reference to Exhibit No. 8(a) to Post-Effective
Amendment No. 35 of Registrant's Registration
Statement on Form N-1A (File Nos. 2-79807 and
811-3586) filed with the Securities and Exchange
Commission on October 30, 1997.
(2) Amendment to the Custodian Contract between the
Registrant and State Street Bank and Trust Company
dated May 23, 1989 - Incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No. 35 of
C-2
Registrant's Registration Statement on Form N-1A
(File Nos. 2-79807 and 811-3586) filed with the
Securities and Exchange Commission on October 30,
1997.
(h) Transfer Agency Agreement between the Registrant and
Alliance Fund Services, Inc. - Incorporated by reference
to Exhibit No. 9 to Post-Effective Amendment No. 35 of
Registrant's Registration Statement on Form N-1A (File
Nos. 2-79807 and 811-3586) filed with the Securities and
Exchange Commission on October 30, 1997.
(i) Opinion of Seward & Kissel LLP - Filed herewith.
(j) Consent of Independent Accounts - Filed herewith.
(k) Not applicable.
(l) Not applicable.
(m) Rule 12b-1 Plan - See Exhibit (e) hereto.
(n) Not applicable.
(p) Not applicable.
Other Exhibits:
Powers of Attorney of: John D. Carifa, Sam Y. Cross,
Charles H. P. Duell, William H. Foulk, Jr., David K.
Storrs, Shelby White, Dave H. Williams - Incorporated by
reference to Other Exhibits to Post-Effective Amendment
No. 36 of Registrant's Registration Statement on Form
N-1A (File Nos. 2-79807 and 811-3586) filed with the
Securities and Exchange Commission on October 29, 1998.
Item 24. Persons Controlled by or Under Common Control with
Registrant.
None.
Item 25. Indemnification
It is the Registrant's policy to indemnify its trustees
and officers, employees and other agents as set forth in
Article V of Registrant's Agreement and Declaration of
Trust, filed as Exhibit (a) in response to Item 23 and
Section 7 of the Distribution Agreement filed as Exhibit
(e) in response to Item 23, all as set forth below. The
liability of the Registrant's trustees and officers is
also dealt with in Article V of Registrant's Agreement
and Declaration of Trust. The Adviser's liability for
C-3
loss suffered by the Registrant or its shareholders is
set forth in Section 4 of the Advisory Agreement filed
as Exhibit (d) in response to Item 23, as set forth
below.
Article V of Registrant's Agreement and Declaration of Trust
reads as follows:
Section 5.1 - No Personal Liability of Shareholders,
Trustees, etc. No Shareholder shall be subject to any
personal liability whatsoever to any Person in
connection with Trust Property, including the property
of any series of the Trust, or the acts, obligations or
affairs of the Trust or any series thereof. No Trustee,
officer, employee or agent of the Trust shall be subject
to any personal liability whatsoever to any Person,
other than the Trust or applicable series thereof or its
Shareholders, in connection with Trust Property or the
property of any series thereof or the affairs of the
Trust or any series thereof, save only that arising from
bad faith, willful misfeasance, gross negligence or
reckless disregard for his duty to such Person; and all
such Persons shall look solely to the Trust Property or
the property of the appropriate series of the Trust for
satisfaction of claims of any nature arising in
connection with the affairs of the Trust or any series
thereof. If any Shareholder, Trustee, officer, employee
or agent, as such, of the Trust is made a party to any
suit or proceeding to enforce any such liability, he
shall not, on account thereof, be held to any personal
liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims by
reason of his being or having been a Shareholder, and
shall reimburse such Shareholder for all legal and other
expenses reasonably incurred by him in connection with
any such claim or liability, provided that any such
expenses shall be paid solely out of the funds and
property of the series of the Trust with respect to
which such Shareholder's Shares are issued. The rights
accruing to a Shareholder under this Section 5.1 shall
not exclude any other right to which such Shareholder
may be lawfully entitled, nor shall anything herein
contained restrict the right of the Trust to indemnify
or reimburse a Shareholder in any appropriate situation
even though not specifically provided herein.
Section 5.2 - Non-Liability of Trustees, etc. No
Trustee, officer, employee or agent of the Trust shall
be liable to the Trust, its Shareholders, or to any
Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including
C-4
without limitation the failure to compel in any way any
former or acting Trustee to redress any breach of trust)
except for his own bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties.
Section 5.3 - Indemnification.
(a) The Trustees shall provide for indemnification by
the Trust (or by the appropriate series thereof) of
every person who is, or has been, a Trustee or officer
of the Trust against all liability and against all
expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by
virtue of his being or having been a Trustee or officer
and against amounts paid or incurred by him in the
settlement thereof, in such manner as the Trustees may
provide from time to time in the By-Laws.
(b) The words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits
or proceedings (civil, criminal, or other, including
appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other
liabilities.
Section 5.4 - No Bond Required of Trustees. No Trustee
shall be obligated to give any bond or other security
for performance of any of his duties hereunder.
Section 5.5 - No Duty of Investigation; Notice in Trust
Instruments, Insurance. No purchaser, lender, transfer
agent or other Person dealing with the Trustees or any
officer, employee or agent of the Trust shall be bound
to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by
said officer, employee or agent or be liable for the
application of money or property paid, loaned, or
delivered to or on the order of the Trustees or of said
officer, employee or agent. Every obligation, contract,
instrument, certificate, Share, other security of the
Trust or undertaking, and every other act or thing
whatsoever executed in connection with the Trust shall
be conclusively presumed to have been executed or done
by the executors thereof only in their capacity as
Trustees under the Declaration or in their capacity as
officers, employees or agents of the Trust. Every
written obligation, contract, instrument, certificate,
Share, other security of the Trust or undertaking made
or issued by the Trustees shall recite that the same is
C-5
executed or made by them not individually, but as
Trustees under the Declaration, and that the obligations
of any such instrument are not binding upon any of the
Trustees or Shareholders, individually, but bind only
the Trust Property or the property of the appropriate
series of the Trust, and may contain any further recital
which they or he may deem appropriate, but the omission
of such recital shall not operate to bind the Trustees
or Shareholders individually. The Trustees shall at all
times maintain insurance for the protection of the Trust
Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees
shall deem adequate to cover possible tort liability,
and such other insurance as the Trustees in their sole
judgment shall deem advisable.
Section 5.6 - Reliance on Experts, etc. Each Trustee
and officer or employee of the Trust shall, in the
performance of his duties, be fully and completely
justified and protected with regard to any act or any
failure to act resulting from reliance in good faith
upon the books of account or other records of the Trust,
upon an opinion of counsel or upon reports made to the
Trust by any of its officers or employees or by the
Investment Adviser, the Distributor, Transfer Agent,
selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by
the Trustees, officers or employees of the Trust,
regardless of whether such counsel or expert may also be
a Trustee.
The Advisory Agreement between Registrant and Alliance
Capital Management L.P. provides that Alliance Capital
Management L.P. will not be liable under such agreement
for any mistake of judgment or in any event whatsoever
except for lack of good faith and that nothing therein
shall be deemed to protect, or purport to protect,
Alliance Capital Management L.P. against any liability
to Registrant or its security holders to which it would
otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its
duties thereunder, or by reason of reckless disregard of
its obligations and duties thereunder.
The Distribution Agreement between the Registrant and
Alliance Fund Distributors, Inc. provides that the
Registrant will indemnify, defend and hold Alliance Fund
Distributors, Inc., and any person who controls it
within the meaning of Section 15 of the Investment
Company Act of 1940, free and harmless from and against
any and all claims, demands, liabilities and expenses
C-6
which Alliance Fund Distributors, Inc. or any
controlling person may incur arising out of or based
upon any alleged untrue statement of a material fact
contained in Registrant's Registration Statement or
Prospectus or Statement of Additional Information or
arising out of, or based upon any alleged omission to
state a material fact required to be stated in or
necessary to make the statements in either thereof not
misleading; provided, however that nothing therein shall
be so construed as to protect Alliance Fund
Distributors, Inc. against any liability to Registrant
or its security holders to which it would otherwise be
subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties
thereunder, or by reason of reckless disregard of its
obligations and duties thereunder.
The foregoing summaries are qualified by the entire text
of Registrant's Agreement and Declaration of Trust, the
Advisory Agreement between Registrant and Alliance
Capital Management L.P. and the Distribution Agreement
between Registrant and Alliance Fund Distributors, Inc.
Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to trustees,
officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection
with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of
whether such indemnification by it is against public
policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
In accordance with Release No. IC-11330 (September 2,
1980) the Registrant will indemnify its directors,
officers, investment manager and principal underwriters
only if (1) a final decision on the merits was issued by
the court or other body before whom the proceeding was
brought that the person to be indemnified (the
C-7
"indemnitee") was not liable by reason or willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office ("disabling conduct") or (2) a reasonable
determination is made, based upon a review of the facts,
that the indemnitee was not liable of disabling conduct,
by (a) the vote of a majority of a quorum of the
directors who are neither "interested persons" of the
Registrant as defined in section 2(a)(19) of the
Investment Company Act of 1940 nor parties to the
proceeding ("disinterested, non-party directors"), or
(b) an independent legal counsel in a written opinion.
The Registrant will advance attorneys fees or other
expenses incurred by its directors, officers, investment
adviser or principal underwriters in defending a
proceeding, upon the undertaking by or on behalf of the
indemnitee to repay the advance unless it is ultimately
determined that he is entitled to indemnification and,
as a condition to the advance, (1) the indemnitee shall
provide a security for his undertaking, (2) the
Registrant shall be insured against losses arising by
reason of any lawful advances, or (3) a majority of a
quorum of disinterested, non-party directors of the
Registrant, or an independent legal counsel in a written
opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the
indemnitee ultimately will be found entitled to
indemnification.
The Registrant participates in a joint directors and
officers liability insurance policy issued by the ICI
Mutual Insurance Company. Coverage under this policy
has been extended to directors, trustees and officers of
the investment companies managed by Alliance Capital
Management L.P. Under this policy, outside trustees and
directors would be covered up to the limits specified
for any claim against them for acts committed in their
capacities as trustee or director. A pro rata share of
the premium for this coverage is charged to each
investment company.
Item 26. Business and Other Connections of Investment Adviser.
The descriptions of Alliance Capital Management L.P.
under the caption "The Adviser" in the Prospectus and
"Management of the Fund" in the Prospectus and in the
Statement of Additional Information constituting Parts A
and B, respectively, of this Registration Statement are
incorporated by reference herein.
C-8
The information as to the directors and executive
officers of Alliance Capital Management Corporation, the
general partner of Alliance Capital Management L.P., set
forth in Alliance Capital Management L.P.'s Form ADV
filed with the Securities and Exchange Commission on
April 21, 1988 (File No. 801-32361) and amended through
the date hereof, is incorporated by reference.
ITEM 27. Principal Underwriters
(a) Alliance Fund Distributors, Inc., the Registrant's
Principal Underwriter in connection with the sale
of shares of the Registrant. Alliance Fund
Distributors, Inc. also acts as Principal
Underwriter or Distributor for the following
investment companies:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Government Reserves
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Health Care Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance Institutional Funds, Inc.
Alliance Institutional Reserves, Inc.
Alliance International Fund
Alliance International Premier Growth Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Money Market Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
Alliance Municipal Income Fund II
Alliance Municipal Trust
Alliance New Europe Fund, Inc.
Alliance North American Government Income
Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Select Investor Series, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
C-9
Alliance Variable Products Series Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
(b) The following are the Directors and Officers of
Alliance Fund Distributors, Inc., the principal
place of business of which is 1345 Avenue of the
Americas, New York, New York, 10105.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
Michael J. Laughlin Director and Chairman
John D. Carifa Director [President],
Director/Trustee
Robert L. Errico Director and President
Geoffrey L. Hyde Director and Senior Vice
President
Dave H. Williams Director
David Conine Executive Vice President
Richard K. Saccullo Executive Vice President
Edmund P. Bergan, Jr. Senior Vice President, Secretary Clerk
General Counsel and
Secretary
Richard A. Davies Senior Vice President
Managing Director
Robert H. Joseph, Jr. Senior Vice President and
Chief Financial Officer
Anne S. Drennan Senior Vice President &
Treasurer
Benji A. Baer Senior Vice President
John R. Bonczek Senior Vice President
Karen J. Bullot Senior Vice President
John R. Carl Senior Vice President
C-10
James S. Comforti Senior Vice President
James L. Cronin Senior Vice President
Byron M. Davis Senior Vice President
Mark J. Dunbar Senior Vice President
Donald N. Fritts Senior Vice President
Andrew L. Gangolf Senior Vice President Assistant
and Assistant General Secretary/
Counsel Assistant Clerk
Bradley F. Hanson Senior Vice President
George H. Keith Senior Vice President
Richard E. Khaleel Senior Vice President
Stephen R. Laut Senior Vice President
Susan L. Matteson-King Senior Vice President
Daniel D. McGinley Senior Vice President
Antonios G. Poleondakis Senior Vice President
Robert E. Powers Senior Vice President
Domenick Pugliese Senior Vice President Assistant
and Assistant General Secretary/
Counsel Assistant Clerk
Kevin A. Rowell Senior Vice President
John P. Schmidt Senior Vice President
Raymond S. Sclafani Senior Vice President
Gregory K. Shannahan Senior Vice President
Scott C. Sipple Senior Vice President
Joseph F. Sumanski Senior Vice President
Peter J. Szabo Senior Vice President
William C. White Senior Vice President
Richard A. Winge Senior Vice President
C-11
Emilie D. Wrapp Senior Vice President and
Assistant General Counsel
Gerard J. Friscia Vice President &
Controller
Ricardo Arreola Vice President
Kenneth F. Barkoff Vice President
Adam J. Barnett Vice President
Charles M. Barrett Vice President
Matthew F. Beaudry Vice President
(R)Leo Benitez Vice President
Gregory P. Best Vice President
Dale E. Boyd Vice President
Robert F. Brendli Vice President
Christopher L. Butts Vice President
Thomas C. Callahan Vice President
Kevin T. Cannon Vice President
John M. Capeci Vice President
John P. Chase Vice President
Doris T. Ciliberti Vice President
William W. Collins, Jr. Vice President
Leo H. Cook Vice President
Russell R. Corby Vice President
John W. Cronin Vice President
Robert J. Cruz Vice President
Richard W. Dabney Vice President
Daniel J. Deckman Vice President
Sherry V. Delaney Vice President
C-12
Richard P. Dyson Vice President
John C. Endahl Vice President
John E. English Vice President
Sohaila S. Farsheed Vice President
Daniel J. Frank Vice President
Shawn C. Gage Vice President
Joseph C. Gallagher Vice President
Michael J. Germain Vice President
Mark D. Gersten Vice President Treasurer and
Chief Financial
Officer
Hyman Glasman Vice President
John Grambone Vice President
Charles M. Greenberg Vice President
Alan Halfenger Vice President
William B. Hanigan Vice President
Michael S. Hart Vice President
Scott F. Heyer Vice President
Timothy A. Hill Vice President
Brian R. Hoegee Vice President
George R. Hrabovsky Vice President
Michael J. Hutten Vice President
Scott Hutton Vice President
Oscar J. Isoba Vice President
Richard D. Keppler Vice President
Richard D. Kozlowski Vice President
Daniel W. Krause Vice President
C-13
Donna M. Lamback Vice President
P. Dean Lampe Vice President
Henry Michael Lesmeister Vice President
Eric L. Levinson Vice President
James M. Liptrot Vice President
James P. Luisi Vice President
Michael F. Mahoney Vice President
Kathryn Austin Masters Vice President
Shawn P. McClain Vice President
David L. McGuire Vice President
Jeffrey P. Mellas Vice President
Michael V. Miller Vice President
Thomas F. Monnerat Vice President
Timothy S. Mulloy Vice President
Joanna D. Murray Vice President
Michael F. Nash, Jr. Vice President
Timothy H. Nasworthy Vice President
Nicole Nolan-Koester Vice President
Daniel A. Notto Vice President
Peter J. O'Brien Vice President
John C. O'Connell Vice President
John J. O'Connor Vice President
Daniel P. O'Donnell Vice President
Richard J. Olszewski Vice President
Catherine N. Peterson Vice President
Jeffrey R. Petersen Vice President
C-14
James J. Posch Vice President
Bruce W. Reitz Vice President
Jeffrey B. Rood Vice President
Karen C. Satterberg Vice President
Robert C. Schultz Vice President
Richard J. Sidell Vice President
Clara Sierra Vice President
Teris A. Sinclair Vice President
Jeffrey C. Smith Vice President
David A. Solon Vice President
Martine H. Stansbery, Jr. Vice President
Eileen Stauber Vice President
Michael J. Tobin Vice President
Joseph T. Tocyloski Vice President
Benjamin H. Travers Vice President
David R. Turnbough Vice President
Andrew B. Vaughey Vice President
Wayne W. Wagner Vice President
Mark E. Westmoreland Vice President
Paul C. Wharf Vice President
Stephen P. Wood Vice President
Keith A. Yoho Vice President
Michael W. Alexander Assistant Vice President
Richard J. Appaluccio Assistant Vice President
Paul G. Bishop Assistant Vice President
Mark S. Burns Assistant Vice President
C-15
Maria L. Carreras Assistant Vice President
Judith A. Chin Assistant Vice President
Jorge Ciprian Assistant Vice President
William P. Condon Assistant Vice President
Jean A. Coomber Assistant Vice President
Dorsey Davidge Assistant Vice President
Ralph A. DiMeglio Assistant Vice President
Faith C. Deutsch Assistant Vice President
Timothy J. Donegan Assistant Vice President
Joan Eilbott Assistant Vice President
Adam E. Engelhardt Assistant Vice President
Michael J. Eustic Assistant Vice President
Michele Grossman Assistant Vice President
Arthur F. Hoyt, Jr. Assistant Vice President
David A. Hunt Assistant Vice President
Theresa Iosca Assistant Vice President
Erik A. Jorgensen Assistant Vice President
Eric G. Kalender Assistant Vice President
Elizabeth E. Keefe Assistant Vice President
Edward W. Kelly Assistant Vice President
Victor Kopelakis Assistant Vice President
Jeffrey M. Kusterer Assistant Vice President
Alexandra C. Landau Assistant Vice President
Laurel E. Lindner Assistant Vice President
Evamarie C. Lombardo Assistant Vice President
Amanda C. McNichol Assistant Vice President
C-16
Richard F. Meier Assistant Vice President
Charles B. Nanick Assistant Vice President
Alex E. Pady Assistant Vice President
Raymond E. Parker Assistant Vice President
Wandra M. Perry-Hartsfield Assistant Vice President
Rizwan A. Raja Assistant Vice President
Carol H. Rappa Assistant Vice President
Brendan J. Reynolds Assistant Vice President
James A. Rie Assistant Vice President
Lauryn A. Rivello Assistant Vice President
Christina Santiago Assistant Vice Assistant Vice
President and Counsel President and
and Counsel Counsel
Nancy D. Testa Assistant Vice President
Margaret M. Tompkins Assistant Vice President
Marie R. Vogel Assistant Vice President
Nina C. Wilkinson Assistant Vice President
Wesley S. Williams Assistant Vice President
Matthew Witschel Assistant Vice President
Mark R. Manley Assistant Secretary
(c) Not applicable.
ITEM 28. Location of Accounts and Records.
The majority of the accounts, books and other
documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the
Rules thereunder are maintained as follows:
journals, ledgers, securities records and other
original records are maintained principally at the
offices of Alliance Fund Services, Inc. 500 Plaza
Drive, Secaucus, New Jersey 07094 and at the
offices of State Street Bank and Trust Company, the
C-17
Registrant's Custodian, 225 Franklin Street,
Boston, Massachusetts 02110. All other records so
required to be maintained are maintained at the
offices of Alliance Capital Management L.P., 1345
Avenue of the Americas, New York, New York 10105.
ITEM 29. Management Services.
Not applicable.
ITEM 30. Undertakings.
The Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's latest report to shareholders, upon
request and without charge.
The Registrant undertakes to provide assistance to
shareholders in communications concerning the
removal of any Trustee of the Fund in accordance
with Section 16 of the Investment Company Act of
1940.
C-18
SIGNATURE
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 27th day of October 2000.
ALLIANCE MUNICIPAL TRUST
By /s/ Ronald M. Whitehill
________________________
Ronald M. Whitehill
President
Pursuant to the requirements of the Securities Act of
1933, as amended, this Amendment to the Registration Statement
has been signed below by the following persons in the capacities
and on the dates indicated:
Signature Title Date
1) Principal
Executive Officer
/s/ Ronald M. Whitehill President October 27, 2000
_________________
Ronald M. Whitehill
2) Principal Financial and
Accounting Officer
/s/ Mark D. Gersten Treasurer October 27, 2000
____________________ and Chief
Mark D. Gersten Financial
Officer
C-19
3) All of the Trustees
John D. Carifa David K. Storrs
Sam Y. Cross Shelby White
Charles H.P. Duell Dave H. Williams
William H. Foulk, Jr.
By /s/ Edmund P. Bergan, Jr. October 27, 2000
_________________________
(Attorney-in-fact)
Edmund P. Bergan, Jr.
C-20
Index to Exhibits
(i) Opinion of Seward & Kissel LLP
(j) Consent of Independent Accountants
C-21
00250185.AQ0
