TAX FREE MUTUAL FUNDS
VOYAGEUR
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ARIZONA TAX FREE FUNDS
CALIFORNIA TAX FREE FUNDS
COLORADO TAX FREE FUNDS
FLORIDA TAX FREE FUNDS
IDAHO TAX FREE FUND
IOWA TAX FREE FUND
KANSAS TAX FREE FUND
MINNESOTA TAX FREE FUNDS
MISSOURI INSURED TAX FREE FUND
NEW MEXICO TAX FREE FUND
NORTH DAKOTA TAX FREE FUND
OREGON INSURED TAX FREE FUND
UTAH TAX FREE FUND
WASHINGTON INSURED TAX FREE FUND
WISCONSIN TAX FREE FUND
NATIONAL TAX FREE FUNDS
Voyageur Funds (Not part of prospectus)
TABLE OF CONTENTS
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3 Fees and Expenses
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6 Financial Highlights
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11 The Funds
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11 Investment Objectives and Policies
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21 Risks and Special Investment Considerations
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24 Investment Restrictions
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24 How to Purchase Shares
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30 How to Sell Shares
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33 Reinstatement Privilege
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33 Exchange Privilege
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33 Management
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36 Determination of Net Asset Value
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37 Distributions to Shareholders and Taxes
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42 Investment Performance
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43 General Information
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Voyageur Funds (Not part of prospectus)
PROSPECTUS
DATED APRIL 30, 1996 AS SUPPLEMENTED JUNE 3, 1996
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Each of the funds listed on this page (individually, a "Fund" and together, the
"Funds") is a series of an open end management investment company, commonly
referred to as a mutual fund. Three styles of funds are contained in this
combined Prospectus: limited term tax free funds (the "Limited Term Tax Free
Funds"), longer term tax free funds (the "Tax Free Funds") and longer term
insured tax free funds (the "Insured Funds"). The investment objective of each
Limited Term Tax Free Fund is to provide investors with preservation of capital
and, secondarily, current income exempt from federal income tax and (except for
the "national" fund) the personal income tax, if any, of the Fund's particular
state, by maintaining a weighted average portfolio maturity of 10 years or less.
The investment objective of each Tax Free Fund and Insured Fund is to seek as
high a level of current income exempt from federal income tax and (except for
the "national" fund) from the personal income tax, if any, of the Fund's
particular state, as is consistent with preservation of capital. The weighted
average maturity of the investment portfolio of each Tax Free Fund and Insured
Fund is expected to be approximately 15 to 25 years. There is no assurance that
any Fund will achieve its investment objective.
Tax Exempt Obligations (as defined herein) in the investment
portfolios of the Insured Funds consist primarily of insured securities and
"escrow secured" or "defeased" bonds. Insurance on portfolio securities does not
guarantee the market value of such securities or the value of the Insured Funds'
shares. See "Investment Objectives and Policies--Insured Funds."
<TABLE>
<CAPTION>
<S> <C>
Voyageur Arizona Limited Term Tax Free Fund Voyageur Kansas Tax Free Fund
Voyageur Arizona Insured Tax Free Fund(1) Voyageur Minnesota Limited Term Tax Free Fund(1)
Voyageur Arizona Tax Free Fund Voyageur Minnesota Insured Fund(1)
Voyageur California Limited Term Tax Free Fund Voyageur Minnesota Tax Free Fund(1)
Voyageur California Insured Tax Free Fund(1) Voyageur Missouri Insured Tax Free Fund
Voyageur California Tax Free Fund Voyageur New Mexico Tax Free Fund
Voyageur Colorado Limited Term Tax Free Fund Voyageur North Dakota Tax Free Fund
Voyageur Colorado Insured Tax Free Fund Voyageur Oregon Insured Tax Free Fund
Voyageur Colorado Tax Free Fund(1) Voyageur Utah Tax Free Fund
Voyageur Florida Limited Term Tax Free Fund Voyageur Washington Insured Tax Free Fund
Voyageur Florida Insured Tax Free Fund(1) Voyageur Wisconsin Tax Free Fund
Voyageur Florida Tax Free Fund Voyageur National Limited Term Tax Free Fund(1)
Voyageur Idaho Tax Free Fund Voyageur National Insured Tax Free Fund(1)
Voyageur Iowa Tax Free Fund Voyageur National Tax Free Fund(1)
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</TABLE>
(1) Diversified series
The Funds' investment adviser is Voyageur Fund Managers, Inc. ("Voyageur"). The
address of Voyageur and the Funds is 90 South Seventh Street, Suite 4400,
Minneapolis, Minnesota 55402.
AN INVESTMENT IN ANY OF THE FUNDS IS NOT A DEPOSIT OR OBLIGATION OF,
OR GUARANTEED OR ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE
UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER FEDERAL AGENCY. AN INVESTMENT IN ANY OF THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL DUE TO
FLUCTUATIONS IN THE APPLICABLE FUND'S NET ASSET VALUE.
This Prospectus sets forth certain information about the Funds that
a prospective investor ought to know before investing. Investors should read and
retain this Prospectus for future reference. The Funds have filed a Statement of
Additional Information (dated April 30, 1996 as supplemented June 3, 1996) with
the Securities and Exchange Commission. The Statement of Additional Information
is available free of charge by telephone (800-553-2143) and is incorporated by
reference herein in its entirety.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1 Voyageur Funds (Prospectus)
The Funds offer investors a choice among classes of shares which
offer different sales charges and bear different expenses. These alternatives
permit an investor to choose the method of purchasing shares that is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances.
CLASS A SHARES
An investor who purchases Class A shares pays a sales charge at the time of
purchase. As a result, Class A shares are not subject to any charges when they
are redeemed (except for sales at net asset value in excess of $1 million or
sales subject to special promotions identified from time to time by Voyageur
which in either case are subject to a contingent deferred sales charge). The
initial sales charge may be reduced or waived for certain purchases. Class A
shares of each Fund are subject to a Rule 12b-1 fee payable at an annual rate of
.25% of a Fund's average daily net assets attributable to Class A shares. See
"How to Purchase Shares--Class A Shares."
CLASS B SHARES
Class B shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5% if redeemed within six years of
purchase. Class B shares are also subject to a higher Rule 12b-1 fee than Class
A shares. The Rule 12b-1 fee for Class B shares will be paid at an annual rate
of 1% of a Fund's average daily net assets attributable to Class B shares. Class
B shares will automatically convert to Class A shares at net asset value
approximately eight years after purchase. Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made but until conversion will have a higher expense ratio and pay
lower dividends than Class A shares due to the higher Rule 12b-1 fee. See "How
to Purchase Shares--Class B Shares."
CLASS C SHARES
Class C shares are sold without an initial sales charge but are subject to a
contingent deferred sales charge of up to 1% if redeemed within one year of
purchase. Class C shares are also subject to a higher Rule 12b-1 fee than Class
A shares. The Rule 12b-1 fee for Class C shares of each Fund will be paid at an
annual rate of 1% of the Fund's average daily net assets attributable to Class C
shares. Class C shares provide an investor the benefit of putting all of the
investor's dollars to work from the time the investment is made, but will have a
higher expense ratio and pay lower dividends than Class A shares due to the
higher Rule 12b-1 fee. See "How to Purchase Shares--Class C Shares." Class C
shares do not convert to any other class of shares.
The decision as to which class of shares provides a more suitable
investment for an investor depends on a number of factors, including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Other investors might
consider Class B or Class C shares because all of the purchase price is invested
immediately. Voyageur will treat orders for Class B shares for $250,000 or more
as orders for Class A shares or such orders will be declined. Sales personnel
may receive different compensation depending on which class of shares they sell.
SHARES OF THE FUNDS COVERED BY THIS PROSPECTUS ARE NOT REGISTERED IN ALL STATES.
SHARES THAT ARE NOT REGISTERED IN ONE OR MORE STATES ARE NOT BEING OFFERED AND
SOLD IN SUCH STATES.
2 Voyageur Funds (Prospectus)
FEES AND EXPENSES
<TABLE>
<CAPTION>
Voyageur Funds4
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Shareholder Transaction Annual Fund Operating Expenses
Expenses as a Percentage of Average Net Assets Total Fund
------------------------ After Fee Waivers and Operating
Maximum Reimbursement Arrangements Expenses
Front End Maximum ---------------------------------------------- Without
Sales Load CDSC Total Fund Voluntary
Imposed on Imposed on Management Other Operating Waiver and
Purchases Redemptions Fee 12b-1 Fee Expenses Expenses Reimbursement(5)
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<S> <C> <C> <C> <C> <C> <C> <C>
STATE LONG TERM FUNDS
Arizona Tax Free - Class A 3.75% 1.00%(2) 0.50% 0.25% 0.25% 1.00% 1.25%
Arizona Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 2.00
Arizona Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
California Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.22
California Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.93
California Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.93
Colorado Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 0.93
Colorado Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.60
Colorado Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.66
Florida Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.25
Florida Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 2.00
Florida Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
Idaho Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.25
Idaho Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.90
Idaho Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
Iowa Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.06
Iowa Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.65
Iowa Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.72
Kansas Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.11
Kansas Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.68
Kansas Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.79(2)
Minnesota Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.18 0.93 0.93
Minnesota Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.18 1.68 1.63
Minnesota Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.18 1.68 1.72
New Mexico Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.09
New Mexico Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.83
New Mexico Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.84
North Dakota Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.05
North Dakota Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.79
North Dakota Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.73
Utah Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.25
Utah Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 2.00
Utah Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
Wisconsin Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.09
Wisconsin Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.70
Wisconsin Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.77
STATE INSURED FUNDS
Arizona Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 0.95
Arizona Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.60
Arizona Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.69
California Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.02
California Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.75
California Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.77
Colorado Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.25
Colorado Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 2.00
Colorado Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
Florida Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 0.95
Florida Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.68
Florida Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.70
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</TABLE>
(table continued from above)
----------------------------------------
Example of Expenses
An investor in a Voyageur Fund would pay
the following dollar amount of expenses on
a $1,000 investment assuming
(a) a 5% annual return and
(b) redemption at the end of each period
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
------------------------------------------
$47 $68 $91 $155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 66 87 148
67(3) 93(3) 111(3) 179
27(3) 53 91 199
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
----------------------------------------
3 Voyageur Funds (Prospectus)
FEES AND EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
Voyageur Funds(4)
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Shareholder Transaction Annual Fund Operating Expenses
Expenses as a Percentage of Average Net Assets Total Fund
------------------------ After Fee Waivers and Operating
Maximum Reimbursement Arrangements Expenses
Front End Maximum ---------------------------------------------- Without
Sales Load CDSC Total Fund Voluntary
Imposed on Imposed on Management Other Operating Waiver and
Purchases Redemptions Fee 12b-1 Fee Expenses Expenses Reimbursement(5)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATE INSURED FUNDS (CONTINUED)
Minnesota Insured - Class A 3.75% 1.00%(2) 0.50% 0.25% 0.25% 1.00% 0.92%
Minnesota Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.64
Minnesota Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.67
Missouri Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.07
Missouri Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.81
Missouri Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.55
Oregon Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.11
Oregon Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.86
Oregon Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.74
Washington Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.25
Washington Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 2.00
Washington Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
STATE LIMITED TERM FUNDS
Arizona Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
Arizona Limited Term - Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
Arizona Limited Term- Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
California Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
California Limited Term- Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
California Limited Term - Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
Colorado Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
Colorado Limited Term- Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
Colorado Limited Term- Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
Florida Limited - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
Florida Limited - Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
Florida Limited - Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
Minnesota Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.26 0.91 0.91
Minnesota Limited Term - Class B N/A(1) 4.00 0.40 1.00 0.26 1.66 1.55
Minnesota Limited Term - Class C N/A(1) 0.50 0.40 1.00 0.26 1.66 1.63
NATIONAL FUNDS
National Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.25
National Tax Free - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 2.00
National Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
National Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.16
National Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 1.81
National Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 1.40
National Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
National Limited Term - Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
National Limited Term - Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
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</TABLE>
(TABLE CONTINUED FROM ABOVE)
- ----------------------------------------
Example of Expenses
An investor in a Voyageur Fund would pay
the following dollar amount of expenses on
a $1,000 investment assuming
(a) a 5% annual return and
(b) redemption at the end of each period
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------
$47 $68 $91 $155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
37 56 77 136
57(3) 82(3) 100(3) 176
22(3) 52 90 197
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
- -----------------------------------------
(1) Class B and Class C shares are sold without a front end sales charge, but
their Rule 12b-1 fees may cause long term shareholders to pay more than
the economic equivalent of the maximum permitted front end sales charges.
(2) A contingent deferred sales charge of up to 1.00% is imposed on certain
redemptions of Class A shares (.50% for Class A shares of the Limited
Term Tax Free Funds) that were purchased without an initial sales charge
as part of an investment of $1 million or more.
(3) Class B and Class C share expenses would be lower assuming no
redemption at the end of the period.
(4) The Underwriter pays broker-dealers and financial institutions an annual
fee equal to .25% of the average daily net assets attributable to the
Class A shares (.15% for Class A shares of the Limited Term Tax Free
Funds), .15% of the average daily net assets attributable to the Class B
shares, and .90% of the average daily net assets attributable to the
Class C shares held by their customers. The fee is paid quarterly
commencing when such shares are sold for Class A and Class B shares. The
fee is paid quarterly commencing in the thirteenth month after such
shares are sold for Class C shares.
(5) The expense ratio reflects the effect of gross expenses attributable to
earnings credits on uninvested cash balances received by each Fund.
4 Voyageur Funds (Prospectus)
THE EXAMPLES CONTAINED IN THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The purpose of the above Fees and Expenses table is to
assist the investor in understanding the various costs and expenses that
investors in the Funds will bear directly or indirectly. The information set
forth in the table under the heading "Annual Fund Operating Expenses as a
Percentage of Net Assets After Fee Waiver and Expense Arrangements" reflects
actual expenses incurred during fiscal 1995 for the Class A shares of Minnesota
Tax Free Fund and Minnesota Limited Term Tax Free Fund. For all other Funds and
classes of shares, such information has been restated to reflect anticipated
voluntary Rule 12b-1 waivers and expense reimbursements during the fiscal period
ending December 31, 1996. After December 31, 1996, such expense waivers and
reimbursements may be discontinued or modified by Voyageur and the Underwriter
in their sole discretion. The Funds' investment adviser, Voyageur, is
contractually obligated to pay certain of the operating expenses (excluding rule
12b-1 fees) of each Fund which exceed 1% of the Fund's average daily net assets
on an annual basis, as further discussed in the section "Management--Expenses of
the Funds." For the fiscal period ended December 31, 1995, Voyageur and the
Underwriter voluntarily waived certain fees and absorbed certain expenses of
each Fund then in existence except for Minnesota Tax Free Fund and Minnesota
Limited Term Tax Free Fund. Absent such fee and expense waivers, Total Fund
Operating Expenses for such period would be equivalent to the corresponding
percentages disclosed under the column "Total Fund Operating Expenses Without
Voluntary Waiver and Reimbursement."
5 Voyageur Funds (Prospectus)
FINANCIAL HIGHLIGHTS
The following table shows certain per share data and selected information for a
share outstanding during the indicated periods for each Fund. This information
has been audited by KPMG Peat Marwick LLP, independent auditors, and should be
read in conjunction with the financial statements of each Fund contained in its
annual report. An annual report of each Fund is available without charge by
contacting the Funds at 800-553-2143. In addition to financial statements, the
annual reports contain further information about the performance of the Funds.
Per share data is not presented for all classes since not all classes of shares
were outstanding during the periods presented below.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------- --------------------
Net Distrib- Net
Net Asset Net Realized and Dividends utions Asset Total
Value Invest- Unrealized from Net from Value Invest-
Beginning ment Gains (Loss) Investment Capital End of ment
Voyageur State Funds of Period Income on Securities Income Gains Period Return(4)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIZONA TAX FREE
Class A - 12/31/95(1) $10.00 0.46 0.84 (0.46) (0.09) $10.75 13.27%
Class B - 12/31/95(1) 10.30 0.26 0.53 (0.26) (0.09) 10.74 7.74
Class C - 12/31/95(1) 10.20 0.30 0.65 (0.30) (0.09) 10.76 9.43
ARIZONA INSURED
Class A - 12/31/95 9.86 0.54 1.31 (0.56) -- 11.15 19.10
Class A - 12/31/94 11.31 0.55 (1.37) (0.53) (0.10)(8) 9.86 (7.41)
Class A - 12/31/93 10.71 0.58 0.74 (0.58) (0.14) 11.31 12.64
Class A - 12/31/92 10.39 0.61 0.38 (0.61) (0.06) 10.71 9.86
Class A - 12/31/91(1) 10.00 0.50 0.47 (0.50) (0.08) 10.39 9.98
Class B - 12/31/95(1) 10.44 0.38 0.69 (0.37) -- 11.14 10.36
Class C - 12/31/95 9.86 0.45 1.31 (0.47) -- 11.15 18.10
Class C - 12/31/94(1) 10.48 0.27 (0.56) (0.25) (0.08)(8) 9.86 (2.84)
CALIFORNIA TAX FREE
Class A - 12/31/95(1) 10.00 0.47 0.70 (0.47) (0.06) 10.64 11.97
Class B - 12/31/95(1) 9.96 0.20 0.74 (0.19) (0.06) 10.65 9.52
CALIFORNIA INSURED
Class A - 12/31/95 9.33 0.53 1.34 (0.55) -- 10.65 20.51
Class A - 12/31/94 9.51 0.10 (0.18) (0.09) (0.01) 9.33 (0.84)
Class A - 10/31/94 11.08 0.55 (1.52) (0.54) (0.06) 9.51 (8.97)
Class A - 10/31/93 10.02 0.60 1.11 (0.60) (0.05) 11.08 17.29
Class A - 10/31/92(1) 10.00 -- 0.02 -- -- 10.02 0.20
Class B - 12/31/95 9.33 0.50 1.33 (0.51) -- 10.65 20.01
Class B - 12/31/94 9.51 0.08 (0.17) (0.08) (0.01) 9.33 (0.92)
Class B - 10/31/94(1) 10.68 0.31 (1.16) (0.30) (0.02) 9.51 (7.93)
Class C - 12/31/95(1) 10.19 0.25 0.53 (0.32) -- 10.65 7.77
COLORADO TAX FREE
Class A - 12/31/95 9.53 0.54 1.38 (0.55) -- 10.90 20.54
Class A - 12/31/94 11.10 0.55 (1.54) (0.54) (0.04) 9.53 (9.12)
Class A - 12/31/93 10.57 0.56 0.85 (0.56) (0.32) 11.10 13.72
Class A - 12/31/92 10.27 0.58 0.45 (0.58) (0.15) 10.57 10.42
Class A - 12/31/91 10.02 0.61 0.43 (0.61) (0.18) 10.27 10.80
Class A - 12/31/90 10.00 0.64 0.02 (0.64) -- 10.02 6.81
Class A - 12/31/89 9.74 0.67 0.32 (0.67) (0.06) 10.00 10.73
Class A - 12/31/88 9.43 0.69 0.34 (0.69) (0.03) 9.74 10.57
Class A - 12/31/87(1) 9.58 0.49 (0.15) (0.49) -- 9.43 3.27
Class B - 12/31/95(1) 10.25 0.35 0.65 (0.35) -- 10.90 9.96
Class C - 12/31/95 9.53 0.45 1.37 (0.45) -- 10.90 19.44
Class C - 12/31/94(1) 10.21 0.29 (0.67) (0.27) (0.03) 9.53 (3.75)
FLORIDA TAX FREE
Class A - 12/31/95(1) 10.00 0.47 0.75 (0.47) (0.02) 10.73 12.49
Class B - 12/31/95(1) 10.37 0.15 0.38 (0.15) (0.02) 10.73 5.10
Class C - 12/31/95(1) 10.20 0.33 0.56 (0.34) (0.02) 10.73 8.88
- -----------------------------------------------------------------------------------------------------
(table continued from above)
Ratios/Supplemental Data
--------------------------------------------------------------
Net Ratio of Ratio of Expenses
Assets Ratio of Net Investment to Average Net
End of Expenses to Income to Portfolio Assets Assuming No
Period Average Average Net Turnover Voluntary Waivers
(000s) Net Assets(2) Assets Rate and Reimbursements
- ---------------------------------------------------------------
<C> <C> <C> <C> <C>
$6,225 0.52%(5) 5.19%5 38.05% 1.25%(5)
1,629 0.99(5) 4.60(5) 38.05 2.00(5)
27 1.20(5) 4.65(5) 38.05 2.00(5)
238,114 0.69 5.07 42.96 0.95
231,736 0.72 5.20 25.18 0.92
263,312 0.59 5.00 33.80 1.03
124,120 0.35 5.60 40.29 1.16
38,322 -- (6) 6.58(5) 177.66 1.24(5)
2,048 1.33(5) 4.08(5) 42.96 1.60(5)
541 1.54 4.18 42.96 1.69
326 1.50(5) 4.10(5) 25.18 1.71(5)
1,012 0.46(5) 5.57(5) 39.51 1.22(5)
128 0.60(5) 5.33(5) 39.51 1.93(5)
33,860 0.70 5.23 107.45 1.02
27,994 0.10(5) 6.30(5) 7.28 1.24(5)
27,282 0.20 5.37 18.34 1.25
12,509 -- 5.26 24.19 1.25
2,056 -- -- 7.31 --
6,029 1.10 4.75 107.45 1.75
2,219 0.57(5) 5.54(5) 7.28 1.94(5)
1,427 0.73(5) 4.82(5) 18.34 1.95(5)
53 1.53(5) 4.25(5) 107.45 1.77(5)
392,815 0.76 5.18 82.83 0.93
354,138 0.66 5.35 69.32 0.72
399,218 0.75 4.97 58.61 0.75
202,165 0.80 5.59 69.72 0.80
104,863 0.82 6.15 92.42 0.82
53,987 1.00 6.38 69.64 1.00
34,625 1.00 6.37 33.06 1.00
19,767 1.00 6.77 56.31 1.00
5,546 1.00(5) 6.49(5) 92.80 1.00(5)
1,643 1.39(5) 3.96(5) 82.83 1.60(5)
1,042 1.66 4.20 82.83 1.66
465 1.80(5) 4.23(5) 69.32 1.81(5)
4,421 0.32(5) 5.26(5) 63.52 1.25(5)
101 0.44(5) 4.88(5) 63.52 2.00(5)
9 1.11(5) 4.57(5) 63.52 2.00(5)
- -------------------------------------------------------------
See Notes to Financial Highlights
</TABLE>
6 Voyageur Funds (Prospectus)
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------- --------------------
Net Distrib- Net
Net Asset Net Realized and Dividends utions Asset Total
Value Invest- Unrealized from Net from Value Invest-
Beginning ment Gains (Loss) Investment Capital End of ment
Voyageur State Funds of Period Income on Securities Income Gains Period Return(4)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FLORIDA INSURED
Class A - 12/31/95 $9.52 0.54 1.44 (0.56) -- $10.94 21.22%
Class A - 12/31/94 9.64 0.10 (0.12) (0.09) (0.01) 9.52 (0.11)
Class A - 10/31/94 11.15 0.55 (1.46) (0.54) (0.06) 9.64 (8.38)
Class A - 10/31/93 10.11 0.58 1.12 (0.58) (0.08) 11.15 17.27
Class A - 10/31/92(1) 10.00 0.51 0.15 (0.51) (0.04) 10.11 6.74
Class B - 12/31/95 9.52 0.50 1.44 (0.52) -- 10.94 20.76
Class B - 12/31/94 9.63 0.09 (0.11) (0.08) (0.01) 9.52 (0.03)
Class B - 10/31/94(1) 10.82 0.31 (1.19) (0.30) (0.01) 9.63 (8.10)
FLORIDA LIMITED TERM
Class A - 12/31/95 9.64 0.44 1.01 (0.49) (0.04) 10.56 15.14
Class A - 12/31/94(1) 10.00 0.18 (0.36) (0.18) -- 9.64 (1.55)
Class B - 12/31/95(1) 10.58 0.10 0.03 (0.11) (0.04) 10.56 1.13
Class C - 12/31/95(1) 10.08 0.25 0.55 (0.29) (0.04) 10.55 7.95
IDAHO TAX FREE
Class A - 12/31/95(1) 10.00 0.60 1.10 (0.60) (0.08) 11.02 17.48
Class B - 12/31/95(1) 10.50 0.42 0.59 (0.42) (0.08) 11.01 9.86
Class C - 12/31/95(1) 10.04 0.50 1.06 (0.50) (0.08) 11.02 15.81
IOWA TAX FREE
Class A - 12/31/95 8.56 0.45 1.29 (0.47) -- 9.83 20.80
Class A - 12/31/94 9.26 0.17 (0.72) (0.15) -- 8.56 (5.86)
Class A - 8/31/94(1) 10.00 0.49 (0.74) (0.49) -- 9.26 (2.67)
Class B - 12/31/95(1) 9.18 0.31 0.64 (0.30) -- 9.83 10.62
Class C - 12/31/95(1) 8.55 0.37 1.28 (0.37) -- 9.83 19.66
KANSAS TAX FREE
Class A - 12/31/95 9.50 0.56 1.22 (0.55) -- 10.73 19.13
Class A - 12/31/94 9.63 0.09 (0.13) (0.09) -- 9.50 (0.38)
Class A - 10/31/94 10.85 0.57 (1.21) (0.57) (0.01) 9.63 (6.10)
Class A - 10/31/93(1) 10.00 0.56 0.85 (0.56) -- 10.85 14.49
Class B - 12/31/95(1) 10.19 0.34 0.54 (0.33) -- 10.74 8.76
Class C - 12/31/95(1) 10.20 0.32 0.51 (0.31) -- 10.72 8.29
MINNESOTA TAX FREE
Class A - 12/31/95 11.33 0.62 1.32 (0.64) -- 12.63 17.49
Class A - 12/31/94 12.85 0.63 (1.48) (0.61) (0.06)(7) 11.33 (6.73)
Class A - 12/31/93 12.21 0.64 0.87 (0.64) (0.23) 12.85 12.70
Class A - 12/31/92 12.07 0.70 0.23 (0.70) (0.09) 12.21 7.97
Class A - 12/31/91 11.67 0.75 0.49 (0.75) (0.09) 12.07 11.04
Class A - 12/31/90 11.68 0.77 0.02 (0.77) (0.03) 11.67 7.03
Class A - 12/31/89 11.48 0.80 0.22 (0.80) (0.02) 11.68 9.11
Class A - 12/31/88 11.16 0.80 0.32 (0.80) -- 11.48 10.31
Class A - 12/31/87 11.85 0.81 (0.66) (0.81) (0.03) 11.16 1.38
Class A - 12/31/86 11.12 0.86 0.82 (0.86) (0.09) 11.85 15.68
Class B - 12/31/95(1) 11.90 0.45 0.71 (0.44) -- 12.62 9.95
Class C - 12/31/95 11.33 0.53 1.32 (0.55) -- 12.63 16.62
Class C - 12/31/94(1) 11.96 0.34 (0.61) (0.32) (0.04) 11.33 (2.30)
MINNESOTA INSURED
Class A - 12/31/95 9.61 0.51 1.14 (0.53) -- 10.73 17.52
Class A - 12/31/94 11.02 0.54 (1.39) (0.52) (0.04) 9.61 (7.88)
Class A - 12/31/93 10.27 0.54 0.84 (0.54) (0.09) 11.02 13.80
Class A - 12/31/92 10.07 0.59 0.25 (0.59) (0.05) 10.27 8.57
- -----------------------------------------------------------------------------------------------------
(table continued from above)
Ratios/Supplemental Data
--------------------------------------------------------------
Net Ratio of Ratio of Expenses
Assets Ratio of Net Investment to Average Net
End of Expenses to Income to Portfolio Assets Assuming No
Period Average Average Net Turnover Voluntary Waivers
(000s) Net Assets(2) Assets Rate and Reimbursements
- ---------------------------------------------------------------
<C> <C> <C> <C> <C>
$242,425 0.51% 5.24% 101.48% 0.95%
240,228 0.20(5) 6.24(5) 2.51 1.06(5)
259,702 0.44 5.24 49.12 0.96
289,682 0.18 5.18 53.51 1.12
50,666 -- 5.38(5) 208.24 1.25(5)
2,814 0.89 4.80 101.48 1.68
1,477 0.59(5) 5.68(5) 2.51 1.81(5)
1,135 1.00(5) 4.63(5) 49.12 1.28(5)
859 0.63 4.28 27.76 1.25
592 -- 4.19(5) -- 1.25(5)
41 1.52(5) 3.32(5) 27.76 2.00(5)
54 1.62(5) 3.10(5) 27.76 2.00(5)
13,540 0.26(5) 5.24(5) 41.97 1.25(5)
1,977 0.79(5) 4.68(5) 41.97 1.90(5)
789 1.05(5) 4.48(5) 41.97 2.00(5)
42,374 0.72 4.88 21.67 1.06
32,373 0.11(5) 5.71(5) 7.18 1.25(5)
38,669 0.12 4.89 119.35 1.25
819 1.28(5) 4.06(5) 21.67 1.65(5)
462 1.61(5) 3.74(5) 21.67 1.72(5)
10,677 0.37 5.32 19.71 1.11
7,355 0.01(5) 5.88(5) -- 1.25(5)
6,469 0.06 5.30 38.96 1.25
2,057 -- 5.26(5) 28.87 1.25(5)
677 0.94(5) 4.63(5) 19.71 1.68(5)
40 1.27(5) 4.21(5) 19.71 1.79(5)
455,220 0.93 5.11 50.84 0.93
406,497 0.90 5.29 24.26 0.90
458,145 1.02 5.02 31.77 1.02
331,314 0.96 5.73 23.60 1.04
251,594 0.83 6.44 26.40 0.98
197,629 0.82 6.68 20.54 1.02
172,476 0.77 6.85 22.84 0.77
150,031 0.77 7.01 9.56 0.77
124,082 0.78 7.10 13.84 0.78
106,563 0.85 7.45 11.40 0.85
2,701 1.38(5) 4.43(5) 50.84 1.63(5)
2,319 1.67 4.33 50.84 1.67
1,061 1.72(5) 4.56(5) 24.26 1.72(5)
307,734 0.87 4.92 53.72 0.92
284,132 0.61 5.29 24.75 0.94
311,187 0.70 4.93 18.25 1.02
162,728 0.37 5.66 14.11 1.06
- ------------------------------------------------------------
See Notes to Financial Highlights.
</TABLE>
7 Voyageur Funds (Prospectus)
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------- --------------------
Net Distrib- Net
Net Asset Net Realized and Dividends utions Asset Total
Value Invest- Unrealized from Net from Value Invest-
Beginning ment Gains (Loss) Investment Capital End of ment
Voyageur State Funds of Period Income on Securities Income Gains Period Return(4)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MINNESOTA INSURED (CONTINUED)
Class A - 12/31/91 $9.65 0.60 0.48 (0.60) (0.06) $10.07 11.59% $
Class A - 12/31/90 9.64 0.61 0.02 (0.61) (0.01) 9.65 6.63
Class A - 12/31/89 9.48 0.63 0.20 (0.63) (0.04) 9.64 8.96
Class A - 12/31/88 9.19 0.67 0.29 (0.67) -- 9.48 10.70
Class A - 12/31/87(1) 9.51 0.46 (0.32) (0.46) -- 9.19 1.48
Class B - 12/31/95(1) 10.14 0.38 0.58 (0.38) -- 10.72 9.59
Class C - 12/31/95 9.61 0.43 1.14 (0.45) -- 10.73 16.63
Class C - 12/31/94(1) 10.23 0.30 (0.62) (0.28) (0.02) 9.61 (3.14)
MINNESOTA LIMITED TERM
Class A - 12/31/95 10.50 0.51 0.64 (0.51) -- 11.14 11.00
Class A - 12/31/94 11.16 0.45 (0.66) (0.45) -- 10.50 (1.91)
Class A - 12/31/93 10.83 0.47 0.37 (0.47) (0.04) 11.16 7.88
Class A - 12/31/92 10.69 0.51 0.18 (0.51) (0.04) 10.83 6.62
Class A - 12/31/91 10.32 0.55 0.37 (0.55) -- 10.69 9.24
Class A - 12/31/90 10.26 0.60 0.06 (0.60) -- 10.32 6.59
Class A - 12/31/89 10.21 0.59 0.05 (0.59) -- 10.26 6.43
Class A - 12/31/88 10.17 0.53 0.04 (0.53) -- 10.21 6.02
Class A - 12/31/87 10.43 0.55 (0.25) (0.55) (0.01) 10.17 2.97
Class A - 12/31/86 10.20 0.61 0.24 (0.61) (0.01) 10.43 8.58
Class B - 12/31/95(1) 10.95 0.17 0.19 (0.17) -- 11.14 3.26
Class C - 12/31/95 10.50 0.42 0.63 (0.42) -- 11.13 10.18
Class C - 12/31/94(1) 10.74 0.24 (0.24) (0.24) -- 10.50 (0.03)
MISSOURI INSURED
Class A - 12/31/95 9.27 0.52 1.29 (0.54) -- 10.54 19.96
Class A - 12/31/94 9.37 0.10 (0.11) (0.09) -- 9.27 (0.07)
Class A - 10/31/94 10.82 0.55 (1.43) (0.54) (0.03) 9.37 (8.28)
Class A - 10/31/93(1) 10.00 0.55 0.89 (0.55) (0.07) 10.82 14.74
Class B - 12/31/95 9.27 0.48 1.28 (0.49) -- 10.54 19.18
Class B - 12/31/94 9.37 0.08 (0.10) (0.08) -- 9.27 (0.14)
Class B - 10/31/94(1) 10.30 0.33 (0.94) (0.32) -- 9.37 (6.16)
Class C - 12/31/95(1) 10.36 0.06 0.17 (0.05) -- 10.54 2.24
NEW MEXICO TAX FREE
Class A - 12/31/95 9.59 0.52 1.33 (0.55) -- 10.89 19.64
Class A - 12/31/94 9.77 0.11 (0.20) (0.09) -- 9.59 (0.90)
Class A - 10/31/94 10.92 0.56 (1.16) (0.55) -- 9.77 (5.56)
Class A - 10/31/93 10.00 0.57 0.98 (0.57) (0.06) 10.92 15.77
Class A - 10/31/92(1) 10.00 -- -- -- -- 10.00 --
Class B - 12/31/95 9.59 0.46 1.32 (0.48) -- 10.89 18.84
Class B - 12/31/94 9.77 0.09 (0.19) (0.08) -- 9.59 (0.98)
Class B - 10/31/94(1) 10.69 0.31 (0.93) (0.30) -- 9.77 (5.84)
NORTH DAKOTA TAX FREE
Class A - 12/31/95 9.85 0.54 1.18 (0.57) -- 11.00 17.81
Class A - 12/31/94 11.07 0.56 (1.15) (0.53) (0.10)(9) 9.85 (5.47)
Class A - 12/31/93 10.59 0.58 0.58 (0.58) (0.10) 11.07 11.20
Class A - 12/31/92 10.34 0.62 0.34 (0.62) (0.09) 10.59 9.70
Class A - 12/31/91(1) 10.00 0.49 0.41 (0.49) (0.07) 10.34 9.23
Class B - 12/31/95 9.85 0.48 1.18 (0.51) -- 11.00 17.24
Class B - 12/31/94(1) 10.31 0.30 (0.39) (0.27) (0.10)(9) 9.85 (0.77)
Class C - 12/31/95(1) 10.51 0.17 0.50 (0.18) -- 11.00 6.47
- -----------------------------------------------------------------------------------------------------
(table continued from above)
Ratios/Supplemental Data
--------------------------------------------------------------
Net Ratio of Ratio of Expenses
Assets Ratio of Net Investment to Average Net
End of Expenses to Income to Portfolio Assets Assuming No
Period Average Average Net Turnover Voluntary Waivers
(000s) Net Assets(2) Assets Rate and Reimbursements
- ---------------------------------------------------------------
<C> <C> <C> <C> <C>
68,250 0.78% 6.13% 43.68% 1.16%
29,394 0.74 6.30 15.12 1.25
8,217 0.78 6.55 28.34 1.00
4,707 0.86 7.08 68.09 1.00
2,759 0.76(5) 7.93(5) 20.66 1.00(5)
4,655 1.34(5) 4.15(5) 53.72 1.64(5)
3,166 1.66 4.11 53.72 1.67
1,525 1.36(5) 4.68(5) 24.75 1.68(5)
72,405 0.91 4.61 40.28 0.91
84,168 0.92(5) 4.18(5) 42.06 0.92(5)
75,374 0.99 4.18 19.13 0.99(5)
48,210 1.09 4.71 25.56 1.09
27,268 1.23 5.35 43.39 1.23
22,526 1.18 5.81 51.47 1.18
21,884 0.84 5.74 68.23 0.84
24,157 0.84 5.15 16.13 0.84
29,063 0.84 5.14 24.79 0.84
20,967 1.00 5.81 30.10 1.00
27 1.30(5) 3.93(5) 40.28 1.55(5)
694 1.63 3.82 40.28 1.63
341 1.71(5) 3.35(5) 42.05 1.71(5)
50,211 0.50 5.25 31.69 1.07
37,790 0.11(5) 6.00(5) 8.85 1.12(5)
37,384 0.15 5.39 32.02 1.13
30,270 -- 4.82(5) 76.51 1.25(5)
6,195 0.97 4.70 31.69 1.81
2,742 0.60(5) 5.32(5) 8.85 1.84(5)
1,701 0.49(5) 4.89(5) 32.02 1.83(5)
20 1.22(5) 4.09(5) 31.69 1.55(5)
21,402 0.87 5.07 55.72 1.09
19,706 0.06(5) 6.38(5) 2.21 1.25(5)
23,096 0.29 5.26 22.94 1.16
17,302 -- 5.10 30.76 1.25
361 -- -- -- --
605 1.53 4.33 55.72 1.83
272 0.75(5) 5.60(5) 2.21 2.00(5)
264 0.98(5) 4.57(5) 22.94 1.86(5)
36,096 0.81 5.07 45.34 1.05
33,829 0.46 5.36 32.60 1.14
34,880 0.59 5.11 27.39 1.25
15,846 0.40 5.78 26.27 1.25
4,914 0.16(5) 6.43(5) 126.37 1.25(5)
375 1.29 4.56 45.34 1.79
144 0.99(5) 4.97(5) 32.60 1.89(5)
20 1.73(5) 4.00(5) 45.34 1.73(5)
- -------------------------------------------------------------
See Notes to Financial Highlights
</TABLE>
8 Voyageur Funds (Prospectus)
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------- --------------------
Net Distrib- Net
Net Asset Net Realized and Dividends utions Asset Total
Value Invest- Unrealized from Net from Value Invest-
Beginning ment Gains (Loss) Investment Capital End of ment
Voyageur State Funds of Period Income on Securities Income Gains Period Return(4)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OREGON INSURED
Class A - 12/31/95 $8.92 0.49 1.14 (0.50) -- $10.05 18.71%
Class A - 12/31/94 9.00 0.09 (0.09) (0.08) -- 8.92 0.06
Class A - 10/31/94 10.24 0.50 (1.24) (0.50) -- 9.00 (7.35)
Class A - 10/31/93(1) 10.00 0.13 0.24 (0.13) -- 10.24 3.64
Class B - 12/31/95 8.92 0.44 1.14 (0.45) -- 10.05 18.10
Class B - 12/31/94 9.00 0.08 (0.09) (0.07) -- 8.92 0.03
Class B - 10/31/94(1) 9.85 0.27 (0.85) (0.27) -- 9.00 (5.95)
Class C - 12/31/95(1) 9.63 0.19 0.41 (0.18) -- 10.05 6.35
UTAH TAX FREE
Class A - 12/31/95 9.80 0.59 1.24 (0.59) -- 11.04 19.06
Class A - 12/31/94 9.94 0.10 (0.15) (0.09) -- 9.80 (0.41)
Class A - 10/31/94 11.07 0.60 (1.07) (0.60) (0.06) 9.94 (4.50)
Class A - 10/31/93 10.00 0.65 1.07 (0.65) -- 11.07 17.54
Class A - 10/31/92(1) 10.00 -- -- -- -- 10.00 --
Class B - 12/31/95(1) 10.63 0.30 0.39 (0.28) -- 11.04 6.60
WASHINGTON INSURED
Class A - 12/31/95 9.21 0.59 1.21 (0.57) -- 10.44 19.94
Class A - 12/31/94 9.37 0.09 (0.16) (0.09) -- 9.21 (0.69)
Class A - 10/31/94 10.67 0.55 (1.26) (0.57) (0.02) 9.37 (6.85)
Class A - 10/31/93(1) 10.00 0.15 0.67 (0.15) -- 10.67 8.05
Class B - 12/31/95(1) 10.18 0.09 0.25 (0.08) -- 10.44 3.30
Class C - 12/31/95(1) 9.94 0.31 0.48 (0.30) -- 10.43 8.13
WISCONSIN TAX FREE
Class A - 12/31/95(1) 8.74 0.48 1.04 (0.48) -- 9.78 17.74
Class A - 12/31/94 9.28 0.16 (0.55) (0.15) -- 8.74 (4.12)
Class A - 8/31/94 10.00 0.49 (0.72) (0.49) -- 9.28 (2.40)
Class B - 12/31/95(1) 9.39 0.28 0.37 (0.27) -- 9.77 7.08
Class C - 12/31/95(1) 9.34 0.30 0.44 (0.29) -- 9.79 8.06
NATIONAL TAX FREE
Class A - 12/31/95(1) 10.00 0.18 0.58 (0.18) (0.10) 10.48 7.11
Class B - 12/31/95(1) 10.09 0.15 0.49 (0.15) (0.10) 10.48 6.41
Class C - 12/31/95(1) 10.00 0.15 0.58 (0.15) (0.10) 10.48 7.32
NATIONAL INSURED
Class A - 12/31/95 9.32 0.54 1.34 (0.56) -- 10.64 20.63
Class A - 12/31/94 10.67 0.56 (1.34) (0.55) (0.02) 9.32 (7.45)
Class A - 12/31/93 10.14 0.60 0.60 (0.60) (0.07) 10.67 12.10
Class A - 12/31/92(1) 10.00 0.57 0.14 (0.57) -- 10.14 7.43
Class B - 12/31/95 9.32 0.50 1.34 (0.52) -- 10.64 20.10
Class B - 12/31/94(1) 9.81 0.31 (0.50) (0.29) (0.01) 9.32 (1.94)
Class C - 12/31/95(1) 10.38 0.09 0.24 (0.08) -- 10.63 3.21
NATIONAL LIMITED TERM
Class A - 12/31/95(1) 10.00 0.14 0.17 (0.14) (0.01) 10.16 3.22
- ----------------------------------------------------------------------------------------------------
(table continued from above)
Ratios/Supplemental Data
--------------------------------------------------------------
Net Ratio of Ratio of Expenses
Assets Ratio of Net Investment to Average Net
End of Expenses to Income to Portfolio Assets Assuming No
Period Average Average Net Turnover Voluntary Waivers
(000s) Net Assets(2) Assets Rate and Reimbursements
- ----------------------------------------------------------------
<C> <C> <C> <C> <C>
$21,590 0.54% 5.12% 41.08% 1.11%
14,650 0.05(5) 5.79(5) -- 1.25(5)
14,086 0.03 5.17 48.98 1.25
4,609 -- 4.61(5) 11.08 1.25(5)
2.786 1.04 4.57 41.08 1.86
1,303 0.60(5) 5.19(5) -- 2.00(5)
1,146 0.75(5) 4.43(5) 48.98 2.00(5)
250 1.39(5) 4.00(5) 41.08 1.74(5)
4,142 0.38 5.51 35.28 1.25
3,728 0.11(5) 6.38(5) -- 1.14(5)
4,054 0.10 5.64 2.77 1.25
3,913 -- 5.65 44.54 1.25
19 -- -- -- --
363 0.92(5) 4.74(5) 35.28 2.00(5)
2,099 0.28 5.57 50.54 1.25
2,049 0.10(5) 6.18(5) -- 1.25(5)
2,118 0.14 5.44 -- 1.25
2,108 -- 5.50(5) 45.14 1.25(5)
15 1.04(5) 4.44(5) 50.54 2.00(5)
19 1.30(5) 4.45(5) 50.54 2.00(5)
26,449 0.88 5.05 12.10 1.09
20,167 0.08(5) 5.54(5) 20.52 1.25(5)
16,093 0.04 4.89 86.26 1.25
725 1.45(5) 4.31(5) 12.10 1.70(5)
73 1.77(5) 4.04(5) 12.10 1.77(5)
1,274 0.35(5) 5.03(5) 49.62 1.25(5)
157 0.88(5) 4.52(5) 49.62 2.00(5)
48 1.22(5) 4.36(5) 49.62 2.00(5)
35,662 0.61 5.29 192.90 1.16
35,305 0.10 5.71 31.25 1.25
25,315 -- 5.29 77.79 1.25
2,919 --(3) 5.85(5) 114.92 1.25(5)
1,545 0.93 4.85 192.90 1.81
478 0.48(5) 5.37(5) 31.25 1.99(5)
10 0.93(5) 4.46(5) 192.90 1.40(5)
1,230 0.56(5) 4.17(5) 54.31 1.25(5)
- ----------------------------------------------------------------
See Notes to Financial Highlights
</TABLE>
9 Voyageur Funds (Prospectus)
Notes to Financial Highlights
1 The information is for the period from each Fund's commencement of
operations to the Fund's year end. The classes of each Fund commenced
operations on the following dates:
ARIZONA TAX FREE FUND
Class A March 2, 1995
Class B June 29, 1995
Class C May 13, 1995
ARIZONA INSURED TAX FREE FUND
Class A April 1, 1991
Class B March 10, 1995
Class C May 26, 1994
CALIFORNIA TAX FREE FUND
Class A March 3, 1995
Class B August 23, 1995
CALIFORNIA INSURED TAX FREE FUND
Class A October 15, 1992
Class B March 1, 1994
Class C April 12, 1995
COLORADO TAX FREE FUND
Class A April 23, 1987
Class B March 22, 1995
Class C May 6, 1994
FLORIDA TAX FREE FUND
Class A March 2, 1995
Class B September 15, 1995
Class C April 22, 1995
FLORIDA INSURED TAX FREE FUND
Class A January 1, 1992
Class B March 1, 1994
FLORIDA LIMITED TERM TAX FREE FUND
Class A May 1, 1994
Class B September 15, 1995
Class C March 23, 1995
IDAHO TAX FREE FUND
Class A January 4, 1995
Class B March 16, 1995
Class C January 11, 1995
IOWA TAX FREE FUND
Class A September 1, 1993
Class B March 24, 1995
Class C January 4, 1995
KANSAS TAX FREE FUND
Class A November 30, 1992
Class B April 8, 1995
Class C April 12, 1995
MINNESOTA TAX FREE FUND
Class B March 11, 1995
Class C May 4, 1994
MINNESOTA INSURED FUND
Class A May 1, 1987
Class B March 7, 1995
Class C May 4, 1994
MINNESOTA LIMITED TERM TAX FREE FUND
Class B August 15, 1995
Class C April 30, 1994
MISSOURI INSURED TAX FREE FUND
Class A November 2, 1992
Class B March 12, 1994
Class C November 11, 1995
NEW MEXICO TAX FREE FUND
Class A October 5, 1992
Class B March 3, 1994
NORTH DAKOTA TAX FREE FUND
Class A April 1, 1991
Class B May 10, 1994
Class C July 29, 1995
OREGON INSURED TAX FREE FUND
Class A August 1, 1993
Class B March 12, 1994
Class C July 7, 1995
UTAH TAX FREE FUND
Class A October 5, 1992
Class B May 27, 1995
WASHINGTON INSURED TAX FREE FUND
Class A August 1, 1993
Class B Ocober 24, 1995
Class C April 21, 1995
WISCONSIN TAX FREE FUND
Class A September 1, 1993
Class B April 22, 1995
Class C March 28, 1995
NATIONAL TAX FREE FUND
Class A September 8, 1995
Class B September 15, 1995
Class C September 12, 1995
NATIONAL INSURED TAX FREE FUND
Class A January 10, 1992
Class B May 26, 1994
Class C October 20, 1995
NATIONAL LIMITED TERM TAX FREE FUND
Class A September 7, 1995
2 Beginning in the year ended December 31, 1995, the expense ratio reflects
the effect of gross expenses attributable to earnings credits on uninvested
cash balances received by the Fund. Prior period expense ratios have not
been adjusted.
3 The Advisor also paid $6,364 beyond total fees and expenses for
National Insured Tax Free Fund for the period ended December 31, 1992.
4 Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value and does not reflect the impact of a sales charge.
5 Adjusted to an annual basis.
6 The Adviser also paid $25,631 for Arizona Insured Tax Free Fund for the
period ended December 31, 1991.
7 Includes (.01) in excess of net realized gains.
8 Includes (.06) and (.04) in excess of net realized gains for Class A and
Class C shares, respectively.
9 Includes (.02) and (.02) in excess of net realized gains for Class A and
Class B shares, respectively.
10 Voyageur Funds (Prospectus)
THE FUNDS
- --------------------------------------------------------------------------------
Each of the Funds is a separate series of one of the parent corporate or trust
entities described herein under the heading "General Information." The series
which are diversified, as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act") are designated as such by a footnote on the
cover page of this Prospectus. All other series are non-diversified. Each
non-diversified Fund will be able to invest, subject to certain federal tax
requirements, a relatively higher percentage of its assets in the securities of
a limited number of issuers which may result in such Fund's securities being
more susceptible to any single economic, political or regulatory occurrence than
the securities of a diversified Fund. The investment objectives and policies of
each Fund are described below. Except where noted, an investment objective or
policy description applies to all Funds.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of each Limited Term Tax Free Fund is to provide
investors with preservation of capital and, secondarily, current income exempt
from federal income tax and (except for the National Limited Term Tax Free Fund)
the personal income tax, if any, of the Fund's particular state, by maintaining
a weighted average portfolio maturity of 10 years or less. The investment
objective of each Tax Free Fund and Insured Fund is to seek as high a level of
current income exempt from federal income tax and (except for National Tax Free
Fund and National Insured Tax Free Fund) from the personal income tax, if any,
of the Fund's particular state, as is consistent with preservation of capital.
The weighted average maturity of the investment portfolio of each Tax Free Fund
and Insured Fund is expected to be approximately 15 to 25 years. Each of Florida
Limited Term Tax Free Fund, Florida Tax Free Fund and Florida Insured Tax Free
Fund will seek to select investments that will enable its shares to be exempt
from the Florida intangible personal property tax.
During times of adverse market conditions when a defensive
investment posture is warranted, each Fund may temporarily select investments
without regard to the foregoing policy. There are risks in any investment
program, and there is no assurance that a Fund's investment objective will be
achieved. The value of each Fund's shares will fluctuate with changes in the
market value of its investments. Each Fund's investment objective and certain
other investment policies explicitly designated herein as such are fundamental,
which means that they cannot be changed without the vote of its respective
shareholders as provided in the 1940 Act.
Each Fund anticipates that, in normal market conditions, it will
invest substantially all of its assets in Tax Exempt Obligations (as defined
below), the interest on which is exempt from federal income tax and (for Funds
other than the three "national" funds) from the personal income tax, if any, of
its respective state. Up to 20% of the securities owned by each such Fund may
generate interest that is an item of tax preference for purposes of federal and
state alternative minimum tax ("AMT"), except that the Minnesota Insured Fund
may invest without limit in such securities and the Minnesota Tax Free Fund may
not invest in such AMT securities.
11 Voyageur Funds (Prospectus)
TAX FREE AND LIMITED TERM TAX FREE FUNDS
Each Tax Free Fund and each Limited Term Tax Free Fund may invest without
limitation in securities rated "investment grade," i.e., within the four highest
investment grades, at the time of investment by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") or, if unrated, judged
by Voyageur to be of comparable quality. Bonds included in the lowest investment
grade rating category involve certain speculative characteristics, and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case for
higher rated bonds. Up to 20% of the Tax Exempt Obligations purchased by the
Funds may be rated lower than investment grade; however, all bonds must be rated
"B" or better by Moody's or S&P (or, if unrated, judged by Voyageur to be of
comparable quality). Such bonds are often referred to as "junk" bonds or "high
yield" bonds. Bonds rated below "BBB" have a greater vulnerability to default
than higher grade bonds. See "Risks and Special Investment
Considerations--General" for a discussion of the risks of investing in lower
grade Tax Exempt Obligations. A description of the ratings assigned by Moody's
and S&P is set forth in Appendix A to the Statement of Additional Information.
The following table sets forth the weighted average percentage of
total investments with respect to the portfolios of certain Funds during the
year ended December 31, 1995.
Moody's Rating Aaa Aa A Baa Ba B Unrated
(S&P Equivalent) (AAA) (AA) (A) (BBB) (BB) (B) Bonds Total
- --------------------------------------------------------------------------------
VOYAGEUR TAX FREE FUNDS
Arizona 74% 1% 8% 17% -- -- -- 100%
California 19% -- 41% 40% -- -- -- 100%
Colorado 52% 18% 16% 14% -- -- -- 100%
Florida 49% 8% 19% 18% -- -- 6% 100%
Idaho 46% 5% 13% 28% -- -- 8% 100%
Iowa 22% 1% 74% 3% -- -- -- 100%
Kansas 70% 28% 2% -- -- -- -- 100%
Minnesota 65% 11% 16% 2% -- -- 6% 100%
National 67% 8% 10% 15% -- -- -- 100%
New Mexico 51% 24% 23% 2% -- -- -- 100%
North Dakota 51% 23% 25% -- -- -- 1% 100%
Utah 76% 15% 9% -- -- -- -- 100%
Wisconsin 31% 14% 36% 2% 8% -- 9% 100%
VOYAGEUR LIMITED TERM
TAX FREE FUNDS
Florida 55% 24% 15% 6% -- -- -- 100%
Minnesota 70% 13% 6% 7% -- -- 4% 100%
National 67% 21% 8% 4% -- -- -- 100%
- --------------------------------------------------------------------------------
INSURED FUNDS
The Tax Exempt Obligations in each Insured Fund's portfolio will consist of (a)
obligations that at all times are fully insured as to scheduled payments of
principal and interest ("insured securities") and (b) "escrow secured" or
"defeased" bonds. Insured securities may consist of bonds covered by Primary
Insurance, Secondary Market Insurance or Portfolio Insurance (as defined
12 Voyageur Funds (Prospectus)
below). All insurers must have a triple A-rated claims paying ability (as
assigned by either or both of Moody's and S&P) at the time of investment.
Securities that are covered by either Primary or Secondary Market Insurance will
carry a triple-A rating at the time of investment by the Fund. However,
securities that are not covered by either Primary or Secondary Market Insurance
at the time of investment (or that are not "escrow secured" or "defeased") must
be covered by Portfolio Insurance immediately after their acquisition. Voyageur
anticipates that such securities, at the time of investment, generally will be
rated investment grade. However, all securities in each Insured Fund's
portfolio, after application of insurance, will be rated Aaa by Moody's and/or
AAA by S&P at the time of investment. Pending the investment or reinvestment of
its assets in longer-term Tax Exempt Obligations, each Insured Fund may invest
up to 35% of its net assets in short-term tax exempt instruments, without
obtaining insurance, provided such instruments carry an A-l+ or SP-l+ short-term
rating or AAA or Aaa long-term rating by S&P or Moody's, and may invest up to
10% of its net assets in securities of tax exempt money market mutual funds. The
"insured securities" in each Insured Fund's investment portfolio are insured as
to the scheduled payment of all installments of principal and interest as they
fall due. The purpose of such insurance is to minimize credit risks to such
Funds and their shareholders associated with defaults in Tax Exempt Obligations
owned by such Funds. Such insurance does not insure against market risk and
therefore does not guarantee the market value of the securities in an Insured
Fund's investment portfolio or the value of any Insured Funds' shares.
Certain insurance companies will issue policies guaranteeing the
timely payment of principal of, and interest on, particular Tax Exempt
Obligations or on a portfolio of Tax Exempt Obligations. Insurance may be
purchased by the issuer of a Tax Exempt Obligation or by a third party at the
time of issuance of the Tax Exempt Obligation ("Primary Insurance") or by the
Fund or a third party subsequent to the original issuance of a Tax Exempt
Obligation ("Secondary Market Insurance"). In each case, a single premium is
paid to the insurer by the party purchasing the insurance when the insurance is
obtained. Primary Insurance and Secondary Market Insurance policies are
non-cancellable and remain in effect for so long as the insured Tax Exempt
Obligation is outstanding and the insurer is in business.
The Insured Funds may also purchase insurance covering certain Tax
Exempt Obligations which the Insured Funds intend to purchase for their
portfolios or which the Insured Funds already own ("Portfolio Insurance").
Portfolio Insurance policies guarantee the timely payment of principal of, and
interest on, covered Tax Exempt Obligations only while they are owned by the
Insured Funds. Such policies are non-cancellable and remain in effect until the
Fund terminates, provided the Fund pays the applicable insurance premiums and
the insurer remains in business. Tax Exempt Obligations in the Insured Funds'
portfolios covered by a Portfolio Insurance policy will not be covered by such
policy after they are sold by a Fund unless the Fund elects to obtain some form
of Secondary Market Insurance for them at the time of sale. The Insured Funds
would obtain such Secondary Market Insurance only if, in Voyageur's view, it
would be economically advantageous for the Funds to do so. Further information
about insurance (including its limitations) is set forth in the Statement of
Additional Information.
13 Voyageur Funds (Prospectus)
ALL FUNDS
The foregoing policies as to credit quality of portfolio investments will apply
only at the time of the purchase of a security, and the Funds are not required
to dispose of securities in the event that Moody's or S&P downgrades its
assessment of the credit characteristics of a particular issuer or, in the case
of unrated securities, in the event Voyageur reassesses its view with respect to
the credit quality of the issuer thereof. In no event, however, will more than
5% of each Fund's total assets consist of securities that have been downgraded
to a rating lower than the minimum rating in which each Fund is permitted to
invest or, in the case of unrated securities, that Voyageur has determined to
have a quality lower than such minimum rating. With respect to the Insured
Funds, up to 35% of each such Fund's total assets may consist of securities that
have been downgraded to AA or Aa subsequent to initial investment in such
securities by an Insured Fund.
Each Fund may invest without limitation in short term Tax Exempt
Obligations or in taxable obligations on a temporary, defensive basis due to
market conditions or, with respect to taxable obligations, for liquidity
purposes. Such taxable obligations, whether purchased for liquidity purposes or
on a temporary, defensive basis, may include: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
within the three highest grades by either Moody's or S&P; commercial paper rated
in the highest grade by either of such rating services (Prime-1 or A-1,
respectively); certificates of deposit and bankers' acceptances of domestic
banks which have capital, surplus and undivided profits of over $100 million;
high-grade taxable municipal bonds; and repurchase agreements with respect to
any of the foregoing investments. Each Fund also may hold its assets in cash and
in securities of tax exempt money market mutual funds.
TAX EXEMPT OBLIGATIONS
As used in this Prospectus, the term "Tax Exempt Obligations" refers to debt
obligations issued by or on behalf of a state or territory or its agencies,
instrumentalities, municipalities and political subdivisions, the interest
payable on which is, in the opinion of bond counsel, excludable from gross
income for purposes of federal income tax and (with respect to Funds other than
the National Fund, National Insured Fund or National Limited Term Fund) from the
personal income tax, if any, of the state specified in the Fund's name. The term
"Tax Exempt Obligations" also includes Derivative Tax Exempt Obligations as
defined below. In certain instances the interest on Tax Exempt Obligations may
be an item of tax preference includable in alternative minimum taxable income
depending upon the shareholder's tax status. See "Distributions to Shareholders
and Taxes--Taxes."
Tax Exempt Obligations are primarily debt obligations issued to
obtain funds for various public purposes such as constructing public facilities
and making loans to public institutions. The two principal classifications of
Tax Exempt Obligations are general obligation bonds and revenue bonds. General
obligation bonds are generally secured by the full faith and credit of an issuer
possessing general taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source.
Revenue bonds are payable only from the revenues derived from a particular
source or facility, such as a tax on particular property or revenues derived
from, for example, a municipal water or sewer utility or an airport. Tax Exempt
Obligations that
14 Voyageur Funds (Prospectus)
benefit private parties in a manner different than members of the public
generally (so-called private activity bonds or industrial development bonds) are
in most cases revenue bonds, payable solely from specific revenues of the
project to be financed. The credit quality of private activity bonds is usually
directly related to the creditworthiness of the user of the facilities (or the
creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Tax Exempt Obligations,
there is a variety of types of municipal securities. Certain Tax Exempt
Obligations may carry variable or floating rates of interest whereby the rate of
interest is not fixed but varies with changes in specified market rates or
indexes, such as a bank prime rate or a tax exempt money market index.
Accordingly, the yield on such obligations can be expected to fluctuate with
changes in prevailing interest rates. Other Tax Exempt Obligations are zero
coupon securities, which are debt obligations which do not entitle the holder to
any periodic interest payments prior to maturity and are issued and traded at a
discount from their face amounts. The market prices of zero coupon securities
are generally more volatile than the market prices of securities that pay
interest periodically.
Tax Exempt Obligations also include state or municipal leases and
participation interests therein. The Funds may invest in these types of
obligation without limit. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered illiquid by the staff of the
Securities and Exchange Commission. Municipal lease obligations held by a Fund
will be treated as illiquid unless they are determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors. Under these guidelines,
Voyageur will consider factors including, but not limited to (1) whether the
lease can be cancelled, (2) what assurance there is that the assets represented
by the lease can be sold, (3) the municipality's general credit strength (e.g.,
its debt, administrative, economic and financial characteristics), (4) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
non-appropriation"), and (5) the legal recourse in the event of failure to
appropriate. Additionally, the lack of an established trading market for
municipal lease obligations may make the determination of fair market value more
difficult. See "Investment Policies and Restrictions--Tax Exempt Obligations" in
the Statement of Additional Information.
Each Fund may also acquire Derivative Tax Exempt Obligations, which
are custodial receipts or certificates underwritten by securities dealers or
banks that evidence ownership of future interest payments, principal payments or
both on certain Tax Exempt Obligations. The sponsor of these certificates or
receipts typically purchases and deposits the securities in an irrevocable trust
or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt, a Fund typically would be authorized to assert its rights
directly against the issuer of the underlying obligation, a Fund could be
required to assert through the custodian bank those rights as may exist against
the underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest
15 Voyageur Funds (Prospectus)
when due, a Fund may be subject to delays, expenses and risks that are greater
than those that would have been involved if a Fund had purchased a direct
obligation of the issuer.
In addition, in the event that the trust or custodial account in
which the underlying security had been deposited is determined to be an
association taxable as a corporation, instead of a non taxable entity, it would
be subject to state income tax (but not federal income tax) on the income it
earned on the underlying security, and the yield on the security paid to such
Fund and its shareholders would be reduced by the amount of taxes paid.
Furthermore, amounts paid by the trust or custodial account to a Fund would lose
their tax exempt character and become taxable, for federal and state purposes,
in the hands of the Fund and its shareholders. However, each Fund will only
invest in custodial receipts which are accompanied by a tax opinion stating that
interest payable on the receipts is tax exempt. If a Fund invests in custodial
receipts, it is possible that a portion of the discount at which the Fund
purchases the receipts might have to be accrued as taxable income during the
period that the Fund holds the receipts.
Investments in Derivative Tax Exempt Obligations, when combined with
investments in below investment grade rated securities, will not exceed 20% of
each Fund's total assets. For a discussion of certain risks involved in
investments in Derivative Tax Exempt Obligations, see "Risks and Special
Investment Considerations--General."
MISCELLANEOUS INVESTMENT PRACTICES
Forward Commitments
New issues of Tax Exempt Obligations and other securities are often purchased on
a "when issued" or delayed delivery basis, with delivery and payment for the
securities normally taking place 15 to 45 days after the date of the
transaction. The payment obligation and the interest rate that will be received
on the securities are each fixed at the time the buyer enters into the
commitment. Each Fund may enter into such "forward commitments" if it holds and
maintains, until the settlement date in a segregated account, cash or high-grade
liquid debt obligations in an amount sufficient to meet the purchase price.
There is no percentage limitation on each Fund's total assets which may be
invested in forward commitments. Tax Exempt Obligations purchased on a
when-issued basis and the securities held in a Fund's portfolio are subject to
changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Tax Exempt Obligations
purchased on a when-issued basis may expose a Fund to risk because they may
experience such fluctuations prior to their actual delivery. Purchasing Tax
Exempt Obligations on a when-issued basis can involve the additional risk that
the yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. Any significant commitment
by a Fund to the purchase of securities on a when-issued basis may increase the
volatility of the Fund's net asset value. Although each Fund will generally
enter into forward commitments with the intention of acquiring securities for
its portfolio, it may dispose of a commitment prior to settlement if the Fund's
investment manager deems it appropriate to do so. The Funds may realize
short-term profits or losses upon the sale of forward commitments.
16 Voyageur Funds (Prospectus)
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to not more than 10%
of its total assets (taken at current value), except when investing for
defensive purposes during times of adverse market conditions. Each Fund may
enter into repurchase agreements with respect to any securities which it may
acquire consistent with its investment policies and restrictions.
A repurchase agreement involves the purchase by a Fund of securities
with the condition that, after a stated period of time, the original seller (a
member bank of the Federal Reserve System or a recognized securities dealer)
will buy back the same securities ("collateral") at a predetermined price or
yield. Repurchase agreements involve certain risks not associated with direct
investments in securities. In the event the original seller defaults on its
obligation to repurchase, as a result of its bankruptcy or otherwise, the Fund
will seek to sell the collateral, which action could involve costs or delays. In
such case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Fund could suffer a
loss. See "Investment Policies and Restrictions--Taxable Obligations" in the
Statement of Additional Information.
Reverse Repurchase Agreements
Certain Funds (Arizona Limited Term Tax Free Fund, Arizona Tax Free Fund,
California Limited Term Tax Free Fund, California Tax Free Fund, Colorado
Limited Term Tax Free Fund, Colorado Insured Tax Free Fund, Florida Limited Term
Tax Free Fund, Florida Tax Free Fund, Idaho Tax Free Fund, National Limited Term
Tax Free Fund and National Tax Free Fund) may engage in "reverse repurchase
agreements" with banks and securities dealers with respect to not more than 10%
of its total assets. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market risks and
transaction costs. Because certain of the incidents of ownership of the security
are retained by the Fund, reverse repurchase agreements are considered a form of
borrowing by the Fund from the buyer, collateralized by the security. At the
time a Fund enters into a reverse repurchase agreement, cash, U. S. Government
securities or other liquid high grade debt obligations having a value sufficient
to make payments for the securities to be repurchased will be segregated, and
will be marked to market daily and maintained throughout the period of the
obligation. Reverse repurchase agreements may be used as a means of borrowing
for investment purposes subject to the 10% limitation set forth above. This
speculative technique is referred to as leveraging. Leveraging may exaggerate
the effect on net asset value of any increase or decrease in the market value of
the Fund's portfolio. Money borrowed for leveraging will be subject to interest
costs which may or may not be recovered by income from or appreciation of the
securities purchased. Because the Funds do not currently intend to utilize
reverse repurchase agreements in excess of 10% of total assets, the Funds
believe the risks of leveraging due to use of reverse repurchase agreements to
principal are reduced. Voyageur believes that the limited use of leverage may
facilitate the
17 Voyageur Funds (Prospectus)
Fund's ability to provide current income without adversely affecting the Fund's
ability to preserve capital.
Options and Futures
Each Fund may utilize put and call transactions and certain Funds (see "Futures
Contracts and Options on Futures Contracts" below) may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See "Investment Policies and Restrictions--Options and Futures Transactions" in
the Statement of Additional Information. Options and futures may be used to
attempt to protect against possible declines in the market value of a Fund's
portfolio resulting from downward trends in the debt securities markets
(generally due to a rise in interest rates), to protect a Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of a Fund's portfolio or to establish a position in the securities markets as a
temporary substitute for purchasing particular securities. The use of options
and futures is a function of market conditions. Other transactions may be used
by the Funds in the future for hedging purposes as they are developed to the
extent deemed appropriate by the Board.
Options on Securities
Each Fund may write (i.e., sell) covered put and call options and purchase put
and call options on the securities in which it may invest and on indices of
securities in which it may invest, to the extent such put and call options are
available.
A put option gives the buyer of such option, upon payment of a
premium, the right to deliver a specified amount of a security to the writer of
the option on or before a fixed date at a predetermined price. A call option
gives the purchaser of the option, upon payment of a premium, the right to call
upon the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price.
In purchasing a call option, a Fund would be in a position to
realize a gain if, during the option period, the price of the security increased
by an amount in excess of the premium paid. It would realize a loss if the price
of the security declined or remained the same or did not increase during the
period by more than the amount of the premium. In purchasing a put option, a
Fund would be in a position to realize a gain if, during the option period, the
price of the security declined by an amount in excess of the premium paid. It
would realize a loss if the price of the security increased or remained the same
or did not decrease during that period by more than the amount of the premium.
If a put or call option purchased by a Fund were permitted to expire without
being sold or exercised, its premium would be lost by the Fund.
If a put option written by a Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by a Fund were exercised, the Fund would be obligated to sell the
underlying security at the exercise price. The risk involved in writing a put
option is that there could be a decrease in the market value of the underlying
security caused by rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then be sold to the
Fund at a higher price than its current market value. The risk involved in
writing a call option is that there could be an increase in the market value of
the underlying security caused by declining interest rates or other factors. If
this occurred, the option could be exercised and the underlying security would
then be sold by the
18 Voyageur Funds (Prospectus)
Fund at a lower price than its current market value. These risks could be
reduced by entering into a closing transaction as described in Appendix B to the
Statement of Additional Information. The Fund retains the premium received from
writing a put or call option whether or not the option is exercised.
Over-the-counter options are purchased or written by a Fund in
privately negotiated transactions. Such options are illiquid, and it may not be
possible for a Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when Voyageur believes it
would be advantageous to do so. Over the counter options are subject to each
Fund's 15% illiquid investment limitation. See Appendix B to the Statement of
Additional Information for a further discussion of the general characteristics
and risks of options.
Participation in the options market involves investment risks and
transaction costs to which the Funds would not be subject absent the use of this
strategy. If Voyageur's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include (1) dependence on Voyageur's
ability to predict correctly movements in the direction of interest rates and
securities prices; (2) imperfect correlation between the price of options and
movements in the prices of the securities being hedged; (3) the fact that the
skills needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; and (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences. See
"Investment Policies and Restrictions-Risks of Transactions in Futures Contracts
and Options" in the Statement of Additional Information for further discussion
and see Appendix B for a discussion of closing transactions and other risks.
Futures Contracts and Options on Futures Contracts
Certain Funds (Arizona Limited Term Tax Free Fund, Arizona Tax Free Fund,
California Limited Term Tax Free Fund, California Tax Free Fund, Colorado
Limited Term Tax Free Fund, Colorado Insured Tax Free Fund, Florida Limited Term
Tax Free Fund, Florida Tax Free Fund, Idaho Tax Free Fund, National Limited Term
Tax Free Fund and National Tax Free Fund) may enter into contracts for the
purchase or sale for future delivery of fixed income securities or contracts
based on financial indices including any index of securities in which the Fund
may invest ("futures contracts") and may purchase and write put and call options
to buy or sell futures contracts ("options on futures contracts"). A "sale" of a
futures contract means the acquisition of a contractual obligation to deliver
the securities called for by the contract at a specified price on a specified
date. The purchaser of a futures contract on an index agrees to take or make
delivery of an amount of cash equal to the difference between a specified dollar
multiple of the value of the index on the expiration date of the contract
("current contract value") and the price at which the contract was originally
struck. Options on futures contracts to be written or purchased by the Fund will
be traded on exchanges or over the counter. The successful use of such
instruments draws upon Voyageur's experience with respect to such instruments
and usually depends upon Voyageur's ability to forecast interest rate movements
correctly. Should interest rates move in an unexpected manner, the Fund may not
achieve the anticipated benefits of futures contracts or options on futures
contracts or may realize losses and would thus be in a worse position than if
such strategies had not
19 Voyageur Funds (Prospectus)
been used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements in the prices of
the securities hedged or used for cover will not be perfect.
A Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements. To the extent
required to comply with applicable Securities and Exchange Commission releases
and staff positions, when purchasing a futures contract or writing a put option,
the Fund will maintain in a segregated account cash, U. S. Government securities
or other liquid high grade debt securities equal to the value of such contracts,
less any margin on deposit. In addition, the rules and regulations of the
Commodity Futures Trading Commission currently require that, in order to avoid
"commodity pool operator" status, the Fund must use futures and options
positions (a) for "bona fide hedging purposes" (as defined in the regulations)
or (b) for other purposes so long as aggregate initial margins and premiums
required in connection with non hedging positions do not exceed 5% of the
liquidation value of the Fund's portfolio. There are no other numerical limits
on a Fund's use of futures contracts and options on futures contracts. For a
discussion of the tax treatment of futures contracts and options on futures
contracts, see "Taxes" in the Statement of Additional Information. For a further
discussion of the general characteristics and risks of futures, see Appendix B
to the Statement of Additional Information.
Concentration Policy
Although each Fund may invest 25% or more of its total assets in revenue bonds,
as a fundamental policy, no Fund will invest 25% or more of its total assets in
revenue bonds payable only from revenues derived from facilities or projects
within a single industry, except that the Funds may invest without limitation,
in circumstances in which other appropriate available investments may be in
limited supply, in housing, health care, and/or utility obligations. In
addition, Arizona Limited Term Tax Free Fund, Arizona Tax Free Fund, California
Limited Term Tax Free Fund, California Tax Free Fund, Colorado Limited Term Tax
Free Fund, Colorado Insured Tax Free Fund, Florida Limited Term Tax Free Fund,
Florida Tax Free Fund, Idaho Tax Free Fund, National Limited Term Tax Free Fund
and National Tax Free Fund may invest in such circumstances in transportation,
education and/or industrial obligations. In such circumstances, economic,
business, political and other changes affecting one bond might also affect other
bonds in the same segment, thereby potentially increasing market or credit risk.
For a discussion of these segments of the municipal bond market, see "Investment
Policies and Restrictions--Concentration Policy" in the Statement of Additional
Information.
Each Fund's Board may change any of the foregoing policies that are
not specifically designated fundamental. The non-fundamental policy of each
Insured Fund requiring the Tax Exempt Obligations to be insured may not be
eliminated except upon 30 days' advance notice to the shareholders of the
applicable Insured Fund.
20 Voyageur Funds (Prospectus)
RISKS AND SPECIAL INVESTMENT CONSIDERATIONS
- -------------------------------------------------------------------------------
GENERAL
The yields on Tax Exempt Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and monetary
conditions, conditions in the relevant market, the size of a particular issue,
maturity of the obligation and the rating of the issue. Generally, the value of
Tax Exempt Obligations will tend to fall as interest rates rise and will tend to
increase as interest rates decrease. In addition, Tax Exempt Obligations of
longer maturity produce higher current yields than Tax Exempt Obligations with
shorter maturities but are subject to greater price fluctuation due to changes
in interest rates, tax laws and other general market factors. Lower-rated Tax
Exempt Obligations generally produce a higher yield than higher-rated Tax Exempt
Obligations due to the perception of a greater degree of risk as to the payment
of principal and interest. Certain Tax Exempt Obligations held by a Fund may
permit the issuer at its option to "call," or redeem, its securities. If an
issuer were to redeem securities held by a Fund during a time of declining
interest rates, the Fund may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
In normal circumstances, each Fund (except for the Insured Funds)
may invest up to 20% of its total assets in Tax Exempt Obligations rated below
investment grade (but not rated lower than B by S&P or Moody's) or in unrated
Tax Exempt Obligations considered by Voyageur to be of comparable quality to
such securities. Investment in such lower grade Tax Exempt Obligations involves
special risks as compared with investment in higher grade Tax Exempt
Obligations. The market for lower grade Tax Exempt Obligations is considered to
be less liquid than the market for investment grade Tax Exempt Obligations,
which may adversely affect the ability of a Fund to dispose of such securities
in a timely manner at a price which reflects the value of such securities in
Voyageur's judgment. The market price for less liquid securities tends to be
more volatile than the market price for more liquid securities. The lower
liquidity of and the absence of readily available market quotations for lower
grade Tax Exempt Obligations may make Voyageur's valuation of such securities
more difficult, and Voyageur's judgment may play a greater role in the valuation
of the Fund's lower grade Tax Exempt Obligations. Periods of economic
uncertainty and changes may have a greater impact on the market price of such
bonds and, therefore, the net asset value of any Fund investing in such
obligations.
Lower grade Tax Exempt Obligations generally involve greater credit
risk than higher grade Tax Exempt Obligations and are more sensitive to adverse
economic changes, significant increases in interest rates and individual issuer
developments. Because issuers of lower grade Tax Exempt Obligations frequently
choose not to seek a rating of such securities, a Fund will rely more heavily on
Voyageur's ability to determine the relative investment quality of such
securities than if such Fund invested exclusively in higher grade Tax Exempt
Obligations. A Fund may, if deemed appropriate by Voyageur, retain a security
whose rating has been downgraded below B by S & P or Moody's, or whose rating
has been withdrawn. In no event, however, will more than 5% of each Fund's total
assets consist of securities that have been downgraded to a rating lower than
the minimum rating in which each Fund is permitted to invest or, in the case of
21 Voyageur Funds (Prospectus)
unrated securities, that have been determined by Voyageur to be of a quality
lower than such minimum rating. Additional information concerning the risks
associated with instruments in lower grade Tax Exempt Obligations is included in
the Fund's Statement of Additional Information.
The principal and interest payments on the Derivative Tax Exempt
Obligations underlying custodial receipts may be allocated in a number of ways.
For example, payments may be allocated such that certain custodial receipts may
have variable or floating interest rates and others may be stripped securities
which pay only the principal or interest due on the underlying Tax Exempt
Obligations. The Funds may also invest in custodial receipts which are "inverse
floating obligations" (also sometimes referred to as "residual interest bonds").
These securities pay interest rates that vary inversely to changes in the
interest rates of specified short term Tax Exempt Obligations or an index of
short term Tax Exempt Obligations. Thus, as market interest rates increase, the
interest rates on inverse floating obligations decrease. Conversely, as market
rates decline, the interest rates on inverse floating obligations increase. Such
securities have the effect of providing a degree of investment leverage, since
the interest rates on such securities will generally change at a rate which is a
multiple of the change in the interest rates of the specified Tax Exempt
Obligations or index. As a result, the market values of inverse floating
obligations will generally be more volatile than the market values of other Tax
Exempt Obligations and investments in these types of obligations will increase
the volatility of the net asset value of shares of the Funds.
STATE CONSIDERATIONS
The value of Tax Exempt Obligations owned by the Funds may be adversely affected
by local political and economic conditions and developments within a particular
state. Adverse conditions in an industry significant to a local economy could
have a correspondingly adverse effect on the financial condition of local
issuers. Other factors that could affect Tax Exempt Obligations include a change
in the local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example, legislation or court decisions reducing state aid to local
governments or mandatory additional services). A summary description of certain
factors affecting and statistics describing issuers of Tax Exempt Obligations of
each applicable state is set forth below. Such information has been taken from
publicly available offering documents relating to the relevant state or issuers
located in such state. No Fund or Voyageur has independently verified this
information and no Fund or Voyageur makes any representation regarding such
information. See "Special Factors Affecting the Funds" in the Statement of
Additional Information.
Arizona's primary economic sectors include services, tourism and
manufacturing. Arizona maintained a general fund surplus of $269 million (on
general fund revenues of approximately $4.694 billion) for its 1995 fiscal year.
Currently there are no general obligation ratings for the state. California's
primary economic sectors are agriculature, services, trade and manufacturing. In
1994, Orange County, California filed a voluntary petition under the bankruptcy
code. It is uncertain what effect the filing will have on the state's ratings or
on issuers located within Orange County. California projected a general fund
surplus of $28 million for its 1995-96 fiscal year (on estimated revenues of
approximately $44 billion). Currently, California's general obligation bonds are
rated A1 by
22 Voyageur Funds (Prospectus)
Moody's, A by S&P and "A+" by Fitch Investors Service, Inc. ("Fitch").
Colorado's economy is based primarily on services. Colorado maintained a
generally balanced budget for its 1995 fiscal year (on estimated revenues of
approximately $5.957 billion). Currently there are no general obligation ratings
for Colorado. Florida's economy is based primarily on the services sector and
tourism in particular. Florida projected a general fund surplus of $478 million
for its 1995-1996 fiscal year (on estimated revenues of approximately $14.808
billion). Currently, Florida's general obligation bonds are rated Aaa by Moody's
and AA by S&P. Idaho's primary economic sectors are agriculture, manufacturing
and mining. Idaho projected a fiscal year 1995 general fund surplus of
approximately $37 million (on revenues of approximately $1.330 billion).
Currently there are no general obligation ratings for Idaho. Iowa's primary
economic sectors are services, manufacturing and agriculture. Iowa maintained an
unreserved fund balance of approximately $434 million (on revenues of
approximately $6.946 billion) for its fiscal year 1995. Currently there are no
general obligation ratings for Iowa. Kansas' economy is based primarily on
agriculture, manufacturing, and services. Kansas projected a positive general
fund balance for its 1996 fiscal year (on estimated general fund revenues of
approximately $3.367 billion). Currently there are no general obligation ratings
for Kansas. Minnesota's economy is based primarily on agriculture, manufacturing
and services. Minnesota projects a balanced general fund at the end of its 1997
biennium. Currently Minnesota's general obligation bonds are rated Aaa by
Moody's and AA+ by S&P. Missouri's primary economic sectors are services,
manufacturing and trade. Missouri had a general fund surplus of $1.586 billion
for its 1995 fiscal year (on revenues of approximately $11 billion). Currently
Missouri's general obligation bonds are rated Aaa by Moody's and AAA by S&P. New
Mexico's economy is based primarily on agriculture but also has tourism,
services and mining sectors. New Mexico projected a $185 million general fund
surplus for its 1995 fiscal year (on estimated revenues of approximately $2.676
billion). Currently New Mexico's general obligation bonds are rated Aa1 by
Moody's and AA by S&P. North Dakota's economy is based primarily on agriculture.
North Dakota had a positive fund balance for its 1995 fiscal year (on revenues
of approximately $1.4 billion). Currently North Dakota's general obligation
bonds are rated Aa by Moody's and AA- by S&P. Oregon's economy is based
primarily on forestry, agriculture and tourism sectors. Oregon maintained a
general fund surplus of approximately $499 million for its 1995 biennium (on
estimated revenue of approximately $6.536 billion). Currently Oregon's general
obligation bonds are rated Aa by Moody's and AA- by S&P. Utah's economy is based
primarily on agriculture and mining sectors. Utah maintained a general fund
surplus of approximately $386 million for its 1995 fiscal year (on estimated
revenues of approximately $4.2 billion). Currently Utah's general obligation
bonds are rated Aaa by Moody's and AAA by S&P. Washington's economy is based
primarily on manufacturing and service sectors. Washington projected a general
fund surplus for its 1995-1997 biennium (on estimated revenues of approximately
$17.669 billion). Currently Washington's general obligation bonds are rated Aa
by Moody's and AA by S&P. Wisconsin's economy is based primarily on agriculture
and manufacturing. Wisconsin maintained a general fund surplus of $401 million
for its 1995 fiscal year (on estimated revenues of approximately $23.319
billion). Currently Wisconsin's general obligation bonds are rated Aa by Moody's
and AA by S&P.
23 Voyageur Funds (Prospectus)
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
Each Fund has adopted certain investment restrictions in addition to those set
forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the restriction providing
that no Fund may borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% of the value of its total assets (10%
for Colorado Tax Free Fund) (certain Funds may also borrow money in the form of
reverse repurchase agreements up to 10% of total assets). Also, certain Funds
may not, as a matter of fundamental policy invest more than 15% of their net
assets in illiquid securities and pledge, hypothecate, mortgage or otherwise
encumber their assets in excess of 10% of net assets. See "Investment Policies
and Restrictions--Investment Restrictions" in the Statement of Additional
Information. Each Fund also has a number of non-fundamental investment
restrictions which may be changed by the Fund's Board without the shareholder
approval. These include restrictions providing that no Fund may (i) invest more
than 5% of its total assets in securities of any single investment company or
(ii) invest more than 10% of its total assets in securities of two or more
investment companies. To the extent that a Fund invests in the securities of
other open-end investment companies, Voyageur will take appropriate action to
avoid subjecting such Fund's shareholders to duplicate management and other fees
and expenses.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
ALTERNATIVE PURCHASE ARRANGEMENTS
The Funds offer investors the choice among three classes of shares which offer
different sales charges and bear different expenses. These alternatives permit
an investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. Page 2 of the Prospectus contains a
summary of these alternative purchase arrangements.
A broker-dealer may receive different levels of compensation
depending on which class of shares is sold. In addition, the Underwriter from
time to time pays certain additional cash incentives of up to $100 and/or non
cash incentives such as vacations or other prizes to its investment executives
and other broker-dealers and financial institutions in consideration of their
sales of Fund shares. In some instances, other incentives not to exceed 1.25% of
a Fund's net assets (such as payments related to retention of shares sold by a
particular broker-dealer or financial institution for a specified period of
time), will be made available only to broker-dealers and financial institutions
who meet certain objective standards developed by the Underwriter, to the
exclusion of other broker-dealers and
24 Voyageur Funds (Prospectus)
financial institutions who do not meet such criteria.
GENERAL PURCHASE INFORMATION
The minimum initial investment in each Fund is $1,000, and the minimum
additional investment is $100. Each Fund's shares may be purchased at the public
offering price from the Underwriter, from other broker-dealers who are members
of the National Association of Securities Dealers, Inc. and who have selling
agreements with the Underwriter, and from certain financial institutions that
have selling agreements with the Underwriter.
When orders are placed for shares of a Fund, the public offering
price used for the purchase will be the net asset value per share next
determined, plus the applicable sales charge, if any. If an order is placed with
the Underwriter or other broker-dealer, the broker-dealer is responsible for
promptly transmitting the order to the Fund. The Fund reserves the right, in its
absolute discretion, to reject any order for the purchase of shares.
Shares of the Funds may be purchased by opening an account either by
mail or by phone. Dividend income begins to accrue as of the opening of the New
York Stock Exchange (the "Exchange") on the day that payment is received. If
payment is made by check, payment is considered received on the day the check is
received if the check is drawn upon a member bank of the Federal Reserve System
within the Ninth Federal Reserve District (Michigan's Upper Peninsula,
Minnesota, Montana, North Dakota, South Dakota and northwestern Wisconsin). In
the case of other checks, payment is considered received when the check is
converted into "Federal Funds," i.e., monies of member banks within the Federal
Reserve System that are on deposit at a Federal Reserve Bank, normally within
two days after receipt.
An investor who may be interested in having shares redeemed shortly
after purchase should consider making unconditional payment by certified check
or other means approved in advance by the Underwriter. Payment of redemption
proceeds will be delayed as long as necessary to verify by expeditious means
that the purchase payment has been or will be collected. Such period of time
typically will not exceed 15 days.
Automatic Investment Plan
Investors may make systematic investments in fixed amounts automatically on a
monthly basis through each Fund's Automatic Investment Plan. Additional
information is available from the Underwriter by calling 800-545-3863.
Purchases by Mail
To open an account by mail, complete the general authorization form attached to
this Prospectus, designate an investment dealer or other financial institution
on the form, and mail it, along with a check payable to the Fund, to:
NW 9369
P.O. BOX 1450
MINNEAPOLIS, MN 55485-9369
25 Voyageur Funds (Prospectus)
Purchases by Telephone
To open an account by telephone, call 612-376-7014 or 800-545-3863 to obtain an
account number and instructions. Information concerning the account will be
taken over the phone. The investor must then request a commercial bank with
which he or she has an account and which is a member of the Federal Reserve
System to transmit Federal Funds by wire to the appropriate Fund as follows:
Norwest Bank Minnesota, N.A., ABA #091000019
For Credit of: (insert applicable Fund name)
Checking Account No.: 872-458
Account Number: (assigned by telephone)
Information on how to transmit Federal Funds by wire is available at
any national bank or any state bank that is a member of the Federal Reserve
System. The bank may charge the shareholder for the wire transfer. If the phone
order and Federal Funds are received before the close of trading on the
Exchange, the order will be deemed to become effective at that time. Otherwise,
the order will be deemed to become effective as of the close of trading on the
Exchange on the next day the Exchange is open for trading. The investor will be
required to complete the general authorization form attached to this Prospectus
and mail it to the Fund after making the initial telephone purchase.
CLASS A SHARES--FRONT END SALES CHARGE ALTERNATIVE
The public offering price of Class A shares of each Fund is the net asset value
of the Fund's shares plus the applicable front end sales charge ("FESC"), which
will vary with the size of the purchase. The Fund receives the net asset value.
The FESC varies depending on the size of the purchase and is allocated between
the Underwriter and other broker-dealers.
The current sales charges are:
Group 1* Funds
<TABLE>
<CAPTION>
Sales Charge Sales Charge Dealer Discount
as % of as % of as % of
Amount of Purchase Net Asset Value Offering Price Offering Price(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.90% 3.75% 3.25%
$50,000 but less than $100,000 3.63 3.50 3.00
$100,000 but less than $250,000 2.83 2.75 2.50
$250,000 but less than $500,000 2.04 2.00 1.75
$500,000 but less than $1,000,000 1.78 1.75 1.75
$1,000,000 or more NAV(3) NAV(3) 1.00(2)
- --------------------------------------------------------------------------------------------
Group 2** Funds
Sales Charge Sales Charge Dealer Discount
as % of as % of as % of
Amount of Purchase Net Asset Value Offering Price Offering Price(1)
- --------------------------------------------------------------------------------------------
Less than $50,000 2.83% 2.75% 2.25%
$50,000 but less than $100,000 2.56 2.50 2.00
$100,000 but less than $250,000 1.78 1.75 1.50
$250,000 but less than $500,000 1.01 1.00 0.75
$500,000 but less than $1,000,000 0.76 0.75 0.75
$1,000,000 or more NAV(3) NAV(3) 0.50(2)
- --------------------------------------------------------------------------------------------
</TABLE>
26 Voyageur Funds (Prospectus)
1 Brokers and dealers who receive 90% or more of the sales charge may be
considered to be underwriters under the Securities Act of 1933, as
amended.
2 The Underwriter intends to pay its investment executives and other
broker-dealers and banks that sell Fund shares, out of its own assets,
a fee of up to 1% (up to .50% for Group 2 Funds) of the offering price
of sales of $1,000,000 or more, other than on sales not subject to a
contingent deferred sales charge.
3 Purchases of $1,000,000 or more may be subject to a contingent
deferred sales charge at the time of redemption. See "How to Sell
Shares--Contingent Deferred Sales Charge."
* Group 1 Funds: Arizona Tax Free, Arizona Insured Tax Free, California
Tax Free, California Insured Tax Free, Florida Tax Free, Florida
Insured Tax Free, Missouri Insured Tax Free, National Tax Free,
National Insured Tax Free, Oregon Insured Tax Free, Washington Insured
Tax Free, Kansas Tax Free, Minnesota Tax Free, Minnesota Insured,
North Dakota Tax Free, Colorado Tax Free, Colorado Insured Tax Free,
Iowa Tax Free, New Mexico Tax Free, Utah Tax Free, Wisconsin Tax Free
and Idaho Tax Free.
** Group 2 Funds: Arizona Limited Term Tax Free, Colorado Limited Term
Tax Free, California Limited Term Tax Free, National Limited Term Tax
Free, Minnesota Limited Term Tax Free and Florida Limited Term Tax
Free.
In connection with the distribution of the Funds' Class A shares, the
Underwriter is deemed to receive all applicable sales charges. The Underwriter,
in turn, pays its investment executives and other broker-dealers selling such
shares a "dealer discount," as set forth above. In the event that shares are
purchased by a financial institution acting as agent for its customers, the
Underwriter or the broker-dealer with whom such order was placed may pay all or
part of its dealer discount to such financial institution in accordance with
agreements between such parties.
Special Purchase Plans--Reduced Sales Charges
Certain investors (or groups of investors) may qualify for reductions in the
sales charges shown above. Investors should contact their broker-dealer or the
Funds for details about the Funds' Combined Purchase Privilege, Cumulative
Quantity Discount and Letter of Intention plans. Descriptions are also included
with the general authorization form and in the Statement of Additional
Information. These special purchase plans may be amended or eliminated at any
time by the Underwriter without notice to existing Fund shareholders.
Rule 12b-1 Fees
Class A shares are subject to a Rule 12b-1 fee payable at an annual rate of .25%
of the average daily net assets of a Fund attributable to Class A shares. All or
a portion of such fees are paid quarterly to financial institutions and service
providers with respect to the average daily net assets attributable to shares
sold or serviced by such institutions and service providers. For additional
information about this fee, see "Management--Plan of Distribution" below.
Contingent Deferred Sales Charge
Although there is no initial sales charge on purchases of Class A shares of
$1,000,000 or more, the Underwriter pays investment dealers out of its own
assets, a fee of up to 1% (up to .50% for Group 2 Funds) of the offering price
of such shares. If these shares are redeemed within a certain period of time
after purchase, the redemption proceeds will be reduced by a contingent deferred
sales charge ("CDSC"). For additional information, see "How to Sell
Shares-Contingent Deferred Sales Charge." The CDSC will depend on the number of
years since the purchase was made according to the following table:
27 Voyageur Funds (Prospectus)
CDSC as a % of Amount Redeemed for Investments of $1,000,000 or More
- -----------------------------------------------------------------------------
Group 1 Funds Group 2 Funds
CDSC Period CDSC CDSC Period CDSC
- ------------------------------------ ------------------------------------
1st year after purchase 1.0% 1st year after purchase 0.5%
2nd year after purchase 1.0 Thereafter 0.0
Thereafter 0.0
- -----------------------------------------------------------------------------
Waiver of Sales Charges
A limited group of institutional and other investors may qualify to purchase
Class A shares at net asset value, with no front end or deferred sales charges.
The investors qualifying to purchase such shares are: (1) officers and directors
of the Funds; (2) officers, directors and full-time employees of Voyageur
Companies, Inc., Voyageur, Voyageur Asset Management Group, Inc., the
Underwriter and Pohlad Companies, and officers, directors and full-time
employees of parents and subsidiaries of the foregoing companies; (3) officers,
directors and full-time employees of investment advisers of other mutual funds
subject to a sales charge and included in any other family of mutual funds that
includes any Voyageur Fund as a member ("Other Load Funds"), and officers,
directors and full-time employees of parents, subsidiaries and corporate
affiliates of such investment advisers; (4) spouses and lineal ancestors and
descendants of the officers, directors/trustees and employees referenced in
clauses (1), (2) and (3), and lineal ancestors and descendants of their spouses;
(5) investment executives and other employees of banks and dealers that have
selling agreements with the Underwriter and parents, spouses and children under
the age of 21 of such investment executives and other employees; (6) trust
companies and bank trust departments for funds held in a fiduciary, agency,
advisory, custodial or similar capacity; (7) any state or any political
subdivision thereof or any instrumentality, department, authority or agency of
any state or political subdivision thereof; (8) partners and full-time employees
of the Funds' general counsel; (9) managed account clients of Voyageur, clients
of investment advisers affiliated with Voyageur and other registered investment
advisers and their clients (the Funds may be available through a broker-dealer
which charges a transaction fee for purchases and sales) and (10) "wrap
accounts" for the benefit of clients of financial planners adhering to certain
standards established by Voyageur.
Class A shares will also be issued at net asset value, without a front
end or deferred sales charge, if the purchase of such shares is funded by the
proceeds from the redemption of shares of any unrelated open-end investment
company that charges a front end sales charge, and, in certain circumstances, a
contingent deferred sales charge. In order to exercise this privilege, the
purchase order must be received by the Fund within 60 days after the redemption
of shares of the unrelated investment company.
CLASS B SHARES--CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE
The public offering price of Class B shares of each Fund is the net asset value
of the Fund's shares. Class B shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC of up to 5% will be imposed if shares are redeemed within six years of
purchase. For additional information, see "How to Sell Shares--Contingent
Deferred Sales Charge." In addition, Class B shares are subject to higher Rule
12b-1 fees as
28 Voyageur Funds (Prospectus)
described below. The CDSC will depend on the number of years since the purchase
was made according to the following table:
CDSC as a % of Amount Redeemed*
Groups 1 Funds Group 2 Funds
CDSC Period CDSC CDSC Period CDSC
- ------------------------------------ ------------------------------
1st year after purchase 5% 1st year after purchase 4%
2nd year after purchase 4 2nd year after purchase 3
3rd year after purchase 4 3rd year after purchase 3
4th year after purchase 3 4th year after purchase 2
5th year after purchase 2 5th year after purchase 1
6th year after purchase 1 Thereafter 0
Thereafter 0
- ----------------------------------------------------------------------
* The CDSC will be calculated on an amount equal to the lesser of the net
asset value of the shares at the time of purchase or the net asset value at
the time of redemption.
Proceeds from the CDSC are paid to the Underwriter and are used to
defray expenses of the Underwriter related to providing distribution-related
services to the Funds in connection with the sale of Class B shares, such as the
payment of compensation to selected broker dealers, and for selling Class B
shares. The combination of the CDSC and the Rule 12b-1 fee enables the Funds to
sell the Class B shares without deduction of a sales charge at the time of
purchase. Although Class B shares are sold without an initial sales charge at
the time the shares are sold, the Underwriter pays a sales commission equal to
4% (3% for Group 2) of the amount invested to broker-dealers who sell Class B
shares and pays an ongoing annual servicing fee of .15% (paid quarterly)
calculated on the net assets attributable to sales made by such broker-dealers.
Rule 12b-1 Fees
Class B shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of a Fund attributable to Class B shares. The
higher 12b-1 fee will cause Class B shares to have a higher expense ratio and to
pay lower dividends than Class A shares. For additional information about this
fee, see "Fees and Expenses" above and "Management--Plan of Distribution" below.
Conversion Feature
On the first business day of the month eight years after the purchase date,
Class B shares will automatically convert to Class A shares and will no longer
be subject to a higher Rule 12b-1 fee. Such conversion will be on the basis of
the relative net asset values of the two classes. Class A shares issued upon
such conversion will not be subject to any FESC or CDSC. Class B shares acquired
by exchange from Class B shares of another Voyageur Fund will convert into Class
A shares based on the time of the initial purchase. Similarly, Class B shares
acquired by exercise of the Reinstatement Privilege will convert into Class A
shares based on the time of the original purchase of Class B shares. See
"Reinstatement Privilege" below. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date of issuance of
such shares.
CLASS C SHARES--LEVEL LOAD ALTERNATIVE
The public offering price of Class C shares of each Fund is the net asset value
of the Fund's shares. Class C shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC
29 Voyageur Funds (Prospectus)
of 1% (0.5% for Group 2 Funds) will be imposed if shares are redeemed within one
year of purchase. For additional information see "How to Sell Shares-Contingent
Deferred Sales Charge." In addition, Class C shares are subject to higher annual
Rule 12b-1 fees as described below.
Rule 12b-1 Fees
Class C shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of a Fund attributable to Class C shares. The
higher Rule 12b-1 fee will cause Class C shares to have a higher expense ratio
and to pay lower dividends than Class A shares. For additional information about
this fee, see "Fees and Expenses" and "Management--Plan of Distribution".
Proceeds from the CDSC are paid to the Underwriter and are used to
defray expenses of the Underwriter related to providing distributionrelated
services to the Funds in connection with the sale of Class C shares, such as the
payment of compensation to selected broker-dealers and for selling Class C
shares. The combination of the CDSC and the Rule 12b-1 fee enables the Funds to
sell the Class C shares without deduction of a sales charge at the time of
purchase. Although Class C shares are sold without an initial sales charge, the
Underwriter pays an annual fee of .90% (paid quarterly commencing in the
thirteenth month after the sale of such shares) calclated on the net assets
attributable to sales made by such broker dealers.
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Each Fund will redeem its shares in cash at the net asset value next determined
after receipt of a shareholder's written request for redemption in good order
(see below). If shares for which payment has been collected are redeemed,
payment must be made within seven days. Shareholders will not earn any income on
redeemed shares on the redemption date. Each Fund may suspend this right of
redemption and may postpone payment only when the Exchange is closed for other
than customary weekends or holidays, or if permitted by the rules of the
Securities and Exchange Commission during periods when trading on the Exchange
is restricted or during any emergency which makes it impracticable for such Fund
to dispose of its securities or to determine fairly the value of its net assets
or during any other period permitted by order of the Commission for the
protection of investors.
Each Fund reserves the right and currently plans to redeem Fund
shares and mail the proceeds to the shareholder if at any time the value of Fund
shares in the account falls below a specified value, currently set at $250.
Shareholders will be notified and will have 60 days to bring the account up to
the required value before any redemption action will be taken by a Fund.
CONTINGENT DEFERRED SALES CHARGE
The CDSC will be calculated on an amount equal to the lesser of the net asset
value of the shares at the time of purchase or their net asset value at the time
of redemption. No charge will be imposed on increases in net asset value above
the initial purchase price. In addition, no charge will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
In determining whether a CDSC is payable with respect to any
redemption, the calculation will be determined in the manner that results in the
30 Voyageur Funds (Prospectus)
lowest rate being charged. Therefore, it will be assumed that shares that are
not subject to the CDSC are redeemed first, shares subject to the lowest level
of CDSC are redeemed next, and so forth. If a shareholder owns Class A and
either Class B or Class C shares, then absent a shareholder choice to the
contrary, Class B or Class C shares not subject to a CDSC, will be redeemed in
full prior to any redemption of Class A shares not subject to a CDSC.
The CDSC does not apply to: (1) redemptions of Class B shares in
connection with the automatic conversion to Class A shares; (2) redemptions of
shares when a Fund exercises its right to liquidate accounts which are less than
the minimum account size; and (3) redemptions in the event of the death or
disability of the shareholder within the meaning of Section 72(m)(7) of the
Internal Revenue Code.
If a shareholder exchanges Class A, Class B or Class C shares
subject to a CDSC for Class A, Class B or Class C shares, respectively, of a
different Voyageur Fund, the transaction will not be subject to a CDSC. However,
when shares acquired through the exchange are redeemed, the shareholder will be
treated as if no exchange took place for the purpose of determining the CDSC.
Fund shares are exchangeable for shares of any money market fund available
through Voyageur. No CDSC will be imposed at the time of any such exchange;
however, the shares acquired in any such exchange will remain subject to the
CDSC and the period during which such shares represent shares of the money
market fund will not be included in determining how long the shares have been
held. Any CDSC due upon a redemption of Fund shares will be reduced by the
amount of any Rule 12b-1 payments made by such money market fund with respect to
such shares.
The Underwriter, upon notification, intends to provide, out of its
own assets, a pro rata refund of any CDSC paid in connection with a redemption
of Class A, Class B or Class C shares of any Fund (by crediting such refunded
CDSC to such shareholder's account) if, within 90 days of such redemption, all
or any portion of the redemption proceeds are reinvested in shares of the same
class in any of the Voyageur Funds. Any reinvestment within 90 days of a
redemption to which the CDSC was paid will be made without the imposition of a
FESC but will be subject to the same CDSC to which such amount was subject prior
to the redemption. The amount of the CDSC will be calculated from the original
investment date.
EXPEDITED REDEMPTIONS
Each Fund offers several expedited redemption procedures, described below, which
allow a shareholder to redeem Fund shares at net asset value determined on the
same day that the shareholder places the request for redemption of those shares.
Pursuant to these expedited redemption procedures, each Fund will redeem its
shares at their net asset value next determined following the Fund's receipt of
the redemption request. Each Fund reserves the right at any time to suspend or
terminate the expedited redemption procedures or to impose a fee for this
service. There is currently no additional charge to the shareholder for use of
the Funds' expedited redemption procedures.
Expedited Telephone Redemption
Shareholders redeeming at least $1,000 and no more than $50,000 (for which
certificates have not been issued) may redeem by telephoning the Fund directly
at 612-376-7014 or 800-545-3863. The applicable section of the general
authorization form must have been completed by the shareholder and filed
31 Voyageur Funds (Prospectus)
with the Fund before the telephone request is received. The proceeds of the
redemption will be paid by check mailed to the shareholder's address of record
or, if requested at the time of redemption, by wire to the bank designated on
the general authorization form. The Funds will employ reasonable procedures to
confirm that telephone instructions are genuine, including requiring that
payment be made only to the shareholder's address of record or to the bank
account designated on the authorization form and requiring certain means of
telephonic identification. The Fund's Adviser and Distributor will not be liable
for following instructions which are reasonably believed to be genuine.
Expedited Redemptions Through Certain Broker Dealers
Certain broker-dealers who have sales agreements with the Underwriter may allow
their customers to effect a redemption of shares of a Fund purchased through
such broker-dealer by notifying the broker-dealer of the amount of shares to be
redeemed. The broker-dealer is then responsible for promptly placing the
redemption request with the Fund on the customer's behalf. Payment will be made
to the shareholder by check or wire sent to the broker-dealer. Broker-dealers
offering this service may impose a fee or additional requirements for such
redemptions.
GOOD ORDER
"Good order" means that stock certificates, if issued, must accompany the
written request for redemption and must be duly endorsed for transfer, or must
be accompanied by a duly executed stock power. If no stock certificates have
been issued, a written request to redeem must be made. Stock certificates will
not be issued for Class B or Class C shares. In any case, the shareholder must
execute the redemption request exactly as the shares are registered. If the
redemption proceeds are to be paid to the registered holder(s), a signature
guarantee is not normally required. A signature guarantee is required in certain
other circumstances, for example, to redeem more than $50,000 or to have a check
mailed other than to the shareholder's address of record. See "Other
Information" in the Statement of Additional Information. The Adviser may waive
certain of these redemption requirements at its own risk, but also reserves the
right to require signature guarantees on all redemptions, in contexts perceived
by the Adviser to subject the Fund to an unusual degree of risk.
MONTHLY CASH WITHDRAWAL PLAN
An investor who owns or buys shares of any Fund valued at $10,000 or more at the
current offering price may open a Withdrawal Plan and have a designated sum of
money paid monthly to the investor or another person. Deferred sales charges may
apply to monthly redemptions of Class B or Class C shares. See "Monthly Cash
Withdrawal Plan" in the Statement of Additional Information.
REINSTATEMENT PRIVILEGE
- --------------------------------------------------------------------------------
An investor in a Fund whose shares have been redeemed and who has not previously
exercised the Reinstatement Privilege as to such Fund may reinvest the proceeds
of such redemption in shares of the same class of any Voyageur Fund eligible for
sale in the shareholder's state of residence. Reinvestment will be at the net
asset value of Fund shares next determined after the Underwriter receives a
check along with a letter requesting
32 Voyageur Funds (Prospectus)
reinstatement. The Underwriter must receive the letter requesting reinstatement
within 365 days following the redemption. Investors who desire to exercise the
Privilege should contact their broker-dealer or the Fund.
Exercise of the Reinstatement Privilege does not alter the income
tax treatment of any capital gains realized on a sale of shares of a Fund, but
to the extent that any shares are sold at a loss and the proceeds are reinvested
within 30 days in shares of such Fund, some or all of the loss may not be
allowed as a deduction, depending upon the number of shares reacquired.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Except as described below, shareholders may exchange some or all of their Fund
shares for shares of another Voyageur Fund, provided that the shares to be
acquired in the exchange are eligible for sale in the shareholder's state of
residence. Class A shareholders may exchange their shares for Class A shares of
other Voyageur Funds. Class B shareholders may exchange their shares for the
Class B shares of other Voyageur Funds and Class C shareholders may exchange
their shares for the Class C shares of other Voyageur Funds. Shares of each
class may also be exchanged for shares of any money market fund available
through Voyageur.
The minimum amount which may be exchanged is $1,000. The exchange
will be made on the basis of the relative net asset values next determined after
receipt of the exchange request, plus the amount, if any, by which the
applicable sales charge exceeds the sum of all sales charges previously paid in
connection with the prior investment. For a discussion of issues relating to the
contingent deferred sales charge upon such exchanges, see "How to Sell
Shares--Contingent Deferred Sales Charge." There is no specific limitation on
exchange frequency; however, the Funds are intended for long term investment and
not as a trading vehicle. The Adviser reserves the right to prohibit excessive
exchanges (more than four per quarter). The Adviser also reserves the right,
upon 60 days' prior notice, to restrict the frequency of, or otherwise modify,
condition, terminate or impose charges upon, exchanges. An exchange is
considered to be a sale of shares on which the investor may realize a capital
gain or loss for income tax purposes. Exchange requests may be placed directly
with the Fund in which the investor owns shares, through the Adviser or through
other broker-dealers. An investor considering an exchange should obtain a
prospectus of the Fund to be acquired and should read such prospectus carefully.
Contact any of the Funds, the Adviser or any of such other broker-dealers for
further information about the exchange privilege.
MANAGEMENT
- --------------------------------------------------------------------------------
The Boards of Directors, or Trustees, as the case may be, of the Funds are
responsible for managing the business and affairs of the Funds. The names,
addresses, principal occupations and other affiliations of Directors and
executive officers of the Funds are set forth in the Statement of Additional
Information.
33 Voyageur Funds (Prospectus)
INVESTMENT ADVISER; PORTFOLIO MANAGEMENT
Voyageur has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as each Fund's investment adviser, subject to the authority
of the Board of Directors. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group, Inc. ("DFG"), which is
owned approximately 49% by Michael E. Dougherty, 49% by Pohlad Companies and
less than 1% by certain retirement plans for the benefit of DFG employees. Mr.
Dougherty co-founded the predecessor of DFG in 1977 and has served as DFG's
Chairman of the Board and Chief Executive Officer since inception. Pohlad
Companies is a holding company owned in equal parts by each of James O. Pohlad,
Robert C. Pohlad and William M. Pohlad. As of March 31, 1996, Voyageur and its
affiliates served as the manager to six closed-end and ten open-end investment
companies (comprising 32 separate investment portfolios), administered numerous
private accounts and managed approximately $9 billion in assets. Voyageur's
principal business address is 90 South Seventh Street, Suite 4400, Minneapolis,
Minnesota 55402.
Each Fund pays Voyageur a monthly investment advisory and management
fee equivalent on an annual basis to .50% of its average daily net assets,
except each Limited Term Tax Free Fund pays .40% of its average daily net
assets.
Andrew M. McCullagh, Jr. has had, since inception, day-to-day
portfolio management responsibility for the Arizona Funds, California Funds,
Colorado Funds, National Insured Fund, as well as the New Mexico Fund, North
Dakota Fund and Utah Fund. Mr. McCullagh was a Director of Voyageur and the
Underwriter from 1993 through 1995 and has been Senior Tax Exempt Portfolio
Manager for Voyageur since January 1990. He is President of Colorado Tax Free
Fund and is an Executive Vice President of each of the other Voyageur Funds. Mr.
McCullagh currently has over 23 years experience in municipal bond trading,
underwriting and portfolio management.
Elizabeth H. Howell has had, since 1991, day-to-day portfolio
management responsibility for the Minnesota Funds, as well as, since inception,
the Idaho, Kansas, Missouri, Oregon and Washington Funds. Ms. Howell is a Vice
President and Senior Tax Exempt Portfolio Manager for Voyageur, where she has
been employed since 1991 and is a Vice President of each of the Voyageur Funds.
Ms. Howell has over ten years experience as a securities analyst and portfolio
manager.
Steven P. Eldrege has had day-to-day portfolio management
responsibility for the Florida Funds, as well as National Tax Free, National
Limited Term Tax Free, Iowa and Wisconsin Funds since July 1995. Prior to that
time, the Florida Funds and the National Funds had been managed by Mr. McCullagh
since their inception and the Iowa and Wisconsin Funds had been managed by Ms.
Howell since their inception. Mr. Eldrege is a Senior Tax Exempt Portoflio
Manager for Voyageur where he has been employed since 1995. Prior to joining
Voyageur, Mr. Eldrege was a portfolio manager for ABT Mutual Funds from 1989
through 1995. Mr. Eldrege has over 18 years experience in portfolio management.
PLAN OF DISTRIBUTION
Each Fund has adopted a Plan of Distribution under the 1940 Act (the "Plan") and
has entered into a Distribution Agreement with Voyageur Fund Distributors, Inc.
(the "Underwriter"). Pursuant to each Fund's Plan, the Fund pays the
34 Voyageur Funds (Prospectus)
Underwriter a Rule 12b-1 fee, at an annual rate of .25% of the Fund's average
daily net assets attributable to Class A shares and 1% of the Fund's average
daily net assets attributable to each of Class B and Class C shares for
servicing of shareholder accounts and distribution related services. Payments
made under the Plan are not tied exclusively to expenses actually incurred by
the Underwriter and may exceed or be less than expenses actually incurred by the
Underwriter. Please see the "Fees and Expenses" table at the beginning of this
Prospectus for information with respect to fee waivers, if any.
All of the Rule 12b-1 fee attributable to Class A shares, and a
portion of the fee equal to .25% of the average daily net assets of the Fund
attributable to each of Class B shares and Class C shares constitutes a
shareholder servicing fee designed to compensate the Underwriter for the
provision of certain services to the shareholders. The services provided may
include personal services provided to shareholders, such as answering
shareholder inquiries regarding the Funds and providing reports and other
information, and services related to the maintenance of shareholder accounts.
The Underwriter may use such Rule 12b-1 fee or portion thereof to make payments
to qualifying broker-dealers and financial institutions that provide such
services.
That portion of the Rule 12b-1 fee equal to .75% of the average
daily net assets of the Fund attributable to Class B shares and Class C shares,
respectively, constitutes a distribution fee designed to compensate the
Underwriter for advertising, marketing and distributing the Class B shares and
Class C shares of each Fund. In connection therewith, the Underwriter may
provide initial and ongoing sales compensation to its investment executives and
other broker-dealers for sales of Class B shares and Class C shares and may pay
for other advertising and promotional expenses in connection with the
distribution of Class B shares and Class C shares. The distribution fee
attributable to Class B shares and Class C shares is designed to permit an
investor to purchase such shares through investment executives of the
Underwriter and other broker-dealers without the assessment of an initial sales
charge and at the same time to permit the Underwriter to compensate its
investment executives and other broker-dealers in connection with the sale of
such shares.
CUSTODIAN; DIVIDEND DISBURSING, TRANSFER, ADMINISTRATIVE AND ACCOUNT SERVICES
AGENT
Norwest Bank Minnesota, N.A. serves as the custodian of each Fund's portfolio
securities and cash.
Voyageur acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent to perform dividend-paying
functions, to calculate each Fund's daily share price, to maintain shareholder
records and to perform certain regulatory and compliance related services for
the Funds. The fees paid for these services are based on each Fund's assets and
include reimbursement of out-of-pocket expenses. Voyageur receives a monthly fee
from each Fund equal to the sum of (1) $1.33 per shareholder account per month,
(2) a monthly fee ranging from $1,000 to $1,500 based on the average daily net
assets of the Fund and (3) a percentage of average daily net assets which ranges
from 0.11% to 0.02% based on the average daily net assets of the Fund. See "The
Investment Adviser and Underwriter--Expenses of the Funds" in the Statement of
Additional Information.
Certain institutions may act as sub-administrators for one or more
of the Funds pursuant to contracts with Voyageur, whereby the institutions will
provide shareholder services to their customers. Voyageur will pay such
sub-administrators'
35 Voyageur Funds (Prospectus)
fees out of its own assets. The fee paid by Voyageur to any sub-administrator
will be a matter of negotiation between the institution and Voyageur based on
the extent and quality of the services provided.
EXPENSES OF THE FUNDS
Voyageur is contractually obligated to pay the operating expenses (excluding
interest expense, taxes, brokerage fees, commissions and Rule 12b-1 fees and,
with respect to the Insured Funds, premiums with respect to Portfolio Insurance
or Secondary Market Insurance) of each Fund which exceed 1% of such Fund's
average daily net assets on an annual basis up to certain limits as set forth in
detail in the Statement of Additional Information. In addition, Voyageur and the
Underwriter reserve the right to voluntarily waive their fees in whole or part
and to voluntarily absorb certain other of the Funds' expenses. Voyageur and the
Underwriter have agreed to waive fees or absorb expenses for the fiscal year
ending December 31, 1996 in such a manner as will result in the Funds being
charged fees and expenses that approximate those set forth in the section "Fees
and Expenses" except Voyageur and the Underwriter are not waiving fees with
respect to Minnesota Tax Free Fund and Minnesota Limited Term Tax Free Fund.
After December 31, 1996, such voluntary fee and expense waivers may be
discontinued or modified by Voyageur and the Underwriter in their sole
discretion.
Each Fund's expenses include, among others, fees of directors,
expenses of directors' and shareholders' meetings, insurance premiums, expenses
of redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Underwriter), expenses of printing and mailing stock
certificates and shareholder statements, association membership dues, charges of
such Fund's custodian, bookkeeping, auditing and legal expenses, the fees and
expenses of registering such Fund and its shares with the Securities and
Exchange Commission and registering or qualifying its shares under state
securities laws and expenses of preparing and mailing prospectuses and reports
to existing shareholders.
PORTFOLIO TRANSACTIONS
No Fund will effect any brokerage transactions in its portfolio securities with
any broker-dealer affiliated directly or indirectly with Voyageur unless such
transactions, including the frequency thereof, the receipt of commissions
payable in connection therewith and the selection of the affiliated
broker-dealer effecting such transactions, are not unfair or unreasonable to the
shareholders of such Fund. It is not anticipated that any Fund will effect any
brokerage transactions with any affiliated broker-dealer, including the
Underwriter, unless such use would be to such Fund's advantage. Voyageur may
consider sales of shares of the Funds as a factor in the selection of
broker-dealers to execute the Funds' securities transactions.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of Fund shares is determined once daily, Monday through
Friday, as of 3:00 p.m. Minneapolis time (the primary close of trading on the
Exchange) on each business day the Exchange is open for trading.
36 Voyageur Funds (Prospectus)
For each Fund, the net asset value per share of each class is
determined by dividing the value of the securities, cash and other assets of the
Fund attributable to such class less all liabilities attributable to such class
by the total number of shares of such class outstanding. For purposes of
determining the net assets of each Fund, tax exempt securities are stated on the
basis of valuations provided by a pricing service, approved by the Board of
Directors, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. Market quotations
are used when available. Non-tax exempt securities for which market quotations
are readily available are stated at market value which is currently determined
using the last reported sale price, or, if no sales are reported, as in the case
of most securities traded over-the-counter, the last reported bid price, except
that U.S. Government securities are stated at the mean between the last reported
bid and asked prices. Short-term notes having remaining maturities of 60 days or
less are stated at amortized cost which approximates market. All other
securities and other assets are valued in good faith at fair value by Voyageur
in accordance with procedures adopted by the Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
The present policy of each Fund is to declare a distribution from net investment
income on each day that the Fund is open for business. Net investment income
consists of interest accrued on portfolio investments of a Fund, less accrued
expenses. Distributions of net investment income are paid monthly. Short-term
capital gains distributions are taxable to shareholders as ordinary income. Net
realized long term capital gains, if any, are distributed annually, after
utilization of any available capital loss carryovers. Distributions paid by the
Funds, if any, with respect to Class A, Class B and Class C shares will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount, except that the higher Rule 12b-1 fees applicable to Class B
and Class C shares will be borne exclusively by such shares. The per share
distributions on Class B and Class C shares will be lower than the per share
distributions on Class A shares as a result of the higher Rule 12b-1 fees
applicable to Class B and Class C shares.
Shareholders receive distributions from investment income and
capital gains in additional shares of the Fund and class owned by such
shareholders at net asset value, without any sales charge, unless they elect
otherwise. Each Fund sends to its shareholders no less than quarterly statements
with details of any reinvested dividends.
TAXES
Federal Income Taxation
Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund qualified during its last taxable year and each Fund intends to qualify
during its current taxable year as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). Each Fund also intends
to take all other action required to ensure that no federal income taxes will be
payable by the Fund and that the Fund can pay exempt-interest dividends.
37 Voyageur Funds (Prospectus)
Distributions of net interest income from tax exempt obligations
that are designated by a Fund as exempt-interest dividends are excludable from
the gross income of the Fund's shareholders. Distributions paid from other
interest income and from any net realized short-term capital gains are taxable
to shareholders as ordinary income, whether received in cash or in additional
shares. Distributions paid from long-term capital gains (and designated as such)
are taxable as long-term capital gains for federal income tax purposes, whether
received in cash or shares, regardless of how long a shareholder has held shares
in a Fund.
Exempt-interest dividends attributable to interest income on certain
tax exempt obligations issued after August 7, 1986 to finance private activities
are treated as an item of tax preference for purposes of computing the
alternative minimum tax for individuals, estates and trusts. Each Fund may
invest up to 20% of its total assets in securities which generate interest which
is treated as an item of tax preference and subject to federal and state AMT,
except that Minnesota Insured Fund may invest without limit in such securities
and Minnesota Tax Free Fund may not invest in obligations which generate
interest subject to federal and state AMT.
The following is a summary of certain information regarding state
taxation. See "Taxes" in the Statement of Additional Information.
Arizona State Taxation
The portion of exempt-interest dividends that is derived from interest income on
Arizona Tax Exempt Obligations is excluded from the Arizona taxable income of
individuals, estates, trusts, and corporations. Dividends qualifying for federal
income tax purposes as capital gain dividends are to be treated by shareholders
as long-term capital gains under Arizona law.
California State Taxation
Individual shareholders of the California Funds who are subject to California
personal income taxation will not be required to include in their California
gross income that portion of their federally tax exempt dividends which a Fund
clearly identifies as directly attributable to interest earned on California
state or municipal obligations, and dividends which a Fund clearly identifies as
directly attributable to interest earned on obligations of the United States,
the interest on which is exempt from California personal income tax pursuant to
federal law, provided that at least 50% of the value of the Fund's total assets
consists of obligations the interest on which is exempt from California personal
income taxation pursuant to federal or California law. Distributions to
individual shareholders derived from interest on state or municipal obligations
issued by governmental authorities in states other than California, short-term
capital gains and other taxable income will be taxed as dividends for purposes
of California personal income taxation. Each Fund's long term capital gains for
federal income tax purposes will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from an exchange or redemption of
shares will be recognized in the year of the change or redemption.
Colorado State Taxation
To the extent that dividends are derived from interest income on Colorado Tax
Exempt Obligations, such dividends will also be exempt from Colorado income
taxes for individuals, trusts, estates, and corporations. Dividends qualifying
for
38 Voyageur Funds (Prospectus)
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains under Colorado law.
Florida State Taxation
Florida does not currently impose a tax on the income of individuals, and
individual shareholders of the Florida Funds will thus not be subject to income
tax in Florida on distributions from the Florida Funds or upon the sale of
shares held in such Funds. Florida does, however, impose a tax on intangible
personal property held by individuals as of the first day of each calendar year.
Under a rule promulgated by the Florida Department of Revenue, shares in the
Florida Funds will not be subject to the intangible property tax so long as, on
the last business day of each calendar year, all of the assets of each Fund
consist of obligations of the U. S. government and its agencies,
instrumentalities and territories, and the State of Florida and its political
subdivisions and agencies. If any Florida Fund holds any other types of assets
on that date, then the entire value of the shares in such Fund (except for the
portion of the value of the shares attributable to U. S. government obligations)
will be subject to the intangible property tax. Each Florida Fund must sell any
non-exempt assets held in its portfolio during the year and reinvest the
proceeds in exempt assets prior to December 31. Transaction costs involved in
converting the portfolio's assets to such exempt assets would likely reduce the
Florida Funds' investment return and might, in extraordinary circumstances,
exceed any increased investment return such Funds had achieved by investing in
non-exempt assets during the year. Corporate shareholders in the Florida Funds
may be subject to the Florida income tax imposed on corporations, depending upon
the domicile of the corporation and upon the extent to which income received
from such Fund constitutes "nonbusiness income" as defined by applicable Florida
law.
Idaho State Taxation
The Idaho Fund has received a ruling from the Idaho Department of Revenue that
provides that dividends paid by the Idaho Fund that are attributable to (i)
interest earned on bonds issued by the State of Idaho, its cities and political
subdivisions, and (ii) interest earned on obligations of the U.S. government or
its territories and possessions will not be included in the income of Fund
shareholders subject to either the Idaho personal income tax or the Idaho
corporate franchise tax. All other dividends paid by the Idaho Fund will be
subject to the Idaho personal or corporate income tax. Capital gain dividends
qualifying as long-term capital gains for federal tax purposes will be treated
as long-term capital gains for Idaho income tax purposes. Idaho taxes long-term
capital gains at the same rates as ordinary income, while imposing limitations
on the deductibility of capital losses similar to those under federal law.
Iowa State Taxation
The Iowa Fund has received a ruling from the Iowa Department of Revenue and
Finance dated May 21, 1993 to the effect that dividends paid by the Iowa Fund
that are attributable to (1) interest earned on bonds issued by the State of
Iowa, its political subdivisions, agencies and instrumentalities, the interest
on which is exempt from taxation by Iowa statute, and (2) interest earned on
obligations of the U.S. government or its territories and possessions will not
be included in the income of the Fund shareholders subject to either the Iowa
personal or the Iowa corporate income tax, except in the case of shareholders
that are financial institutions subject to the tax imposed by Iowa Code ss.
422.60.
39 Voyageur Funds (Prospectus)
All other dividends paid by the Iowa Fund will be subject to the Iowa personal
or corporate income tax. Capital gain dividends qualifying as long-term capital
gains for federal tax purposes will be treated as long-term capital gains for
Iowa income tax purposes.
Kansas State Taxation
Individuals, trusts, estates and corporations will not be subject to Kansas
income tax on the portion of dividends derived from interest on obligations of
Kansas and its political subdivisions issued after December 31, 1987, and
interest on specified obligations of Kansas and its political subdivisions
issued before January 1, 1988. The Fund intends to invest only in Kansas
obligations the interest on which is excludable from Kansas taxable income. All
remaining dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts, estates, and corporations. Dividends qualifying for
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Kansas taxes long-term capital gains at
the same rates as ordinary income, while restricting the deductibility of
capital losses. Dividends received by shareholders will be exempt from the tax
on intangibles imposed by certain counties, cities and townships.
Minnesota State Taxation
Minnesota taxable net income is based generally on federal taxable income. The
portion of exempt-interest dividends that is derived from interest income on
Minnesota Tax Exempt Obligations is excluded from the Minnesota taxable net
income of individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all shareholders
represents 95 percent or more of the exempt-interest dividends paid by the
respective Fund. Exempt-interest dividends are not excluded from the Minnesota
taxable income of corporations and financial institutions. Dividends qualifying
for federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Minnesota has repealed the favorable
treatment of long-term capital gains, while retaining restrictions on the
deductibility of capital losses. Exempt interest dividends subject to the
federal alternative minimum tax will also be subject to the Minnesota
alternative minimum tax imposed on individuals, estates and trusts.
The 1995 Minnesota Legislature has enacted a statement of intent
that interest on obligations of Minnesota governmental units and Indian tribes
be included in net income of individuals, estates and trusts for Minnesota
income tax purposes if a court determines that Minnesota's exemption of such
interest unlawfully discriminates against interstate commerce because interest
on obligations of governmental issuers located in other states is so included.
This provision applies to taxable years that begin during or after the calendar
year in which any such court decision becomes final, irrespective of the date on
which the obligations were issued. The Minnesota Limited Term Tax Free Fund, the
Minnesota Insured Fund, and the Minnesota Tax Free Fund are not aware of any
decision in which a court has held that a state's exemption of interest on its
own bonds or those of its political subdivisions or Indian tribes, but not of
interest on the bonds of other states or their political subdivisions or Indian
tribes, unlawfully discriminates against interstate commerce or otherwise
contravenes the United
40 Voyageur Funds (Prospectus)
States Constitution. Nevertheless, the Funds cannot predict the likelihood that
interest on the Minnesota Tax Exempt Obligations held by the Funds would become
taxable under this Minnesota statutory provision.
Missouri State Taxation
The portion of exempt interest dividends that is derived from interest on
Missouri Tax Exempt Obligations is excluded from the taxable income of
individuals, trusts, and estates and of corporations subject to the Missouri
corporate income tax. All remaining dividends (except dividends attributable to
interest on obligations of the United States, its territories and possessions),
including dividends derived from capital gains, will be includable in the
taxable income of individuals, trusts, estates and corporations. Dividends
qualifying for federal income tax purposes as capital gain dividends are to be
treated by shareholders as long-term capital gains. Missouri taxes long-term
capital gains at the same rates as ordinary income, while restricting the
deductibility of capital losses.
New Mexico State Taxation
The portion of exempt interest dividends that is derived from interest on New
Mexico Tax Exempt Obligations is excluded from the taxable income of
individuals, trusts, and estates, and of corporations subject to the New Mexico
corporate income tax. The Fund will provide shareholders with an annual
statement identifying income paid to shareholders by source. All remaining
dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts, estates and corporations. Dividends qualifying for
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. New Mexico taxes long-term capital
gains at the same rates as ordinary income, while restricting the deductibility
of capital losses.
North Dakota State Taxation
North Dakota taxable income is based generally on federal taxable income. The
portion of exempt interest dividends that is derived from interest income on
North Dakota Tax Exempt Obligations is excluded from the North Dakota taxable
income of individuals, estates, trusts and corporations. Exempt interest
dividends are not excluded from the North Dakota taxable income of banks.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains under North Dakota
law.
Oregon State Taxation
The portion of exempt interest dividends that is derived from interest on Oregon
Tax Exempt Obligations is excluded from the taxable income of individuals,
trusts and estates. All remaining dividends (except for dividends, if any,
derived from interest paid on obligations of the United States, its territories
and possessions), including dividends derived from capital gains, will be
includable in the taxable income of individuals, trusts and estates.
Furthermore, all dividends, including exempt interest dividends, will be
includable in the taxable income of corporations subject to the Oregon
corporation excise tax. Dividends qualifying for federal income tax purposes as
capital gain dividends are to be treated by shareholders as long-term capital
gains. Oregon taxes long-term capital gains at the same rates as ordinary
income, while restricting the deductibility of capital losses.
41 Voyageur Funds (Prospectus)
Utah State Taxation
All exempt interest dividends, whether derived from interest on Utah Tax Exempt
Obligations or the Tax Exempt Obligations of any other state, are excluded from
the taxable income of individuals, trusts, and estates. Any remaining dividends
(except for dividends, if any, derived from interest paid on obligations of the
United States, its territories and possessions), including dividends derived
from capital gains, will be includable in the taxable income of individuals,
trusts, and estates. Furthermore, all dividends, including exempt interest
dividends, will be includable in the taxable income of corporations subject to
the Utah corporate franchise tax. Dividends qualifying for federal income tax
purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains. Utah taxes long-term capital gains at the same rates as
ordinary income, while restricting the deductibility of capital losses.
Washington State Taxation
Washington does not currently impose an income tax on individuals or
corporations. Therefore, dividends paid to shareholders will not be subject to
tax in Washington.
Wisconsin State Taxation
The Wisconsin Fund has received a ruling from the Wisconsin Department of
Revenue dated July 7, 1993 to the effect that dividends paid by the Wisconsin
Fund that are attributable to (1) interest earned on certain higher education
bonds issued by the State of Wisconsin, certain bonds issued by the Wisconsin
Housing and Economic Development authority, Wisconsin Housing Finance Authority
bonds, and public housing authority bonds and redevelopment authority bonds
issued by Wisconsin municipalities, the interest on which is exempt from
taxation by Wisconsin statute, and (2) interest earned on obligations of the U.
S. government or its territories and possessions will not be included in the
income of the Fund shareholders subject to the Wisconsin personal income tax.
Capital gain dividends qualifying as long-term capital gains for federal tax
purposes will be treated as long-term capital gains for Wisconsin income tax
purposes.
The foregoing discussion relates to federal and state taxation as of
the date of the Prospectus. See "Taxes" in the Statement of Additional
Information. Distributions from the Funds, including exempt-interest dividends,
may be subject to tax in other states. This discussion is not intended as a
substitute for careful tax planning. You are urged to consult your tax adviser
with specific reference to your own tax situation.
INVESTMENT PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements and other sales literature for the Funds may refer to "yield,"
"taxable equivalent yield," "average annual total return" and "cumulative total
return" and may compare such performance quotations with published indices and
comparable quotations of other funds. Performance quotations are computed
separately for Class A, Class B and Class C shares of the Funds. When a Fund
advertises any performance information, it also will advertise its average
annual total return as required by the rules of the Securities and Exchange
Commission and will include performance data for Class A, Class B and Class C
shares. All such figures are based on historical earnings and performance and
are not intended to be indicative of future
42 Voyageur Funds (Prospectus)
performance. Additionally, performance information may not provide a basis for
comparison with other investments or other mutual funds using a different method
of calculating performance. The investment return on and principal value of an
investment in any of the Funds will fluctuate, so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The advertised yield of each Fund will be based on a 30-day period
stated in the advertisement. Yield is calculated by dividing the net investment
income per share deemed earned during the period by the maximum offering price
per share on the last day of the period. The result is then annualized using a
formula that provides for semiannual compounding of income.
Taxable equivalent yield is calculated by applying the stated income
tax rate only to that portion of the yield that is exempt from taxation. The tax
exempt portion of the yield is divided by the number 1 minus the stated income
tax rate (e.g., 1-28% = 72%). The result is then added to that portion of the
yield, if any, that is not tax exempt.
Average annual total return is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. In calculating average annual total return, the maximum sales
charge is deducted from the hypothetical investment and all dividends and
distributions are assumed to be reinvested.
Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the ending redeemable value of such payment (at
the end of the relevant advertised period), dividing such difference by $1,000
and multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales load is deducted.
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Funds'
shares, including data from Lipper Analytical Services, Inc. and Morningstar.
For Fund performance information and daily net asset value
quotations, investors may call 612-376-7010 or 800-525-6584. For additional
information regarding the calculation of a Fund's yield, taxable equivalent
yield, average annual total return and cumulative total return, see "Calculation
of Performance Data" in the Statement of Additional Information.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Each Fund sends to its shareholders six-month unaudited and annual audited
financial statements.
The shares of the Funds constitute separate series of the parent
entities listed below. Certain of these parent entities are organized as
Minnesota corporations, and the shares of the series thereof are transferable
common stock, $.01 par value per share, of such corporations. Other parent
entities are organized as business trusts under the laws of the Commonwealth of
Massachusetts, and the shares of the series thereof represent transferable
common shares of beneficial interest. All shares of each corporation and,
subject to the statement below regarding shareholder liability, of each trust,
are non assessable and fully transferable when issued and paid for in accordance
with the terms thereof and possess no cumulative voting, preemptive or
conversion rights. The
43 Voyageur Funds (Prospectus)
Board of each corporation and trust is empowered to issue other series of common
stock or common shares of beneficial interest without shareholder approval. Set
forth below is a listing of the parent entities and constituent series, form of
organization and date of organization of the parent.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Parent Form of Organization Date Organized
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
VOYAGEUR TAX FREE FUNDS, INC. Minnesota Corporation November 10, 1983
Minnesota Tax Free
North Dakota Tax Free
VOYAGEUR INTERMEDIATE TAX FREE FUNDS, INC. Minnesota Corporation January 21, 1985
Arizona Limited Term Tax Free
California Limited Term Tax Free
Colorado Limited Term Tax Free
Minnesota Limited Term Tax Free
National Limited Term Tax Free
VOYAGEUR INSURED FUNDS, INC. Minnesota Corporation January 6, 1987
Arizona Insured Tax Free
Colorado Insured Tax Free
Minnesota Insured
National Insured Tax Free
VOYAGEUR INVESTMENT TRUST Massachusetts Business Trust September 16, 1991
California Insured Tax Free
Florida Insured Tax Free
Florida Tax Free
Kansas Tax Free
Missouri Insured Tax Free
New Mexico Tax Free
Oregon Insured Tax Free
Utah Tax Free
Washington Insured Tax Free
VOYAGEUR INVESTMENT TRUST II Massachusetts Business Trust November 16, 1993
Florida Limited Term Tax Free
VOYAGEUR MUTUAL FUNDS, INC. Minnesota Corporation April 14, 1993
Arizona Tax Free
California Tax Free
Idaho Tax Free
Iowa Tax Free
Wisconsin Tax Free
National Tax Free
VOYAGEUR MUTUAL FUNDS II, INC. Minnesota Corporation January 13, 1987
Colorado Tax Free
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Funds currently offer their shares in multiple classes, each
with different sales arrangements and bearing different expenses. Class A, Class
B and Class C shares each represent interests in the assets of the respective
Funds and have identical voting, dividend, liquidation and other rights on the
same terms and conditions except that expenses related to the distribution of
each class are borne solely by such class and each class of shares has exclusive
voting rights with respect to provisions of a Fund's Rule 12b-1 distribution
plan which pertain to a
44 Voyageur Funds (Prospectus)
particular class and other matters for which separate class voting is
appropriate under applicable law.
Fund shares are freely transferable, subject to applicable
securities laws, are entitled to dividends as declared by the Board, and, in
liquidation of a Fund, are entitled to receive the net assets, if any, of such
Fund. The Funds do not generally hold annual meetings of shareholders and will
do so only when required by law. Shareholders may remove Board members from
office by votes cast in person or by proxy at a meeting of shareholders or by
written consent and, in accordance with Section 16 of the 1940 Act, the Board
shall promptly call a meeting of shareholders for the purpose of voting upon the
question of removal of any Board member when requested to do so by the record
holders of not less than 10% of the outstanding shares. Under Massachusetts law,
shareholders could, under certain circumstances, be held personally liable for
the obligations of the Funds organized as Massachusetts business trusts.
However, each Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of such Funds and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by such Funds or the trustees. The Declaration of Trust further
provides for indemnification out of the assets and property of a Fund for all
loss and expense of any shareholder held personally liable for the obligations
of such Fund. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which a Fund
would be unable to meet its obligations. Each Fund organized as a series of a
Massachusetts business trust believes that the likelihood of such circumstances
is remote.
Each share of a series has one vote irrespective of the relative net
asset value of the shares. On some issues, such as the election of Board
members, all shares of a corporation or trust vote together as one series of
such corporation or trust. On an issue affecting only a particular series or
class, the shares of the affected series or class vote as a separate series or
class. An example of such an issue would be a fundamental investment restriction
pertaining to only one series. In voting on the Investment Advisory Agreements,
approval by the shareholders of a particular series is necessary to make such
agreement effective as to that series.
The assets received by a corporation or trust for the issue or sale
of shares of each series or class thereof, and all income, earnings, profits and
proceeds thereof, subject only to the rights of creditors, are allocated to such
series, and in the case of a class, allocated to such class, and constitute the
underlying assets of such series or class. The underlying assets of each series
or class thereof, are required to be segregated on the books of account, and are
to be charged with the expenses in respect to such series or class thereof, and
with a share of the general expenses of such corporation or trust. Any general
expenses of a corporation or trust not readily identifiable as belonging to a
particular series or class shall be allocated among the series or classes
thereof, based upon the relative net assets of the series or class at the time
such expenses were accrued. Each corporation's Articles of Incorporation and
trust's Declaration of Trust limit the liability of the respective Board members
to the fullest extent permitted by law. For a further discussion of the above
matters, see "Additional Information" in the Statement of Additional
Information.
In the opinion of the staff of the Securities and Exchange
Commission, the use of this combined Prospectus may possibly subject all of the
Funds to a certain amount of liability for any losses arising out of any
statement or omission
45 Voyageur Funds (Prospectus)
in this Prospectus regarding a particular Fund. In the opinion of the Funds'
executive officers, however, the risk of such liability is not materially
increased by the use of a combined Prospectus.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR VOYAGEUR FUND DISTRIBUTORS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
46 Voyageur Funds (Prospectus)
PART B
VOYAGEUR ARIZONA LIMITED TERM TAX FREE FUND
VOYAGEUR ARIZONA INSURED TAX FREE FUND
VOYAGEUR ARIZONA TAX FREE FUND
VOYAGEUR CALIFORNIA LIMITED TERM TAX FREE FUND
VOYAGEUR CALIFORNIA TAX FREE FUND
VOYAGEUR CALIFORNIA INSURED TAX FREE FUND
VOYAGEUR COLORADO LIMITED TERM TAX FREE FUND
VOYAGEUR COLORADO TAX FREE FUND
VOYAGEUR COLORADO INSURED TAX FREE FUND
VOYAGEUR FLORIDA LIMITED TERM TAX FREE FUND
VOYAGEUR FLORIDA TAX FREE FUND
VOYAGEUR FLORIDA INSURED TAX FREE FUND
VOYAGEUR IDAHO TAX FREE FUND
VOYAGEUR IOWA TAX FREE FUND
VOYAGEUR KANSAS TAX FREE FUND
VOYAGEUR MINNESOTA LIMITED TERM TAX FREE FUND
VOYAGEUR MINNESOTA TAX FREE FUND
VOYAGEUR MINNESOTA INSURED FUND
VOYAGEUR MISSOURI INSURED TAX FREE FUND
VOYAGEUR NATIONAL LIMITED TERM TAX FREE FUND
VOYAGEUR NATIONAL INSURED TAX FREE FUND
VOYAGEUR NATIONAL TAX FREE FUND
VOYAGEUR NEW MEXICO TAX FREE FUND
VOYAGEUR NORTH DAKOTA TAX FREE FUND
VOYAGEUR OREGON INSURED TAX FREE FUND
VOYAGEUR UTAH TAX FREE FUND
VOYAGEUR WASHINGTON INSURED TAX FREE FUND
VOYAGEUR WISCONSIN TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with each Fund's Prospectus dated April 30, 1996,
as supplemented June 3, 1996. A copy of the Prospectus or this Statement of
Additional Information may be obtained free of charge by contacting the Funds at
90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402. Telephone:
(612) 376-7000 or (800) 553-2143.
TABLE OF CONTENTS
Page
Investment Policies and Restrictions.....................................B- 2
Special Factors Affecting the Funds......................................B-15
Insurance................................................................B-58
Board Members and Executive Officers of the Funds........................B-60
The Investment Adviser and Underwriter...................................B-62
Taxes ...............................................................B-73
Special Purchase Plans ..................................................B-77
Net Asset Value and Public Offering Price................................B-79
Calculation of Performance Data..........................................B-83
Monthly Cash Withdrawal Plan.............................................B-95
Additional Information...................................................B-96
Appendix A - Descriptions of Bond Ratings................................A- 1
Appendix B - General Characteristics and Risks of Options and Futures ...B- 1
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated April 30, 1996, as supplemented June 3,
1996, and, if given or made, such information or representations may not be
relied upon as having been authorized by the Funds. This Statement of Additional
Information does not constitute an offer to sell securities in any state or
jurisdiction in which such offering may not lawfully be made. The delivery of
this Statement of Additional Information at any time shall not imply that there
has been no change in the affairs of any of the Funds since the date hereof.
Dated April 30, 1996, as supplemented June 3, 1996
B-1
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions of the open-end
series investment companies on the first page of this Statement of Additional
Information (collectively, the "Funds") are set forth in the combined
prospectus. Certain additional investment information is set forth below. All
capitalized terms not defined herein have the same meanings as set forth in the
prospectus.
TAX EXEMPT OBLIGATIONS
The term "Tax Exempt Obligations" refers to debt obligations issued
by or on behalf of a state or territory or its agencies, instrumentalities,
municipalities and political subdivisions, the interest payable on which is, in
the opinion of bond counsel, excludable from gross income for purposes of
federal income taxation (except, in certain instances, the alternative minimum
tax, depending upon the shareholder's tax status) and with respect to the Funds
other than the three national funds, personal income tax of the state specified
in the Fund's name, if any. Tax-Exempt Obligations are generally issued to
obtain funds for various public purposes, including the construction or
improvement of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Tax Exempt Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, Tax Exempt Obligations may be issued by or on behalf of
public bodies to obtain funds to provide for the construction, equipping, repair
or improvement of housing facilities, convention or trade show facilities,
airport, mass transit, industrial, port or parking facilities and certain local
facilities for water supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Funds may invest, including Tax Exempt
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Tax Exempt Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for
the purpose of restricting the availability of or eliminating the federal income
tax exemption for interest on Tax Exempt Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Tax Exempt Obligations for investment by the
Funds and the value of each Fund's portfolio. In such event, management of the
Funds may discontinue the issuance of shares to new investors and may reevaluate
each Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Ratings Services ("S&P") for Tax Exempt
Obligations may change as a result of changes in such organizations or their
rating systems, the Funds will attempt to use comparable ratings as standards
for their investments in accordance with the investment policies contained in
the Funds' Prospectus and this Statement of Additional Information. The ratings
of Moody's and S&P represent their opinions as to the quality of the Tax Exempt
Obligations which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings provide an initial criterion for selection of portfolio
investments, Voyageur Fund Managers, Inc. ("Voyageur"), the Funds' investment
manager, will subject these securities to other evaluative criteria prior to
investing in such securities.
Floating and Variable Rate Demand Notes. The Funds may purchase
floating and variable rate demand notes. Generally, such notes are secured by
letters of credit or other credit support arrangements provided by banks. Such
notes normally have a stated long-term maturity but permit the holder to tender
the note for purchase and payment of principal and accrued interest upon a
specified number of days' notice. The issuer of floating and variable rate
demand notes normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the note plus accrued
interest upon a specified number of days' notice to the noteholders. The
B-2
interest rate on a floating rate demand note is based on a specified interest
index, such as a bank's prime rate, and is adjusted automatically each time such
index is adjusted. The interest rate on a variable rate demand note is adjusted
at specified intervals, based upon current market conditions. Voyageur monitors
the creditworthiness of issuers of floating and variable rate demand notes in
each Fund's portfolio.
Escrow Secured Bonds or Defeased Bonds. Escrow secured bonds or
defeased bonds are created when an issuer refunds in advance of maturity (or
pre-refunds) some of its outstanding bonds and it becomes necessary or desirable
to set aside funds for redemption or payment of the bonds at a future date or
dates. In an advance refunding, the issuer will use the proceeds of a new bond
issue to purchase high grade interest bearing debt securities which are then
deposited in an irrevocable escrow account held by an escrow agent to secure all
future payments of principal and interest of the advance refunded bond. Escrow
secured bonds will often receive a triple A rating from S&P and Moody's. The
Insured Tax Free Funds will purchase escrow secured bonds without additional
insurance only where the escrow is invested in securities of the U.S. government
or agencies or instrumentalities of the U.S. Government.
State or Municipal Lease Obligations. Municipal leases may take the
form of a lease with an option to purchase, an installment purchase contract, a
conditional sales contract or a participation certificate in any of the
foregoing. In determining leases in which the Funds will invest, Voyageur will
evaluate the credit rating of the lessee and the terms of the lease.
Additionally, Voyageur may require that certain municipal leases be secured by a
letter of credit or put arrangement with an independent financial institution.
State or municipal lease obligations frequently have the special risks described
below which are not associated with general obligation or revenue bonds issued
by public bodies.
The Constitution and statutes of many states contain requirements
with which the state and municipalities must comply whenever incurring debt.
These requirements may include approving voter referendums, debt limits,
interest rate limits and public sale requirements. Leases have evolved as a
means for public bodies to acquire property and equipment without needing to
comply with all of the constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations may be inapplicable for one or
more of the following reasons: (1) the inclusion in many leases or contracts of
"nonappropriation" clauses that provide that the public body has no obligation
to make future payments under the lease or contract unless money is appropriated
for such purpose by the appropriate legislative body on a yearly or other
periodic basis (the "nonappropriation" clause); (2) the exclusion of a lease or
conditional sales contract from the definition of indebtedness under relevant
state law; or (3) the lease provides for termination at the option of the public
body at the end of each fiscal year for any reason or, in some cases,
automatically if not affirmatively renewed.
If the lease is terminated by the public body for nonappropriation
or another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
Concentration Policy. As set forth in the Funds' Prospectus,
although each Fund may invest 25% or more of its total assets in limited
obligation bonds, no Fund will invest 25% or more of its total assets in limited
obligation bonds payable only from revenues derived from facilities or projects
within a single industry, except that the Funds may invest without limitation,
in circumstances in which other appropriate available investments may be in
limited supply, in housing, health care and/or utility obligations. Arizona
Limited Term Tax Free Fund, Arizona Tax Free Fund, California Limited Term Tax
Free Fund, California Tax Free Fund, Colorado Limited Term Tax Free Fund,
Colorado Insured Tax Free Fund, Florida Limited Term Tax Free Fund, Florida Tax
Free Fund, Idaho Tax Free Fund, National Limited Term Fund and National Tax Free
Fund also may, under such circumstances, invest without limit in transportation,
education and/or industrial obligations. Appropriate available investments may
be in limited supply, from time to time in the opinion of Voyageur, due to,
among other things, each Fund's investment policy of investing primarily in
obligations of its state (and the state's municipalities, other political
subdivisions and public authorities) and of investing primarily in investment
grade (high grade, with respect to the Insured Tax Free Funds) securities.
Additionally, the insurance policies of the Insured Tax Free Funds may affect
the appropriate available investment supply from time to time in the opinion of
Voyageur. Certain of the risks set forth below may be reduced or eliminated to
the extent a Fund invests in insured Tax Exempt Obligations.
B-3
Housing Obligations. Each Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
Health Care Obligations. Each Fund may invest, from time to time,
25% or more of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance hospital or health care
facilities or equipment. The ability of any health care entity or hospital to
make payments in amounts sufficient to pay maturing principal and interest
obligations is generally subject to, among other things, the capabilities of its
management, the confidence of physicians in management, the availability of
physicians and trained support staff, changes in the population or economic
condition of the service area, the level of and restrictions on federal funding
of Medicare and federal and state funding of Medicaid, the demand for services,
competition, rates, government regulations and licensing requirements and future
economic and other conditions, including any future health care reform.
Utility Obligations. Each Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
Transportation Obligations. Certain Funds may, from time to time,
invest 25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance airports and highway,
bridge and toll road facilities. The major portion of an airport's gross
operating income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for airport use,
occupancy of certain terminal space, service fees and leases. Airport operating
income may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The revenues of issuers which derive their payments from bridge, road or tunnel
toll revenues could be adversely affected by competition from toll-free
vehicular bridges and roads and alternative modes of transportation. Such
revenues could also be adversely affected by a reduction in the availability of
fuel to motorists or significant increases in the costs thereof.
Education Obligations. Certain Funds may, from time to time, invest
25% or more of their total assets in obligations of issuers which are, or which
govern the operation of, schools, colleges and universities and whose revenues
are derived mainly from tuition, dormitory revenues, grants and endowments.
General problems of such issuers include the prospect of a declining percentage
of the population consisting of college aged individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
Industrial Revenue Obligations. Certain Funds may, from time to
time, invest 25% or more of their total assets in obligations issued by public
bodies, including state and municipal authorities, to finance the cost of
acquiring, constructing or improving various industrial projects. These projects
are usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
B-4
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal
income taxes and the personal income taxes of certain states for certain
housing, health care, utility, transportation, education and industrial revenue
bonds depends on compliance with relevant provisions of the Code. The failure to
comply with these provisions could cause the interest on the bonds to become
includable in gross income, possibly retroactively to the date of issuance,
thereby reducing the value of the bonds, subjecting shareholders to
unanticipated tax liabilities and possibly requiring the Funds to sell the bonds
at the reduced value. Furthermore, such a failure to meet these ongoing
requirements may not enable the holder to accelerate payment of the bond or
require the issuer to redeem the bond.
TAXABLE OBLIGATIONS
As set forth in the Funds' prospectus, the Funds may invest to a
limited extent in obligations and instruments, the interest on which is
includable in gross income for purposes of federal and state income taxation.
Government Obligations. The Funds may invest in securities issued or
guaranteed by the U. S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally have
maturities of one year or less; Treasury Notes generally have maturities of one
to ten years; and Treasury Bonds generally have maturities of greater than ten
years. Some obligations issued or guaranteed by U. S. Government agencies and
instrumentalities, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U. S. Treasury;
other obligations, such as those of the Federal Home Loan Banks, are secured by
the right of the issuer to borrow from the Treasury; other obligations, such as
those issued by the Federal National Mortgage Association, are supported by the
discretionary authority of the U. S. Government to purchase certain obligations
of the agency or instrumentality; and other obligations, such as those issued by
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality itself. Although the U. S. Government provides financial support
to such U. S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law. The
Funds will invest in such securities only when Voyageur is satisfied that the
credit risk with respect to the issuer is minimal.
Repurchase Agreements. The Funds may invest in repurchase
agreements. The Funds' custodian will hold the securities underlying any
repurchase agreement or such securities will be part of the Federal Reserve Book
Entry System. The market value of the collateral underlying the repurchase
agreement will be determined on each business day. If at any time the market
value of the collateral falls below the repurchase price of the repurchase
agreement (including any accrued interest), the obligor under the agreement will
promptly furnish additional collateral to the Funds' custodian (so the total
collateral is an amount at least equal to the repurchase price plus accrued
interest).
Other Taxable Investments. The Funds also may invest in certificates
of deposit, bankers' acceptances and other time deposits. Certificates of
deposit are certificates representing the obligation of a bank to repay the
funds deposited (plus interest thereon) at a time certain after the deposit.
Bankers' acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of time at a
stated interest rate. With respect to Colorado Fund, investments in time
deposits generally are limited to London branches of domestic banks that have
total assets in excess of one billion dollars.
B-5
OPTIONS AND FUTURES TRANSACTIONS
To the extent set forth in the prospectus, each Fund may buy and
sell put and call options on the securities in which they may invest, and
certain Funds may enter into futures contracts and options on futures contracts
with respect to fixed-income securities or based on financial indices including
any index of securities in which the Fund may invest. Futures and options will
be used to facilitate allocation of a Fund's investments among asset classes, to
generate income or to hedge against changes in interest rates or declines in
securities prices or increases in prices of securities proposed to be purchased.
Different uses of futures and options have different risk and return
characteristics. Generally, selling futures contracts, purchasing put options
and writing (i.e. selling) call options are strategies designed to protect
against falling securities prices and can limit potential gains if prices rise.
Purchasing futures contracts, purchasing call options and writing put options
are strategies whose returns tend to rise and fall together with securities
prices and can causes losses if prices fall. If securities prices remain
unchanged over time option writing strategies tend to be profitable, while
option buying strategies tend to decline in value.
Writing Options. The Funds may write (i.e. sell) covered put and
call options with respect to the securities in which they may invest. By writing
a call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.
"Covered options" means that so long as a Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). A Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains with its custodian cash, U. S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option.
Through the writing of call or put options, a Fund may obtain a
greater current return than would be realized on the underlying securities
alone. A Fund receives premiums from writing call or put options, which it
retains whether or not the options are exercised. By writing a call option, a
Fund might lose the potential for gain on the underlying security while the
option is open, and by writing a put option, a Fund might become obligated to
purchase the underlying security for more than its current market price upon
exercise.
Purchasing Options. The Funds may purchase put options in order to
protect portfolio holdings in an underlying security against a decline in the
market value of such holdings. Such protection is provided during the life of
the put because a Fund may sell the underlying security at the put exercise
price, regardless of a decline in the underlying security's market price. Any
loss to a Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit a Fund realizes on the sale of the security
will be reduced by the premium paid for the put option less any amount for which
the put is sold.
A Fund may wish to protect certain portfolio securities against a
decline in market value at a time when no put options on those particular
securities are available for purchase. The Fund may therefore purchase a put
option on securities other than those it wishes to protect even though it does
not hold such other securities in its portfolio.
Each of the Funds may also purchase call options. During the life of
the call option, the Fund may buy the underlying security at the call exercise
price regardless of any increase in the underlying security's market price. In
order for a call option to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
and transaction costs. By using call options in this manner, a Fund will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Securities Index Option Trading. The Funds may purchase and write
put and call options on securities indexes. Options on securities indexes are
similar to options on securities except that, rather than the right to take or
B-6
make delivery of a security at a specified price, an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated to make delivery of
this amount.
The effectiveness of purchasing or writing index options as a
hedging technique depends upon the extent to which price movements in a Fund's
portfolio correlate with price movements of the index selected. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular security, whether a Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon movements
in the level of prices in the relevant underlying securities markets generally
or, in the case of certain indexes, in an industry market segment, rather than
movements in the price of a particular security. Accordingly, successful use by
a Fund of options on security indexes will be subject to Voyageur's ability to
predict correctly movements in the direction of the stock market or interest
rates market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. In the event Voyageur is unsuccessful in predicting the movements of
an index, a Fund could be in a worse position than had no hedge been attempted.
Because exercises of index options are settled in cash, a Fund
cannot determine the amount of its settlement obligations in advance and, with
respect to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When a Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker as collateral for the option, cash,
high-grade liquid debt securities or "qualified securities" with a market value
determined on a daily basis of not less than 100% of the current market value of
the option.
Options purchased and written by a Fund may be exchange traded or
may be options entered into by the Fund in negotiated transactions with
investment dealers and other financial institutions (over-the-counter or "OTC"
options) (such as commercial banks or savings and loan associations) deemed
creditworthy by Voyageur. OTC options are illiquid and it may not be possible
for the Fund to dispose of options it has purchased or to terminate its
obligations under an option it has written at a time when Voyageur believes it
would be advantageous to do so.
Futures Contracts and Options on Futures Contracts. Certain Funds
may enter into futures contracts and purchase and write options on these
contracts, including but not limited to interest rate and securities index
contracts and put and call options on these futures contracts. These contracts
will be entered into on domestic and foreign exchanges and boards of trade,
subject to applicable regulations of the Commodity Futures Trading Commission.
These transactions may be entered into for bona fide hedging and other
permissible risk management purposes.
In connection with transactions in futures contracts and writing
related options, each Fund will be required to deposit as "initial margin" a
specified amount of cash or short-term, U. S. Government securities. The initial
margin required for a futures contract is set by the exchange on which the
contract is traded. It is expected that the initial margin would be
approximately 1-1/2% to 5% of a contract's face value. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract. No Fund will purchase or
sell futures contracts or related options if, as a result, the sum of the
initial margin deposit on that Fund's existing futures and related options
positions and premiums paid for options or futures contracts entered into for
other than bona fide hedging purposes would exceed 5% of the Fund's assets.
Although futures contracts by their terms call for the actual
delivery or acquisition of securities, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded, a
Fund will incur brokerage fees when it purchases or sells futures contracts.
B-7
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in indexes of securities and movements
in the prices of futures contracts, even a correct forecast of general market
trends may not result in a successful hedging transaction over a very short
period.
Another risk arises because of imperfect correlation between
movements in the value of the futures contracts and movements in the value of
securities subject to the hedge. With respect to index futures contracts, the
risk of imperfect correlation increases as the composition of a Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by a Fund is subject to the
ability of Voyageur to predict correctly movements in the direction of interest
rates or the relevant underlying securities market. If a Fund has hedged against
the possibility of an increase in interest rates adversely affecting the value
of fixed-income securities held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its security which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
Liquidity of Futures Contracts. A Fund may elect to close some or
all of its contracts prior to expiration. The purpose of making such a move
would be to reduce or eliminate the hedge position held by the Fund. A Fund may
close its positions by taking opposite positions. Final determinations of
variation margin are then made, additional cash as required is paid by or to the
Fund, and the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. The daily limit establishes the maximum amount that the
price of a futures contract may vary either up or down from the previous day's
settlement price at the end of a trading session. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses because the
limit may prevent the liquidation of unfavorable positions. It is possible that
futures contract prices could move to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses. In
such event, it will not be possible to close a futures position and, in the
event of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on a futures contract.
Risk of Options. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of
B-8
call or put options involves less potential risk to a Fund because the maximum
amount at risk is the premium paid for the options (plus transactions costs).
The writing of a call option generates a premium, which may partially offset a
decline in the value of a Fund's portfolio assets. By writing a call option, the
Fund becomes obligated to sell an underlying instrument or a futures contract,
which may have a value higher than the exercise price. Conversely, the writing
of a put option generates a premium, but the Fund becomes obligated to purchase
the underlying instrument or futures contract, which may have a value lower than
the exercise price. Thus, the loss incurred by a Fund in writing options may
exceed the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on a Fund's ability to terminate options positions at a time when
Voyageur deems it desirable to do so. Although a Fund will enter into an option
position only if Voyageur believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
A Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by Voyageur, which
could prove to be inaccurate. Even if the expectations of Voyageur are correct,
there may be an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; a Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the
B-9
option expires or it delivers the underlying security upon exercise. Reasons for
the absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options, (ii) restrictions may be
imposed by a national securities exchange ("Exchange") on opening transactions
or closing transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange, (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
Certain Funds may purchase put options to hedge against a decline in
the value of their portfolios. By using put options in this way, such Funds will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
Certain Funds may purchase call options to hedge against an increase
in price of securities that the Funds anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Funds to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when Voyageur believes it would be advantageous to do so. Accordingly, OTC
options are subject to each Fund's limitation that a maximum of 15% of its net
assets be invested in illiquid securities. In the event of the bankruptcy of the
writer of an OTC option, a Fund could experience a loss of all or part of the
value of the option. Voyageur anticipates that options on Tax Exempt Obligations
will consist primarily of OTC options.
ILLIQUID INVESTMENTS
Each Fund is permitted to invest up to 15% of its net assets in
illiquid investments. For certain Funds, this policy is fundamental. See
"Investment Restrictions" below. An investment is generally deemed to be
"illiquid" if it cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the investment company is
valuing the investment. "Restricted securities" are securities which were
originally sold in private placements and which have not been registered under
the Securities Act of 1933 (the "1933 Act"). Such securities generally have been
considered illiquid by the staff of the Securities and Exchange Commission (the
"SEC"), since such securities may be resold only subject to statutory
restrictions and delays or if registered under the 1933 Act. However, the
Securities and Exchange Commission has acknowledged that a market exists for
certain restricted securities (for example, securities qualifying for resale to
certain "qualified institutional buyers" pursuant to Rule 144A under the 1933
Act, certain forms of interest-only and principal-only, mortgaged-backed U.S.
Government securities and commercial paper issued pursuant to the private
placement exemption of Section 4(2) of the 1933 Act). As a fundamental policy,
the Funds may invest without limitation in these forms of restricted securities
if such securities are deemed by Voyageur to be liquid in accordance with
standards established by the Funds' Board. Under these guidelines, Voyageur must
consider, among other things, (a) the frequency of trades and quotes for the
security, (b) the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, (c) dealer undertakings to make a
market in the security, and (d) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer.)
At the present time, it is not possible to predict with accuracy how
the markets for certain restricted securities will develop. Investing in
restricted securities could have the effect of increasing the level of a Fund's
illiquidity to the extent that qualified purchasers of the securities become,
for a time, uninterested in purchasing these securities.
B-10
As more fully described in the Funds' prospectus, the Funds are
permitted to invest in municipal leases. Traditionally, municipal leases have
been viewed by the Securities and Exchange Commission staff as illiquid
investments. However, subject to Board standards similar to the standards
applicable to restricted securities (as discussed above), Voyageur may treat
certain municipal leases as liquid investments and not subject to the policy
limiting illiquid investments.
DIVERSIFICATION
Each Fund designated as such on the cover of the prospectus operates
as a "diversified" management investment company, as defined in the Investment
Company Act of 1940 (the "1940 Act"), which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables),
Government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
such Fund and to not more than 10% of the outstanding voting securities of such
issuer. The other Funds are "non-diversified," as defined in the 1940 Act. See
the prospectus regarding certain considerations relating to "non-diversified"
status.
For purposes of such diversification, the identification of the
issuer of Tax Exempt Obligations depends on the terms and conditions of the
security. If a State or a political subdivision thereof pledges its full faith
and credit to payment of a security, the State or the political subdivision,
respectively, is deemed the sole issuer of the security. If the assets and
revenues of an agency, authority or instrumentality of a State or a political
subdivision thereof are separate from those of the State or political
subdivision and the security is backed only by the assets and revenues of the
agency, authority or instrumentality, such agency, authority or instrumentality
is deemed to be the sole issuer. Moreover, if the security is backed only by
revenues of an enterprise or specific projects of the State, a political
subdivision or agency, authority or instrumentality, such as utility revenue
bonds, and the full faith and credit of the governmental unit is not pledged to
the payment thereof, such enterprise or specific project is deemed the sole
issuer.
Similarly, in the case of an industrial development bond, if that
bond is backed only by certain revenues to be received from the non-governmental
user of the project financed by the bond, then such non-governmental user is
deemed to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by one of the
Funds exceeds 10% of the value of such Fund's total assets, the guarantee is
considered a separate security and is treated as an issue of the guarantor.
Investments in municipal obligations refunded with escrowed U. S. Government
securities will be treated as investments in U. S. Government securities for
purposes of determining a Fund's compliance with the 1940 Act diversification
requirements.
In order to qualify as a regulated investment company, each Fund
must limit its investments so that, at the close of each quarter of the taxable
year, with respect to at least 50% of its total assets, not more than 5% of its
total assets will be invested in the securities of a single issuer. In addition,
the Internal Revenue Code of 1986, as amended (the "Code") requires that not
more than 25% in value of each Fund's total assets may be invested in the
securities of a single issuer at the close of each quarter of the taxable year.
Each Fund intends to conduct its operations so that it will comply with
diversification requirements and qualify under the Code as a "regulated
investment company."
PORTFOLIO TURNOVER
Portfolio turnover for a Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by such Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of a Fund's portfolio
securities for a particular year were equal to the average monthly value of the
portfolio securities owned by the Fund during the year. The portfolio turnover
rate for each of the Funds (other than for Funds which have not commenced
investment operations as of the date of this Statement of Additional
Information) is set forth in the prospectus under "Financial Highlights."
Certain Funds had increased portfolio turnover rates in 1995. California Insured
Tax Free, Florida Insured Tax Free, Minnesota Tax Free, Minnesota Insured,
Missouri Insured Tax Free, New Mexico Tax Free and National Insured Tax Free
Funds experienced increased portfolio turnover as Voyageur sought to make
changes in the average maturity and duration of such Funds, to manage gains and
losses in the best interests of Fund shareholders, and to enhance yield where
possible.
B-11
INVESTMENT RESTRICTIONS
The Funds have adopted certain investment restrictions set forth
below which, together with the investment objectives of each Fund and other
policies which are specifically identified as fundamental in the Prospectus or
herein cannot be changed without approval by holders of a majority of the
outstanding voting shares of the Fund. As defined in the 1940 Act, this means
the lesser of the vote of (1) 67% of the shares of a Fund at a meeting where
more than 50% of the outstanding shares of a Fund are present in person or by
proxy or (2) more than 50% of the outstanding shares of a Fund. The following
investment restrictions apply to Arizona Insured Tax Free Fund, California
Insured Tax Free Fund, Colorado Tax Free Fund, Florida Insured Tax Free Fund,
Kansas Tax Free Fund, Minnesota Insured Fund, Minnesota Limited Term Tax Free
Fund, Minnesota Tax Free Fund, Missouri Insured Tax Free Fund, National Insured
Tax Free Fund, New Mexico Tax Free Fund, North Dakota Tax Free Fund, Oregon
Insured Tax Free Fund, Utah Tax Free Fund, and Washington Insured Tax Free Fund.
No such Fund will:
(1) Borrow money, except from banks for temporary or
emergency purposes in an amount not exceeding 20% (10% for Colorado
Tax Free Fund) of the value of such Fund's total assets, including
the amount borrowed. The Funds may not borrow for leverage purposes,
and securities will not be purchased while borrowings are
outstanding. Interest paid on any money borrowed will reduce such
Fund's net income.
(2) Pledge, hypothecate, mortgage or otherwise encumber
its assets in excess of 10% of its total assets (taken at the lower
of cost or current value) and then only to secure borrowings
permitted by restriction (1) above.
(3) Purchase securities on margin, except such
short-term credits as may be necessary for the clearance of
purchases and sales of securities.
(4) Make short sales of securities or maintain a short
position for the account of such Fund unless at all times when a
short position is open it owns an equal amount of such securities or
owns securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short.
(5) Underwrite securities issued by other persons except
to the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter under
federal securities laws.
(6) Purchase or sell real estate, although it may
purchase securities which are secured by or represent interests in
real estate.
(7) Purchase or sell commodities or commodity contracts
(including futures contracts).
(8) Make loans, except by purchase of debt obligations
in which such Fund may invest consistent with its investment
policies, and through repurchase agreements.
(9) Invest in securities of any issuer if, to the
knowledge of such Fund, officers and directors (or trustees) of such
Fund or officers and directors of such Fund's investment adviser who
beneficially own more than 1/2 of 1% of the securities of that
issuer together own more than 5% of such securities.
(10) Invest 25% or more of its assets in the securities
of issuers in any single industry, except that the Funds may invest
without limitation, in circumstances in which other appropriate
available investments may be in limited supply, in housing, health
care and utility obligations; provided that there shall be no
limitation on the purchase of Tax Exempt Obligations and, for
defensive purposes, obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. (Note: For purposes
of this investment restriction, Voyageur interprets "Tax Exempt
Obligations" to exclude limited obligation bonds payable only from
revenues derived from facilities or projects within a single
industry.)
(11) Invest more than 15% of its net assets in illiquid
investments.
B-12
The following fundamental investment restrictions apply to Iowa Tax
Free Fund and Wisconsin Tax Free Fund. These Funds will not:
(1) Borrow money, except from banks for temporary or
emergency purposes in an amount not exceeding 20% of the value of
such Fund's total assets, including the amount borrowed. The Funds
may not borrow for leverage purposes, and securities will not be
purchased while borrowings are outstanding. Interest paid on any
money borrowed will reduce such Fund's net income.
(2) Underwrite securities issued by other persons except
to the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter under
federal securities laws.
(3) Purchase or sell real estate, although it may
purchase securities which are secured by or represent interests in
real estate.
(4) Make loans, except by purchase of debt obligations
in which such Fund may invest consistent with its investment
policies, and through repurchase agreements.
(5) Invest 25% or more of its assets in the securities
of issuers in any single industry , except that it may invest
without limitation, in circumstances in which other appropriate
available investments may be in limited supply, in housing, health
care and/or utility obligations; provided that there shall be no
limitation on the purchase of Tax Exempt Obligations and, for
defensive purposes, obligations issued or guaranteed by U.S.
Government, its agencies or instrumentalities. (Note: For purposes
of this investment restriction, Voyageur interprets "Tax Exempt
Obligations" to exclude limited obligations bonds payable only from
revenues derived from facilities or projects within a single
industry.)
(6) Issue any senior securities (as defined in the 1940
Act), except as set forth in investment restriction number (1)
above, and except to the extent that purchasing or selling on a
when-issued or forward commitment basis may be deemed to constitute
issuing a senior security.
(7) Purchase or sell commodities or commodity contracts
(including futures contracts).
(8) Make short sales of securities or maintain a short
position for the account of such Fund unless at all times when a
short position is open it owns an equal amount of such securities or
owns securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short.
The following restrictions apply to Arizona Limited Term Tax Free
Fund, Arizona Tax Free Fund, California Limited Term Tax Free Fund, California
Tax Free Fund, Colorado Limited Term Tax Free Fund, Colorado Insured Tax Free
Fund, Florida Limited Term Tax Free Fund, Florida Tax Free Fund, Idaho Tax Free
Fund, National Limited Term Tax Free Fund and National Tax Free Fund. No such
Fund will:
(1) Borrow money (provided that such Fund may enter into
reverse repurchase agreements), except from banks for temporary or
emergency purposes in an amount not exceeding 20% of the value of
the Fund's total assets, including the amount borrowed. The Funds
may not borrow for leverage purposes, provided that such Funds may
enter into reverse repurchase agreements for such purposes, and
securities will not be purchased while outstanding borrowings exceed
5% of the value of such Fund's total assets.
(2) Underwrite securities issued by other persons except
to the extent that, in connection with the disposition of portfolio
investments, such Fund may be deemed to be an underwriter under
federal securities laws.
(3) Purchase or sell real estate, although it may
purchase securities which are secured by or represent interests in
real estate.
B-13
(4) Make loans, except by purchase of debt obligations
in which the Fund may invest consistent with its investment
policies, and through repurchase agreements.
(5) Invest 25% or more of its assets in the securities
of issuers in any single industry (except that it may invest without
limitation, in circumstances in which other appropriate available
investments may be in limited supply, in housing, health care,
utility, transportation, education and/or industrial obligations);
provided that there shall be no limitation on the purchase of Tax
Exempt Obligations and, for defensive purposes, obligations issued
or guaranteed by the U. S. government, its agencies or
instrumentalities. (Note: For purposes of this investment
restriction, Voyageur interprets "Tax Exempt Obligations" to exclude
limited obligations bonds payable only from revenues derived from
facilities or projects within a single industry.)
(6) Issue any senior securities (as defined in the 1940
Act), except as set forth in investment restriction number (1)
above, and except to the extent that using options, futures
contracts and options on futures contracts, purchasing or selling on
a when-issued or forward commitment basis or using similar
investment strategies may be deemed to constitute issuing a senior
security.
(7) Purchase or sell commodities or futures or options
contracts with respect to physical commodities. This restriction
shall not restrict the Fund from purchasing or selling, on a basis
consistent with any restrictions contained in its then-current
Prospectus, any financial contracts or instruments which may be
deemed commodities (including, by way of example and not by way of
limitation, options, futures, and options on futures with respect,
in each case, to interest rates, currencies, stock indices, bond
indices or interest rate indices).
(8) With respect to Florida Limited Term Tax Free Fund
only, pledge, hypothecate, mortgage or otherwise incumber its assets
in excess of 10% of its total assets (taken at the lower of cost or
current value). For the purposes of this restriction, collateral
arrangements for margin deposits on futures contracts with respect
to the writing of options, with respect to reverse repurchase
agreements or with respect to similar investment techniques are not
deemed to be a pledge of assets.
The following non-fundamental investment restrictions may be changed
by the Board of each Fund at any time. None of the Funds will:
(1) Invest more than 5% of its total assets in
securities of any single investment company, nor more than 10% of
its total assets in securities of two or more investment companies,
except as part of a merger, consolidation or acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights
or royalty contracts.
(3) With respect to the National Funds, such Funds will
not write puts if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover such puts.
(4) With respect to Arizona Limited Term Tax Free Fund,
Arizona Tax Free Fund, California Limited Term Tax Free Fund,
California Tax Free Fund, Colorado Limited Term Tax Free Fund,
Colorado Insured Tax Free Fund, Florida Limited Term Tax Free Fund,
Florida Tax Free Fund, Idaho Tax Free Fund, National Limited Term
Tax Free Fund and National Tax Free Fund, such Funds will not make
short sales of securities or maintain a short position for the
account of such Fund, unless at all times when a short position is
open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal
in amount to, the securities sold short.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
B-14
SPECIAL FACTORS AFFECTING THE FUNDS
The following information is a brief summary of particular state
factors effecting the Funds and does not purport to be a complete description of
such factors. The financial condition of a state, its public authorities and
local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of the
respective state Fund, or result in the default of existing obligations,
including obligations which may be held by a Fund. Further, each state faces
numerous forms of litigation seeking significant damages which, if awarded, may
adversely affect the financial situation of such state or issuers located in
such state. It should be noted that the creditworthiness of obligations issued
by local issues may be unrelated to the creditworthiness of a state, and there
is no obligation on the part of a state to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by a state.
Bond ratings received on a state's general obligation bonds, if any,
are discussed below. Moody's, S&P and/or Fitch Investors Service, Inc. provide
an assessment/rating of the creditworthiness of an obligor. The debt rating is
not a recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor. The
ratings are based on current information furnished by the issuer or obtained by
the rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstance. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised or
withdrawn entirely by any such rating agencies, if in their respective
judgments, circumstances so warrant. The ratings are based, in varying degrees,
on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation.
2. Nature of, and provisions of, the obligation.
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement(s) under the
laws of bankruptcy and other laws affecting creditors rights.
A revision or withdrawal of any such credit rating could have an
effect on the market price of the related debt obligations. An explanation of
the significance and status of such credit ratings may be obtained from the
rating agencies furnishing the same. In addition, a description of Moody's and
S&P's bond ratings is set forth in Appendix A hereto.
The information contained below is based primarily upon information
derived from state official statements, Certified Annual Financial Reports,
state and industry trade publications, newspaper articles, other public
documents relating to securities offerings of issuers of such states, and other
historically reliable sources. It has not been independently verified by the
Funds. The Funds make no representation or warranty regarding the completeness
or accuracy of such information. The market value of shares of any Fund may
fluctuate due to factors such as changes in interest rates, matters affecting a
particular state, or for other reasons.
Factors Affecting Arizona Funds
General Economic Conditions. Progressing from its traditional
reliance on a cyclical construction industry, Arizona's economic base is
maturing and diversifying.
One of the nation's leaders in employment growth, Arizona has
created more that 171,000 jobs since January 1994 and close to 335,000 jobs
since 1990. After climbing by 6.2% in 1994, during which the state's economy
produced the second-highest number of jobs of any year in Arizona history, job
creation in Arizona is forecast to increase by 4.8% in 1995, 4.5% in 1996
(adding more than 60,000 new jobs) and 3.8% in 1997.
B-15
Overall, Arizona's forecast is for continued but moderate rates of
growth in employment and personal income. The numbers suggest a positive
outlook, although less so in 1996 than in 1995. By 1997 employment growth is
expected by Arizona to be less than half of Arizona's 1994 growth rate.
Continued job growth is forecast by Arizona to be accompanied by
strong population growth. During the last ten years, Arizona's population grew
at an average rate of 3.5% to a total of 4.1 million people. Arizona's
population grew by an estimated 2.8% in 1994 and could grow by another 3% in
1995. That rate is expected by Arizona to drop back to 2.8% in 1996 and moderate
further in 1997.
Budgetary Process. Annually, no later than five days after the
regular Legislative session convenes, the Governor must submit a budget to the
Legislature. Before July 1 the budget is enacted through the passage of a
General Appropriations Act, a Capital Outlay Bill and various Omnibus
Reconciliation Bills (ORBs). The reconciliation bills are used for statutory
adjustments that must be implemented to carry out the adopted budget. Upon
presentation, the Governor has five days to sign the bills into law, veto it in
its entirety, line-item veto individual items of appropriations, or allow the
bill to become law without his signature. The Legislature may, with a two-thirds
vote, override a veto or line-item veto.
The Budget Reform Act of 1993 initiated a one-and two-year budget
review process for State agencies beginning with the FY 1996/FY 1997. Agencies
selected for annual review and appropriation are designated as Major Budget
Units (MBUs). MBUs can be described as agencies with difficult issues requiring
frequent and critical reviews and, ultimately, more resources. The 20 MBUs
account for over 92% of the total General Fund expenditures. Agencies selected
for biennial review and appropriation are designated as Other Budget Units
(OBUs). Whereas Temporary Major Budgets Units (TMBUs) can be described as budget
units that would normally be appropriated for both years of the biennium but
were given FY 1996 appropriations only because of pending issues that the
Legislature chose to review during the 1996 legislative session. Therefore these
budget units are temporarily on the annual budget schedule.
Revenues and Expenditures. The General Fund closed fiscal year 1995
with a $269.5 million ending balance, and the Executive plan for fiscal year
1996 anticipates a $275.4 million balance. Overall, fiscal year 1995 revenues
exceeded the spring 1995 forecast by about $60 million. While there were many
offsetting changes in the various revenue sources, the most notable were in
corporate and individual income taxes. Revetments were anticipated to be about
$76 million in spring 1995. The final closing of the books revealed total
revetments of some $127 million - a $51 million increase.
Fiscal Year 1996. In March 1995, when the fiscal year 1996 budget
was adopted, the consensus revenue estimate was $4.36 billion. The current
Executive forecast for fiscal year 1996 is $209 million higher, at $4.57
billion.
The major revenue source remaining essentially unchanged from the
spring 1995 forecast is individual income taxes, still forecast to produce $1.45
billion for fiscal year 1996. As of November 1995, fiscal year 1996 YTD revenue
collections were up 9.45% over the previous year and support the present
Executive General Fund forecast. All three major revenue categories - individual
income taxes, corporate income taxes and transaction privilege taxes showed
gains on a year-over-year basis. Overall, the Executive anticipates a 2.9%, or
$133.9 billion, increase in base revenues of the current FY 1996 estimate. This
compares to the 2.3%, or $102.5 million, increase in base revenues between
fiscal year 1995 and fiscal year 1997.
Fiscal Year 1997. The Executive is recommending a base operating
budget of $4.59 billion for fiscal year 1997, an increase of approximately $127
million. The majority of recommended expenditures for fiscal year 1997 are in
the area of education. The K-12 budget (Department of Education) and the higher
education budgets (Community Colleges and University system) account for 55%
($4.7 billion) of General Fund operating budget. Additionally, the health and
welfare area accounts for 24% ($1.1 billion), the protection and safety area
accounts for over 11% ($527 million), and other areas of government account for
less than 8% of the General Fund operating budget.
The Executive fiscal plan for fiscal year 1997 is based on revenue
estimates, yet still provides for the implementation of last year's promised
$200 million property tax cut; a $50 million income tax reduction to continue
the Governor's phase-out of that revenue source; a $46.4 million capital
program; and a $15 million employee compensation package. The Executive projects
a fiscal year 1997 ending balance of $12.9 million.
B-16
Significant Litigation. In response to the court's ruling in the
Roosevelt v. Bishop case the Executive recommends $30 million for the first-year
implementation of a capital assistance program for Arizona's schools. The
program would be designed to help school districts that lack bonding capacity
due to low value or rapid growth. It would require an application that would
include documentation of need and would be submitted to a capital equity board.
The board would determine the priority of requests and the amounts to be
allocated for each approved project. The board would receive funding for staff
and consultants who would provide technical assistance on school construction,
conduct needs assessments to verify applications, and make recommendations to
the board for action. A local share, proportionate to district wealth, would be
assumed in the initial analysis of each application, but the local share could
be waived or reduced under special circumstances. Monies allocated might be in
the form of grants, loans or debt service assistance, and could be used for new
construction, renovation, buses, equipment for new schools, and technology for
existing schools. A portion of the income from the State Land Fund could be
appropriated by statute to the capital equity board to provide a stable floor
funding for the program in future years.
Debt Administration and Limitation. The State is not permitted to
issue general obligation debt. The particular source of payment and security for
each of the Arizona Tax Exempt Obligations is detailed in the debt instruments
themselves and in related offering materials. There can be no assurances with
respect to whether the market value or marketability of any of the Arizona Tax
Exempt Obligations issued by an entity other than the State of Arizona will be
affected by financial or other conditions of the State or of any entity located
within the State. In addition, it should be noted that the State of Arizona, as
well as counties, municipalities, political subdivisions and other public
authorities of the State, are subject to limitations imposed by Arizona's
Constitution with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the State legislature cannot appropriate revenues in
excess of 7% of the total personal income of the State in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
Although most of the Arizona Tax Exempt Obligations are revenue
obligations of local governments or authorities in the State, there can be no
assurance that the fiscal and economic conditions referred to above will not
affect the market value or marketability of the Arizona Tax Exempt Obligations
or the ability of the respective obligors to pay principal of and interest on
the Arizona Tax Exempt Obligations when due.
Factors Affecting California Funds
General Economic Conditions. California's economy is the largest
among the 50 states and one of the largest in the world. This diversified
economy has major components in agriculture, manufacturing, high-technology,
trade, entertainment, tourism, construction and services. Total State gross
domestic product of about $835 billion in 1994 was larger than all but six
nations in the world.
After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. Employment has grown over
500,000 in 1994 and 1995, and the pre-recession level of total employment is
expected to be matched by early 1996. The strongest growth has been in
export-related industries, business services, electronics, entertainment and
tourism, all of which have offset the recession-related losses which were
heaviest in aerospace and defense-related industries (which accounted for
two-thirds of the job losses), finance and insurance. Residential housing
construction, with new permits for under 100,000 annual new units issued in 1994
and 1995, is weaker than in previous recoveries, but has been growing slowly
since 1993.
The State's July 1, 1994 population of 32.1 million represented over
12% of the total United States population. California's population is
concentrated in metropolitan areas. As of July 1, 1994, the 5-county Los Angeles
area accounted for 48% of the State's population, with 15.6 million residents,
and the 10-county San Francisco Bay Area represented 21% with a population of
6.7 million.
California enjoys a large and diverse labor force. For the year
1994, the total civilian labor force was 15,470,000 with 14,141,000 individuals
employed and 1,330,000, or 8.6%, unemployed. In comparison, the unemployment
rate for the United States during the same time was 6.1%.
Budgetary Process. The State's fiscal year begins on July 1 and ends
on June 30. The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State
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law, the annual proposed Governor's Budget cannot provide for projected
expenditures in excess of projected revenues and balances available from prior
fiscal years. Under the State Constitution, money may be drawn from the Treasury
only through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature and
signed by the Governor. The Budget Act must be approved by a two-thirds majority
vote of each House of the Legislature. The Governor may reduce or eliminate
specific line items in the Budget Act or any other appropriations bill without
vetoing the entire bill. Such individual line-item vetoes are subject to
override by a two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except K-14 education) must be
approved by a two-thirds majority vote in each House of the Legislature and be
signed by the Governor. Bills containing K-14 education appropriations only
require a simple majority vote. Continuing appropriations, available without
regard to fiscal year, may also be provided by statute or the State
Constitution. Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
Revenues and Expenditures. The moneys of the State are segregated
into the General Fund and approximately 600 Special Funds. The General Fund
consists of revenues received by the State Treasury and not required by law to
be credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
Moneys on deposit in the State's Centralized Treasury System are
invested by the Treasurer in the Pooled Money Investment Account ("PMIA"). As of
January 31, 1996, the PMIA held approximately $17.31 billion of State moneys,
and $10.60 billion of moneys invested for 2,366 local governmental entities
through the Local Agency Investment Fund ("LAIF"). The total assets of the PMIA
as of January 31, 1996 were $27,912,100,000. The Treasurer does not invest in
leveraged products or inverse floating rate securities. The investment policy
permits the use of reverse repurchase agreements subject to limits of no more
than 10% of PMIA. All reverse repurchase agreements are cash matched either to
the maturity of the reinvestment or an adequately positive cash flow date which
is approximate to the maturity date. The average life of the investment
portfolio of the PMIA as of January 31, 1996 was 233 days.
Special Fund for Economic Uncertainties. The Special Fund for
Economic Uncertainties ("SFEU") is funded with General Fund revenues and was
established to protect the State from unforeseen revenue reductions and/or
unanticipated expenditure increases. Amounts in the SFEU may be transferred by
the State Controller as necessary to meet cash needs of the General Fund. The
State Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. For
budgeting and accounting purposes, any appropriation made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the State Controller is required to add the balance in the SFEU to the balance
in the General Fund so as to show the total moneys then available for General
Fund purposes. Inter-fund borrowing has been used for may years to meet
temporary imbalances of receipts and disbursements in the General Fund. As of
June 30, 1995, the General Fund did not have any outstanding loans from Special
Funds (but did have $4 billion of external loans represented by the 1994 Revenue
Anticipation Warrant, Series C and D which mature on April 25, 1996).
Proposition 13. The primary units of local government in California
are the counties. Counties are responsible for the provision of many basic
services, including indigent health care, welfare, courts, jails and public
safety in unincorporated areas. There are also about 480 unincorporated cities,
and thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. A recent California Supreme Court decision has upheld the
constitutionality of an initiative statute, previously held invalid by lower
courts, which requires voter approval for "general" as well as "special" taxes
at the local level. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, yet have been required to
maintain many services.
B-18
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds. Article XIII B
prohibits the State from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. "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 that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state subventions 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 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, 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.
Orange County, CA. On December 6, 1994, Orange County, together with
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and Orange County. More than 200 other public entities, most of which,
but not all, are located in Orange County, were also depositors in the Pools.
Orange County has reported the Pools' loss at about $1.69 billion, or about 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including Orange County, faced interim
and/or extended cash flow difficulties because of the bankruptcy filing and may
be required to reduce programs or capital projects. Orange County has embarked
on a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
Litigation Generally. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
Fiscal Year 1995-1996. The following discussion regarding the
1995-96 fiscal year budget is based on estimates and projections of revenues and
expenditures for the current fiscal year made by the State of California or
branches of its government and must not be construed as statements of fact.
These estimates and projections are based upon various assumptions which may be
affected by numerous factors, including future economic conditions in the State
and the nation, and there can be no assurance that the estimates will be
achieved.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995,
34 days after the start of the fiscal year. The Budget Act projected General
Fund revenues and transfers of $44.1 billion, a 3.5% increase from the prior
B-19
year. Expenditures were budgeted at $43.4 billion, a 4% increase. The Department
of Finance projected that, after repaying the last of the carryover budget
deficit, there would be a positive balance of $28 million in the budget reserve,
the SFEU, at June 30, 1996. The Budget Act also projected Special Fund revenues
of $12.7 billion and appropriated Special Fund expenditures of $13 billion.
The Governor's Budget for fiscal year 1995-96, released January 10,
1996, updated the current year projections, so that revenues and transfers are
estimated to be $45 billion, and expenditures to be $44.2 billion. The SFEU is
projected to have a positive balance of about $50 million at June 30, 1996, and
on that date available internal borrowable resources (available cash, after
payment of all obligations due) will be about $2.2 billion. The Administration
projects it will issue up to $2 billion of revenue anticipation notes in April,
1996 to mature by June 30, 1996, to assist in cash flow management for the final
two months of the year, after repayment of the $4 billion revenue anticipation
warrants issued on April 25, 1996. The following are the principal features of
the 1995-96 Budget Act.
1. Proposition 98 funding for schools and community colleges was
originally budgeted to increase by about $1 billion (General Fund) and $1.2
billion total above revised 1994-95 levels. Because of higher than projected
revenues in 1994-95, an additional $543 million was appropriated to the 1994-95
Proposition 98 entitlement. A large part of this is a block grant of about $54
per pupil for any one-time purpose. For the first time in several years, a full
2.7% cost of living allowance was funded. The budget compromise anticipates a
settlement of the California Teachers Association v. Gould litigation (discussed
above). The Governor's Budget indicates that, with revenues even higher than
projected, Proposition 98 apportionments will exceed the amounts originally
budgeted, reaching a level of $4,500 per ADA.
2. Cuts in health and welfare costs totaling about $0.9 billion.
Some of these cuts (totaling about $500 million) require federal legislative or
administrative approval, which were still pending as of February, 1996.
3. A 3.5% increase in funding for the University of California ($90
million General Fund) and California State University system ($24 million
General Fund), with no increases in student fees.
4. The Budget, as updated by the 1996-97 Governor's Budget dated
January 10, 1996, assumed receipt of $494 million in new federal aid for
incarceration and health care costs of illegal immigrants, above commitments
already made by the federal government.
5. General Fund support for the Department of Corrections is
increased by about 8% over the prior year, reflecting estimates of increased
prison population, but funding is less than proposed in the 1995 Governor's
Budget.
1996-97 Fiscal Year. On January 10, 1996, the Governor released his
proposed budget for the next fiscal year. The Governor requested total General
Fund appropriations of about $45.2 billion, based on projected revenues and
transfers of about $45.6 billion, which would leave a budget reserve in the SFEU
at June 30, 1997 of about $400 million. The Governor renewed a proposal, which
had been rejected by the Legislature in 1995, for a 15% phased cut in individual
and corporate tax rates over three years (the budget proposal assumes this will
be enacted, reducing revenues in 1996-97 by about $600 million). There was also
a proposal to restructure trial court funding in a way which would result in a
$300 million decrease in General Fund revenues. The Governor requested
legislation to make permanent a moratorium on cost of living increases for
welfare payments, and suspension of a renters tax credit, which otherwise would
go back into effect in the 1996-97 fiscal year. The Governor further proposed
additional cuts in certain health and welfare programs, and assumed that cuts
previously approved by the Legislature will receive federal approval. Other
proposals include an increase in funding for K-12 schools under Proposition 98,
for state higher education systems (with a second year of no student fee
increases), and for corrections. The Governor's Budget projects external cash
flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
Debt Administration and Limitation. The State Treasurer is
responsible for the sale of debt obligations of the State and its various
authorities and agencies. The State Constitution prohibits the creation of
indebtedness of the State unless a bond law is approved by a majority of the
electorate voting at a general election or a direct primary. General obligation
bond acts provide that debt service on general obligation bonds shall be
appropriated annually from the General Fund and all debt service on general
obligation bonds is paid from the General Fund. Under the State Constitution,
debt service on general obligation bonds is the second charge to the General
Fund after the application of
B-20
moneys in the General Fund to the support of the public school system and public
institutions of higher education. Certain general obligation bond programs
receive revenues from sources other than the sale of bonds or the investment of
bond proceeds. The State had $18,543,095,000 aggregate principal amount of
general obligation bonds outstanding, and $2,888,864,000 authorized and
unissued, as of February 1, 1996.
From July 1, 1995 to December 15, 1995, the State issued
approximately $461 million in general obligation bonds and $44 million in
revenue bonds. Refunding bonds, which are used to refinance existing debt,
accounted for $81 million of the general obligation bonds and the entire $44
million of the revenue bonds. The Legislature has placed two general obligation
bond measures totaling $5 billion on the March, 1996 statewide ballot.
Additional bond measures may be placed on the November 1996, ballot.
The State's general obligation bonds have received ratings of "A1"
by Moody's Investors Service, "A" by Standard & Poor's Ratings Group and "A+" by
Fitch Investors Service, Inc.
FACTORS AFFECTING COLORADO FUNDS
General Economic Conditions. Colorado entered the Union on August 1,
1876, and was called the "Centennial State" in honor of the 100th anniversary of
the Declaration of Independence. It is the eighth largest state in the nation,
with an area of 104,247 square miles. The main feature of the state's geography
is the Continental Divide, extending northeast to southwest and roughly
bisecting Colorado into the Eastern and Western Slopes. The major rivers of
Colorado are the Arkansas, Platte, Rio Grande, and Colorado. Colorado enjoys an
average of nearly 300 days of sunshine per year. Precipitation varies from 8
inches per year in lower elevations to 23 inches in the mountains, with a yearly
statewide average of 16.5 inches.
The U.S. Bureau of Census estimates Colorado's population as of July
1, 1995 at 3,746,585. This represents a 2.3% increase over the 1994 revised
estimate of 3,661,665. With a growth of 2.3%, Colorado was the fourth most
rapidly growing state in the country during 1994-1995. A large part of
Colorado's current growth is related to growth in the West and to
decentralization trends that emanate from California.
As the primary services center for the Rocky Mountain region, the
state suffered a sharp recession in the midto-late 1980s because of retrenchment
in the energy sector. Real estate values dropped sharply, with evidence of
overbuilding in commercial and residential sectors. Office vacancy rates in the
Denver area soared, and the state lost significant jobs in mining and
construction.
Colorado's economic vitality returned and was evident through the
1991-1992 national recession and more recent recovery. Wage and salary
employment growth topped 6.1% in 1994, following growth rates of 1.1% and 5.2%
in 1992 and 1993, respectively, while real personal income grew more than 7%
each year. The state has added nearly 231,000 jobs since 1990, mostly in
service, trade, and government. Construction employment has been strong,
bolstered by the recently completed Denver International Airport construction,
but activity has shifted to other public infrastructure projects and
single-family homes. Employment is now diversified among service (27.7%), trade
(24.8%), government (16%), and manufacturing (10.9%). Housing starts have
rebounded from a 1989 low, with over 29,000 units permitted in 1993. Conversely,
the state's manufacturing sector has recorded the loss of about 5,000 jobs since
1990, although employment at Martin Marietta Corp., the state's largest defense
contractor, has stabilized. Retail trade has been strong, growing 7% in 1994.
Income levels, while below their early 1980s peak, are rising, with per capita
personal income at 103.6% of the national average.
Despite current strength, near-term economic problems remain. Lowry
Air Force Base recently closed (a loss of about 6,600 jobs), the Rocky Flats
weapons plant will phase out its nuclear mission, and Fitzsimmons military
medical center recently landed on the base closure list. While construction job
losses at the airport largely have been absorbed into other public
infrastructure projects and residential housing, the construction sector is
likely to lose jobs as population growth slows. Projections of 6.2% growth in
personal income for 1996 are still strong by national standards, but represent a
slowdown from recent growth.
Significant Litigation. On June 19, 1995, the Colorado Supreme Court
affirmed the December 1993 Arapahoe County District Court decision in favor of
the Littleton School District. The Bolt v. Littleton School
B-21
District case was a class action lawsuit brought by three taxpayers residing in
the District. Plaintiffs argued that Littleton School District's 1993 property
tax millage rate increase violated Amendment 1. The Amendment states that all
Districts must obtain voter approval in advance of any new tax, tax rate
increase, or mill levy above that for the prior year, unless annual District
revenue is less than annual payments on G.O. bonds, pensions, and final court
judgments, with certain exceptions. The School District increased its 1993 mill
levy to pay debt service on its Series 1985 G.O. bonds. In affirming the Trial
Court's ruling in favor of the District, the Supreme Court reasoned that the
increase in the District's bond redemption mill levy for 1993 did not violate
the provisions of Amendment 1 because the District already received voter
approval for the tax rate increase when the Bonds originally were authorized by
voters at an election in 1984. The ruling has significance for the Colorado
municipal bond market because it upholds the right of Municipalities to increase
property tax millage rates to pay debt service on G.O. bonds issued before
Amendment 1.
The Littleton ruling follows another important ruling by the
Colorado Supreme Court last September in the case of Bickel v. City and County
of Boulder and Boulder Valley School District. In that case the court upheld the
right of Municipalities to request and obtain voter approval to issue G.O. bonds
after passage of Amendment 1. Together, the Boulder and Littleton cases settle
two of the most controversial Amendment 1 issues and should lead to a more
orderly primary and secondary market for Colorado municipal bonds.
Budgetary Process. The financial operations of the legislative,
judicial, and executive branches of the state's government, with the exception
of custodial funds or federal moneys not requiring matching state funds, are
controlled by annual appropriation made by the General Assembly. The
Transportation Department's portion of the Highway Fund is appropriated to the
State Transportation Commission. Within the legislative appropriation, the
Commission may appropriate the specific projects and other operations of the
Department. In addition, the Commission may appropriate available fund balance
from their portion of the Highway Fund.
The legislative appropriation is constitutionally limited to the
unrestricted funds held at the beginning of the year plus revenues estimated to
be received during the year as determined by the modified accrual basis of
accounting. The Governor has line item veto authority over the Long
Appropriations Bill, but the General Assembly may override each individual line
item veto by a two-thirds majority vote in each house. For budgetary purposes,
cash funds are all funds received by the state that are neither general purpose
revenues, nor revenues received from the federal government. General and cash
fund appropriations, with the exception of capital construction, lapse at
year-end unless executive action is taken to roll-forward all or part of the
remaining unspent budget authority. Appropriations that meet the strict criteria
for roll-forward are reserved at year-end. Capital construction appropriations
are generally available for three years after appropriations.
Revenues and Expenditures. Audited GAAP financial statements for the
year-ended June 30, 1994 report an unreserved general fund balance of $320.3
million, or about 6.1% of general fund expenditures, and a total general fund
balance of $579 million, or 11% of expenditures. This is in contrast to the
unreserved general fund balance of just $16.3 million in 1991. In fiscal 1994,
challenged to deliver on a 1988 plan to increase the state's contribution toward
primary and secondary education, the state budget added nearly $200 million to
K-12 education. Further enhancement was limited by a statutory limit on
appropriations. Still, revenue growth exceeded projections in 1994 and 1995,
with sales tax collections growing nearly 12% in fiscal 1994 and an estimated
10.1% in 1995, while individual income taxes are projected to grow 8.1% in 1995.
In addition, the state carried a $226 million balance in its capital projects
fund in 1994, and is expected to transfer $152 million to the fund in 1996, an
increase from prior years.
The Amendment 1 constitutional revenue and spending limit will not
affect the fiscal 1996 budget, because projected revenues and expenditures fall
below limits. With slower population growth, the long-term projections suggest a
convergence of revenues with the amendment's limits.
The State Controller's Office created spending authority of
$4,315,000, based on its interpretation of two Governor's executive orders for
disaster emergencies, without reducing the spending authority for other
purposes. As a result, the State of Colorado, in total, had more spending
authority on the financial records than legally allowable. This also resulted in
inflated reversions at the end of the fiscal year. During the fiscal year, the
Governor issued two executive orders declaring disaster emergencies. In July,
1994, the Governor declared a disaster emergency due to
B-22
wildfires. In fiscal year 1995 spending authority of $1,415,000 was recorded and
a total of $914,184 was expended for this disaster. No funds were expended for
this purpose after December 31, 1994. In June 1995, the Governor declared a
disaster emergency due to the spring snow melt flooding and landslides. The
Order transferred $2,900,000 from the state's General Fund into the state
Disaster Emergency Fund. As of November 6, 1995, $661,407 had been expended for
this disaster.
The State Controller may allow certain over expenditures of the
legal appropriation with the approval of the Governor. If the State Controller
restricts the subsequent year appropriation, the agency is required to seek a
supplemental appropriation from the General Assembly or reduce their subsequent
year's expenditures. As provided by statute, there is unlimited authority for
Medicaid over expenditures. The Department of Human Services is allowed $1
million in over expenditures not related to Medicaid and unlimited over
expenditures for self-insurance of its workers' compensation plan. An additional
$1 million over expenditure is allowed for the Judicial Branch. State statute
also allows over expenditures up to $1 million in total for the remainder of the
executive branch.
Debt Administration and Limitation. The Constitution prohibits
Colorado from incurring G.O. debt, and most long-term financing takes the form
of lease purchase obligations. The state relies on general fund appropriations
for pay-as-you-go capital projects, with $120 million transferred to the capital
projects fund in 1994 and $152 million in 1995. Since 1988, the State's master
lease purchase program primarily has been used to finance new correctional
facilities. Lottery revenues are intended for repayment on these obligations,
but deficiencies are appropriated from the general fund. In November 1992,
Colorado voters approved an amendment that redirects lottery revenues to outdoor
recreation. After 1998, alternate general fund resources will need to be
allocated for future lease payments, but the annual lease payment obligation by
then is only about $2.5 million. The State supports affordable housing through
the Colorado Housing Finance Authority, whose G.O.s ultimately are secured by
the State's moral obligation pledge.
The Funds Management Act (the "Act") was enacted to allow the State
to provide for temporary cash flow deficits caused by fluctuations in revenues
and expenditures. Under the Act the State Treasurer is authorized to sell Tax
and Revenue Anticipation Notes which are payable from the future anticipated
pledged revenues. The law directs the State Auditor to review information
relating to the Notes and report this information to the General Assembly. On
July 6, 1995, the State Treasurer issued General Fund Tax Revenue Anticipation
Notes (the "Notes") in the amount of $300 million. These Notes have a maturity
date of June 27, 1996 and are not subject to redemption prior to maturity. The
amount due at maturity is $311,015,828, consisting of the Note principal of
$300,000,000 and interest of $11,015,828. To ensure the payment of the Notes,
the Treasurer has agreed to deposit pledged revenues into the Account so that
the balance on June 15,1996, will be no less than the amount to be repaid. The
Note agreement also provides remedies for holders of the Notes in the event of
default.
Since the State of Colorado does not have G.O. debt, it does not
have S&P, Moody's or Fitch ratings.
FACTORS AFFECTING FLORIDA FUNDS
General Economic Conditions. Florida is the twenty-second (22nd)
largest state with an area of 54,136 square miles and a water area of 4,424
square miles. The State is 447 miles long (St. Marys River to Key West) and 361
miles wide (Atlantic Ocean to Perdido River) and has tidal shoreline of almost
2,300 miles. Florida has grown dramatically since 1980 and as of April 1, 1994,
ranks fourth among the fifty states with an estimated population of 13.9
million. The State's strong population growth is one fundamental reason why its
economy has typically performed better than the nation as a whole. Since 1984,
the United States has had an average population increase of about 1.0% annually,
while Florida's average annual rate of increase is around 2.3%. Florida has
been, and continues to be, the fastest growing of the eleven (11) largest
states.
While many of the Nation's senior citizens choose Florida as their
place of retirement, the State is also recognized as attracting a significant
number of working age people. Since 1985, the prime working age population
(18-44) has grown at an average annual rate of 2.2%. Florida's economic assets,
such as competitive wages and low per capita taxes, have attracted new
businesses and consequently have created many new job opportunities. The share
of Florida's total working age population (18-59) to total population is
approximately 54%.
B-23
Over the years, Florida's personal income has grown and has
generally outperformed both the U.S. as a whole and the southeast in particular.
The reasons for this are two fold. First, Florida's population has expanded.
Second, the State's economy since the early seventies has diversified in such a
way as to provide a broader economic base. As a result, Florida's personal
income has tracked closely with the national average and, historically, above
that of the southeast. From 1985 through 1994, Florida's per capita income rose
an average of 5.2% per year, while the national per capita income increased an
average of 5.1%. Real personal income is estimated to increase 4.6% in 1995-
1996 and increase 3.8% in 1996-1997, while real income per capita is projected
to grow at 2.7% in 1995-1996 and 1.9 percent in 1996-1997.
Presently, the State's service sector employment constitutes 86.4%
of total non-farm employment. While structurally the southeast and the nation
are endowed with a greater proportion of manufacturing jobs, which tend to pay
higher wages, service jobs, historically, tend to be less sensitive to business
cycle swings. Florida has a concentration of manufacturing jobs in high-tech and
high value-added sectors, such as electrical and electronic equipment, as well
as printing and publishing. The State's manufacturing sector has kept pace with
the U.S., at about 2.7% of total U.S. manufacturing employment since the
eighties.
Florida predicts that employment in the service sector should
experience an increase of 5.3% in 1995-1996, while growing 4.5% in 1996-1997.
Trade is expected to expand 3.4% this year and 3.0% next year. However, in
recent years, the State's economic growth has slowed from its previous highs and
the unemployment rate has tracked above the national average. The average rate
of unemployment for Florida since 1985 is 6.3%, while the national average is
6.4%. Florida's unemployment rate is forecasted at 5.6% in 1995-1996 and 5.7% in
1996-1997.
Tourism is one of Florida's most important industries. Approximately
39.9 million people visited the State in 1994. In terms of business activities
and State tax revenues, tourists in Florida effectively represented additional
residents, spending their dollars predominantly at eating and drinking
establishments, hotels and motels, and amusements and recreation parks. The
State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus, to a degree, reducing its seasonality.
Besides a sub-tropical climate and clean beaches that attract people in the
winter months, the State has added, among other attractions, a variety of
amusement and educational theme parks. This diversification has helped to reduce
the seasonal and cyclical character of the industry and has effectively
stabilized tourist related employment as a result. By the end of this fiscal
year, 41.4 million domestic and international tourists are expected to have
visited the State. In 1996-1997, tourist arrival should approximate 43.2
million. The current Florida Economic Consensus Estimating Conference forecast
shows that the Florida economy is expected to decelerate along with the nation,
but will continue to outperform the U.S. as a whole as a result of relatively
rapid population growth.
Budgetary Process. The budgetary process is an integrated,
continuous system of planning, evaluation and controls. Individual state
agencies prepare and submit appropriation requests to the Office of Planning and
Budgeting, Executive Office of the Governor, no later than September 1 of the
year next preceding Legislative consideration. After a evaluation of the
agencies' requests, the Office of Planning and Budgeting, Executive Office of
the Governor, makes recommendations to the Governor that are within previously
established policy guidelines of the Governor and revenue estimate. Florida
Statutes provides that financial operations of the State covering all receipts
and expenditures be maintained through the use of three funds - the General
Revenue Fund, Trust Funds, and Working Capital Fund. The General Revenue Fund
receives the majority of State tax revenues. Monies for all funds are expended
pursuant to appropriations acts. The Trust Funds consist of monies received by
the State which under law or trust agreement are segregated for a purpose
authorized by law. Revenues in the General Fund which are in excess of the
amount needed to meet appropriations may be transferred to the Working Capital
Fund. The Florida Constitution adds a fourth fund, the Budget Stabilization
Fund. The Florida Constitution and Statutes mandate that the State budget as a
whole, and each separate fund within the State budget be kept in balance from
currently available revenues each State Fiscal year (July 1-June 30). The
Governor and Comptroller are responsible for insuring that sufficient revenues
are collected to meet appropriations and that no deficit occurs in any State
fund.
Revenues and Expenditures. Financial operations of the State of
Florida covering all receipts and expenditures are maintained through the above
described four fund types - General Revenue Fund, Trust Funds, Working Capital
Fund, and Budget Stabilization Fund. In fiscal year 1994-1995, an estimated 66%
of total direct revenues to these funds were derived from State taxes and fees.
Federal funds and other special revenues accounted
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for the remaining revenues. Major sources of tax revenues to the General Revenue
Fund are the sales and use tax, corporate income tax, intangible personal
property tax, and beverage tax, which amount to 67%, 7%, 4%, and 4%,
respectively, of total General Revenue funds available.
State expenditures are categorized for budget and appropriation
purposes by type of fund and spending unit, which are further subdivided by line
item. In fiscal year 1994-1995, appropriations from the General Revenue Fund for
education, health and welfare, and public safety amounted to approximately 49%,
32%, and 11%, respectively, of total General Revenue funds available.
Revenues for governmental funds increased 7.6% over the previous
year, while expenditures for governmental fund types totaled $29.7 billion in
fiscal year 1995, a 7.6% increase from the previous year. Total fund balance at
June 30, 1995, for all governmental fund types was $6.83 billion compared to
$5.78 billion at June 30, 1994. Of this total, $4.61 billion represents
unreserved fund balance which is $1.37 billion more than the $3.24 billion last
year.
The Department of Lottery is the largest enterprise fund in the
State. In comparison to the year ended June 30, 1994, combined enterprise fund
operating revenues increased from $2.5 billion to $2.7 billion in 1995 and
operating expenses increased from $1.5 billion to $1.6 billion. In addition to
the Lottery, other major enterprise funds account for the operations of the toll
and turnpike facilities and the Florida Housing Finance Agency.
Combined internal service fund operating revenues increased from
$845 million in 1994 to $896 million in 1995, while operating expenses decreased
to $840 million in 1995 from $849 million in 1994. Principal services provided
to the agencies by these funds are the consolidated equipment financing program,
facilities management, data processing, motor pool, self-insurance, and
telephone communications.
The State Treasurer is responsible for investing the General Revenue
Fund and trust fund monies. Authorized investments include certificates of
deposits in Florida banks and savings and loan associations, direct obligations
of the United States Treasury, commercial paper and banker's acceptances,
medium-term corporate notes and co-mingled and mutual funds. Among other
functions, the Treasurer also serves as administrator of the Florida Security
for Public Deposit Program. This program encompasses all governmental entities
in the State. Participating banks and savings and loan associations guarantee
government deposits and pledge collateral at levels varying between 50% and
125%. Acceptable collateral includes obligations of the United States Government
and its agencies, obligations of the State of Florida and its political
subdivisions, and obligations of several states.
Debt Administration. By law, the State of Florida is not authorized
to issue obligations to fund governmental operations. State bonds, pledging the
full faith and credit of the State of Florida may be issued only to finance or
refinance the cost of State fixed capital outlay projects upon approval by a
vote of the electors. Article III, Section 11(d) of the Florida Constitution
provides that revenue bonds may be issued by the State of Florida or its
agencies without a vote of the electors only to finance or refinance the cost of
State fixed capital outlay projects which shall be payable solely from funds
derived directly from sources other than State tax revenues.
Florida maintains a bond rating from Moody's Investors Services
(Aa), Standard and Poor's Corporation (AA) and Fitch Investors Service, Inc.
(AA) on all of its general obligation bonds. Outstanding general obligation
bonds at June 30, 1995, totaled almost $6.8 billion and were issued to finance
capital outlay for educational projects of local school districts, community
colleges and state universities, environmental protection and highway
construction.
FACTORS AFFECTING IDAHO FUND
General Economic Conditions. State Government in Idaho originates
from the State Constitution adopted at the constitutional convention of August
6, 1889, and ratified by the people in November of the same year. Congress
approved the Constitution and admitted Idaho to the Union on July 3, 1890.
Idaho, located in the northwestern portion of the United States, is bordered by
Washington, Oregon, Nevada, Utah, Wyoming, Montana and Canada. Idaho's land area
consists of 83,557 square miles of varied terrain including prairies, rolling
hills and mountains with altitudes ranging from 736 feet to 12,662 feet.
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With close of 1994, Idaho completed the eighth consecutive year of
economic expansion, maintaining one of the fastest annual growth rates of
employment and income among all states; employment expanded 5.5% and personal
income increased 8.1% during 1994. However, it is anticipated that the rapid
employment increases enjoyed by the state for the last eight years will slow to
the 2.5% range. The unemployment rate is expected to rise from 5.2% in 1994 to
5.7% in 1995, partly due to an average annual population growth rate of 2.5% for
1995 through 1997. Personal income increased at an 8.1% rate in 1994 and will
continue to grow at rates exceeding 7% during 1995 and 1996.
Exports. Exports of agricultural and manufactured goods played an
ever increasingly important role in Idaho's economic performance. With Japan,
the United Kingdom, Canada, Singapore, and Taiwan as the state's biggest
customers, Idaho's export value rose from $1.9 billion in 1993 to $2.3 billion
in 1994, a 21% increase; nonfarm exports rose 20% in that period to $1.32
billion, creating an estimated 5,000 new jobs; exports climbed 187% from 1987 to
1993. Idaho ranked thirty-second among the states in the total value of goods
and services exported in 1994. Japan was Idaho's best customer importing $263
million worth of goods and services; the United Kingdom increased its imports
from Idaho 31% to $183 million and Canada came in third at $161 million for a
34% increase over 1993.
The jobs supported by Idaho's recent experiences in exports markets
are relatively evenly distributed between farm and manufacturing jobs. The
return to the state government from its investment in promoting Idaho products
abroad is elevated tax revenues. In 1994, the state tax revenues increased 12.1%
to $1.17 billion, the largest gain in five years; taxable sales rose 10.5% in
1994 to $10.5 billion, the third year of double digit growth. With taxable sales
and personal income increasing in the neighborhood of 7.5%, budget estimates
place the growth rate for tax revenues at 9.5% for 1995. The revenue increases
provided the state with the opportunity of providing $40 million in property tax
relief, further improving the state's business climate.
Importance of Water. Although located in the arid West, Idaho has
large water resources which have dominated its history and development and may
prove equally important to its future. There are 26,000 miles of rivers and
streams and more than 2,000 natural lakes. Three of Idaho's rivers--Clearwater,
the Kootenai and the Salmon--are more than half as large as the Colorado. The
Snake Plain Aquifer is one of the largest fractured basalt aquifers in the
world. Equally important to quantity is the quality of Idaho's waters, which
remains outstanding. The drop in elevation of rivers like the Snake allow
valuable hydropower production, allowing the State some of the lowest
electricity rates in the nation.
Agriculture. Idaho has traditionally been an agriculture state.
Livestock, beef, dairy cattle, and sheep are important to the economy, while the
major crops of Idaho's farmers include potatoes, wheat, barley, sugar beets,
peas, lentils, seed crops and fruit. According to recent estimates, agricultural
related products make up 16% of Idaho's Gross State Product, making them key
elements in Idaho's economic performance. The improvement in water conditions
will help Idaho farmers on the supply side of the market; the third wheat crop
of over 100 million bushels is predicted for 1995. The combination of improved
demand and supply conditions pushed wheat prices to well above the $4.00 level
during 1994. In Idaho's most famous agricultural market, potatoes, 1994
production rose 6.4% to 134.3 million cwt and for Idaho's largest cash crop,
beef, production rose 7%. When all market factors are taken into consideration,
including an expected reduction of 2% in the nation's wheat production, the
outlook for Idaho's agricultural industry improves in 1995, with the state's
beef production increasing at least 3% and wheat production matching or
exceeding previous records. The net result is growth in farm proprietor income
and agricultural employment. From December 1993 to December 1994 agricultural
employment increased 18.1% to 25,240 driven by a 39.2% increase in hired
workers.
Service Producing Sector. By the most important economic measures,
the service producing sector is the heart of Idaho's economy; it accounts for
68% of Gross State Product and 78% of all nonagricultural jobs. For 1995, and
the next three years, employment growth in the service producing sector is
expected to slow from its 1994 rate of 5.4% to around 4% per year. Within the
service producing sector, the weakest performer is expected to be the federal
government, which will have stable employment. State and local governments,
including public education, are expected to expand at an average of 4% per year
over the forecast period in response to population pressures. The remaining
components of the service producing sector, including the finance, insurance,
transportation, communication and public utility industries, are expected to
continue to have mixed experiences with employment;
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growth partly offset by right-sizing. The net result is that these industries
are expected to average around 2.5% per year employment growth through 1997.
Goods Producing Sector. The goods producing sector, composed of
manufacturing, mining, and construction, had two of the star performers in the
state's eight years of economic expansion; electronics and construction. Both of
these industries are expected to have substantially slower growth rates in 1995;
the goods producing sector will be a consistent rather than spectacular
performer. Overall, this sector's employment gains are expected to decline from
the 5.8% level for 1994 to just above a 1% level for 1995 and 1996. The causes
of the dramatic shifts are the problems being experienced by Morrison-Knudsen,
some restructuring in microelectronics, the economic hardships suffered in
resource based industries and a slowing in residential construction. Even with
offsetting job creation at some electronic firms in other goods producing
industries, this sector will have to wait until 1997 for employment to recover a
3% growth rate.
Budgetary Process. In the fall of each year, all agencies of the
State submit requests for appropriations to the Governor's Office, Division of
Financial Management, so a budget may be prepared for the upcoming legislative
session. The budget is generally prepared by agency, fund, program, and object.
The budget presentation includes information on the past year, current year
estimates, and requested appropriations for the next fiscal year.
The Governor's proposed budget is presented to the legislature for
review, change, and preparation of the annual appropriation acts for the various
agencies. The legislature enacts annual appropriations for the majority of funds
held in the state treasury. These budgets are adopted in accordance with State
statutes. Both houses of the legislature must pass the appropriation acts by a
simple majority vote. The appropriation acts become law upon the Governor's
signature, or 10 days after the end of the session if not signed by the
Governor.
For funds that are annually appropriated, the State's central
accounting and reporting system controls expenditures by appropriation
line-item. At no time can expenditures exceed appropriations, and financially
related legal compliance is assured. At fiscal year end, unexpended
appropriation balances may: (1) revert to unreserved fund equity balances and be
available for future appropriations; (2) be reappropriated as part of the
spending authority for the future year; or, (3) may be carried forward to
subsequent years as outstanding encumbrances with the approval of the Division
of Financial Management.
Revenues and Expenditures. Fiscal Year 1994. General Fund revenue in
fiscal year 1994 was $1,173,071,300. There was an additional $10,880,000 due to
carryover from the prior fiscal year. Fund transfers reduced funds availably by
$38,867,600 and adjustments to cash reduced funds available by $281,800. Net
General Funds available in fiscal year 1994 totaled $1,145,997,700. Total
General Fund revenue growth was $129.6 million, or 12.4% in fiscal year 1994.
Strongest growth was in the corporate income tax, which increased by 25.2%.
Miscellaneous revenues grew by 21.3%, sales tax grew by 12.4%, individual income
tax grew by 10.1%, and product taxes grew by 4.7%
Expenditures in fiscal year 1994 consisted of $1,084,561,400 in
original appropriations, plus $25,039,400 in supplementals and reappropriations,
less $1,551,300 in reversions and ending year reappropriations. Net expenditures
in fiscal year 1994 were $1,108,049,500. An ending balance of $37,948,200 was
carried over into fiscal year 1995.
Fiscal Year 1995. Total funds available to the General Fund in
fiscal year 1995 are estimated to be $1,330,423,400. This consists of an
estimated $37,948,200 carryover from fiscal year 1994, plus $1,330,423,440 in
base revenues, less $1,009800 in revenue adjustments. General Fund expenditures
and fund transfers authorized for fiscal year 1995 are $1,329,395,700. This
leaves a projected General Fund carryover of $1,027,700 in fiscal year 1996.
The revised fiscal year 1995 Executive revenue forecast of
$1,293,485,000 reflects 10.5% growth over fiscal year 1994. The revised base
General Fund revenue forecast for fiscal year 1995 consists primarily of sales
and income tax receipts. Product taxes account for a little over 1% of General
Fund revenues, and miscellaneous receipts account for slightly less than 5% of
General Fund revenues. Individual income tax revenues are expected to grow by
10.3% in fiscal year 1995, while corporate income tax revenues are projected to
grow by 28.8%. Sales tax revenues are
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expected to grow by 7.7%. Product taxes are forecast to decline by 2.2% and
miscellaneous revenues are projected to increase by 5.3%.
General Fund expenditures in fiscal year 1995 consist of
$1,264,200,400 in original appropriations, plus $1,252,100 in reappropriations,
less $163,800 in reversions, plus $6,012,600 in net supplementals. The
supplementals consist of $23,155,200 in positive supplementals and $17,142,600
in negative supplementals. Approximately half of the positive supplemental
($11,977,400) is for Catastrophic Health Care medical claims in the fiscal years
1994 and 1995. Other large supplemental went to the Department of Health and
Welfare ($6,116,000) and the Department of Corrections ($4,167,100). The
remaining $894,700 in positive supplemental is spread over all other agencies.
Almost 90% of the negative supplemental ($14,943,100) is attributable to
Medicaid cost containment. The bulk of the remainder is associated with
elimination of vacant positions.
Fiscal Year 1996. The amount of total funds available to the General
Fund in fiscal year 1996 is estimated to be $1,349,969,400. This consists of an
estimated $1,027,700 beginning unobligated balance plus $1,348,941,700 in
revenue in fiscal year 1996. General Fund expenditures authorized for fiscal
year 1996 are $1,348,714,000 plus $1,050,000 in transfers. This leaves an
estimated free-fund balance of $205,400 in General Fund at the end of fiscal
year 1996.
The original Executive revenue forecast of $1,390,995,000 for fiscal
year 1996 reflects 7.5% growth over fiscal year 1995. It has been adjusted to
reflect a net reduction of $42,053,300. General Fund revenues consist primarily
of sales tax and income tax. The net growth rate for total General Fund revenue
in fiscal year 1996 is 7.5% before adjustments for legislative changes. After
adjusting for legislation, General Fund revenue growth is projected to be 4.3%.
The largest revenue adjustment is $40,000,000 in reduced General
Fund revenue from the sales tax as a result of House Bill 156. This measure was
proposed by the Governor, and essentially replaces 25% of the existing maximum
school district maintenance and operation levy with funds from the sales tax
revenue stream. Three other bills that reduce expected revenue in fiscal year
1996 are House Bill 216, a $739,000 increase in the investment tax credit;
Senate Bill 1153a, a $900,000 income tax revenue reduction associated with
medical savings accounts; and House Bill 301, a $500,000 sales tax exemption for
ski area purchases of lifts, snow groomers and snow making equipment.
Expenditures in fiscal year 1996 consist of $1,225,099,900 in base
spending plus $123,614,100 in salary increases, inflation adjustments,
replacement capital outlays, annualizations, fund shifts and enhancements. Above
base increases in public school expenditures are the largest item of increase,
with $58,560,000 provided as a lump sum. A state worker salary increase of 5%
accounts for $18,661,700 of increase above the base. Replacement capital outlay
is $5,754,600 and fund shifts are $6,162,600. Personnel benefit increases,
operating expenditure inflation, annualizations and other nonstandard
adjustments total $11,807,500. Program increases total $22,667,700.
Debt Administration and Limitation. The State has no outstanding
general obligation bond debt. By law, if the General Fund cash flow shortages
exist for more than 30 days, the State Treasurer must issue a tax anticipation
note to correct the shortfall. The State Treasurer has issued internal tax
anticipation notes which are notes issued by the General Fund to borrow monies
from other available State funds or accounts. Internal tax anticipation notes
were not issued in fiscal years 1988 through 1994. In the past ten fiscal years
the State Treasurer has issued "External" tax anticipation notes which were sold
in the open market. All Notes issued by the State must mature not later than the
end of the then current fiscal year. Each Note when duly issued and paid for
will constitute a valid and binding obligation of the State of Idaho. The faith
and credit of the State of Idaho are solemnly pledged for the payment of the
Notes.
Series 1994 Notes. The State issued $200 million in Tax Anticipation
Notes ("TANs") on July 5, 1994, which mature on June 29, 1995. The 1994 Notes
were issued in anticipation of the income and revenues and taxes to be received
by the General Fund during the fourth quarter of the 1995 fiscal year. As
required by law, all income and revenues from the taxes collected during the
fourth quarter of the 1995 fiscal year shall be deposited into the Note Payment
Account as received until the monies therein together with investment earnings
shall be sufficient to pay principal and interest on the Notes at maturity.
Sufficient monies to redeem the Series 1994 Notes with full payment
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of interest at maturity have been deposited into the Note Payment Account held
by an escrow agent. These monies will be transferred to the paying agent on June
29, 1995, for payment of the Series 1994 Notes.
Series 1995 Notes. The $200 million TANs are being issued to fund
the State's anticipated cash flow shortfalls during the fiscal year ending June
30, 1996. The 1996 fiscal year General Fund cash flow (before borrowing) is
estimated to have a negative balance at the end of the months of July through
March and May with the greatest ending month cash deficit estimated to be
$244,670,000 at the end of November. However, each month's mid-month cash
deficit is estimated to be greater than the end-of-the-month deficit balance.
This situation occurs because only approximately 20% of the month's revenues are
received during the same period. The majority of taxes are received during the
second half of the month because of statutorily established dates for tax
payments. A primary factor in the heavy percentage of first half expenditures
are the required dates for General Fund transfers to the public schools. The
greatest projected mid-month deficit for the 1996 fiscal year is $296,613,000
occurring on November 15, 1995. Moody's Investors Service and Standard and
Poor's corporation have assigned the 1995 Notes the rating of MIG-1 and SP-1+
respectively.
FACTORS AFFECTING IOWA FUND
General Economic Conditions. For Iowans, 1995 was a year of slow
growth and economic consolidation following several years of substantial growth.
Iowa's seasonally adjusted unemployment rate increased from 3.3% in December
1995, to 3.4% in January 1996, according to a report released by the Iowa
Department of Employment Services (DES). Comparatively, the statewide jobless
rate was reported at 3.3% in January 1995. The State's Department of Employment
Services measures the number of individuals in non-farm payroll jobs from state
unemployment tax records. In January 1996, 32,200 more Iowans were working at
payroll jobs than one year earlier. Of this increase, 2,700 were new
construction jobs, 2,600 were new factory jobs, 6,700 new jobs were added by the
retail sector, 900 of the new jobs were in insurance firms and 16,100 of the new
jobs were added by service firms. For the first nine months of 1995, the average
employment in manufacturing topped the 1994 average by 5,000 jobs (2.0%), 2,900
of which were in the interest-sensitive durable goods sector (2.1%). The
University of Iowa's Institute for Economic Research is currently expecting the
state's payroll job count to average 1,354,300 for 1995, a 37,043 increase
(2.8%). The Institute's models forecast growth slowing to 1.9% in 1996 and 2.0%
in 1997. If that were to occur, the payrolls would have increased by 25,420 and
27,240 in those two years, respectively.
During the late-1980's and early 1990's Iowa became a major
exporting state. Despite its inland location, Iowa has been a major supplier to
the world's markets for industrial machinery, instruments and measurement
devices, electronics, consumer appliances, specialized transportation equipment,
chemicals and pharmaceutical, processed food products, farm commodities and
livestock. During the years 1991-1993, the value of Iowa's factory exports
increased a compounded rate of 9% per year. In 1994, factory exports increased
14% to $3.4 billion while farm exports fell to $2.4 billion. The drop in farm
exports in 1994 was tied to the flood in 1993 and the diminished size of the
crop that went into storage. Even though the circumstances were unique, the
facts were clear: factory exports surpassed farm exports for the first time in
Iowa's history. For the first half of 1995, the value of factory exports, at $2
billion, grew by 29% over the value exported during the same period in 1994. At
this rate of growth, 1995 factory exports can now be projected at $4 billion
added to an estimated $3.2 billion in farm exports.
One of the issues addressed by the Governor and the General Assembly
during Fiscal Year 1995, was the increasing amount of property taxes levied to
support expenditures for mental health. Legislation was passed which provides
significant property tax relief through a process of managed care and through
increased State assistance which will ultimately finance 50% of the mental
health expenditures funded by property taxes. This legislation established a new
Mental Health/Developmental Disabilities Fund at the county level and provided
State appropriations for mental health property tax relief in the amount of $61
million, $78 million and $95 million for fiscal years 1996, 1997, and 1998
respectively. The amount of property taxes that may be levied in this fund is
limited and the property taxes must be reduced dollar for dollar for each dollar
of mental health property tax relief the counties receive.
The second item of property tax relief was the elimination of
property taxes on industrial machinery, equipment and computers acquired after
January 1, 1994, and a phase-out of the property taxes on existing industrial
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machinery, equipment and computers. For fiscal years 1997 through 2006, county
auditors may file claims with the State for partial replacement of lost taxes.
Budgetary Process. The current statewide accounting system was
implemented in 1983 and has been periodically upgraded and modified. As part of
that implementation, and on an ongoing basis, emphasis has been placed on the
adequacy of internal and budgetary controls. Internal controls are in place to
provide reasonable, but not absolute, assurance that assets are safeguarded
against unauthorized use or disposition, and that financial records from all
appropriate sources are reliable for preparing financial statements and
maintaining accountability. All claims presented for payment must be certified
by the appropriate department that the expenditure is for a purpose intended by
law and a sufficient unexpended appropriation balance is available. The
automated statewide accounting system also performs various edits to assure
appropriation authorizations are not exceeded. For programs supported totally or
in part with federal or other funds, expenditures can not exceed the sum of
appropriations and additional dedicated revenue that is received. If dedicated
revenue is not received as expected, expenditures must be reduced in a like
manner.
Revenues and Expenditures. Most State operations are accounted for
through the following Governmental fund types: General, Special Revenue, and
Capital Projects. Governmental Revenues and Other Financing Sources totaled
$6,946.5 million for fiscal year 1995. Taxes had the largest increase of $382.3
million which was a 10% increase over the previous year, while Receipts From
Other Entities increased $66.2 million which was a 3.5% increase from the
previous year. Governmental revenues and other financing sources for 1995
included: Taxes (61%); Receipts from other Entities (28%); Fees, Licenses and
Permits (5%); and, Other Financing Sources (6%).
Governmental Expenditures and Other Financing Uses totaled $6,459.9
million for fiscal year 1995. Health and Human Services had the largest increase
of $126.2 million which was a 7% increase over the previous year, while
Education experienced an increase of $67.1 million which was a 3.8% increase
over the previous year. Changes in expenditures from fiscal year 1994 levels are
as follows: Health and Human Services, 30%; Education, 29%; Transportation, 11%;
General Government, 10%; and Other Financing Uses, 20%.
Debt Administration and Limitation. The Constitution of the State of
Iowa prohibits the State from exceeding a maximum of $250 thousand in general
obligation debt without voter approval. However, State law authorizes the
issuance of Tax and Revenue Anticipation Notes (TRANS), provided that the total
issuance does not exceed anticipated revenue receipts for the fiscal year and
that the total issuance matures during the fiscal year. For the first time in
the last ten years, it was not necessary this year for the State to issue TRANS.
Revenue bonds issued by various authorities of the State totaled
$1,255.9 million outstanding at fiscal year-end. This amount consisted of $7.8
million of internal service revenue bonds, $559.9 million of component unit
proprietary funds revenue bonds (housing and higher education), $519.1 million
in revenue bonds issued by the three State universities (for facilities), and
$106.5 million and $62.5 million in various bonds issued by the Iowa Finance
Authority for the Underground Storage Tank Program and the Department of
Corrections, respectively.
Certificates of Participation (COPS), issued by the State and
outstanding at fiscal year-end, amounted to $135.2 million. COPS represents an
ownership interest of the certificate holder in a lease purchase agreement.
Other financing arrangements payable, excluding COPS, totaled $3.8 million at
June 30, 1995. State agencies, including the universities, have also entered
into capital leases and installment purchase agreements for various purposes.
Total long-term capital leases and installment purchases outstanding on June 30,
1995, was $38.2 million.
Since the State of Iowa does not have G.O. debt, it does not have
S&P, Moody's or Fitch ratings.
FACTORS AFFECTING KANSAS FUND
General Economic Conditions. Kansas is the 14th largest state in
terms of size with an area in excess of 82,000 square miles. It is rectangular
in shape and is 411 miles long from east to west and 208 miles wide. The
geographic center of the 48 contiguous states lies within its borders. Kansas
became the 34th state in 1861 and Topeka was chosen to be the capitol later that
year. The population of the State of Kansas has grown from 2,477,588
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in 1990 to 2,554,047 in 1994. This represents a percentage increase of 3.1%. In
comparison, the growth in population of the United States was 4.7%.
Relatively strong growth in manufacturing and construction
employment propelled the state's 1995 employment growth. Employment growth
exceeded the national rate of increase, a rarity in recent years. In only three
of the prior 13 years had Kansas employment growth exceeded that of the nation.
All but one of the state's major labor markets (finance, insurance and real
estate) had employment gain between 1994 and 1995. There are two measures of
employment in Kansas: place-of-residence data and place-of-work data. The former
are based on a sample survey of Kansas households, while the latter are based on
data primarily obtained directly from firms as part of the unemployment
insurance program. In 1995, place-of-residence data indicated that Kansas
employment grew 2.8%,while place-of-work data showed a 5.4% increase. The growth
rates exceeded the corresponding national growth rates of 1.6% and 2.3%. Average
monthly unemployment fell from 70,000 in 1994 to 56,200 in 1995. Likewise the
average monthly unemployment rate fell from 5.3% to 4.2% from 1994 to 1995.
Budgetary Process. The Governor is statutorily mandated to present
spending recommendations to the Legislature. "The Governor's Budget Report"
reflects expenditures for both the current and upcoming fiscal years and
identifies the sources of financing for those expenditures. The Legislature uses
"The Governor's Budget Report" as a guide as it appropriates the money necessary
for state agencies to operate. Only the Legislature can authorize expenditures
by the State of Kansas. The Governor recommends spending levels, while the
Legislature chooses whether to accept or modify those recommendations. The
Governor may veto legislative appropriations, although the Legislature may
override any veto by two-thirds majority vote.
The state "fiscal year" runs from July 1 to the following June 30
and is numbered for the calendar year in which it ends. The "current fiscal
year" is the one which ends the coming June. The "actual fiscal year" is the
year which concluded the previous June. The "budget year" refers to the next
fiscal year, which begins the July following the Legislature's adjournment. In
"The FY 1997 Governor's Budget Report," the actual fiscal year is fiscal year
1995, the current fiscal year is fiscal year 1996, and the budget year is fiscal
year 1997. By law, "The Governor's Budget Report" must reflect actual year
spending, the Governor's revised spending recommendations for the current fiscal
year, state agency spending requests for the budget year, and the Governor's
spending recommendations for the budget year. The budget recommendations cannot
include the expenditure of anticipated income attributable to proposed
legislation.
Revenues and Expenditures. The State General Fund is the largest of
the "uncommitted" revenue sources available to the state. It is also the fund to
which most general tax receipts are credited. The Legislature may spend State
General Fund dollars for any purpose. All revenues coming into the state
treasury not specifically authorized by statute or the constitution to be placed
in a separate fund are deposited in the State General Fund.
Fiscal Year 1996. The Governor's fiscal year 1996 budget
recommendations total $7.9 billion from all funding sources and approximately
$3.47 billion from the State General Fund. The budget includes a total of
44,697.9 state employees, a reduction of 118.7 from the amount approved by the
1995 Legislature. These recommendations reflect significant changes to the
budget approved by the 1995 Legislature. In September 1995, the Governor
announced the need for a 1.5% across-the-board reduction to the budgets of most
agencies funded through the State General Fund. This action was necessary
because of a shortfall of approximately $25 million in estimated fiscal year
1995 receipts and resulting downward revisions to the consensus revenue estimate
made for fiscal year 1996. In addition to the 1.5% reduction, significant
savings were available in agency budgets because of a reduction in the funding
requirements for group health insurance rates for state employees and in the
funding necessary for the state share of local option school budgets. In total,
these adjustments allow the Governor to recommend a budget which maintains the
targeted 7.5% ending balance for fiscal year 1996 while providing only necessary
supplemental appropriations to maintain commitments to higher education and
public schools. In addition, the Governor directed all agencies under his
supervision to reduce their workforce by 2% in fiscal year 1996 through
attrition and retirements. The salary savings attributable to those reductions
will be identified at the end of the fiscal year.
Fiscal Year 1997. The fiscal year 1997 budget recommendations
include all funding source expenditures of $7.8 billion, a reduction of almost
$100 million from fiscal year 1996. The largest single source of fiscal year
1997 receipts is the State General Fund, with 46.6% of the total receipts.
Individual income taxes account for the largest
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source of State General Fund revenue, totaling $1.410 billion (39.9%) in fiscal
year 1997. The next largest category, sales and use taxes, is projected to
generate $1.392 billion (39.5%) for the State General Fund during fiscal year
1997. State General Fund expenditure recommendations for fiscal year 1997 are
$3.52 billion, an increase of 1.4%. The Governor recommends that $1,923.7
million, or 54.6% of State General Fund expenditures be used for aid to local
units of government.
Federal grants represent 21.9% of total receipts from all funding
sources, with 42 state agencies receiving $1.7 billion in fiscal year 1997. Of
the $1.7 billion, 50.4% will go to the Department of Social and Rehabilitation
Services. This is followed by the Department of Transportation, 15.4%, the
Department of Education, 12%, the Regents institutions, 5.8%, and the Department
of Health and Environment, 4.3%. The remaining 12.1% is distributed to 29 other
agencies. Agency service charges include revenues received for services provided
by state agencies. This includes charges for inspections, examinations, and
audits; fees collected for tuition and fees at the Regents institutions; and
admissions to the Kansas State Fair. This revenue category represents 6.6% of
total receipts for fiscal year 1997.
Dedicated sales tax receipts represent revenues from four taxes that
are collected for a specific purpose and are deposited in special revenue funds,
rather than the State General Fund. Taxes on motor fuels and vehicle
registrations as well as a dedicated sales tax of one-quarter of a cent are
credited to the State Highway Fund. A statewide property tax of 1.5 mills is
assessed for construction and maintenance of state buildings at Regents
institutions and state hospitals. This revenue category represents 5.1% of total
receipts for fiscal year 1997.
Other special revenue receipts include license fees, interest
earnings on special revenue funds, non-federal grants, the sale of state
property, and numerous other miscellaneous revenue sources. This revenue
category represents 8.9% of total receipts for fiscal year 1997. Non revenue
receipts are collections and reimbursements not considered revenue. Examples
include collections by the Department of Human Resources for the payment of
unemployment benefits and collections by KPERSS for payment of retirement
benefits. Collections made by SRS from absent parents for child support are also
included in this category. This category represents 8.5% of total receipts for
fiscal year 1997. Lottery ticket sales account for the remaining 2.4% of total
receipts for fiscal year 1997 from all funding sources.
It was clear from the beginning of the fiscal year 1997 budget
process that the revenues available to state government could not support
continuation of existing levels of service for all agencies. A variety of
factors contributed to the austerity of the fiscal year 1997 budget. First and
most important, for the past two fiscal years, the State General Fund ending
balance was significantly above the 7.5% ending balance target, allowing
expenditures to exceed receipts in both fiscal years 1995 and 1996. In simple
terms, fiscal year 1997 cannot exceed receipts while complying with the ending
balance requirements. The expenditures in fiscal year exceeded receipts by
$106.6 million. In effect, the first claim on projected increases in State
General Fund receipts for fiscal year 1997 will be to correct this imbalance.
Second, a variety of factors required significant additional funding for the
school finance formula including enrollment growth, the second year of increased
aid requirements to offset motor vehicle tax reductions passed by the 1995
Legislature, the remainder of the Real Estate Settlement Procedures Act (RESPA)
adjustment, and growth in capital improvement aid. In addition, growth in inmate
populations required additional staff and funding for correctional institutions.
Further, caseload and cost increases in various populations served by SRS
seriously affected the fiscal year 1997 budget.
Debt Administration and Limitation. The State of Kansas finances a
portion of its capital expenditures with various debt instruments. Of capital
expenditures that are debt-financed, revenue bonds and loans from the Pooled
Money Investment Board finance most capital improvements for buildings, and
certificates of participation and "third-party" financing pay for most capital
equipment. The Kansas Constitution makes provision for the issuance of general
obligation bonds subject to certain restrictions; however, no bonds have been
issued under this provision for may years. No other provision of the
Constitution or state statute limits the amount of debt that can be issued. As
of June 30, 1995, the state had authorized but unissued debt of $27,230,000.
Although, the state has no General Obligation debt rating, it seeks
an underlying rating on specific issues of at least "AA-" from Standard & Poor's
and "A1" from Moodys. The ratings for the most recently issued fixed rate bonds
issued by the Kansas Department of Transportation were "Aa" and "AA" from Moody
and Standard & Poor's
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respectively. The Kansas Development Finance Authority is currently working with
the rating agencies to obtain a rating indicator for the State of Kansas.
The Kansas Department of Transportation issues debt to finance
highway projects. The Comprehensive Highway Program began during fiscal year
1989. The 20-year bonds will be retired with motor fuel taxes, motor vehicle
registration fees, retail sales and compensating use taxes, and accrued
interest. During fiscal years 1994 and 1995, the state sold bonds totaling
approximately $151 million and $167.1 million. respectively. Again, the largest
use of the bond proceeds was $125 million and $140 million for the Comprehensive
Highway Program for these two years, respectively.
Other State of Kansas debt is issued by the Kansas Development
Finance Authority (KDFA), an independent instrumentality of the state which was
created in 1987 for this purpose. The Governor's budget recommendations for
Regents institutions are a significant departure from the traditional way
revenues from the Educational Building Fund (EBF) have been used for
construction projects at the state's universities. Based on concerns for the
aging buildings on the state's campuses, the Governor recommends that KDFA issue
bonds in fiscal year 1997 in the amount of $156.5 million to address a wide
variety of rehabilitation and repair projects at the universities. With interest
earnings, the total project costs would be an estimated $163.6 million. Debt
service over the 15-year period will total $228.4 million, with each year's debt
service payment over the next 15 years totaling $15 million. No project paid
with bond proceeds will have a life-expectancy of less than 20 years, so as to
"keep ahead" of the bonded indebtedness. Because the current cost of borrowing
money is less than the projected cost of inflation for construction, it is more
cost-effective to perform the repairs now and leverage the EBF, rather than
incurring higher annual repair costs in the future. Rehabilitation and repair
projects at the campuses include compliance with the Americans with Disability
Act Accessibility Guidelines and life safety codes, energy conservation
projects, and improvements to classrooms, in addition to the typical repairs
made to aging buildings.
Bonds totaling $4.4 million were issued by KDFA in November 1990 to
begin Energy Conservation Improvements Program authorized by the 1990
Legislature. The bonds are retired by utility cost savings from the energy
conservation improvements undertaken. Projects financed with the bond proceeds
consist of improvements at many of the state universities, the Department of
Administration, the Department of Social and Rehabilitation Services, the
Highway Patrol, and the Department of Corrections. An amount of $5,000 was
appropriated from the State General Fund to the Department of Administration,
the paying agent, for fiscal year 1992 to begin retirement of the debt service.
The second series of bonds, issued in June 1992, totaled $3.6 million. On
October 1, 1993, a third series of bonds totaling $4,370,000 under the Energy
Conservation Improvements Program was issued. In August 1995, the fourth series
of bond, totaling $2,734,000 was issued. For fiscal year 1997, the debt service
totals $1,785,007 from the State General Fund, $1,340,000 for principal and
$445,007 for interest. To date, $15.1 million in bonds has been issued by the
Kansas Development Finance Authority for these projects. A fifth bond issue
estimated to total $4.8 million is scheduled for early 1996.
FACTORS AFFECTING MINNESOTA FUNDS
General Economic Conditions. Diversity and a significant natural
resource base are two important characteristics of the Minnesota economy.
Generally, the structure of the State's economy parallels the structure of the
United States economy as a whole. There are, however, employment concentrations
in durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. During the period from 1980 to 1990, overall
employment growth in Minnesota lagged behind national employment growth, in
large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1994. Since 1980, Minnesota per capita income generally
has remained above the national average, but tightness in local labor markets
may reduce the rate of personal income growth below that of the national average
in the future. During 1993, 1994 and 1995, the State's monthly unemployment rate
generally has been less than the national unemployment rate.
Revenue and Expenditures. The State relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing
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expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustment. The Minnesota
Department of Finance February 1996 Forecast has projected that, under current
laws, the State will complete its current biennium June 30, 1997 with a $15
million surplus, plus a $350 million cash flow account balance, plus a $220
million budget reserve. Total General Fund expenditures and transfers for the
biennium are projected to be $18.8 billion. State expenditures for education
finance (K-12), post-secondary education, and human services in the biennium
ending June 30, 1997 are not anticipated to be sufficient to maintain program
levels of the previous biennium. The State is party to a variety of civil
actions that could adversely affect the State's General Fund. In addition,
substantial portions of State and local revenues are derived from federal
expenditures, and reductions in federal aid to the State and its political
subdivisions and other federal spending cuts may have substantial adverse
effects on the economic and fiscal condition of the State and its local
governmental units. The February 1996 Forecast states that pending federal
legislation could reduce federal aid to Minnesota's state and local governments
by a total of $3.2 billion over seven years. Risks are inherent in making
revenue and expenditure forecasts. Economic or fiscal conditions less favorable
than those reflected in State budget forecasts and planning estimates may create
additional budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective obligors to make timely payment of the principal and interest on
Minnesota Tax Exempt Obligations that are held by a Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future change sin
federal and State income tax laws, including rate reductions, could adversely
affect the value and marketability of Minnesota Municipal Tax Exempt Obligations
that are held by a Fund. See "Distributions to Shareholders and Taxes; Minnesota
State Taxation" in the Prospectus.
The most recent ratings applicable to General Obligation bonds
issued by the State of Minnesota are as follows: "Aaa" by Moody's; "AA+ by S&P
and "AAA" by Fitch Investors Service.
FACTORS AFFECTING MISSOURI FUND
General Economic Conditions. Missouri was organized as a territory
in 1812 and was admitted to the Union as the 24th state on August 10, 1821. The
State ranks 19th in size with a total area of approximately 69,697 square miles.
Missouri is a central mid-western state located near the geographic center of
the United States. Bordered by Iowa on the north, Arkansas on the south,
Illinois, Kentucky and Tennessee across the Mississippi River on the east, and
Nebraska, Kansas and Oklahoma on the west, Missouri is one of only two states
which shares it boundaries with as many as eight states.
As a major manufacturing, financial, and agricultural state,
Missouri's economic health is tied closely to that of the nation. The economic
outlook is for continued improvement in fiscal year 1996. Missouri's personal
income, which directly impacts individual income tax and sales tax, rose at a
6.3% rate during calendar year 1994. Missouri's employment stood at 2,698,900 at
the end of June, up 107,700 from one year ago. Manufacturing employment is up
significantly, particularly in automobile manufacturing. At the end of June
1995, the state unemployment rate was 5.0% and county unemployment rates were
below the national unemployment rate of 5.8% in 70 of Missouri's 115 counties.
Budgetary Process. Annually, all State agencies submit budget
requests for the following appropriation year to the Division of Budget and
Planning of the Office of Administration. The Division Budget and Planning
prepares the Executive Budget and an estimate of general revenues. The Executive
Budget contains the budget amount which is recommended and submitted to the
General Assembly by the Governor within thirty days after the General Assembly
convenes in each regular session.
The General Assembly appropriates money after consideration of both
the Executive Budget and the revenue estimate. The legislative appropriations
are subject to the Governor's approval or veto, except for the funding of
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public debt and public education which the Governor is prohibited by the
Constitution of Missouri from vetoing. The Governor may control the rate at
which an appropriation is expended by allotment or other means and may limit the
expenditures for any State agencies below their appropriations, whenever actual
revenues are less than the revenue estimated upon which the appropriations were
based. The Governor has line-item veto power, except for appropriations for
public debt and public education.
Revenues and Expenditures. Balancing Missouri's budget in fiscal
year 1995 was achieved through sound financial management. The growing economy
produced general revenues that were better than projected. The Governor and
General Assembly adopted a conservative State budget meeting mandated
expenditure increases and providing limited funding for new and expanded
program. In future years, Missouri will focus on controlling the growth of
mandatory programs though welfare reform, managed care, and cost-effective
alternatives. Major funding priorities include education, corrections, economic
development, mental health, children's services, and repairs and upgrades to
existing state facilities.
The State of Missouri completed fiscal year 1995 in excellent
financial condition due to strong revenue collections and efficient management
of State programs. Net general revenue collections increased over fiscal year
1994 due to a strong national and state economy. Revenues exceeded expenditures
for the General Revenue Fund an all funds in total. General revenue collections
in fiscal year 1995 were below $5,390.3 million, 15.7% above fiscal year 1994
collections. The fiscal year 1996 budget is conservatively based upon general
revenue collections of $5,455.6 million.
The State ended fiscal year 1995 with an unreserved fund balance
(surplus) of $1,586,4 million for the governmental funds. The unreserved fund
balance of the General Fund improved due to revenue collection which were
slightly better than projections. In comparison, the 1994 fiscal year unreserved
fund balanced totaled $940,304.
Federal court-ordered payments for the St. Louis and Kansas City
desegregation plans were $314.4 million in fiscal year 1995 which is about 6% of
the State's general revenue budget. Desegregation expenditures, court orders,
and other developments are continually monitored to provide the best possible
anticipation and forecast of future costs.
Debt Administration and Limitation. Pursuant to the Missouri State
Constitution, the General Assembly may issue general obligation bonds solely for
the purpose of (1) refunding outstanding bonds; or, (2) upon the recommendation
of the Governor, for a temporary liability by reason of unforeseen emergency or
of deficiency in revenue in an amount not to exceed $1 million for any one year
and to be paid in not more than five years or as otherwise specifically
provided. When the liability exceeds $1 million, the General Assembly, or the
people by initiative, may submit the proposition to incur indebtedness to the
voters of the State, and the bonds may be issued if approved by a majority of
those voting. Before any bonds so authorized are issued, the General Assembly
shall make adequate provisions for the payment of the principal and interest and
shall provide for an annual tax on all taxable property in an amount sufficient
for that purpose.
The State has had a clear debt payment record since 1869 when it
arranged for payment of railroad bond interest which had been in default from
1861 to 1867. Missouri did no other significant borrowing until 1922, after
which the debt climbed to $124,700,000 in 1936. Thereafter, the State's debt
declined through 1956. In 1956, the voters approved a constitutional amendment
authorizing $75 million principal amount of bonds for the purpose of repairing
existing buildings or constructing new buildings at the State's correctional
institutions, the State training schools, State hospitals and State schools and
other eleemosynary institutions and institutions of higher education. Missouri
voters have, subsequently, approved constitutional amendments providing for the
issuance of general obligation bonds used for a number of purposes.
The amount of general obligation debt that can be issued by the
State is limited to the amount approved by popular vote plus the amount of $1
million. The State's debt limits at June 30, 1995, was $1,476,000,000 of which
$396,505 was unissued. The general obligation debt position of the State at June
30, 1995 was: general obligation bonded debt (net of amount available in
governmental funds), $896,935,000; and, Debt per capita, $169.30. During fiscal
year 1995, $33,690,000 of the bonds were retired and $105 billion new bonds were
issued. At year end, the total general obligation debt outstanding was
$933,745,000. The interest rate range was .05-9.25%.
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In fiscal year 1995 Missouri invested a total of $470 million in its
capital assets with appropriations for maintenance and construction projects
throughout the State. Included in this total were capital appropriations of $250
million funded out of voter-approved Fourth State Building Bond Funds. A total
of $115.8 million of the bond funds were used to provide for an aggressive
attack on both juvenile and adult crime through construction of major Your
Services and Department of Corrections facilities. The facilities will greatly
expand the state's ability to deal with crime. In addition, the bond issue
provided $134.2 million for high priority construction and renovation of
buildings at the State's higher education institutions. Missouri also invested
$845 million in road and bridge construction and maintenance as part of a
15-year plan to improve highways using State gasoline tax revenues and matching
federal dollars.
The State's general obligation bond issues received triple "A"
ratings from Moody's Investors Service, Inc., Standard & Poor's Rating Group,
and Fitch Investors Service, Inc.
FACTORS AFFECTING NEW MEXICO FUND
General Economic Conditions. The State of New Mexico, admitted as
the forty-seventh state on January 6, 1912, is the fifth largest state,
containing approximately 121,593 square miles. The State's climate is
characterized by sunshine and warm bright skies in both winter and summer. New
Mexico has a semiarid subtropical climate with light precipitation. At the time
of the official 1990 United States Census, the State's population was 1,515,069.
In 1994, the population had increased to 1,654,000, or 2.4%.
Major industries in the State are energy resources, tourism,
services, arts and crafts, agriculture-agribusiness, government, manufacturing,
and mining. In 1993, the value of energy resources production (crude petroleum,
natural gas, uranium, and coal) was approximately $4.28 billion. Other mineral
production was $788 million. The mining industry employed about 16,683 New
Mexicans in 1994. Major federally funded scientific research facilities at Los
Alamos, Albuquerque and White Sands are also a notable part of the State's
economy.
The State has a thriving tourist industry. In 1994, there were
approximately 2.29 million visits to national parks and about 4.9 million visits
to State parks, in the State. According to a 1991 estimate by the U.S. Travel
Data Center, the State's tourist industry generated about $2.3 billion in
revenue and more than 38,370 jobs. One of the State's most famous attractions is
Carlsbad Cavern, which was made a national monument in 1923 and designated a
national park in 1930.
Agriculture is a major part of the State's economy, with crop and
livestock sales in excess of $1.6 billion in 1993. As a high, relatively dry
region with extensive grasslands, the State is ideal for raising cattle, sheep,
and other livestock. Because of irrigation and a variety of climatic conditions,
the State's farmers are able to produce a diverse assortment of quality
products. The State's farmers are major producers of alfalfa hay, wheat, chile
peppers, cotton, fruits and pecans. Agricultural businesses include chile
canneries, wineries, alfalfa pellets, chemical and fertilizer plants, farm
machinery, feed lots, and commercial slaughter plants.
Budgetary Process. The State's government consists of the three
branches characteristic of the American political system: executive, legislative
and judicial. The executive branch is headed by the Governor who is elected for
a four-year term and may succeed him(her)self in office once. Following a
reorganization plan implemented in 1978 to reduce and consolidate some 390
agencies, boards and commissions, the primary functions of the executive branch
are now carried out by sixteen cabinet departments, each headed by a cabinet
secretary appointed by the Governor.
The Board, in addition to other powers and duties provided by law,
has general supervisory authority over the fiscal affairs of the State and over
the safekeeping and depositing of all money and securities belonging to, or in
the custody of, the State. The Board has seven members consisting of the
Governor, the Lieutenant Governor, the Treasurer and four members appointed by
the Governor with the advice and consent of the Senate; no more than two such
appointed members may be from the same political party.
The Department of Finance and Administration, created in 1957 as
part of governmental reorganization measures of that year, is the principal
financial organization of State government and performs through its divisions
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the duties and functions relating to State and local government financing and
general administration. On July 1, 1983, the Department of Finance and
Administration was reorganized into the DFA, which retained the prior name and
handles the State's financial functions, and the General Services Department,
which now handles the administrative functions. The executive and administrative
head of the DFA is the Secretary, who is appointed by the Governor with the
advice and consent of the Senate, and who also serves as Executive Officer of
the Board. In 1983, a Board of Finance Division was created in the DFA, to staff
and coordinate the functions of the Board.
The Legislature convenes in regular session annually on the third
Tuesday in January. Regular sessions are constitutionally limited in length to
sixty calendar days in odd-numbered years and thirty calendar days in
evennumbered years. In addition, special sessions of the Legislature may be
convened by the Governor under certain limited circumstances.
All State agencies are required to submit their budget requests to
the Budget Division of the DFA by September 1 of each year. Budget hearings are
scheduled for the purpose of examining the merits of budget requests through the
fall and are usually completed by the middle of December. Statutes require the
Budget Division to present comprehensive budget recommendations to the Governor
annually by January 2.
By statute, the Governor is required to submit a budget for the
upcoming fiscal year to the Legislature by the 25th legislative day. The State
budget is contained in a General Appropriation Bill which is first referred to
the House Appropriations and Finance Committee for consideration. The General
Appropriation Act may also contain proposals for supplemental and deficiency
appropriations for the current fiscal year. The Senate and the Senate Finance
Committee consider the General Appropriation Act after its approval by the House
of Representatives. Upon Senate passage, the Governor may sign the General
Appropriation Act, veto it, veto line items or veto parts of it. After the
Governor has signed the General Appropriation Act, the Budget Division of the
DFA approves the agency budgets and monitors the expenditure of the funds
beginning on July 1, the fist day of the fiscal year.
Revenues and Expenditures. The State derives the bulk of its
recurring General Fund revenues from five major sources: general and selective
sales taxes, income taxes, the emergency school tax on oil and gas production,
rents and royalties from State and federal land, and interest earnings from its
two Permanent Funds. Effective July 1, 1981, the Legislature abolished all
property taxes for State operating purposes.
Declines in oil and gas prices and in gas production have
contributed to a major restructuring of the State's tax base by the 1986, 1987,
1988, 1990, and 1993 Legislatures. Sales and income taxes were increased to
offset declines in severance tax and royalty revenue. However, economic growth
in 1993 and 1994 was substantially greater than expected and large surpluses
became available. The 1994 Legislature rolled back approximately one-half of the
1993 increases.
Fiscal Year 1993-1994. Revenues for fiscal year 1993-1994 were
$2.557 billion, up 12.7% from the prior fiscal year. The 1993 Legislature
increased revenues by $114 million including $76.5 million of tax increases, $20
million from elimination of food and medical rebates, and $10 million from
de-earmarking. Tax changes included a 6 cents per gallon increase in gasoline
taxes (with 1 cent per gallon to the Road Fund), cigarette and alcohol tax
increases, and a 0.85% increase in the emergency school tax rate on natural gas.
Reflecting the substantial increase in revenues and reserves, non-recurring
appropriations for fiscal year 1994, including spending from reserves, totaled
$220 million. Most of this was for capital projects. General Fund balances for
fiscal year 1994 were $156 million, or almost 6% of fiscal year 1995
appropriations.
Fiscal Year 1994-1995. Reflecting strength in the economy and
sufficient revenues, the 1994 Legislature cut General Fund revenues for fiscal
year 1995 by almost $60 million by restoring low income/personal income tax
rebates, lowering personal income tax rates, especially for married filers,
suspending 2 cents of the gasoline tax for a 3-year period and diverting the
governmental gross receipts tax to an infrastructure fund. Scheduled personal
income tax rate cuts in 1995 and 1996 will reduce personal income tax revenues
an additional $25 million by fiscal year 1997. The current estimate of fiscal
year 1995 revenues is $2.676 billion. Recurring appropriations for fiscal year
1995 total $2.606 billion, up 8.6% from fiscal year 1994. Estimated fiscal year
1995 ending balances are $185 million, but the Governor is recommending
approximately $40 million of additional fiscal year 1995 appropriations to bring
the General Fund reserve level to approximately 5%.
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Fiscal Year 1995-1996. Estimated fiscal year 1996 revenues total
$2.824 billion; estimated recurring revenues are up 5%.
Debt Administration. The principal sources of funding for capital
projects by the State are surplus general fund balances, general obligation
bonds, and Severance Tax Bonds. Total funding of such capital projects for the
period 1983 to 1985 ranged from $170 million to $210 million per year. For the
period 1986 to 1990, capital appropriations were approximately $100 million per
year (except in 1987 when fund dropped to $57 million). The 1994 Legislature
authorized the largest capital program in the State's history, $383 million.
These authorizations fund a broad range of State and local capital needs for
various public school and higher education acquisitions as well as correction
facilities, museum and cultural facilities, health facilities, State building
repairs, water rights, wastewater and water systems, State parks, local roads,
and senior citizens facilities projects.
General Obligation Bonds. General obligation bonds of the State are
issued and the proceeds thereof appropriated to various purposes pursuant to an
act of the Legislature of the State. The State Constitution requires that any
law which authorizes general obligation debt of the State shall provide for an
annual tax levy sufficient to pay the interest and to provide a sinking fund to
pay the principal of the debts. General obligation bonds are general obligations
of the State for the payment of which the full faith and credit of the State are
pledged. The general obligation bonds are payable from "ad valorem" taxes levied
without limit as to rate or amount on all property in the State subject to
taxation for State purposes. For the fiscal year ended June 30, 1994, there was
an unpaid balance of $24,235,000 and a total debt service requirements of
$159,852,000 for all outstanding General Obligation Bonds.
The State of New Mexico General Obligation Capital Projects
Improvements Bonds Series 1995 in the principal amount of $66,265,000 are
authorized by the 1994 Capital Projects General Obligation Bond Act (the "Act")
passed by the State Legislature in 1994, have been approved by the voters in a
statewide election in November 1994 and will be issued pursuant to a resolution
of the State Board of Finance adopted on March 7, 1995. The proceeds of the
general obligation bonds will be used to pay the expenses incurred in the
preparation and sale of the general obligation bonds and to provide for certain
capital expenditures described in the Act. Proceeds will be distributed for the
following amounts and purposes: $3,674,732, certain senior citizen facility
improvements, equipment and vehicles; $59,851,200, certain State public
educational capital improvements and acquisitions; and, $2,500,000 for public
library acquisitions.
Severance Tax Bonds. Severance Tax Bonds are not general obligations
of the State and the State is prohibited by law from using the proceeds of
property taxes as a source of payment of revenue bonds, including Severance Tax
Bonds. The State Treasurer keeps separate accounts for all money collected as
Severance Taxes, and is directed by State statute to pay Severance Tax Bonds
from monies on deposit in the Bonding Fund. Most of the 1994 authorizations were
issued in a $16.8 million sale in 1994 to the New Mexico State Treasurer and
$92.1 million in a bond sale in August, 1994. For the fiscal year ended June 30,
1994, there was an unpaid balance of $56,048,000 and total debt service
requirements of $345,693,000 for all outstanding Severance Tax Bonds.
The Severance Tax Bonds, Series 1995A funds 55 projects for schools,
local governments, universities, and State agencies, including $1 million for
University of New Mexico medical equipment; $525,000 for Department of Health
laboratories; $400,000 for an overpass in Albuquerque; $800,000 for a local
water system; and, $250,000 for a wastewater treatment plant in Anthony, New
Mexico. Following the issuance of the Severance Tax Bonds, Series 1995A,
Severance Tax Bonds in the principal amount of $7.8 million remain authorized
but unissued (including pre- 1994 legislative authorizations).
Severance taxes have been collected by the State since the adoption
of the Severance Tax Act in 1937. Since 1959, certain severance tax receipts and
certain other monies determined by the Legislature have been deposited into the
Bonding Fund and used, in part, to retire bond issues which have funded a
variety of capital improvements in the State. The principle minerals extracted
from the State which contribute the largest portion of Severance Tax revenues
are natural gas, oil and coal. Severance Tax Collections on these three mineral
resources produced 98% of total fiscal year 1993-1994 Severance Tax Bonding Fund
tax collections. Severance Taxes from natural gas and oil together represent
approximately 80% of total fiscal year 1993-1994 Bonding Fund tax receipt.
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Moody's Investors Service, Inc. and Standard & Poors Corporation
have assigned the bond ratings of "Aa1" and "AA+," respectively to General
Obligation Bonds and "Aa" and "AA," respectively, to the Severance Tax Bonds,
Series 1995A.
FACTORS AFFECTING NORTH DAKOTA FUND
General Economic Conditions. North Dakota lies in the central
portion of the Northern Plains with a land area of 70,665 square miles.
Elevation in the northeast corner of the State is 750 feet above sea level and
in the southwest corner of the State is 3,506 feet. The North Dakota economy
continues to grow at a slow and steady pace. The production-based economy, which
provides the basis for this stable, slow growth, while sensitive to change, is
not as susceptible to recessionary impacts as the rest of the nation. Taxable
sales and purchases for the second quarter of 1995 increased 4.6% over the
second quarter of 1994. Retail trade, the state's largest sector, grew by more
than $30 million in taxable sales and purchases, or 4.08% during the quarter.
Construction showed the largest increase of 13.63%.
Agriculture is an important segment of the state's economy. As a
major producer of durum wheat, North Dakota is expected to benefit from high
wheat prices while cattle prices are expected to remain low. NAFTA and GATT are
expected to increase agricultural exports. In recent years, the state's farmers
have formed cooperatives that combine production and processing to create
manufacturing jobs and new markets for their goods. An example of North Dakota's
commitment to agriculture-related economic development is its recent success in
attracting the ProGold corn processing plant which is under construction near
Wahpeton, North Dakota. The plant is expected to process 72,000 bushels of corn
per day, expanding to 320,000 bushels per day, raising corn prices in the area
by approximately one dollar per bushel.
Oil production was expected to decline in the current biennium.
However, new oil and gas discoveries in North Dakota have been significant and
may boost production. Oil production in this state is currently averaging
approximately 80,600 barrels per day, up 5% from last years production level of
76,700 barrels per day. With the closure of Gascoyne mine, the historical upward
trend in lignite coal production will decline this biennium. The forecasted
production of twenty-nine million tons of lignite per year is a decrease of
approximately one million tons per year compared to the production during the
past two years.
The labor force and employment situation for the state appears
healthy. Employment in the state has grown by 6,700 wage and salary jobs over
the same period last year and 18,000 more than in August 1993. Seven of the nine
major employment sectors showed increases: construction showed an increase of
7.1% followed by wholesale trade at 3.9%. The mining sector had no change and
the government sector dropped by 0.9%. Unemployment is significantly below
national levels. North Dakota's unemployment rate in August was 2.7%, its lowest
level for the month of August since 1978. This is significantly lower than the
national unemployment rate.
The 1995 Legislative Assembly funded the design, development and
implementation of a Welfare Reform Computer System. The demonstration, known as
the Training, Education, Employment, and Management (TEEM) Project, is
progressing with numerous waivers received from the federal government in
September, 1995. The TEEM demonstration provides for a uniform treatment of
income and assets, a uniform budget methodology, standard certification periods
and reporting requirements, and employment and training with adequate child care
as a means of helping participants to become self-sufficient, and incorporates
child support enforcement issues. Ten counties will be included in the TEEM
demonstration.
The 54th Legislative Assemble contained substantial workers
compensation reform. Legislators passed a number of bills which dealt directly
with the North Dakota Workers Compensation Bureau. Among the list of issues
addressed in the legislation were: fraud prevention; designated providers; first
report of injury; retirement; claims closure; rehabilitation; permanent partial
injury; worker adviser/ombudsman program; and, litigation/attorney fees.
Additionally, the North Dakota Workers Compensation Bureau is implementing a
number of other changes to improve customer service. The Fund is also expanding
its employer-based programs to get more employers actively involved in risk
management. These programs focus on intense communication between the injured
worker, medical providers and the employer.
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Budgetary Process. The State operates through a biennial
appropriation which represents departmental appropriations recommended by the
Governor and presented to the General Assembly at the beginning of each
legislative session. The General Assembly enacts the budgets of the various
State departments through passage of specific appropriation bills. The Governor
has line item veto powers over all legislation subject to legislative override.
Session laws that were passed by the Legislature in 1993 authorize directors of
various state agencies to transfer appropriation authority among the various
divisions of their specific agency, subject to the Budget Section of the North
Dakota Legislative Council's approval. Unexpended appropriations lapse at the
end of each biennium, except certain capital expenditures covered under the
North Dakota Code and except for all unexpended general funds appropriation
authority which must be deposited in special revenue funds of the institutions
in the University System according to law. During the 1993-1995 biennium there
were supplemental appropriations of $105,573,249. The general fund appropriation
authority was increased by approximately $6.5 million. Of this amount $3.7
million was carryover from the 1991-1993 biennium, $2.0 million was approved by
the 54th Legislative Assembly for Risk Management and $.8 million was for
deficiencies also approved by the 54th Legislative Assembly.
The GAAP General Fund undesignated balance decreased from $72.1
million on June 30, 1994 to $64.6 million as of June 30, 1995. The primary
reason for the decrease was increased expenditure levels for education ($9.4
million) and health and human services program ($9.6 million). The 1995 general
fund reserved fund balance includes a $31.9 million appropriation receivable
from the Bank of North Dakota.
North Dakota implemented a new accounting standard, GASB Statement
No 22 "Accounting for Taxpayer Assessed Tax Revenues in Governmental Funds."
This created a one time acceleration of revenue recognition for the State's
major tax types. The change resulted in a restatement of the general fund's 1994
balance, increasing it from $64.3 million to $94.4 million. In fiscal year 1995
an additional $75.6 million was recognized for taxes receivable in the general
fund. The increase in taxes receivable resulted in an additional $36 million
being recognized as revenue and $39.6 million as deferred revenue in fiscal year
1995 in the general fund. The general fund also had an $11 million increase in
accrued tax refunds payable which decreased revenues in the general fund for
fiscal year 1995.
Revenues and Expenditures. General governmental activities are
accounted for in four governmental fund types: general (GAAP) basis; special
revenue; capital projects; and, debt service funds. Revenues for general
governmental functions totaled approximately $1.4 billion for the fiscal year
ended June 30, 1995. Of the total revenues, taxes accounted for $680,620,000.
The largest increase in taxes on a budgetary basis comes from sales and use
taxes with an increase of $24.5 million for the fiscal year. Twelve million of
the increase is attributed to the acceleration of sales tax collected and
reported as required by North Dakota Code in each odd-numbered year. The
remaining $12.5 million is due to economic growth. The second largest source of
general fund revenue, the individual income tax, increase approximately $4
million due to economic growth. On the other hand, corporate income taxes
decreased approximately $6.7 million as a result of an unusually high corporate
audit collection of $13.6 million in fiscal year 1994.
Expenditures for GAAP general government functions totaled
approximately $1.3 billion for the fiscal year ended June 30, 1995. The three
leading expenditures were: health and human services, $528,052,000; education,
$329,249; and, highways, $226,626,000. Overall, general government expenditures
increased by 30%. The increase is the result of higher federal funding because
of the Presidential Flood Declaration of 1993. The Office of Intergovernmental
Assistance passed on to local political subdivisions approximately $9.8 million
for flood disaster and community block grants.
Claims/Judgments Payable are primarily Workers Compensation Claims
Incurred But Not Yet Reported (IBNR) by the claimants as well as claims related
to various litigation matters. Claims and judgments for governmental funds are
reflected entirely in the general long-term debt account group and not in
individual funds as the liability is not expected to be liquidated with
expendable available financial resources.
Debt Administration. The Constitution of North Dakota provides that
the State may issue or guarantee the payment of bonds provided that all bonds in
excess of $2 million are: secured by first mortgage upon property and no further
indebtedness may be incurred by the State unless evidenced by a bond issue;
authorized by law, for a certain purpose; provisioned to pay the interest
semiannually, and pay the principal within 30 years. The law authorizing the
bond issue must specifically appropriate the provisions to the payment of the
principal and interest of the bond. The
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State is currently in compliance with the constitutional debt limitation. At
June 30, 1995, the state had a number of debt issues outstanding. These issued
include:
General Obligation Bonds. General obligation bonds have been
authorized and issued to provide funds to the Bank of North Dakota. General
obligation bonds issued according to the constitution and enabling statutes are
backed by the full faith, credit and taxing power of the State of North Dakota.
Debt service requirements are provided by repayment of the real estate loans and
transfers from the Bank of North Dakota. The State's net general obligation debt
per capita is $36. General obligation bonds currently outstanding are the 1984
and 1986 Real Estate Series. At June 30, 1995, the balance was $39,046,000.
Revenue Bonds. Current State statutes empower certain State agencies
to issue bonds as part of their activities. This debt is not backed by the full
faith and credit of the State of North Dakota. The principal and interest on
such bonds shall be payable only from the applicable agencies' program income.
On June 30, 1995, total Revenue Bonds outstanding totaled $825,439. The Bonds
and balance were as follows: State Fair, $3,421,000; Student Loan Trust,
$199,320,000; Building Authority, $65,613,000; Housing Finance, $425,149,000;
University
System, $65,571,000; and Municipal Bond Bank, $66,365,000.
Long-Term Notes. The Bank of North Dakota has long-term notes in the
amount of $53.5 million. The Fuji Bank, Ltd. Notes ($50 million) were issued in
December, 1986 and are due December, 1996. The rate of interest in 7.875% with
an effective interest rate of 7.94%. The bank has two advances from the Federal
Home Loan Bank in the amounts of $2.5 million and $1 million. The rates of
interest are 7.99% and 8.34%, respectively.
North Dakota continues to receive bond ratings from both Moody's
Investors Service (Aa) and Standard and Poor's Corporation (AA-) on general
obligation bond issues.
FACTORS AFFECTING OREGON FUND
General Economic Conditions. Oregon's economy clearly slowed in the
first half of 1995, but growth remains stronger than the national average. As
they have since 1993, the state's electronics manufacturing and construction
sectors led economic growth in the second quarter. Strong job growth also
occurred in the service sector. However, lumber and wood products turned sharply
negative in the second quarter. Second only to the lumber and wood products
industry, Oregon agriculture had gross farm sales over $3 billion in 1994.
Oregon's diversified agricultural base reported 84 commodities with sales of $1
million or more in 1994. The top ten cash commodities for 1994 were: farm forest
products, $521 million; cattle and calves, $385 million; nursery crops, $269
million; dairy, $218 million; wheat, $214 million; potatoes, $124 million;
alfalfa hay, $82 million; perennial rye grass seed, $78 million; Christmas
Trees, $72 million; and dry onions, $72 million.
Employment is expected to grow 3.8% in 1995 down only slightly from
the 4.3% pace recorded in 1994. Job growth is expected to slow further to 2.2%
in 1996 as the construction boom winds down and a shortage of available labor
limits net job creation.
Budgetary Process. The Oregon budget is approved on a biennial basis
by separate appropriation measures. a biennium begins July 1 and ends June 30 of
odd-numbered years. Measures are passed for the approaching biennium during each
regular Legislative session, held beginning in January of odd-numbered years.
Because the Oregon Legislative Assembly meets in regular session for
approximately six months of each biennium, provision is made for interim funding
through the Legislative Emergency Board. The Emergency Board is authorized to
make allocations of General Fund monies to State agencies from the State
Emergency Fund. The Emergency Board may also authorize increases in expenditure
limitations from Other or Federal Funds (dedicated or continuously appropriated
funds), and may take other actions to meet emergency needs when the Legislative
Assembly is not in session. The most significant feature of the budgeting
process in Oregon is the constitutional requirement that the budget be in
balance at the end of each biennium. Because of this provision, Oregon may not
budget a deficit and is required to alleviate any revenue shortfalls within each
biennium.
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Revenue and Expenditures. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: program
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. In its 1995 Regular
Session, the Oregon Legislative Assembly approved General Fund appropriations
totaling $7,372.6 million for the 1995-1997 biennium. This is a 15.2% increase
compared to estimated 1993-1995 expenditures.
General Fund revenue totaled $6,536.1 million for the 1993-1995
biennium. Revenue exceeded the May estimate by $16.7 million in the 1993 Close
of Session (COS) estimate by $330.6 million or 5.3%. Expenditures are estimated
to be $6,402.6 million for the biennium leaving a 1993-1995 ending balance of
$499.9 million.
The 1995-1997 Close of Legislative Session estimate (COS) is based
on the May estimate adjusted for actions taken by the 1995 Legislative Assembly.
The COS revenue estimate is $6,961.5 million. The May forecast called for
revenue of $6,853.8 million. Actions taken during the 1995 regular session are
expected to lead to an additional $107.7 million for the 1995-1997 biennium. The
COS ending balance estimate for the 1995-1997 biennium is $72.1 million.
The September forecast for the 1995-1997 General Fund revenue is
$7,000.4 million, an increase of $38.9 million form the COS estimate. The
beginning balance is now estimated to be $499.9 million leaving total General
Fund resources available for the 1995-1997 biennium of $7,500.3 million. The
General Fund resources estimate is $55.6 million higher than the COS estimate.
The State is 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. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims filed against the State. Of those claims, 544 also have
been filed as court actions, and are pending against the State. These cases are
pending in State courts and are subject to the liability limitations stated in
the Tort Claims Act of $500,000 per occurrence, $200,000 per individual for
physical injuries, and $50,000 per occurrence for property damage. The
likelihood of an unfavorable outcome in these cases ranges from probable to
remote, but it is certain that these cases do not involve real exposure of $25
million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
Debt Administration and Limitation. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for state agencies on proposed and outstanding debt. Statutes
contain management and reporting requirements for state agencies on proposed and
outstanding debt.
A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are normally
expressed as a percentage of statewide True
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Cash Value (TCV) of taxable property. Revenue bonds usually are limited by the
Legislative Assembly to a specific dollar amount.
The State's constitution authorizes the issuance of general
obligation bonds for financing community colleges, highway construction, and
pollution control facilities. Higher education institutions and activities and
community colleges are financed through an appropriation from the General Fund.
Facilities acquired under the pollution control program are required to
conservatively appear to be at least 70% self-supporting and self-liquidating
from revenues, gifts, federal government grants, user charges, assessments, and
other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. For the year ending June 30, 1994, the total
balance of general obligation bonds was $4.6 billion. The debt service
requirements for general obligation bonds, including interest of approximately
$3.734 million, as of June 30, 1994, was $8.3 billion.
In addition to general obligation and direct revenue bonds, the
State of Oregon issues industrial development revenue bonds ("IDBs"), Oregon
Mass Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing request from local mass transit districts
and my authorize issuance of revenue bonds to finance eligible projects. The
State has no financial obligation for these bonds, which are secured solely by
payments from local transit districts.
The State is statutorily authorized to enter into financing
agreements through the issuance of certificates of participation. Certificates
of participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of Administrative Services, and the
Department of Higher Education. Also, certificates of participation have been
used for the acquisition or construction of buildings by the Department of
Administrative Services, Department of Fish and Wildlife, Department of
Corrections, State Police, and Department of Higher Education. Further,
certificates of participation were used in the acquisition of telecommunication
system by the Department of Administrative Services and the Adult & Family
Services Division. For the year ending June 30, 1994, the certificates of
participation debt totaled $174.3 million. The debt service requirements for
certificates of participation, including interest of approximately $105.1
million, as of June 30, 1994, totaled $281.3 million.
HHECFA is a public corporation created in 1989, and modified in
1991, to assist with the assembling and financing of lands for health care,
housing, educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally
taxable bonds in those situations where securing a federal tax exemption is
unlikely or undesirable; regulate "current" as well as "advance" refunding
bonds; enter into financing agreements, including lease purchase agreements,
installment sales agreements and loan agreements to finance real or personal
property and approve certificates of participation with respect to the financing
agreements. Amounts payable by the State under a financing agreement are limited
to funds appropriated or otherwise made
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available by the Legislative Assembly for such payment. The principal amount of
such financing agreements are treated as bonds subject to maximum annual bonding
levels established by the Legislative Assembly under Oregon statute.
Each of Fitch Investors Service, Moody's Investors Service and
Standard & Poor's Ratings Group has assigned their municipal bond ratings of
"AA," "Aa," and AA-" respectively.
FACTORS AFFECTING PUERTO RICO
General Economic Conditions. Puerto Rico, the fourth largest of the
Caribbean islands, is located approximately 1,600 miles southeast of New City
and 1,000 miles east-southeast of Miami, Florida. It is approximately 100 miles
long and 35 miles wide. According to estimates of the Planning Board, the
population of Puerto Rico increased to 3,653,000 during fiscal 1994.
Puerto Rico came under United States sovereignty by the Treaty of
Paris, signed on December 10, 1898, terminating the Spanish-American War. Puerto
Ricans have been citizens of the United States since 1917. Puerto Rico's
constitutional status is that of a territory of the United States and the
ultimate source of power over Puerto Rico, pursuant to the Territories Clause of
the Federal Constitution, is the United States Congress. The Commonwealth
exercises virtually the same control over its internal affairs as do the fifty
states; however, it differs from the states in its relationship with the federal
government. The people of Puerto Rico are citizens of the United States but do
not vote in national elections. They are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives and limited voting
powers. Most federal taxes, except those such as social security taxes, are not
levied in Puerto Rico. No federal income tax is collected from Commonwealth
residents on ordinary income earned from sources in Puerto Rico, except for
certain federal employees who are subject to taxes on their salaries and for
income earned from sources outside Puerto Rico.
The Commonwealth has established policies and programs directed at
the development of manufacturing and the expansion and modernization of the
island's infrastructure. The investment of mainland United States, foreign and
local funds in new factories has been stimulated by selective tax exemption,
development loans, and other financial and tax incentives. Infrastructure
expansion and modernization have bee to a large extent financed by bonds and
notes issued by the Commonwealth, its public corporations and municipalities.
Economic progress has been aided by significant increases in the levels of
education and occupational skills of the island's population.
The economy of Puerto Rico is closely integrated with that of the
mainland United States. During fiscal 1994 approximately 87% of Puerto Rico's
exports went to the United States mainland, which was also the source of
approximately 67% of Puerto Rico's imports. In fiscal 1994, Puerto Rico
experienced a $4.3 billion positive adjusted merchandise trade balance. Gross
product in fiscal 1991 was $22.8 billion and gross product in fiscal 1995 was
$28.4 billion. This represents an increase in gross product of 24.4% from fiscal
1991 to 1995.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1991 through fiscal 1995. Almost
every sector of the economy was affected and record levels of employment were
achieved. Average employment in creased from 977,000 in fiscal 1991 to 1,051,300
in fiscal 1995. Average unemployment decreased from 15.2% in fiscal 1991 to
13.8% in fiscal 1995.
Puerto Rico has a diversified economy. During the fiscal years
1990-1994, the manufacturing and service sectors generated the largest portion
of gross domestic product. Three sectors of the economy provide the most
employment: Manufacturing, services, and government.
Gross product in fiscal 1991 was $22.8 billion and gross product in
fiscal 1995 was $28.4 billion. This represents an increase in gross product of
24.4% from fiscal 1991 to 1995. Since fiscal 1985, personal income, both
aggregate and per capita, has increased consistently each fiscal year. In fiscal
1994, aggregate personal income was $25.7 billion and personal income per capita
was $7,047. Personal income includes transfer payments to individuals in Puerto
Rico under various social program. Transfer payments to individual in fiscal
1994 were $5.7 billion, of which $3.9 billion, or 68.9% represent entitlements
to individuals who had previously performed services or made contributions under
programs such as Social Security, Veterans' Benefits, and Medicare.
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Budgetary Process. The fiscal year of the Commonwealth begins on
July 1. The Governor is constitutionally required to submit to the Legislature
an annual balanced budget of capital improvements and operating expenses of the
Commonwealth for the ensuing fiscal year. Section 7 of Article VI of the
Constitution provides that, "The appropriations made for any fiscal year shall
not exceed the total revenues, including available surplus, estimated for said
fiscal year unless the imposition of taxes sufficient to cover said
appropriations as provided by law."
Revenues and Expenditures. In the fiscal 1995 budget revenues and
other resources of all budgetary funds total $8,381,444,000, excluding balances
from the previous fiscal year and general obligation bonds authorized. Current
expenses and capital improvements, other than those financed by bonds, of all
budgetary funds total $8,673,845,000, an increase of $1,160,550,000 from fiscal
1994. The general obligation bond authorization for the fiscal 1995 budget is
$325,000,000.
In the fiscal 1996 budget proposal revenues and other resources of
all budgetary funds total $8,269,848,000 excluding balances from the previous
fiscal year and general obligation bonds authorized. Current expenses and
capital improvements other than those financed by bonds, of all budgetary funds
total $8,546,543,000, a decrease of $127,303,000 from fiscal 1995. The general
obligation bond authorization for the fiscal 1996 budget is $355,000,000.
Tax Incentives. Much of the development of the manufacturing sector
in Puerto Rico can be attributed to various federal and Commonwealth tax
incentive, particularly Section 936 of the Internal Revenue Code, as amended
(the "Code") and the Commonwealth's Industrial Incentives Program.
Section 936. Under Section 936 of the Code, United States
corporations that meet certain requirements and elect its application ("Section
936 Corporations") are entitled to credit against their United States corporate
income tax the portion of such tax attributable to (I) income derived from the
active conduct of a trade or business within Puerto Rico ("active business
income") or from the sale of exchange of substantially all assets used in the
active conduct of such trade or business; and, (ii) qualified possession source
investment income ("passive income"). To qualify under Section 936 in any given
taxable year a corporation must derive (I) for the three-year period immediately
preceding the end of such taxable year 80% or more of its gross income from
sources within Puerto Rico; and, (ii) for taxable years beginning after December
31, 1986, 75% or more of its gross income from the active conduct of a trade or
business in Puerto Rico. A Section 936 Corporation may elect to compute its
active business income eligible for the Section 936 credit under one of three
formulas.
On November 17, 1995 the United States Congress adopted, as part of
its larger federal income tax legislative package, a ten-year phase out of the
current 936 credit for companies that are existing credit claimants and the
elimination of the credit for companies establishing new operation in Puerto
Rico and for existing companies that add a substantial new lime of business. The
credit based on the economic limitation will continue as under current law
without change until tax years beginning in 2002, during which years the
possession business income will be subject to a cap based on the corporation's
possession income for an average adjusted base period. The credit based on the
percentage limitation will continue as under current law until tax years
beginning in 1998. In that year and thereafter, the credit based on the
percentage limitation will be 40%, but the possession business income will be
subject to a cap based on the corporation's possession income for an average
adjusted base period. The 936 credit is eliminated for taxable years beginning
in 2006. However, the credit granted to passive income (QPSII) is eliminated for
taxable years beginning after December 31, 1995.
The President vetoed the legislation submitted by the United States
Congress on December 7, 1995. The Administration has proposed a modification to
the 936 credit that would phase out the credit based upon the percentage
limitation over a five year period beginning in 1997, retain the credit based
upon the economic limitation under current law, allow a five year carry forward
of excess credit based upon the economic limitation and retain the credit
granted to passive income (QPSII) under current law.
It is not possible at this time to determine the final legislative
changes that may be made to Section 936, or the effect on the long-term outlook
on the economy of Puerto Rico. The government of Puerto Rico does not believe
there will be short-term or medium-term material adverse effects on Puerto
Rico's economy as a result of the changes to Section 936 currently proposed by
Congress or the Administration. The Government of Puerto Rico further
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believes that even if the Congressional proposal became law, sufficient time
exists to put additional incentive programs in place to safeguard Puerto Rico's
competitive position.
Industrial Incentives Program. Since 1948 Puerto Rico has had
various industrial incentives laws designed to stimulate industrial investment
in the island. On January 24, 1987, the Governor of Puerto Rico signed into law
the most recent industrial incentives law, known as the Puerto Rico Tax
Incentive Act (the "1987 Act"). The tax exemption benefits provided by the 1987
Act are generally more favorable than those provided by its predecessor, the
Industrial Incentives Act of 1978 (the "1978 Act"). The activities eligible for
exemption under the 1987 Act include manufacturing, certain designated services
for markets outside Puerto Rico, the production of energy from local renewable
sources for consumption in Puerto Rico, and laboratories for scientific and
industrial research.
The 1987 Act provides a fixed 90% exemption from income and property
taxes and a 60% exemption from municipal license taxes during a 10, 15, 20 or 25
year period, depending on the zone where the operations are located. The 1987
Act also provides a special deduction equal to 15% of the production payroll for
companies whose net income from operations is less than $20,000 per production
job. This special benefit is designed to attract and maintain labor intensive
operations in Puerto Rico. The passive income from certain qualified investment
in Puerto Rico and the instruments evidencing such investments are fully exempt
from income tax. In addition, companies making such investments for fixed
periods of not less than five years are eligible to reduce the tollgate tax
imposed on dividend and liquidating distributions from a maximum rate of 10% to
5%, depending on the amount and term of the investment.
The bottom limit of 5% was approved in a recent amendment (December
1993) of the 1987 Act (the "1993 amendments"). The 1993 amendments also impose a
new 5% estimated tax on annual industrial development income, subject to
reduction in the event certain long-term qualified investments with such income
are made. The Department of Treasury is collecting an additional amount annually
as a result of the implementation of the bottom limit. As a result of the 1993
amendments, the Department of the Treasury has increased its ability to predict
tax revenues from corporations with greater accuracy. The 1993 amendments also
contain an option to pay a flat 14% tax on annual industrial development income,
which would allow eligible companies to repatriate profits free of tollgate
taxes. Under this option, if a company invests 25% or 50% of its profits in
qualified industrial development investments, the 14% rate drops to 11% or 9%,
respectively. The 1987 Act applies to newly established operations as well as to
existing operations that elect to convert their tax exemption grants to the
provision of the 1987 Act.
Since 1983 hotel operations have been covered by a special
incentives law, the Tourism Incentives Act of 1983, which provides exemptions
from income, property and municipal license taxes for a period of 10 years. In
1993, legislation was enacted providing for an additional set of tax incentives
for new hotel development projects. In addition to providing for exemptions from
income, property and municipal license taxes for a period of up to 10 years, it
provides certain tax credits for qualifying investments in such projects.
Caribbean Basin Initiative. In August, 1983, the President of the
United States signed into law the Caribbean Basin Economic Recovery Act. The Tax
Reform Act of 1986 amended Section 936 to allow Puerto Rico financial
institutions to invest funds representing earnings accumulated under Section
936, in active business assets or development projects in a qualified Caribbean
Basin country. As of December 1994, 167 projects under the Puerto Rico Caribbean
Development Program have been promoted in fourteen Caribbean Basin countries,
representing 36,115 jobs and over $1,989 million in loan commitments, of which
$1,217 million of Section 936 funds have been disbursed.
Debt Administration and Limitation. Public sector debt comprises
bonds and notes of the Commonwealth and its municipalities and public
corporations. Direct debt of the Commonwealth is supported by Commonwealth
taxes. Debt of municipalities, other than bond anticipation notes, is supported
by real and personal property taxes and municipal license taxes. Debt of public
corporations, other than bond anticipation notes is generally supported by the
revenues of such corporations from charges for services or products. However,
certain debt of public corporations is supported, in whole or in part, directly
or indirectly, by Commonwealth appropriations or taxes.
Commonwealth Guaranteed Debt. Annual debt service on outstanding
Commonwealth guaranteed bonds issued by Urban Renewal and Housing Corporation
and assumed in fiscal year 1992 by Housing Bank and Finance
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Agency is $13,254,048 in the fiscal year ending September 30, 1996, which
constitutes the maximum annual debt service on such bonds. The final maturity of
such bonds is October 1, 2001. As of September 30, 1995, $74,755,000 of
Commonwealth guaranteed bonds of Housing Bank and Finance Agency were
outstanding. Annual debt service on Commonwealth guaranteed bonds of Public
Buildings Authority is $114,777,000 in fiscal year ending June 30, 1996 with the
final maturity on July 1, 2025. As of September 30, 1995, $1,335,611,000 of
Commonwealth guaranteed bonds of Public Buildings Authority were outstanding. No
payments under the Commonwealth guaranty have been required to date for bonds of
Housing Bank and Finance Agency or Public Buildings Authority.
As of September 30, 1995, $267,000,000 of Commonwealth guaranteed
obligations of Government Development Bank were outstanding. No payments under
the Commonwealth guaranty have been required for any obligations of Government
Development Bank to date.
Public Sector Debt. In Puerto Rico, many governmental or
quasi-governmental functions are performed by public corporations. These are
governmental entities of the Commonwealth created by the Legislature but with
varying degrees of independence from the central government. Most public
corporations obtain revenues from charges for services or products, but many are
subsidized to some extent by the central governments. Capital improvements of
most of the larger public corporations are financed by revenue bonds under trust
notes of certain of the public corporations as of September 30, 1995. Debt of
certain other public corporations is payable primarily from the Federal
Government or is payable from sources other than Commonwealth appropriations or
taxes or revenues of public corporations derived from services or products.
Historically, the Commonwealth has maintained a fiscal policy which
provides for a prudent relationship between the growth of public sector debt and
the growth of the economic base required to service that the debt. The
Commonwealth has also sought opportunities to realize debt service savings by
refunding outstanding debt with obligations bearing lower interest rates. Over
fiscal years 1991 to 1995, public sector debt increased by 24.7% while gross
product rose 24.4%. This slightly greater increase in the rate of public sector
debt relative to the rate of increase in gross product over the subject period
was principally the result of refinancing to achieve debt service savings. Short
term debt outstanding relative to total debt was 7.7% as of September 30, 1995.
Government Development Bank. The principal functions of Government
Development Bank are to act as financial advisor to, and fiscal agent for, the
Commonwealth, its municipalities and public corporations in connection with the
issuance of bonds and notes, to make loans and advances to public corporations
and municipalities, and to make loans to private enterprises to aid in the
economic development of Puerto Rico.
As of September 30, 1995, $1,540,948,000 of bonds and notes of
Government Development Bank were outstanding. Government Development Bank has
loaned $1,901,578,894 to Commonwealth public corporations and municipalities.
Act No. 12, approved May 9, 1975, as amended, provides that the payment of
principal of and interest on specified notes and other obligations of Government
Development Bank, not exceeding $550,000,000, may be guaranteed by the
Commonwealth, of which $267,000,000 were outstanding as of September 30, 1995.
Government Development Bank has the following principal subsidiaries: Higher
Education Assistance Corporation, Housing Finance Corporation, Tourism
Development Fund, Development Fund, Capital Fund, and Public Finance
Corporation.
FACTORS AFFECTING UTAH FUND
General Economic Conditions. On January 4, 1896, the State became
the forty-fifth state of the United States of America. Ranking eleventh among
the states in total area, the State contains approximately 82,168 square miles.
It ranges in elevation from a low of 2,500 feet above sea level in the south, to
a high of 13,500 feet above sea level in the north. The State is located in an
arid region (precipitation ranks as the forty-ninth lowest in the nation, ahead
of Nevada) and in the center of the Rocky Mountain region with excellent access
to major national and international markets. Home to deserts, plateaus, the
Great Basin and the Rocky Mountains, the State is known for its scenic beauty
and the diversity of its outdoor recreation areas. Approximately 20% of the
State is national park and forest land, 42% is Bureau of Land Management land
and 7% is State park land. Transportation infrastructure in the form of
interstate highways, railroad lines, and an international airport is in place to
provide efficient transportation for business and tourism.
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The population forecast for 1995 is 1,964,000, indicating continued
growth. As of July 1, 1994, Utah's population was approximately 1,916,000, a
2.7% increase over 1993. This is the highest rate in the last twelve years. Net
in-migrations were approximately 22,800 people in 1994. This is the fourth
consecutive year Utah experienced strong net in-migrations. This net
in-migration trend is projected to continue for at least the next three year.
The State's population continues to be concentrated in the metropolitan area
along the Wasatch mountains, with Salt Lake City as the hub. Growth in the rural
areas has picked up in the last few years and in 1994 over half of the net
inmigration was attributed to non-metropolitan counties. The State continues to
face the challenge of bringing more economic development to the rural areas of
the State.
Utah's economy continues to experience sustained growth rates
greater than that of the national economy. Employment growth, an important
economic indicator, continues to look strong. Utah consistently ranked near the
top of the nation in job growth. From September 1993 to September 1994, Utah led
the nation in job growth at 6.2%. From August 1994 through August 1995, Utah
created 54,200 new jobs. The job growth rates for 1995 are projected to be
around 5.8%. Projected job growth for 1996 is about 4.8%.
The strength of the State's economy over the past several years has
occurred at the same time that it has become more diversified. That is, the
distribution of the State's employment has become less specialized across
industries while the level of total employment has increased. The result of this
restructuring in the midst of economic growth is that sectors in which the
State's employment has been disproportionately concentrated in the past (such as
the federal government and extractive industries) have lost in employment share,
while sectors other than these (notably those affected by the expansion of
tourism, computer software, financial services, and biomedical technologies)
have increased in shares. The service industries continue to generate the
largest number of jobs in the State. During 1994, services created 13,400 new
jobs. The major contributors to rapid expansion were the high-tech computer
services, business services, engineering/management services, and
personal/amusement services.
In light of Utah's economic growth and positive financial position,
the State continues to face many significant issues. The State must deal with
the increased demand for services associated with this growth. Education,
economic development, transportation, corrections, health, and human service
needs continue to be the major demands on state resources.
Budgetary Process. The Governor is required to submit a balanced
budget to the Legislature for each fiscal year. The budget is required to
describe, among other things, (I) a complete plan of proposed expenditures and
estimated revenues for the ensuing year, (ii) the revenues and expenditures for
the next preceding fiscal year, and (iii) current assets, liabilities and
reserves, any surplus or deficit and the debts and funds of the State. The
budget is required to include an itemized estimate of appropriations for payment
and discharge of the principal and interest of the indebtedness of the State,
among other things. Deficits or anticipated deficits must be included in the
budget.
The State Constitution requires that budgeted expenditures should
not exceed estimated revenues and other sources of funding, including beginning
fund balances. The Legislature authorizes expenditures in annual state
"Appropriations Acts." The Acts also identify the sources of funding for
budgeted expenditures. In the event actual revenues are insufficient to cover
budgeted expenditures, the Governor must order budget reductions. Adjustments to
the budget may be made throughout the year for changes in department revenues or
fund revenues so that departments and funds will not end the fiscal year in a
deficit positions.
The State also has an appropriation limitation statute which limits
the growth in state appropriations. The law provides three basic limitations.
First, as population, personal income, and inflation increase, appropriations
are allowed to increase only at the same relative rate. Second, it limits
outstanding state general obligation debt to 20% of the appropriations limit.
Third, it freezes the state-mandated property tax rate, which funds a portion of
public education at the local level. These statutory limitations can be exceeded
only if a fiscal emergency is declared and approved by more than two-thirds of
both houses of the Legislature, or if approved by a vote of the people. However,
the spending limit statute may be amended by a majority in both houses of the
Legislature.
Using 1985 as the base year, the State was $4 million below the
appropriation limitation for the fiscal year ended June 30, 1995. The State is
currently below the fiscal year 1996 appropriation limitation by $3 million.
Also,
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the Sate is currently $145 million below the statutory debt limit and is $743
million below the debt limit established in the Constitution.
Revenues and Expenditures. The General Fund is the principal fund
from which appropriations are made for State operations. It is specifically
maintained to account for all financial resources and transactions not accounted
for in another fund. The General Fund receives all State sales taxes, which
comprise the largest source of this Fund's revenues. Other principal sources of
revenues include Federal contracts, grants and mineral lease payments, State
department collections and miscellaneous licenses, fees and taxes.
Each fund of the State maintains an equity position which is either
restricted by state law, restricted by contract, or is unreserved and available
for future appropriation. The equity position of the State' General Fund and
Special Revenue Funds are:
1. General Revenue Fund. Departments lapsed unexpended
appropriations of $3 million to the unrestricted fund balance. The General Fund
ended the year with an unreserved fund balance of $15 million and a reserved and
designated fund balance of $372 million, including $66 million designation for
the Rainy Day Reserve Account.
2. Special Revenue Funds. These funds are the Uniform School Fund,
the Transportation Fund, the Sports Authority Fund, the Consumer Education Fund,
and the Federal Retirees Settlement Fund. The Department of Transportation
returned $25 million of unexpended appropriations to the unrestricted fund
balance of the Transportation Fund. The Transportation Fund ended the year with
an unreserved fund balance of $16 million and a reserved and designated fund
balance of $48 million.
The Minimum School Program lapsed $5 million to the Uniform School
Fund Building Loan. The Uniform School Fund ended the year with a $46 million
unreserved fund balance and a reserved and designated fund balance of $167
million. The Sports authority Fund was created in 1989 to account for sales tax
revenue restricted for Winter Olympic facilities. The Fund ended the year with a
negative unreserved fund balance of $13 million and a reserved fund balance of
$10 million. The negative fund balance developed because construction
commitments for facilities have exceeded initial collection of revenues. The
ten-year budget of the Sports Authority Fund, ending December 31, 1999, is
balanced. The Federal Retirees Settlement Fund was created in 1993 to record
liabilities due federal retirees for income taxes collected by the State in
error. The courts have authorized a settlement which was funded with transfers
from the General Fund and the Rainy Day Reserve Account. The Fund has assets
equal to liabilities.
Revenues for general government functions totaled $4.2 billion in
1995, an increase of 8.4% over 1994. The amounts of revenue from various sources
are as follows: Sales Taxes, $1.062 billion; Individual Income Taxes, $1.027
billion; Corporate Income Taxes, $158 million; Motor and Special Fuel Tax, $196
million; Licenses, Permits, and Fees, $65.5 million; Interest on Investments,
34.9 million; Federal Revenues, $1.193 billion; and, Other Taxes and Revenue,
$485.5 million.
Sales and Use Taxes are the largest unrestricted sources of state
tax revenues. The increase of $78 million or 7.9% over the previous year, was
the result of increase consumer spending caused by economic growth, net
inmigration, and new housing and commercial construction. This economic growth
was evident in statistics through the end of 1994. During 1994 retail sales
increased 10%, residential housing permit values increased 13.8%, nonresidential
permit values increased 64.7%, and new auto and truck sales increased 10.3%.
Statistics for 1995 continue to reflect strong growth but at lower rates.
Individual Income taxes increased $102 million, or 11%. The growth
was mainly attributed to the increased growth in jobs of approximately 6.2% and
personal income growth of about 7.7% in 1994. The Corporate Income Taxes
increase of $33 million, or 26.1%, was attributable to the previously discussed
economic growth. Motor and Special Fuel Taxes increased $9 million or 4.8%. This
was caused by population growth from in-migration and strong employment. The
Licenses, Permits, and Fees increase of $3 million, or 4.7%, was mainly the
result of an increase of $2.7 million for vehicle registration and control fees
and for transportation permits. The Interest on Investments increase of $14
million, or 66.1%, was a result of the average cash balances doubling and an
increase in the average yield on investments in the State Treasurer pools, which
increased to 5.44% in fiscal year 1995 from 3.61% in fiscal year 1994. The
increase in cash balanced occurred because of the strong growth in tax revenues
and increases in fund
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balances. The Federal Revenues net increase of $51 million, or 4.5% was most
attributable to increased federal revenue for Medicaid off $25 million, Family
Services program of $6 million, Environmental Quality programs of $5 million,
Loan Program increases over $6 million, and various other increases and
decreases in federal program.
The Other Taxes and Revenues increase of $37 million, or 8.2%,
included a $17 million increase in accrued taxes; and $18 million increase in
miscellaneous taxes; a $6 million increase in department collections for
regulatory fees, service fees and grants; and a $13 million increase in
aeronautic revenue used for airport maintenance and expansion. These increases
were offset by a decrease of $11 million in revenue from other governments for
capital projects managed by the State; a decrease of $4 million in federal
mineral lease revenues; and a $2 million decrease in miscellaneous collections.
Expenditures and other uses for total general governmental functions
were $4.2 billion, an increase of 7.6% over 1994. This does not include
transfers made to other funds except General Fund appropriated and transfers to
the colleges and universities, which are included as higher education
expenditures. State government expenditures and other uses by function are as
follows: General Government, $252.3 million; Education (Public and Higher),
$1.85 billion; Human Services, Corrections, Health, and Environmental Quality,
$1.3 billion; Transportation and Public Safety, $503 million; Natural Resource,
$78 million; Community and Economic Development, $72 million; Business, Labor,
and Agriculture, $34.5 million; Debt Service, $86.6 million; and , Capital
Projects, $177.9 million.
The increase in General Government expenditures of $17 million, or
7.3%, is mainly due to a $21 million increase in leave/post-employment benefits,
increase in courts of $8 million, and a $4 million increase in the Attorney
General's Office. The increase was offset by an $18 million reduction in
expenditures for one-time income tax refunds paid to federal retirees. The
settlement of a class action suit filed against the State by federal retirees
for income taxes paid on retirement income for 1986 through 1989 was
substantially completed in fiscal year 1994. Expenditures for the income tax
refunds to federal retirees were expended over two fiscal years and amounted to
$50 million in 1993 and $18 million in 1994.
Expenditures for Public and Higher Education are the largest use of
state revenues. The increase of $83 million, or 6.9%, in Public Education and
$34 million, or 9.2%, in Higher Education reflect additional funding for the
continued growth in school age population and efforts to reduce class size, and
to increase teachers compensation.
Human services, Corrections, Health, and Environmental Quality
expenditures increased $90 million, or $7.5%. Expenditures in the Department of
Human Services, Health, and Environmental Quality increased by $79 million. The
largest expenditures increases occurred in the following areas: Medical
assistance, $45 million; family support and human assistance programs, $20
million; and environmental quality, $9 million. Food stamps and food commodities
distributions deceased by $5 million. Federal revenues provided the majority of
the funding for the increases in the Departments of Human Services, Health, and
Environmental Quality. Expenditures in the Department of Corrections increased
$12 million due to expanding prison facilities and population. Transportation
and Public Safety expenditures increased by $22 million, or 4.6%. This was
mainly due to a $3 million increase in public safety, a $13 million increase in
aeronautics for the expansion of airports, and an increase of $5 million in
leave/postemployment benefits.
The Debt Service expenditures increase of 12% was due to the
increase in debt retirement related to the increase in previous debt issuances.
The Capital Project expenditures' increases of $29 million are related to
increased building construction funded from capital facilities bonds issued in
1987 through 1995. This is a result of the Legislatures willingness to increase
bonded debt to take advantage of historically low interest cost and increased
building demands mostly at colleges and universities.
Debt Administration and Limitation. Utah's Constitution limits the
State to a total general obligation debt not to exceed, in the aggregate any one
time, an amount equal to 1.5% of the value of the taxable property of the State,
as shown by the last assessment for state purposes. Using the latest December
1994 value, the debt limit of the State is $1.156 billion. Revenue bonds and
certificates of participation issued by the State are legally excluded from the
debt limitations.
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During the fiscal year, the State issued $95 million in general
obligation bonds and $31 million in lease revenue bonds for construction and
renovation of various capital facilities. Shortly after fiscal year end, the
State issued general obligation bonds totaling $45 million for buildings
construction and purchases. The State also issued $93 million in lease revenue
bonds on August 15, 1995, to be used to purchase and construct state buildings.
The State is authorized to issue an additional $15 million in general obligation
bonds for construction and renovation of various capital facilities. The bonds
are not likely to be issued before July 1996.
The State issued $8.4 million in water revenue refunding notes on
October 4, 1995. The note proceeds and original bond reserve funds were used to
defease the 1989 Revolving Loan Recapitalization Program Revenue Bond of $7.7
million. The notes also provided an additional $2 million in capital for
revolving water loan programs.
As of June 30, 1995, the State's total general obligation debt
outstanding was $431 million, leaving available to the Sate $725 million of
additional general obligation borrowing capacity. As of October 31, 1995, the
outstanding debt was $413 million, with a remaining constitutional limit of $743
million. a statutory debt limit is established in the Utah Code Annotated. It
sets the maximum general obligation bonding authority at 20% of the
appropriation limitation. Under this limitation, the State may have total
outstanding general obligation debt of approximately $558 million. As of October
31, 1995, the remaining borrowing capacity of the State under this limitation is
$145 million.
Funding for debt service on the State's general obligation bonds is
usually appropriated from the General Fund and transferred to the various bond
sinking funds within the Debt Service Fund. All State general obligation bond
and certain revenue bond principal and interest payments are made from
individual sinking funds within the Debt Service Fund. Investment earnings on
moneys held in the sinking funds (except as may be required by the proceedings
authorizing the issuance of particular series of bonds), transfers from the
General Fund or Special Revenue Funds and certain pledged revenues are the only
sources of funding for this fund.
The outstanding general obligation bonds of the State were rated
"Aaa by Moody's, "AAA" by Standard & Poor's, and "AAA" by Fitch as of July 1,
1995.
FACTORS AFFECTING WASHINGTON FUND
General Economic Conditions. The state of Washington was created by
an enabling act of Congress in 1889. The state is located on the Pacific Coast
in the northwestern corner of the continental United States. Washington
comprises 68,139 square miles. On the west side of the state, high mountains
rise above coastal waters. The mild moist climate in western Washington makes
this region excellent for dairy farming and the production of flower bulbs. The
forests of the Olympic Peninsula are among the rainiest places in the world.
Washington's location makes it a gateway for land, sea, and air travel to Alaska
and the Pacific Rim countries. Its coastline has hundreds of bays and inlets
that make excellent harbors. East of the Cascade Mountain Range, farmers raise
livestock and wheat on large ranches. Washington leads the nation in apple
production and the state produces large amounts of lumber, pulp, paper, and
other wood products.
The State's population reached an estimated 5,429,900 in April 1995,
with an annual growth rate of more than 2% despite slower economic growth since
1990. In fiscal year 1995, Washington's population growth remained relatively
strong, with an estimated net migration of 57,400 people between April 1, 1994
and April 1, 1995. This was only slightly higher than the 55,7000 increase
recorded in the previous fiscal year, but still substantially above the 30- year
historical average of approximately 40,000 net migrants per year.
The City of Seattle, located in northwestern Washington, is the
largest city in the Pacific Northwest and serves as the King County seat. King
County and the adjacent counties to the north, Snohomish and Island Counties,
comprise the Seattle Primary Metropolitan Statistical Area ("PMSA"), which is
the fourth largest metropolitan center on the Pacific Coast and biggest single
component of the State's economy. The population in Seattle declined gradually
to 488,200 in 1986 and since that time has increased to 531,400 in 1994. The
percent of State residents living east of the Cascades, which had remained
stable at 25% throughout the 1970's, declined to nearly 20% by 1990. Since 1990
the pace of growth picked up in several eastern cities, including Spokane, as
growth began to slow in the Puget Sound area.
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The economic base of the State includes manufacturing and service
industries as well as agricultural and timber production. As the State's largest
employer, the Boeing Company, is preeminent in aircraft manufacture and is
headquartered in Seattle. Boeing exerts a significant impact on overall State
production, employment and labor earnings. Workforce reductions at Boeing and
other aerospace companies claimed 7,100 jobs in Fiscal Year 1995, bringing total
employment loss in aerospace to almost 28,000 since the Boeing Company began
reducing the size of its work force in the second quarter of Fiscal Year 1990.
As of December, 1995, Boeing employed approximately 70,000 people state-wide.
While the primary activity of Boeing is the manufacture of commercial aircraft,
Boeing has played leading roles in aerospace and military missile programs for
the United States and has undertaken a broad program of diversification
activities including Boeing Information and Support Services. In 1995, Boeing
had $19.515 billion in sales and net earnings of $329 million, and a backlog of
orders totaling $72.3 billion. While Boeing has dominated manufacturing
employment, other manufacturers have experienced growth, thus reducing Boeing's
percentage of total manufacturing jobs in the State. The most significant growth
in manufacturing jobs, exclusive of aerospace, has occurred in high
technology-based companies.
The highest employment growth in the State between 1981 and the
present occurred in the services sector, although rate of growth has shown small
but consistent decline since 1990 from 7% to 3.5% forecast for 1994. As the
business, legal, and financial center of the State, Seattle ranks ninth in the
country in the number of downtown hotel rooms. The Washington State Convention
and Trade Center, occupying 370,000 square feet at an investment of $152 million
opened in June 1988. The convention facility has the capacity for events
involving as many as 11,000 people. The State's natural attractions include the
Olympic and Cascade Mountain Ranges, Mt. Rainier, Mt. St. Helens National
Volcanic Monument, Puget Sound and the ocean beaches. Tourists also enjoy the
State's wineries. Seven of the ten largest wine producers in the Pacific
Northwest are located in the State.
Natural forests cover more than 40% of the State's land area. Forest
products rank second behind aerospace in value of total production. 2.6% of
non-farm employment is in the forest products industry, with The Weyerhaeuser
Company being the largest employer. Productivity in the State's forest products
industry increased steadily from 1980 to 1990; however, since 1991 recessionary
influences have resulted in a production decline, although a leveling and slight
increase in employment was projected for 1994. A continued decline in overall
production during the next few years is expected due to federally imposed
limitations on the harvest of old-growth timber and the inability to maintain
the recent record levels of production increases. Although continued decline in
unemployment may be anticipated in certain regions, the impact is not expected
to significantly affect the State's overall economic performance.
Agriculture, combined with food processing, is the State's most
important industry. The State's major products, wheat, milk, apples and cattle,
comprise 55% of total production. The value of agricultural production was $2.6
billion in 1992. Growth in agricultural production, including potatoes and hay,
was an integral factor in the State's economic growth in the late 1980's and
early 1990's.
On a combined basis, employment in the government sector represents
approximately 19% of all wage and salary employment in the State. Seattle is the
regional headquarters of a number of federal government agencies, and the State
receives an above-average share of defense expenditures. Major federal
installations include Navy bases at Bremerton, Whidbey Island and Bangor;
Everett is the site of a new Naval home port; an Air Force base (McChord) and an
Army base (Fort Lewis) are located in the Tacoma area. As part of the
President's plan to reduce the federal deficit, the Secretary of Defense has
proposed spending cuts that would include the Puget Sound Naval Shipyard and the
Bangor Trident Submarine Base in Kitsap County. None of the military
installations in the State are included among those bases proposed for closure
in 1995. Recent declines of naval and civilian personnel in Kitsap County have
been offset by increases in army personnel in Pierce County. During 1994, Army
unit reassignments to Fort Lewis from Europe and parts of the United States
increased troop strength by more than 5,000. At present no major additions or
reductions to troop strength at Fort Lewis have been made. The long term outlook
is for relative stability.
Budgetary Process. The Governor is required to submit a budget to
the state Legislature no later than December 20 of the year preceding
odd-numbered year sessions of the Legislature. The budget is a proposal for
expenditures in the ensuing biennial period based upon anticipated revenues from
the sources and rates existing by law at the time of submission of the budget.
The appropriated budget and any necessary supplemental budgets are legally
required to be adopted through the passage of biennial appropriation bills by
the Legislature and approved by the Governor. Biennial operating appropriations
are generally made at the fund/account and agency level, however, in a
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few cases, biennial appropriations are made at the fund/account and
agency/program level. Biennial capital appropriations are generally made at the
fund/account, agency, and project level.
Biennial legislative appropriations are strict legal limits on
expenditures/expenses, and over expenditures are prohibited. All appropriated
and non-appropriated/allotted funds are further controlled by the executive
branch through the allotment process. This process allocates the
expenditure/expense plan into monthly allotments by program, source of funds,
and object of expenditures. According to statutes, except under limited
circumstances, the original biennial allotments are approved by the Governor and
may be revised only at the beginning of the second year of the biennium and must
be initiated by the Governor.
Proprietary funds earn revenues and incur expenses not covered by
the allotment process. Budget estimates are generally made outside the allotment
process according to prepared business plans. These proprietary fund business
plan estimates are adjusted only at the beginning of each fiscal year.
Additional fiscal control is exercised through various means. OFM is
authorized to make expenditure/expenses allotments based on availability of
unanticipated receipts, mainly federal government grant increases made during a
fiscal year. State law does not preclude the over expenditure of allotments
although, the statute requires that the Legislature be provided an explanation
of major variances.
Revenues and Expenditures. The General Fund accounts for all general
government financial resources and expenditures not required to be accounted for
in other funds. Fiscal Year 1995 revenues in the General Fund increased by $670
million or 5.9%. Based on the November 1995 forecast by the ERFC, General
Fund-State revenues for the 1995-1997 Biennium are forecast to be about $17.669
billion, an increase of 6.7% over the previous biennium in nominal terms. In
real terms and on a constant rate and base, the revenue growth will be about
4.9%. Tax changes enacted during the 1994 legislative session reduced revenues
for the 1995-1997 Biennium by $192 million; additional changes during the 1995
legislative session and the special session further reduced revenues for the
1995 Biennium by $252 million. Without these legislative reductions, the revenue
growth for the 1995-1997 Biennium would have been 9.6%
Governmental activities are accounted for in four governmental fund
types: the general, special revenue, debt service, and capital projects funds.
Revenues for all governmental funds totaled $15.5 billion for the fiscal year
ended June 30, 1995. This represents an increase of 6.2% over revenue for the
fiscal year ended June 30, 1994. Taxes, the largest source of governmental
revenue, produced 61% of revenues. Although this percentage is a slight decrease
from Fiscal Year 1994, actual tax revenues increased by $447 million. This
increase was attributable to growth in the state's population and personal
income during Fiscal Year 1995 which increased retail sales and use tax
collections by $93 million or 2.2%. Also, during Fiscal Year 1995, the federal
government grants-in-aid increased by $291 million or 7.8%.
Claims and judgments payable is materially comprised of three
activities: workers' compensation, risk management, and state employees'
insurance. The Workers' Compensation Fund, an enterprise fund, establishes a
liability for both reported and incurred but not reported insured events, which
includes estimates of both future payments of losses and related claim
adjustment expenses. At June 30, 1995, $23.4 billion of unpaid claims and claim
adjustment expenses are presented at their net present value of $10.4 billions.
The $10.4 billion claims and claim adjustment liabilities as of June 30, 1995,
includes $4.7 billion for supplemental pension cost of living adjustments (COLA)
that by statute are not to be fully funded. The remaining $5.7 billion in claims
liabilities is fully funded by $6.7 billion in assets, including $6.2 billion of
long-term investments, held for payment of the claims.
The Risk Management Fund, an internal service fund, reports claims
and judgment liabilities when it becomes probable that a loss has occurred and
the amount of that loss can be reasonably estimated. The state and its component
public authorities are defendants in a significant number of lawsuits pertaining
to property and casualty matters. As of June 30, 1995, outstanding and
actuarially determined claims against the state and its public authorities were
$113.8 million for which the state has recorded a liability. At June 30, 1995,
the Risk Management Fund held $69.3 million in cash equivalents designated for
payment of these claims. Of this amount, $52.6 million has been accumulated
under the state's Self Insurance Liability Program initiated in 1990. This Self
Insurance Liability Program is intended to provide funds for the payment of all
claims resulting from accidents after June 30, 1990. The
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state is restricted by law from accumulating funds in the Self Insurance
Liability Program in excess of 50% of total outstanding and actuarially
determined claims. Current projections indicate that the state will reach this
limit by June 30, 1996.
The State Employees' Insurance Fund, an internal service fund,
establishes a liability when it becomes probable that a loss has occurred and
the amount of that loss can be reasonably estimated. Liabilities include an
actuarially determined amount for claims that have been incurred but not
reported. Because actual claims liabilities depend on various complex factors,
the process used in computing claims liabilities does not necessarily result in
an exact amount. At June 30, 1995, the state held $31.1 million in investments
designated for payment of state employees' insurance claims.
Debt Administration. The State Constitution and enabling statutes
authorize the incurrence of state general obligation debt, to which the state's
full faith, credit, and taxing power are pledged, either by the Legislature or
by a body designated by statute (presently the State Finance Committee). Bonds
payable at June 30, 1995 consisted of bonds issued by the state of Washington
and accounted for in the General Long-Term Obligations Account Group, and
certain state agency bonds accounted for in proprietary funds. During Fiscal
Year 1995, the state of Washington maintained its "AA" rating from Fitch
Investors Service and Standard & Poor's Corporation, and its "Aa" rating from
Moody's Investors Service.
General Obligation Bonds. General obligation bonds have been
authorized and issued primarily to provide funds for acquisition and
construction of capital facilities for public and common schools, higher
education, public and mental health, corrections, conservation, and maintenance
and construction of highways, roads, and bridges. The state also issued bonds
for assistance to municipalities for construction of water and sewage treatment
facilities and corrections facilities. Additionally, bonds are authorized and
issued to provide for the advance refunding of general obligation bonds
outstanding.
Zero Interest Rate General Obligation Bonds. Zero interest rate
general obligation bonds have been authorized and issued primarily to provide
funds for acquisition and construction of public administrative buildings and
facilities, and capital facilities for public and common schools and higher
education. Total debt service (principal and interest) requirements for zero
interest rate general obligation bonds to maturity as of June 30, 1995 was
approximately $492 million. As of June 30, 1995, zero interest rate general
obligation bonds outstanding totaled $208 million while bonds authorized but
unissued equaled zero.
Limited Obligation Bond. Limited obligation bonds have been
authorized and issued to provide funds for public school plant facilities;
state, county, and city arterials; and state capital buildings and facilities.
These bonds are payable primarily from dedicated revenue of the state's motor
vehicle fuel excise tax and other miscellaneous dedicated revenue generated from
assets such as harbors and tidelands, park, and land grants. Total debt service
(principal and interest) requirements for limited obligation bonds to maturity
at June 30, 1995 was approximately $8.1 million. As of June 30, 1995, limited
obligation bonds outstanding totaled $7 million while bonds authorized but
unissued equaled zero.
Revenue Bonds. Current state statutes empower certain state agencies
to issue bonds that are not supported, or are not intended to be supported, by
the full faith and credit of the state. These bonds pledge income derived from
acquired or constructed assets for retirement of the debt and payment of the
related interest. Revenue bonds issued by individual agencies are supported by
fees, rentals, and tolls assessed to users. Primary issuing agencies are the
State's Public Universities and various Community Colleges. Total debt service
(principal and interest) for revenue bonds to maturity at June 30, 1995 was
approximately $310 million. As of June 30, 1995, revenue bonds outstanding
totaled $162 million while bonds authorized but unissued equaled zero.
Certificates of Participation. The office of the State Treasurer
continued its administration of the state certificates of participation program
("COPs")which has been in existence since Fiscal Year 1990. This program enables
state agencies to finance the acquisition of real and personal property at tax
exempt interest rates realizing substantial savings over vendor financing. The
state's publicly-offered equipment certificates of participation have been rated
"A" by both rating agencies which rely on the centralized oversight of the State
Treasurer and the Office of Financial Management as a strong credit element in
the rating. In the real estate component of the financing program,
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certain projects have been rated "A1" by Moody's Investors Service as a
reflection of their essentialness to state government operations. As of June 30,
1995, there were outstanding $193 million in certificates of participation.
Underlying this amount were agency certificates originating from 73 agencies
amounting to $178.5 million with the balance on deposit with the trustee either
for use in the program (unissued proceeds) or to satisfy reserve requirements.
These programs are currently funded using a combination of publicly offered
securities and bank financial services master installment agreements.
FACTORS AFFECTING WISCONSIN FUND
General Economic Conditions. Wisconsin provides a full range of
services which include education, health and social services, transportation,
law, justice, public safety, recreation and resource development, public
improvements and general administrative services. The State's economy remains
strong. Unemployment fell to 3.7% for all of 1995, the lowest rate since 1969.
This is well below the national rate of 5.6% and is the ninth lowest
unemployment rate in the country. Manufacturing jobs set an all-time high in
1995 at 596,000 eclipsing the old mark of 591,000 set in 1979. Construction
employment increased to 102,800 in 1995, breaking the record set in 1994, while
total non-farm employment increased to 2,555,000, also a new record. In 1995,
Wisconsin's jobs increased 2.6% compared to 2.3% growth nationally. However,
looking ahead, continued strong gains in employment will be more difficult.
Employment growth is expected to slow in 1995. Manufacturing payrolls are
expected to shrink in early 1995, as high credit costs dampen spending on new
homes, cars, and other consumer goods. Losses in durable manufacturing, most
notably the elimination of 2,000 jobs from engine manufacturer Briggs and
Stratton Co. in Milwaukee, will contribute to slowing overall employment growth
to a projected 1.6% in 1995. Unemployment should remain below 4% for the year
but employment growth will slow to about 1%. The strongest gains in employment
will be construction, trade and services.
Wisconsin's personal income growth will be affected by the slowdown
in employment growth. Personal income increased 5.7% in 1995 and should increase
by 3.7%, faster than inflation. However, the slowdown in job growth will
restrain income gains to increases below the rest of the country for 1996, 4.9%.
By 1997, income gains should match the pace of national income growth, about
4.5%.
In 1995, the State continued its efforts to expand existing State
business and attract new businesses to Wisconsin. In 1995, $11.4 million was
awarded in grants and loans from the Wisconsin Development Fund for major
economic development projects, customized labor training and technology
development. In addition, the State operates a variety of programs that target
minority business development, development zones and community-based economic
development. The State expended $8.2 million in 1995 to market Wisconsin as a
tourism destination. In Calendar Year 1994, the tourism industry created
directly and indirectly 147,149 jobs and $5.6 billion in expenditures.
Wisconsin's Clean Water Fund program provides financial assistance
to municipalities for the planning, design and construction of pollution
abatement facilities - primarily for wastewater treatment. Funding is provided
from the federal state revolving fund grant authorized through the Water Quality
Act, and through four State programs backed by State revenue and general
obligation bonds. In fiscal year 1995, the Clean Water Fund reached agreements
with municipalities amounting to $116.7 million, bringing the total amount of
loans and grants awarded by the program to $761.7 million since its inception in
1991.
Welfare reform initiatives moved forward in Wisconsin in fiscal year
1995 with the implementation of the Parental and Family Responsibility program
and the Two-Tier Demonstration project, each in four counties on July 1, 1994.
In addition, the Work Not Welfare initiative, one of the first programs in the
nation to test time-limited benefits, began in January 1995 in two counties. As
a result of ongoing welfare reform efforts and a strong economy the AFDC
caseload dropped from 76,457 in June 1994 to 71,485 in June 1995, a reduction of
6.5% and the lowest level since the early 1980's. Wisconsin continued its
commitment to care in the community for those with long term care needs by
increasing the Community Options Program by an additional 1,901 slots, bringing
the total to 15,543 slots, and increasing the GPR commitment by $8.7 million,
bringing the total to $70.9 million GPR annually.
In fiscal year 1995, the legislature and Governor acted to fulfill
their commitment to increase the State's share of school costs to 66.7% in
fiscal year 1997. To facilitate reaching this goal, $171 million was added to
the $103 million fiscal year 1995 school aid increase originally approved in the
1993-95 biennial budget, bringing the
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total fiscal year 1995 State school aid increase to $274 million. This $274
million increase is the largest dollar increase in school aid in the State's
history and resulted in a statewide 1994 school property tax increase of only
0.3%, the smallest levy increase since 1973. Full implementation of the
two-thirds State funding commitment in Fiscal Year 1997 will result in the
largest reduction in the school property tax levy in the State's history.
Budgetary Process. The State Constitution requires the Legislature
to enact a balanced budget. The State's fiscal year runs from July 1 through
June 30 of the following year. State law establishes procedures for the budget's
enactment. The Secretary of Administration, under the direction of the Governor,
compiles all budget information and prepares an executive budget consisting of
the planned operating expenditures and revenues of all State agencies. The
Department of Revenue furnishes forecasts of tax revenues to the Department of
Administration. The budget is submitted to the Legislature on or about February
15 of each odd-numbered year. Upon concurrence by both houses of the Legislature
in the appropriations and revenue measures embodied in the budget bill, the
entire bill is submitted to the Governor. The Governor is empowered to sign the
bill into law or to veto all or part of the bill. If the Governor vetoes any
portions, those items may be reconsidered in accordance with the rules of each
house and, if approved by two-thirds of the members of each house, will become
law notwithstanding the Governor's veto. In the event that a budget is not in
effect at the start of a fiscal year, the prior year's budget serves as the
budget until such time a new one is enacted.
State law prohibits the enactment of legislation which would cause
the estimated General Fund balance to be less than 1% of the general purpose
revenue appropriations for that fiscal year. For the 1995-1996 fiscal year and
1996-1997 fiscal year, the statutorily required reserves are $83 million and $92
million respectively. The effect of the State law provision is to divide the
year-ending General Fund balance into two components: the statutorily required
reserve and the amount above such reserve.
The Statutes provide that if, following the enactment of the budget,
the Secretary of Administration determines that budgeted expenditures will
exceed revenues by more than one-half of one percent of general purpose
revenues, no action can be taken regarding approval of expenditure estimates.
Further, the Secretary of Administration must notify the Governor, the
Legislature and its Joint Committee on Finance, and the Governor must submit a
bill correcting the imbalance. If the Legislature is not in session, the
Governor must call a special session to take up the matter.
The Secretary of Administration also has statutory power to order
reductions in the appropriations of state agencies (which represent less than
one-third of the General Fund budget). The Secretary of Administration may also
temporarily reallocate free balances of certain funds to other funds which have
insufficient balances and, further, may prorate or defer certain payments in the
event current or projected balances are insufficient to meet current
obligations. In such an event, the Department of Administration may also request
the issuance of operating notes by the Building Commission.
The 1995-1997 State budget provides for a reorganization of State
government that occurs between July 29, 1995 and July 1, 1996. This
reorganization is intended to improve accountability, consolidate similar
functions, provide a better framework to administer policy changes and improve
government efficiency and effectiveness. The reorganization creates two
departments. The Department of Tourism initiates operations on January 1, 1996,
and will perform various duties previously conducted within parts of the
Department of Development and Department of Natural Resources. The Department of
Financial Institutions commences operations on July 1, 1996 and will perform
duties currently conducted within the Offices of the Commissioners of Banking,
Savings and Loan, Securities, and Credit Unions.
This reorganization renames the Department of Public Instruction the
Department of Education and transfers revised duties of the State Superintendent
of Public Instruction to the new Office of the State Superintendent of Public
Instruction. These actions were to go into effect on January 1, 1996; however,
the State Supreme Court issued a temporary injunction on December 27, 1995 that
delays the renaming of the Department of Public Instruction and transfer of
revised duties of the State Superintendent of Public Instruction. Effective July
1, 1996, this reorganization also renames other State Departments and includes
other components for reorganization in eight other functions groupings as well.
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Revenues and Expenditures. The State has an extremely diverse
revenue-raising structure. Approximately forty-four percent of the total revenue
is derived from the various taxes levied by the State. The remainder comes from
the federal government and from various kinds of fees, licenses, permits and
service charges paid by users of specific services, privileges or facilities.
State expenditures are categorized under eight functional categories
and three distinct types of expenditures within each. The eight functional
categories are: Commerce, Education, Environmental Resources, Human Relations
and Resources, General Executive, Judicial, Legislative, and General
Appropriations.
As of June 30, 1995, the State ended the fiscal year on a statutory
and unaudited basis with an unreserved, undesignated balance of $401 million. On
an all-funds basis, the total amount available was $23.319 billion consisting of
(I) a beginning balance of $235 million, (ii) tax revenues of $8.577 billion and
(iii) nontax revenues of $14.507 billion. Total disbursements and reserves were
$22.918 billion, resulting in the balance stated previously. On a general-fund
basis the total amount available was $13.495 billion consisting of (I) the same
beginning balance, (ii) tax revenues of $7.816 billion and (iii) nontax revenues
of $5.444 billion. Total disbursements and reserves were approximately $13.94
billion, resulting in the same balance as described on an all-fund basis.
For fiscal year ending June 30, 1996, the budget on an all-funds
basis projects a balance of $442 million. Total available revenues are estimated
to be $20.686 billion consisting of (I) a beginning balance of $337 million,
(ii) tax revenues of $8.218 billion and (iii) nontax revenues of $12.131
billion. Total disbursements and reserves are estimated to be $20.327 billion,
consisting of net disbursements of $20.187 billion and reserves of $140 million.
This results in an estimated balance of $359 million which, when combined with
statutorily required balance of $83 million, results in a balance at June 30,
1996 of $442 million.
Since 1984 the State has issued operating notes each year in
anticipation of cash-flow imbalances, primarily experienced in November and
December. These operating notes eliminated the need to prorate or defer large
local assistance payments or to reallocate balances in other State funds. During
the fiscal year ending June 30, 1995 the State issued $350 million of operating
notes. The operating notes were issued on July 7, 1994 and matured on June 15,
1995. Operating notes are not general obligations of the State and are not on a
parity with State general obligations.
The Dane County Circuit Court has specified the remedies resulting
form its 1991 decision regarding the source of payment for certain additional
pension amounts. One part of the remedy required a lump-sum payment from the
General Fund to the Employee Trust Fund to be made by August 1994. The payment
is estimated to be $95.3 million. In addition, the State is expected to incur
other costs of about $0.5 million to implement the remedy and an amount yet to
be determined to pay plaintiffs' attorneys fees. The monetary remedy has been
stayed by the Dane Count Circuit Court pending entry of a final, nonappealable
judgment. All parties have filed appeals or cross-appeals. It is possible that
the amount of the remedy may be increased or decreased, perhaps substantially,
or eliminated. The 1995-1996 and 1996-1997 budgets do not specifically provide
for this payment.
Debt Administration and Limitation. At the inception of statehood,
constitutional limitations severely restricted the issuance of direct State
debt. Prior to 1969, independent nonstock, nonprofit corporations were
established to issue debt on behalf of the State. In April 1969, the voters of
the State, by referendum, adopted an amendment to the Constitution that
authorized the State to borrow money directly and simultaneously terminated the
use of the corporations for financing State construction. Legislation that
established specific implementation powers was subsequently passed in December
1969, whereupon the State first issued general obligation bonds. To date, the
Legislature has authorized the issuance of general obligations for 59 distinct
purposes and has limited the amount of general obligations which may be issued
for each purpose. The purposes for which State general obligations may be issued
are set forth in the Wisconsin Constitution, which provides the basis for the
State's general obligation borrowing program. It permits three types of
borrowing: (1) to acquire, construct, develop, extend, enlarge or improve land,
waters, property, highways, railways, buildings, equipment or facilities for
public purposes; (2) make funds available for veterans housing loans; and, (3)
fund or refund any outstanding State general obligations. There is no
constitutional requirement that the issuance of general obligations receive the
direct approval of the electorate.
B-57
The Wisconsin Constitution and State Statutes limits the amount of
debt the State can contract in total and in any calendar year. In total, debt
cannot exceed five percent of the value of all taxable property in the State.
The amount of debt contracted in any calendar year is limited to the lesser of
three-quarters of one percent of aggregate value of taxable property or 5
percent of aggregate value of taxable property less net indebtedness at January
1. Currently, the annual limit is $1,511,535,818 and the cumulative debt limits
is $10,076,905,450 (of which the amount available is 46,832,826,001). The lesser
amount is $1,511,535,818. A refunding bond issue is not taken into account for
purposes of the annual debt limit, and a refunded bond issue is not taken into
account for purposes of the cumulative debt limits. Interest scheduled to accrue
on any obligation that is not payable during the current fiscal year is treated
as debt and taken into account for purposes of the debt limitations.
The $158,080,000 State of Wisconsin General Obligation Bonds of
1996, Series A, are the State's first publicly offered general obligation bond
issue in 1996. The State anticipates several competitive sales of general
obligations for governmental purposes. The State anticipates the competitive
sale of at least one general obligation issue for the veterans housing loan
program and several private sales of general obligations for the Clean Water
Fund program. The amounts will be based on cash needs and market conditions. The
State is currently considering a general obligation refunding issue which the
State would undertake to achieve debt service savings. The size of this
transaction is estimated to be $75-$125 million.
Although all general obligation bonds and notes issued by the State
are supported by its full faith, credit and taxing power, a substantial amount
of the indebtedness of the State is issued with the expectation that debt
service payments will not impose a direct burden on the State's taxpayers and
its general revenue sources. Similarly, a portion of the indebtedness issued by
nonstock, nonprofit corporations on behalf of the State prior to 1970 and backed
by lease-rental obligations of various State agencies was issued with the
expectation that the rental obligations of the State would not be discharged
from General Fund revenues. At June 30, 1995, State of Wisconsin bonds had a
rating of Aa from Moody's Investors Services and a rating of AA from Standard
and Poor's Corporation.
INSURANCE
Voyageur anticipates that substantially all of the insured
Tax-Exempt Obligations in each Insured Fund's investment portfolio will be
covered by either Primary Insurance or Secondary Market Insurance. However, as a
non-fundamental policy, the Insured Funds must obtain Portfolio Insurance on all
Tax-Exempt Obligations requiring insurance that are not covered by either
Primary Insurance or Secondary Market Insurance. Both Primary Insurance and
Secondary Market Insurance are non-cancelable and continue in force so long as
the insured security is outstanding and the respective insurer remains in
business. Premiums for Portfolio Insurance, if any, would be paid from Fund
assets and would reduce the current yield on its investment portfolio by the
amount of such premiums.
Because Portfolio Insurance coverage terminates upon the sale of an
insured security from a Fund's portfolio, such insurance does not have an effect
on the resale value of the security. Therefore, unless a Fund elects to purchase
Secondary Market Insurance with respect to such securities or such securities
are already covered by Primary Insurance, it generally will retain any such
securities insured by Portfolio Insurance which are in default or in significant
risk of default, and will place a value on the insurance equal to the difference
between the market value of the defaulted security and the market value of
similar securities which are not in default.
The Insured Funds are authorized to obtain Portfolio Insurance from
insurers that have obtained a claims-paying ability rating of "AAA" from S&P or
"Aaa" (or a short-term rating of "MIG-1") from Moody's, including AMBAC
Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIA"), Financial Guaranty Insurance Company ("FGIC") and Financial Security
Assurance, Inc. ("FSA").
A Moody's insurance claims-paying ability rating is an opinion of
the ability of an insurance company to repay punctually senior policyholder
obligations and claims. An insurer with an insurance claims-paying ability
rating of Aaa is adjudged by Moody's to be of the best quality. In the opinion
of Moody's, the policy obligations of an insurance company with an insurance
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position. An S&P insurance claims-paying ability rating is
an assessment of an operating insurance company's financial capacity to meet
obligations under an insurance policy in
B-58
accordance with its terms. An insurer with an insurance claims-paying ability
rating of AAA has the highest rating assigned by S&P. The capacity of an insurer
so rated to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time.
An insurance claims-paying ability rating by Moody's or S&P does not
constitute an opinion on any specific insurance contract in that such an opinion
can only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet non-policy
obligations (i.e., debt contracts).
The assignment of ratings by Moody's or S&P to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of insurance claims-paying ability
ratings. The likelihood of a timely flow of funds from the insurer to the
trustee for the bondholders is a likely element in the rating determination for
such debt issues.
Each of AMBAC, MBIA, FGIC, and FSA has a insurance claims-paying
ability rating of Aaa from Moody's and AAA from S&P.
AMBAC has received a letter ruling from the Internal Revenue Service
which holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Insured Tax Free Funds, under policy provisions
substantially identical to those contained in its municipal bond insurance
policy, will excludable from federal gross income under Section 103(a) of the
Internal Revenue Code.
As of December 31, 1995, the total admitted assets (unaudited) of
AMBAC were approximately $3.8 billion with statutory capital (unaudited) of
approximately $1.2 billion. Statutory capital consists of the AMBAC's statutory
contingency reserve and policyholders' surplus.
As of December 31, 1995, the total admitted assets (unaudited) of
MBIA were approximately $2.4 billion with total liabilities (unaudited) of
approximately $2.2 billion and total capital and surplus (unaudited) of
approximately $860 million.
As of December 31, 1995, the total admitted assets (unaudited) of
FGIC were approximately 2.2 billion total capital and surplus (unaudited)
approximately $1.3 billion.
As of December 31, 1995, admitted assets (unaudited) of FSA were
approximately $1 billion with statutory capital (unaudited) of approximately
$644 million.
None of AMBAC, MBIA, FGIC and FSA or any associate thereof, has any
material business relationship, direct or indirect, with the Funds.
AMBAC, MBIA, FGIC and FSA are subject to regulation by the
department of insurance in each state in which they are qualified to do
business. Such regulation however, is not a guarantee that any of AMBAC, MBIA,
FGIC and FSA will be able to perform on its contractual insurance in the event a
claim should be made thereunder at some time in the future.
The information relating to AMBAC, MBIA, FGIC and FSA set forth
above, including the financial information, has been furnished by such
corporations or has been obtained from publicly available sources. Financial
information with respect to AMBAC, MBIA, FGIC and FSA appears in reports filed
by AMBAC, MBIA, FGIC and FSA with insurance regulatory authorities and is
subject to audit and review by such authorities. No representation is made
herein as to the accuracy or adequacy of such information with respect to AMBAC,
MBIA, FGIC and FSA or as to the absence of material adverse changes in such
information subsequent to the date thereof.
B-59
BOARD MEMBERS AND EXECUTIVE OFFICERS OF THE FUNDS
The Board members and officers of the Funds, their position with the
Funds and their principal occupations during the past five years are set forth
below. In addition to the occupations set forth below, the Directors and
officers also serve as directors and trustees or officers of various other
closed-end and open-end investment companies managed by Voyageur.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION PAST FIVE YEARS AND OTHER AFFILIATIONS
<S> <C> <C>
Clarence G. Frame, 77 Director Of counsel, Briggs & Morgan law firm.
W-875
First National Bank Building
332 Minnesota Street
St. Paul, Minnesota 55101
Richard F. McNamara, 63 Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle Minneapolisbased holding company consisting
Minneapolis, Minnesota 55439 of seventeen companies in industrial
plastics, sheet metal, automotive
aftermarket, construction supply,
electronics and financial services, since
1966.
Thomas F. Madison, 60 Director President and CEO of MLM Partners, Inc.
200 South Fifth Street since January 1993; previously, Vice
Suite 2100 Chairman-Office of the CEO, Minnesota Mutual
Minneapolis, Minnesota 55402 Life Insurance Company from February 1994 to
September 1994; President of U.S. WEST
Communications-Markets from 1988 to 1993;
Mr. Madison currently serves on the board of
directors of Valmont Industries, Inc. (a
manufacturing company), Eltrax Systems,
Inc.(a data communications integration
company) and various civic and educational
organizations.
James W. Nelson, 54 Director Chairman and Chief Executive Officer of
81 South Ninth Street Eberhardt Holding Company and its
Suite 400 subsidiaries since 1990; prior to which he
Minneapolis, Minnesota 55440 had been President since 1976.
Robert J. Odegard, 75 Director Special Assistant to the President of the
University of Minnesota University of Minnesota from August 1984 to
Foundation April 1989 and from May 1990 to present;
1300 South Second Street Associate Vice President for Alumni
Minneapolis, Minnesota 55454 Relations and Development of the University
of Minnesota from 1970 to August 1984 and
from April 1989 to May 1990.
John G. Taft, 41 President President (since 1991) and Director (since
90 South Seventh Street (Executive 1993) of Voyageur; Director (since 1993) and
Suite 4400 Vice President- Executive Vice President of Voyageur Fund
Minneapolis, Minnesota 55402 Colorado Tax Distributors, Inc. ("the Underwriter ");
Free Fund Management Committee member of Voyageur from
only) 1991 to 1993.
Andrew M. McCullagh, Jr., 47 Executive Portfolio Manager of Voyageur since 1990;
717 Seventeenth Street VicePresident previously Director of Voyageur and the
Denver, Colorado 80202 (President - Underwriter from 1993 to 1995; Executive
Vice President of Voyageur since 1990.
B-60
Colorado Tax
Free Fund
only)
Jane M. Wyatt, 41 Executive Director and Chief Investment Officer of
90 South Seventh Street Vice Voyageur since 1993; Director of the
Suite 4400 President Underwriter since 1993; Executive Vice
Minneapolis, Minnesota 55402 President and Portfolio Manager of Voyageur
from 1992 to 1993; Vice President and
Portfolio Manager from 1989 to 1992.
Steven Eldredge, 40 Vice President Senior Vice President and Senior Tax Exempt
90 South Seventh Street Portfolio Manager of Voyageur since 1995;
Suite 4400 previously, portfolio manager for ABT Mutual
Minneapolis, Minnesota 55402 Funds from 1989 to 1995.
Elizabeth H. Howell, 34 Vice Vice President of Voyageur and Senior Tax
90 South Seventh Street President Exempt Portfolio Manager since 1991.
Suite 4400
Minneapolis, Minnesota 55402
James C. King, 55 Vice Director of Voyageur and the Underwriter
90 South Seventh Street President since 1993; Executive Vice President and
Suite 4400 Senior Equity Portfolio Manager of Voyageur
Minneapolis, Minnesota 55402 since 1990.
Kenneth R. Larsen, 33 Treasurer Treasurer of Voyageur and the Underwriter
90 South Seventh Street since 1990; Director of Voyageur and the
Suite 4400 Underwriter from 1990 to 1993; Secretary and
Minneapolis, Minnesota 55402 Treasurer of Voyageur and the Underwriter
from 1990 to 1993.
Thomas J. Abood, 32 Secretary Senior Vice President (since 1995) and
90 South Seventh Street General Counsel (since October 1994) of
Suite 4400 Voyageur, the Underwriter and Voyageur
Minneapolis, Minnesota 55402 Companies, Inc.; Vice President of Voyageur
and Voyageur Companies, Inc. from October 1994
to 1995; previously associated with the law
firm of Skadden, Arps, Slate, Meagher & Flom,
Chicago, Illinois from September 1988 to
October 1994.
</TABLE>
- ------------------------
The Funds do not compensate their officers. Each director or trustee
(who is not an employee of Voyageur or any of its affiliates) currently receives
a total annual fee of $26,000 for serving as a director or trustee for all of
the open-end and closed-end investment companies (the "Fund Complex") for which
Voyageur acts as investment adviser, plus a $500 fee for each special in-person
meeting attended by such director. These fees are allocated among each series or
fund in the Fund Complex based on the relative average net asset value of each
series or fund. Currently the Fund Complex consists of ten open-end investment
companies comprising 32 series or funds and six closed-end investment companies.
In addition, each director or trustee who is not an employee of Voyageur or any
of its affiliates is reimbursed for expenses incurred in connection with
attending meetings. Mr. Harley Danforth received $10,000 for services as a
consultant. The following table sets forth the aggregate compensation received
by each director from each parent entity as well as the total compensation
received by each director from the Fund Complex during the fiscal and calendar
year ended December 31, 1995.
B-61
<TABLE>
<CAPTION>
Aggregate Compensation from each Registrant
--------------------------------------------------------------------------------
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Total
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual Compensation
Funds Funds ment Free Funds ment Funds Funds II from Fund
Director Inc. Inc. Trust Inc. Trust II Inc. Inc. Complex
- -------- ---- ---- ----- ---- -------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Clarence G. Frame $4,989 $6,143 $4,056 $ 799 $ 7 $ 708 $4,329 $24,500
Richard F. McNamara $4,989 $6,143 $4,056 $ 799 $ 7 $ 708 $4,329 $24,500
Thomas F. Madison $4,989 $6,143 $4,056 $ 799 $ 7 $ 708 $4,329 $24,500
James W. Nelson $4,989 $6,143 $4,056 $ 799 $ 7 $ 708 $4,329 $24,500
Robert J. Odegard $4,989 $6,143 $4,056 $ 799 $ 7 $ 708 $4,329 $24,500
</TABLE>
THE INVESTMENT ADVISER AND UNDERWRITER
Voyageur Fund Managers, Inc., a Minnesota corporation ( "Voyageur"),
has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as each Fund's investment adviser, subject to the authority
of the Board of each Fund. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group Inc. ("DFG"), which is
owned 50% by Michael E. Dougherty and 50% by Pohlad Companies. Mr. Dougherty
co-founded the predecessor of DFG in 1977 and has served as DFG's Chairman of
the Board and Chief Executive Officer since inception. Pohlad Companies is a
holding company owned in equal parts by each of James O. Pohlad, Robert C.
Pohlad and William M. Pohlad. Certain key employees of DFG and its subsidiaries
and an employee benefit plan benefitting the employees of such companies have
been offered the opportunity to purchase voting common shares of DFG through
stock options granted with respect thereto, with the shareholdings of Pohlad
Companies and Mr. Dougherty each to be diluted proportionately by any such
purchases. Following any such purchases, Mr. Dougherty and Pohlad Companies
would each continue to own greater than 25% of the outstanding voting common
shares of DFG, and no other person or entity would own greater than 25% of such
shares. The principal executive offices of Voyageur are located at 90 South
Seventh Street, Suite 4400, Minneapolis, Minnesota 55402.
Voyageur Fund Distributors, Inc. (the "Underwriter") is the
principal distributor of the Funds' shares. With regard to the Underwriter, Mr.
Taft and Ms. Wyatt are Executive Vice Presidents and directors, Mr. Abood is
Senior Vice President and General Counsel, and Mr. Larsen is Treasurer.
INVESTMENT ADVISORY AGREEMENTS
The Funds do not maintain their own research departments. The Funds
have contracted with Voyageur for investment advice and management. Pursuant to
an Investment Advisory Agreement, Voyageur has the sole and exclusive
responsibility for the management of each Fund's portfolio and the making and
execution of all investment decisions for each Fund subject to the objectives
and investment policies and restrictions of each Fund and subject to the
supervision of each Fund's Board of Directors. Voyageur also furnishes, at its
own expense, office facilities, equipment and personnel for servicing the
investments of each Fund. Voyageur has agreed to arrange for officers and
employees of Voyageur to serve without compensation from the Funds as directors,
officers or employees of each Fund if duly elected to such positions by the
shareholders or directors of the Funds.
As compensation for Voyageur's services, each Fund is obligated to
pay to Voyageur a monthly investment advisory and management fee equivalent on
an annual basis to .50 of 1% (.40 of 1% for the Limited Term Tax Free Funds) of
its average daily net assets, respectively. The fee is based on the average
daily value of each Fund's net assets at the close of each business day.
The Investment Advisory Agreement on behalf of each Fund continues
from year to year only if approved annually (a) by the Fund's Board or by vote
of a majority of the outstanding voting securities of the Fund and (b) by vote
of a majority of board members of the Fund who are not parties to such
Investment Advisory Agreement or interested persons (as defined in the 1940 Act)
of any such party, cast in person at a meeting of the Board called for the
purpose of voting on such approval. The Investment Advisory Agreement on behalf
of each Fund may be terminated by either party on 60 days' notice to the other
party and terminates automatically upon its assignment. The Investment Advisory
Agreement also provides that amendments to the Agreement may be affected if
approved by the
B-62
Board (including a majority of the directors who are not interested persons of
Voyageur or the Fund), unless the 1940 Act requires that any such amendment must
be submitted for approval by the Fund's shareholders and that all proposed
assignments of such agreement are subject to approval by the Board of Directors
(unless the 1940 Act otherwise requires shareholder approval).
ADMINISTRATIVE SERVICES AGREEMENTS
Voyageur also acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement. Pursuant to the Administrative Services Agreements, Voyageur
provides each Fund all dividend disbursing, transfer agency, administrative and
accounting services required by such Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of each Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of the Fund's
shares or the receipt of redemption requests with respect to the Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon the Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of the Fund to be received by
each shareholder of the Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of the Fund as the Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of the Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
the Fund and Voyageur may from time to time agree upon. Pursuant to each
Administrative Services Agreement, Voyageur also provides such regulatory,
reporting and compliance related services and tasks as the Funds may reasonably
request.
As compensation for these services, each Fund pays Voyageur a
monthly fee based upon each Fund's average daily net assets and the number of
shareholder accounts then existing. This fee is equal to the sum of (i) $1.33
per shareholder account per month, (ii) $1,000 per month if the Fund's average
daily net assets do not exceed $50 million, $1,250 per month if the Fund's
average daily net assets are greater than $50 million but do not exceed $100
million, and $1,500 per month if the Fund's average daily net assets exceed $100
million, (iii) with respect to each of Colorado Tax Free Fund, Minnesota Tax
Free Fund, Minnesota Insured Tax Free Fund, Minnesota Limited Term Tax Free
Fund, Florida Limited Term Tax Free Fund, Iowa Tax Free Fund, Idaho Tax Free
Fund, and Wisconsin Tax Free Fund; 0.11% per annum of the first $20 million of
the Fund's average daily net assets, 0.06% per annum of the next $20 million of
the Fund's average daily net assets, 0.035% per annum of the next $60 million of
the Fund's average daily net assets, 0.03% per annum of the next $400 million of
the Fund's average daily net assets and 0.02% per annum of the Fund's average
daily net assets in excess of $500 million and (iv) with respect to each of
Arizona Limited Term Tax Free Fund, Arizona Tax Free Fund, Arizona Insured Tax
Free Fund, California Limited Term Tax Free Fund, California Tax Free Fund,
California Insured Tax Free Fund, Colorado Limited Term Tax Free Fund, Colorado
Insured Tax Free Fund, Florida Tax Free Fund, Florida Insured Tax Free Fund,
Kansas Tax Free Fund, Missouri Insured Tax Free Fund, New Mexico Tax Free Fund,
Oregon Insured Tax Free Fund, Utah Tax Free Fund, Washington Insured Tax Free
Fund, National Limited Term Fund, National Tax Free Fund, National Insured Tax
Free Fund and North Dakota Tax Free Fund, 0.11% per annum of the first $50
million of the Fund's average daily net assets, 0.06% per annum of the next $100
million of the Fund's average daily net assets, 0.035% per annum of the next
$250 million of the Fund's average daily net assets, 0.03% per annum of the next
$300 million of the Fund's average daily net assets and 0.02% per annum of the
Fund's average daily net assets in excess of $700 million. For purposes of
calculating average daily net assets, as such term is used in the Administrative
Services Agreements, each Fund's net assets equal its total assets minus its
total liabilities. Each Fund also reimburses Voyageur for its out-of-pocket
expenses in connection with Voyageur's provision of services under the Fund's
Administrative Services Agreement.
Each Administrative Services Agreement is renewable from year to
year if the directors approve it in the same way they approve the Investment
Advisory Agreements. The Administrative Services Agreements can be terminated by
either party on 60 days' notice to the other party and the Agreements terminate
automatically upon their assignment. The Administrative Services Agreements also
provide that amendments to the Agreement may be
B-63
effected if approved by the Board (including a majority of the board members who
are not interested persons of Voyageur or the Fund), unless the 1940 Act
requires that any such amendment must be submitted for approval by the Fund's
shareholders and that all proposed assignments of such agreement are subject to
approval by the Board (unless the 1940 Act otherwise requires shareholder
approval thereof).
EXPENSES OF THE FUNDS
Voyageur is contractually obligated to pay the operating expenses of
each Fund (excluding interest, taxes, brokerage fees and commissions, Rule 12b-1
fees, if any, and, with respect to the Insured Funds, insurance premiums on
portfolio securities) which exceed 1% of the Fund's average daily net assets on
an annual basis up to the amount of the investment advisory and management fee,
and, with respect to the Insured Tax Free Funds up to the combined amount of the
investment advisory and management fee and the dividend disbursing,
administrative and accounting services fee. In addition, Voyageur reserves the
right to voluntarily waive its fees in whole or part and to voluntarily absorb
certain other of the Funds' expenses. Any such waiver or absorption, however, is
in Voyageur's sole discretion and may be lifted or reinstated at any time. In
order to comply with requirements of California law, the California Funds and
National Funds have undertaken to limit expenses in certain circumstances such
that aggregate annual expenses will not exceed 2-1/2% of the first $30 million
of the average net assets, 2% of the next $70 million of the average net assets
and 1-1/2% of the remaining average net assets for any fiscal year. Set forth
below is certain information regarding the investment advisory and
administrative services fees and the amounts waived, if any, by each Fund to
Voyageur during the indicated fiscal periods.
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
<S> <C> <C> <C>
Arizona Insured Tax Free Fund
1/1/95-12/31/95 $1,223,121 $ 299,757 $ 60,000
1/1/94-12/31/94 $1,298,673 $ 289,690 None
1/1/93-12/31/93 $ 990,603 $ 291,426 $ 389,913
Arizona Tax Free Fund
1/1/95-12/31/95(4) $ 14,301 $ 15,541 $ 29,842
California Insured Tax Free Fund
1/1/95-12/31/95 $ 184,315 $ 67,135 $ 90,000
11/1/94-12/31/94(1) $ 23,717 $ 9,550 $ 33,267
11/1/93-10/31/94 $ 111,570 $ 52,328 $ 163,898
11/1/92-10/31/93 $ 28,388 $ 24,463 $ 52,851
California Tax Free Fund
1/1/95-12/31/95(5) $ 4,468 $ 13,974 $ 18,442
Colorado Tax Free Fund
1/1/95-12/31/95 $1,944,802 $ 441,178 None
1/1/94-12/31/94 $2,039,009 $ 409,511 None
1/1/93-12/31/93 $1,539,825 $ 344,565 None
Florida Limited Term Tax Free Fund
1/1/95-12/31/95 $ 2,665 $ 10,995 $ 13,660
1/1/94-12/31/94 (3) $ 956 $ 11,264 $ 12,220
Florida Insured Tax Free Fund
1/1/95-12/31/95 $1,235,118 $ 325,819 $ 480,000
11/1/94-12/31/93 (1) $ 204,833 $ 76,709 $ 250,000
11/1/93-10/31/94 $1,481,786 $ 350,992 $ 805,000
11/1/92-10/31/93 $ 794,887 $ 261,534 $1,056,421
Florida Tax Free Fund
1/1/95-12/31/95(6) $ 10,974 $ 15,010 $ 25,984
B-64
Idaho Tax Free Fund
1/1/95-12/31/95(7) $ 38,282 $ 29,996 $ 68,278
Iowa Tax Free Fund
1/1/95-12/31/95 $ 193,451 $ 85,579 $ 45,000
9/1/94-12/31/94 (1) $ 56,650 $ 34,707 $ 91,357
9/1/93-8/31/94 $ 127,361 $ 70,832 $ 198,193
Kansas Tax Free Fund
1/1/95-12/31/95 $ 47,512 $ 14,005 $ 50,000
11/1/94-12/31/94 (1) $ 5,550 $ 5,993 $ 11,543
11/1/93-10/31/94 $ 22,132 $ 18,251 $ 40,383
11/1/92-10/31/93 $ 4,534 $ 15,024 $ 19,558
Minnesota Limited Term Tax Free Fund
1/1/95-12/31/95 $ 298,529 $ 114,999 None
3/1/94-12/31/94 (2) $ 272,884 $ 104,431 None
1/1/94-2/28/94 (2) $ 49,861 $ 16,471 None
1/1/93-12/31/93 $ 250,315 $ 95,608 None
Minnesota Insured Fund
1/1/95-12/31/95 $1,541,687 $ 329,546 $ 25,000
1/1/94-12/31/94 $1,561,406 $ 366,842 $ 925,000
1/1/93-12/31/93 $1,175,742 $ 258,060 $ 442,000
Minnesota Tax Free Fund
1/1/95-12/31/95 $2,229,862 $ 499,083 None
1/1/94-12/31/94 $2,241,071 $ 460,255 None
1/1/93-12/31/93 $2,015,440 $ 470,493 None
Missouri Insured Tax Free Fund
1/1/95-12/31/95 $ 250,578 $ 111,588 $ 170,000
11/1/94-12/31/94 (1) $ 32,651 $ 20,078 $ 50,000
11/1/93-10/31/94 $ 173,907 $ 79,615 $ 253,522
11/1/92-10/31/93 $ 79,101 $ 48,736 $ 127,837
National Limited Term Tax Free Fund
1/1/95-12/31/95 (8) $ 1,389 $ 7,315 $ 8,704
National Insured Tax Free Fund
1/1/95-12/31/95 $ 179,363 $ 70,870 $ 175,000
1/1/94-12/31/94 $ 154,949 $ 68,996 $ 223,945
1/1/93-12/31/93 $ 66,604 $ 38,036 $ 104,640
National Tax Free Fund
1/1/95-12/31/95 (9) $ 1,882 $ 6,361 $ 8,243
New Mexico Tax Free Fund
1/1/95-12/31/95 $ 108,209 $ 46,835 None
11/1/94-12/31/94 (1) $ 17,494 $ 12,232 $ 29,726
11/1/93-10/31/94 $ 108,865 $ 47,287 $ 135,000
11/1/92-10/31/93 $ 42,112 $ 31,103 $ 73,215
North Dakota Tax Free Fund
1/1/95-12/31/95 $ 179,121 $ 75,910 None
1/1/94-12/31/94 $ 180,617 $ 80,745 $ 157,087
1/1/93-12/31/93 $ 135,899 $ 72,879 $ 119,913
Oregon Insured Tax Free Fund
1/1/95-12/31/95 $ 103,343 $ 42,931 $ 75,000
11/1/94-12/31/94 (1) $ 12,840 $ 6,649 $ 19,489
11/1/93-10/31/94 $ 49,537 $ 33,740 $ 83,277
11/1/92-10/31/93 $ 2,080 $ 3,422 $ 5,502
B-65
Utah Tax Free Fund
1/1/95-12/31/95 $ 20,769 $ 18,829 $ 35,000
11/1/94-12/31/94 (1) $ 3,184 $ 1,757 $ 4,941
11/1/93-10/31/94 $ 20,384 $ 17,294 $ 37,678
11/1/92-10/31/93 $ 9,477 $ 18,569 $ 28,046
Washington Insured Tax Free Fund
1/1/95-12/31/95 $ 10,374 $ 12,752 $ 23,126
11/1/94-12/31/94 (1) $ 1,422 $ 2,369 $ 3,791
11/1/93-10/31/94 $ 7,561 $ 13,824 $ 21,385
11/1/92-10/31/93 $ 1,001 $ 3,702 $ 4,703
Wisconsin Tax Free Fund
1/1/95-12/31/95 $ 123,548 $ 49,595 None
9/1/94-12/31/94 (1) $ 31,634 $ 22,386 $ 54,020
9/1/94-8/31/94 $ 46,460 $ 31,486 $ 77,946
</TABLE>
(1) Effective December 31, 1994, the Fund changed its fiscal year end to
December 31.
(2) Effective February 28, 1994, Minnesota Limited Term Tax Free Fund changed
its fiscal year end to February 28 and, effective December 31, 1994,
changed back to December 31.
(3) Period from May 1, 1994 (commencement of operations) to December 31, 1994.
(4) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(5) Period from March 3, 1995 (commencement of operations) to December 31,
1995.
(6) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(7) Period from January 4, 1995 (commencement of operations) to December 31,
1995.
(8) Period from September 7, 1995 (commencement of operations) to December 31,
1995.
(9) Period from September 8, 1995 (commencement of operations) to December 31,
1995.
All costs and expenses (other than those specifically referred to as
being borne by Voyageur or the Underwriter) incurred in the operation of each
Fund are borne by the Fund. These expenses include, among others, fees of the
Board members who are not employees of Voyageur or any of its affiliates,
expenses of directors' and shareholders' meetings, including the cost of
printing and mailing proxies, expenses of insurance premiums for fidelity bond
and other coverage and, with respect to the Insured Tax Free Funds, insurance
premiums for portfolio securities, expenses of redemption of shares, expenses of
issue and sale of shares (to the extent not borne by the Underwriter under its
agreement with such Fund), expenses of printing and mailing stock certificates
representing shares of such Fund, association membership dues, charges of such
Fund's custodian, and bookkeeping, auditing and legal expenses. Each Fund will
also pay the fees and bear the expense of registering and maintaining the
registration of such Fund and its shares with the Securities and Exchange
Commission and registering or qualifying its shares under state or other
securities laws and the expense of preparing and mailing prospectuses, reports
and statements to shareholders.
RULE 12B-1 PLANS OF DISTRIBUTION; DISTRIBUTION AGREEMENTS
Each Fund has adopted a Plan of Distribution (the "Plan") relating
to the payment of certain expenses pursuant to Rule 12b-1 under the 1940 Act.
Rule 12b-1(b) provides that any payments made by a Fund in connection with the
distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing.
Rule 12b-1(b)(1) requires that such plan be approved by a vote of at
least a majority of the Fund's outstanding shares, and Rule 12b-1(b)(2) requires
that such plan, together with any related agreements, be approved by a vote of
the Board of Directors and of the directors who are not interested persons of
the Fund and have no direct or indirect financial interest in the operation of
the plan or in any agreements related to the plan, cast in person at a meeting
called for the purpose of voting on such plan or agreements. Rule 12b-1(b)(3)
requires that the plan or agreement provide, in substance:
B-66
(1) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such continuance
is specifically approved at least annually in the manner described in paragraph
(b)(2) of Rule 12b-1;
(2) that any person authorized to direct the disposition of monies
paid or payable by a Fund pursuant to its plan or any related agreement shall
provide to the Board of Directors, and the directors shall review, at least
quarterly, a written report of the amount so expended and the purposes for which
such expenditures were made; and
(3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the Board of Directors who are not
interested persons of the Fund and have no direct or indirect financial interest
in the operation of the plan or in any agreements related to the plan or by vote
of a majority of the outstanding voting securities of a Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1(c) provides that
each Fund may rely upon Rule 12b-1 only if the selection and nomination of that
Fund's disinterested directors are committed to the discretion of such
disinterested directors. Rule 12b-1(e) provides that each Fund may implement or
continue a plan pursuant to Rule 12b-1(b) only if the directors who vote to
approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under state
law, and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable
likelihood that the plan will benefit the Fund and its shareholders.
Each Fund has entered into a Distribution Agreement with the
Underwriter, pursuant to which the Underwriter acts as the principal underwriter
of each Fund's shares. The Distribution Agreement and Plan provide that the
Underwriter agrees to provide, and shall pay costs which it incurs in connection
with providing, administrative or accounting services to shareholders of each
Fund (such costs are referred to as "Shareholder Servicing Expenses") and that
the Underwriter shall also pay all costs of distributing the shares of each Fund
("Distribution Expenses"). Shareholder Servicing Expenses include all expenses
of the Underwriter incurred in connection with providing administrative or
accounting services to shareholders of the Funds, including, but not limited to,
an allocation of the Underwriter's overhead and payments made to persons,
including employees of the Underwriter, who respond to inquiries of shareholders
regarding their ownership of Fund shares, or who provide other administrative or
accounting services not otherwise required to be provided by the Funds'
investment adviser or dividend disbursing, transfer, administrative and
accounting services agent. Distribution Expenses include, but are not limited
to, initial and ongoing sales compensation (in addition to sales loads) paid to
investment executives of the Underwriter and to other broker-dealers and
participating financial institutions; expenses incurred in the printing of
prospectuses, statements of additional information and reports used for sales
purposes; expenses of preparation and distribution of sales literature; expenses
of advertising of any type; an allocation of the Underwriter's overhead;
payments to and expenses of persons who provide support services in connection
with the distribution of Fund shares; and other distribution-related expenses.
Pursuant to the provisions of the Distribution Agreements, the
Underwriter is entitled to receive a total fee each quarter at an annual rate of
.25% of the average daily net assets attributable to each Fund's Class A shares,
1.00% of the average daily net assets attributable to each Fund's Class B shares
and 1.00% of the average daily net assets attributable to each Fund's Class C
shares to pay distribution expenses. As determined from time to time by the
Board, a portion of such fees shall be designated as a "shareholder servicing
fee" and a portion shall be designated as a "distribution fee." The Board has
determined that all of the fee payable with respect to Class A shares shall be
designated a shareholder servicing fee. With respect to fees payable with
respect to Class B shares and Class C shares, that portion of the fee equal to
.25% of average daily net assets attributable to a Fund's Class B shares and
Class C shares is designated a shareholder servicing fee and that portion of the
fee equal to .75% of average daily net assets attributable to a Fund's Class B
shares and Class C shares is designated a distribution fee. Amounts payable to
the Underwriter under the Distribution Agreement may exceed or be less than the
Underwriter's actual distribution expenses and shareholder servicing expenses.
In the event such distribution expenses and shareholder servicing expenses
exceed amounts payable to the Underwriter under the Plan, the Underwriter shall
not be entitled to reimbursement by the Funds. In addition to being paid
shareholder servicing and distribution fees, the Underwriter also receives for
its services the sales charge on sales of Fund shares set forth in each
Prospectus.
B-67
Each Fund's Distribution Agreement is renewable from year to year if
such Fund's Board approves the Agreement and the Fund's Plan. Each Fund or the
Underwriter can terminate its Distribution Agreement on 60 days' notice to the
other party, and each Distribution Agreement terminates automatically upon its
assignment. In each Fund's Distribution Agreement, the Underwriter agrees to
indemnify the Fund against all costs of litigation and other legal proceedings
and against any liability incurred by or imposed on the Fund in any way arising
out of or in connection with the sale or distribution of the Fund's shares,
except to the extent that such liability is the result of information which was
obtainable by the Underwriter only from persons affiliated with the Fund but not
the Underwriter.
For the fiscal years (or portions thereof, as indicated) ended
December 31, 1995, 1994, and 1993, Rule 12b-1 fees and the amount waived, if
any, for each Fund are set forth below:
<TABLE>
<CAPTION>
1995 1994 1993
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
<S> <C> <C> <C> <C> <C> <C>
Arizona Insured Tax Free Fund
Class A $608,790 $582,768 $648,615 $493,491 $495,302 $ 495,302
Class B 7,062 1,807 N/A N/A N/A N/A
Class C 4,263 561 1,609 333 N/A N/A
Arizona Tax Free Fund
Class A 6,184 0 N/A N/A N/A N/A
Class B 3,765 975 N/A N/A N/A N/A
Class C 121 0 N/A N/A N/A N/A
California Insured Tax Free Fund
12/31/95 - Class A 80,709 23,803 11,176 8,495 N/A N/A
12/31/95 - Class B 44,275 17,904 2,774 1,260 N/A N/A
12/31/95 - Class C 1,792 0 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A 54,720 44,074 14,194 14,194
10/31/94 - Class B N/A N/A 4,534 1,869 N/A N/A
California Tax Free Fund
Class A 2,145 0 N/A N/A N/A N/A
Class B 390 177 N/A N/A N/A N/A
Colorado Tax Free Fund
Class A 969,424 642,447 265,096 265,096 N/A N/A
Class B 5,460 1,113 N/A N/A N/A N/A
Class C 7.874 0 2,161 14 N/A N/A
Florida Limited Term Tax Free Fund
Class A 1,536 1,389 602 602 N/A N/A
Class B 120 30 N/A N/A N/A N/A
Class C 402 0 N/A N/A N/A N/A
Florida Insured Tax Free Fund
12/31/95 - Class A 611,873 595,950 101,760 101,760 N/A N/A
12/31/95 - Class B 22,840 13,701 2,101 1,265 N/A N/A
10/31/94 - Class A N/A N/A 739,775 739,775 397,444 397,444
10/31/94 - Class B N/A N/A 4,452 1,761 N/A N/A
Florida Tax Free Fund
Class A 5,427 0 N/A N/A N/A N/A
Class B 195 99 N/A N/A N/A N/A
Class C 48 0 N/A N/A N/A N/A
Idaho Tax Free Fund
Class A 16,620 3,224 N/A N/A N/A N/A
Class B 6,034 1,549 N/A N/A N/A N/A
Class C 4,499 93 N/A N/A N/A N/A
B-68
Iowa Tax Free Fund
12/31/95 - Class A 95,497 86,503 28,296 28,296 N/A N/A
12/31/95 - Class B 2,753 704 N/A N/A N/A N/A
12/31/95 - Class C 2,373 0 N/A N/A N/A N/A
8/31/94 - Class A N/A N/A 63,681 63,681 N/A N/A
Kansas Tax Free Fund
12/31/95 - Class A 23,138 19,960 2,775 2,775 N/A N/A
12/31/95 - Class B 2,445 601 N/A N/A N/A N/A
12/31/95 - Class C 136 0 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A 11,078 11,078 2,267 2,267
Minnesota Limited Term Tax Free Fund
12/31/95 - Class A 185,286 0 171,101 0 125,158 0
12/31/95 - Class B 83 21 N/A N/A N/A N/A
12/31/95 - Class C 5,099 0 1,385 0 N/A N/A
2/28/94 Class A N/A N/A 31,163 0 N/A N/A
2/28/94 - Class C N/A N/A N/A N/A N/A N/A
Minnesota Insured Fund
Class A 759,866 126,114 778,913 119,759 587,871 311,980
Class B 19,425 5,515 N/A N/A N/A N/A
Class C 25,345 453 6,399 0 N/A N/A
Minnesota Tax Free Fund
Class A 1,108,235 0 1,118,958 0 1,007,720 0
Class B 8,871 2,274 N/A N/A N/A N/A
Class C 17,906 0 4,020 0 N/A N/A
Missouri Insured Tax Free Fund
12/31/95 - Class A 113,879 103,135 15,539 15,539 N/A N/A
12/31/95 - Class B 44,885 22,490 3,190 1,609 N/A N/A
12/31/95 - Class C 28 0 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A 85,866 85,866 39,551 39,551
10/31/94 - Class B N/A N/A 4,486 2,119 N/A N/A
National Insured Tax Free Fund
Class A 87,384 21,418 76,958 47,420 33,302 33,302
Class B 9,212 3,702 2,238 903 N/A N/A
Class C 19 0 N/A N/A N/A N/A
National Limited Term Tax Free Fund
Class A 876 332 N/A N/A N/A N/A
National Tax Free Fund
Class A 874 0 N/A N/A N/A N/A
Class B 211 77 N/A N/A N/A N/A
Class C 62 0 N/A N/A N/A N/A
New Mexico Tax Free Fund
12/31/95 - Class A 52,868 48,466 8,619 8,619 N/A N/A
12/31/95 - Class B 5,003 1,508 446 134 N/A N/A
10/31/94 - Class A N/A N/A 54,411 54,411 21,056 21,056
10/31/94 - Class B N/A N/A 1,441 310 N/A N/A
North Dakota Tax Free Fund
Class A 88,956 85,447 90,095 90,095 67,950 67,950
Class B 2,317 1,161 622 310 N/A N/A
Class C 168 0 N/A N/A N/A N/A
Oregon Insured Tax Free Fund
12/31/95 - Class A 46,075 39,592 5,914 5,914 N/A N/A
12/31/95 - Class B 21,913 9,883 2,045 923 N/A N/A
12/31/95 - Class C 708 0 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A 23,890 23,890 1,040 1,040
10/31/94 - Class B N/A N/A 3,762 1,507 N/A N/A
B-69
Utah Tax Free Fund
12/31/95 - Class A 10,086 9,556 1,590 1,590 N/A N/A
12/31/95 - Class B 1,209 305 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A 10,190 10,190 4,739 4,739
Washington Insured Tax Free Fund
12/31/95 - Class A 5,154 4,717 710 710 N/A N/A
12/31/95 - Class B 29 8 N/A N/A N/A N/A
12/31/95 - Class C 123 0 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A 3,782 3,782 501 501
Wisconsin Tax Free Fund
12/31/95 - Class A 60,960 50,749 15,845 14,603 N/A N/A
12/31/95 - Class B 3,151 803 N/A N/A N/A N/A
12/31/95 - Class C 308 0 N/A N/A N/A N/A
8/31/94 - Class A N/A N/A 23,230 23,230 N/A N/A
</TABLE>
The following table sets forth the aggregate dollar amount of
underwriting commissions paid by each Fund for the fiscal periods indicated and
the amount of such commissions retained by the Underwriter.
<TABLE>
<CAPTION>
Underwriting Commissions
Total Underwriting Commissions Retained by Underwriter
------------------------------------ ------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year year year year year year
ended ended ended ended ended ended
12/31/95 12/31/94 12/31/93 12/31/95 12/31/94 12/31/93
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Arizona Insured Tax Free Fund $804,383 $2,007,707 $ 5,870,964 $103,168 $272,585 $ 789,394
Arizona Tax Free Fund 20,987 N/A N/A 2,901 N/A N/A
California Insured Tax Free Fund
12/31/95 (1) 231,679 61,913 N/A 34,177 8,043 N/A
10/31/94 N/A 434,743 434,394 N/A 58,732 58,855
California Tax Free Fund 19,639 N/A N/A 2,554 N/A N/A
Colorado Tax Free Fund 721,452 2,513,880 6,056,629 117,743 346,636 835,738
Florida Limited Term Tax Free Fund 3,866 0 N/A 741 0 N/A
Florida Insured Tax Free Fund
12/31/95 (1) 357,154 39,051 N/A 48,112 5,589 N/A
10/31/94 N/A 1,497,591 9,639,186 N/A 207,722 1,350,713
Florida Tax Free Fund 42,789 N/A N/A 6,121 N/A N/A
Idaho Tax Free Fund 338,974 N/A N/A 62,968 N/A N/A
Iowa Tax Free Fund
12/31/95 (1) 223,046 101,383 N/A 40,943 18,061 N/A
8/31/94 N/A 1,352,653 N/A N/A 249,929 N/A
Kansas Tax Free Fund
12/31/95 (1) 104,287 9,935 N/A 14,394 1,572 N/A
10/31/94 N/A 175,196 98,488 N/A 24,852 14,245
Minnesota Limited Term
Tax Free Fund
12/31/95 (1) 47,098 126,433 457,090 8,399 22,538 79,125
2/28/94 N/A 67,700 N/A N/A 12,408 N/A
Minnesota Tax Free Fund 812,687 1,781,640 3,572,923 114,391 246,291 496,962
Minnesota Insured Fund 658,955 1,938,352 5,068,046 86,858 269,910 690,609
Missouri Insured Tax Free Fund
12/31/95 (1) 316,387 37,792 N/A 53,274 5,375 N/A
10/31/94 N/A 467,540 528,375 N/A 65,646 74,660
National Insured Tax Free Fund 85,169 406,397 720,463 16,952 54,878 98,702
B-70
National Limited Term Free Fund 5,775 N/A N/A 1,275 N/A N/A
National Tax Free Fund 293 N/A N/A 45 N/A N/A
New Mexico Tax Free Fund
12/31/95 (1) 77,084 7,174 N/A 15,700 1,424 N/A
10/31/94 N/A 302,834 669,386 N/A 50,348 92,055
North Dakota Tax Free Fund 65,566 188,974 663,051 10,960 27,132 95,206
Oregon Insured Tax Free Fund
12/31/95 (1) 265,488 30,428 N/A 42,930 4,107 N/A
10/31/94 N/A 398,064 126,674 N/A 55,282 18,509
Utah Tax Free Fund
12/31/95 (1) 10,693 1,003 N/A 1,782 201 N/A
10/31/94 N/A 75,407 120,641 N/A 12,223 16,878
Washington Insured Tax
Free Fund
12/31/95 (1) 26,941 3,265 N/A 3,915 380 N/A
10/31/94 N/A 26,890 13,308 N/A 3,895 1,743
Wisconsin Tax Free Fund
12/31/95 (1) 139,886 101,720 N/A 25,338 18,121 N/A
8/31/94 N/A 487,555 N/A N/A 71,314 N/A
</TABLE>
(1) Effective 12/31/94, the fund changed its fiscal year end to 12/31.
PORTFOLIO TRANSACTIONS, ALLOCATION OF BROKERAGE AND TURNOVER RATE
As the Funds' portfolios are composed exclusively of debt, rather
than equity securities, most portfolio transactions are effected with dealers
without the payment of brokerage commissions, but rather at net prices which
usually include a spread or markup. In effecting such portfolio transactions on
behalf of the Funds, Voyageur seeks the most favorable net price consistent with
the best execution. However, frequently, Voyageur selects a dealer to effect a
particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the bond market and the
desire of Voyageur to accept a particular price for a security because the price
offered by the dealer meets its guidelines for profit, yield or both.
Decisions with respect to placement of the Funds' portfolio
transactions are made by Voyageur. The primary consideration in making these
decisions is efficiency in the execution of orders and obtaining the most
favorable net prices for the Funds. When consistent with these objectives,
business may be placed with broker-dealers who furnish investment research
services to Voyageur. Such research services include advice, both directly and
in writing, as to the value of securities; the advisability of investing in,
purchasing or selling securities; and the availability of securities, or
purchasers or sellers of securities; as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. This allows Voyageur to supplement its own
investment research activities and enables Voyageur to obtain the views and
information of individuals and research staffs of many different securities
firms prior to making investment decisions for the Funds. To the extent
portfolio transactions are effected with broker-dealers who furnish research
services to Voyageur, Voyageur receives a benefit, not capable of evaluation in
dollar amounts, without providing any direct monetary benefit to the Funds from
these transactions.
Voyageur has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Funds' portfolio transactions in exchange
for research services provided Voyageur, except as noted below. However,
Voyageur does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Funds' business, in
order to encourage certain broker-dealers to provide Voyageur with research
services which Voyageur anticipates will be useful to it. Because the list is
merely a general guide, which is to be used only after the primary criterion for
the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. Voyageur
will authorize the Funds to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if Voyageur determines in good faith that
such amount of commission is reasonable in relation to the value of the
B-71
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or Voyageur's overall responsibilities
with respect to the accounts as to which it exercises investment discretion.
The Funds will not effect any brokerage transactions in their
portfolio securities with any broker-dealer affiliated directly or indirectly
with Voyageur, unless such transactions, including the frequency thereof, the
receipt of commissions payable in connection therewith and the selection of the
affiliated broker-dealer effecting such transactions are not unfair or
unreasonable to the shareholders of the Funds. In the event any transactions are
executed on an agency basis, Voyageur will authorize the Funds to pay an amount
of commission for effecting a securities transaction in excess of the amount of
commission another broker-dealer would have charged only if Voyageur determines
in good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either that particular transaction or Voyageur's overall
responsibilities with respect to the Funds as to which it exercises investment
discretion. If the Funds execute any transactions on an agency basis, they will
generally pay higher than the lowest commission rates available.
In determining the commissions to be paid to a broker-dealer
affiliated with Voyageur, it is the policy of the Funds that such commissions
will, in the judgment of Voyageur, subject to review by the Board, be both (a)
at least as favorable as those which would be charged by other qualified brokers
in connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time, and (b) at
least as favorable as commissions contemporaneously charged by such affiliated
broker-dealers on comparable transactions for their most favored comparable
unaffiliated customers. While each Fund does not deem it practicable and in its
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
None of the Funds in existence during the fiscal periods ended
December 31, 1994, 1993 and 1992, paid any brokerage commissions, directed
portfolio transactions to broker-dealers because of research services provided
to Voyageur or executed brokerage transactions with an affiliated broker-dealer.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Funds may purchase securities from an underwriting
syndicate of which an affiliated broker-dealer is a member (but not directly
from such affiliated broker-dealer itself). Such conditions relate to the price
and amount of the securities purchased, the commission or spread paid and the
quality of the issuer. The rules further require that such purchases take place
in accordance with procedures adopted and reviewed periodically by the Board of
the Funds, particularly those Board members who are not interested persons of
the Funds.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to the policies set forth in
the preceding paragraphs and such other policies as the Funds' directors may
determine, Voyageur may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' securities transactions.
OTHER INFORMATION
Conversion of Class B Shares. In addition to information regarding
conversion set forth in the prospectus, the conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that payment of different
dividends by each of the classes of shares does not result in the Funds'
dividends or distributions constituting "preferential dividends" under the Code
and that such conversions do not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
Signature Guaranty. In addition to information regarding redemption
of shares and signature guaranty set forth in the prospectus, a signature
guaranty will be required when redemption proceeds: (1) exceed $50,000 (unless
it is being wired to a pre-authorized bank account, in which case a guarantee is
not required), (2) are to be paid to someone other than the registered
shareholder or (3) are to be mailed to an address other than the address of
record or
B-72
wired to an account other than the pre-authorized bank or brokerage account. On
joint account redemptions of the type previously listed, each signature must be
guaranteed. A signature guarantee may not be provided by a notary public. Please
contact your investment executive for instructions as to what institutions
constitute eligible signature guarantors.
Valuation of Portfolio Securities. Generally, trading in certain
securities such as tax exempt securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the primary close of trading on the Exchange. The values
of such securities used in determining the net asset value of Fund shares are
computed as of such times. Occasionally events affecting the value of such
securities may occur between such times and the primary close of trading on the
Exchange which are not reflected in the computation of net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities are valued at their fair market value as
determined in good faith by Voyageur in accordance with procedures adopted by
the Boards.
Bank Purchases. Banks, acting as agents for their customers and not
for the Funds or the Underwriter, from time to time may purchase Fund shares for
the accounts of such customers. Generally, the Glass-Steagall Act prohibits
banks from engaging in the business of underwriting, selling or distributing
securities. Should the activities of any bank, acting as agent for its customers
in connection with the purchase of any Fund's shares, be deemed to violate the
Glass-Steagall Act, management will take whatever action, if any, is appropriate
in order to provide efficient services for the Funds. Management does not
believe that a termination in the relationship with a bank would result in any
material adverse consequences to the Funds. In addition, state securities laws
on this issue may differ and banks and financial institutions may be required to
register as dealers pursuant to state law. Fund shares are not deposits or
obligations of, or guaranteed or endorsed by, any bank and are not insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other federal agency.
TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"),
all or a portion of the interest on indebtedness incurred or continued to
purchase or carry shares of an investment company paying exempt-interest
dividends, such as each of the Funds, will not be deductible by a shareholder.
Indebtedness may be allocated to shares of a Fund even though not directly
traceable to the purchase of such shares.
Each Fund's present policy is to designate exempt-interest dividends
at each daily distribution of net interest income. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns.
An exchange of shares in one Voyageur fund for shares in another
fund pursuant to exercise of the Exchange Privilege is considered to be a sale
of the shares for federal tax purposes that may result in a taxable gain or
loss. If a shareholder incurs a sales charge in acquiring shares and then, after
holding those shares not more than 90 days, exchanges them pursuant to the
Exchange Privilege for shares of another Voyageur fund, the shareholder may not
take into account the initial sales charge (to the extent that the otherwise
applicable sales charge on the later-acquired shares is reduced) for purposes of
determining the shareholder's gain or loss on the exchange of the first held
shares. To the extent that the sales charge is disregarded upon the exchange of
the first shares, however, it may be taken into account in determining gain or
loss on the eventual sale or exchange of the later-acquired shares.
Each Fund will be subject to a nondeductible excise tax equal to 4%
of the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, each Fund must declare dividends by the end of the calendar year
representing 98% of such Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long- and short-term capital gain) for the
12-month period ending on October 31 of such year. For purposes of the excise
tax, any income on which a Fund has paid corporate-level tax is considered to
have been distributed. Each Fund intends to make sufficient distributions each
year to avoid the payment of the excise tax.
B-73
Under a special provision of the Revenue Reconciliation Act of 1993,
all or a portion of the gain that a Fund realizes on the sale of a Tax Exempt
Obligation that it purchased at a market discount may have to be treated as
ordinary income rather than capital gain.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
For federal income tax purposes, an alternative minimum tax ("AMT")
is imposed on taxpayers to the extent that such tax, if any, exceeds a
taxpayer's regular income tax liability (with certain adjustments).
Exempt-interest dividends attributable to interest income on certain tax-exempt
obligations issued after August 7, 1986 to finance private activities are
treated as an item of tax preference that is included in alternative minimum
taxable income for purposes of computing the federal AMT for all taxpayers and
the federal environmental tax on corporations. In addition, all other tax-exempt
interest received by a corporation, including exempt-interest dividends, will be
included in adjusted current earnings for purposes of determining the federal
corporate AMT and the environmental tax imposed on corporations by Section 59A
of the Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if
not satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Funds. The Funds will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in any Fund's portfolio lost its exempt status,
such Fund would make every effort to dispose of such investment on terms that
are not detrimental to the Fund.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which any Fund
may purchase options. To the extent a Fund engages in short-term trading and
enters into options transactions, the likelihood of violating this 30%
requirement is increased.
Gain or loss on options is taken into account when realized by
entering into a closing transaction or by exercise. In addition, with respect to
many types of options held at the end of a Fund's taxable year, unrealized gain
or loss on such contracts is taken into account at the then current fair market
value thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from such options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by a
Fund in a subsequent sale or other disposition of such options will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale under the "marked-to-market, 60/40
system."
Arizona State Taxation The portion of exempt-interest dividends that
is derived from interest income on Arizona Tax Exempt Obligations is excluded
from the Arizona taxable income of individuals, estates, trusts, and
corporations. Dividends qualifying for federal income tax purposes as capital
gain dividends are to be treated by shareholders as long-term capital gains
under Arizona law.
California State Taxation. Individual shareholders of a California
Fund who are subject to California personal income taxation will not be required
to include in their California gross income that portion of their federally tax
exempt dividends which the Fund clearly identifies as directly attributable to
interest earned on California state or municipal obligations, and dividends
which the Fund clearly identifies as directly attributable to interest earned on
obligations of the United States, the interest on which is exempt from
California personal income tax pursuant to federal law, provided that at least
50% of the value of the Fund's total assets consists of obligations the interest
on which is exempt from California personal income taxation pursuant to federal
or California law. Distributions to individual shareholders derived from
interest on state or municipal obligations issued by
B-74
governmental authorities in states other than California, short-term capital
gains and other taxable income will be taxed as dividends for purposes of
California personal income taxation. Each Fund's long-term capital gains for
federal income tax purposes will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from an exchange or redemption of
shares will be recognized in the year of the change or redemption. Present
California law taxes both long-term and short-term capital gains at the rates
applicable to ordinary income. Interest on indebtedness incurred or continued by
a shareholder in connection with the purchase of shares of California Fund will
not be deductible for California personal income tax purposes. California has an
alternative minimum tax similar to the federal alternative minimum tax described
above. However, the California alternative minimum tax does not include interest
from private activity bonds as an item of tax preference. Generally, corporate
shareholders of a California Fund subject to the California franchise tax will
be required to include any gain on an exchange or redemption of shares and all
distributions of exempt interest, capital gains and other taxable income, if
any, as income subject to such tax. The California Funds will not be subject to
California franchise or corporate income tax on interest income or net capital
gain distributed to the shareholders. Shares of the California Funds will be
exempt from local property taxes in California.
Colorado State Taxation. To the extent that dividends are derived
from interest income on Colorado Tax Exempt Obligations, such dividends will
also be exempt from Colorado income taxes for individuals, trusts, estates, and
corporations. Dividends qualifying for federal income tax purposes as capital
gain dividends are to be treated by shareholders as long-term capital gains
under Colorado law.
Florida State Taxation. Florida does not currently impose a tax on
the income of individuals, and individual shareholders of the Florida Fund will
thus not be subject to income tax in Florida on distributions from the Florida
Fund or upon the sale of shares held in such Fund. Florida does, however, impose
a tax on intangible personal property held by individuals as of the first day of
each calendar year. Under a rule promulgated by the Florida Department of
Revenue, shares in the Florida Fund will not be subject to the intangible
property tax so long as, on the last business day of each calendar year, all of
the assets of each Fund consist of obligations of the U. S. government and its
agencies, instrumentalities and territories, and the State of Florida and its
political subdivisions and agencies. If any Florida Fund holds any other types
of assets on that date, then the entire value of the shares in such Fund (except
for the portion of the value of the shares attributable to U. S. government
obligations) will be subject to the intangible property tax.
In order to take advantage of the exemption from the intangibles tax
in any year, each Florida Fund must sell any non-exempt assets held in its
portfolio during the year and reinvest the proceeds in exempt assets prior to
December 31. Transaction costs involved in converting the portfolio's assets to
such exempt assets would likely reduce a Florida Fund's investment return and
might, in extraordinary circumstances, exceed any increased investment return
such Fund achieved by investing in non-exempt assets during the year.
Corporate shareholders in a Florida Fund may be subject to the
Florida income tax imposed on corporations, depending upon the domicile of the
corporation and upon the extent to which income received from such Fund
constitutes "nonbusiness income" as defined by applicable Florida law.
Iowa State Taxation. The Fund has received a ruling from the Iowa
Department of Revenue and Finance dated May 21, 1993 to the effect that
dividends paid by the Iowa Fund that are attributable to (1) interest earned on
bonds issued by the State of Iowa, its political subdivisions, agencies and
instrumentalities, the interest on which is exempt from taxation by Iowa
statute, and (2) interest earned on obligations of the U. S. government or its
territories and possessions, will not be included in the income of the Fund
shareholders subject to either the Iowa personal or the Iowa corporate income
tax, except in the case of shareholders that are financial institutions subject
to the tax imposed by Iowa Code ss. 422.60. All other dividends paid by the Iowa
Fund will be subject to the Iowa personal or corporate income tax. Capital gain
dividends qualifying as long-term capital gains for federal tax purposes will be
treated as long-term capital gains for Iowa income tax purposes. Iowa taxes
long-term capital gains at the same rates as ordinary income, while imposing
limitations on the deductibility of capital losses similar to those under
federal law.
Iowa imposes an alternative minimum tax on individuals and
corporations to the extent that such tax exceeds the taxpayer's regular tax
liability. Iowa AMT is based on federal alternative minimum taxable income, with
B-75
certain adjustments. The Fund has received a ruling to the effect that dividends
paid by the Iowa Fund that are attributable to interest paid on obligations
issued by the State of Iowa, its political subdivisions, agencies and
instrumentalities, the interest on which is exempt under Iowa statute, and on
obligations of U. S. territories and possessions will not be subject to the AMT
that Iowa imposes on individuals and corporations.
Kansas State Taxation. Individuals, trusts, estates and corporations
will not be subject to Kansas income tax on the portion of dividends derived
from interest on obligations of Kansas and its political subdivisions issued
after December 31, 1987, and interest on specified obligations of Kansas and its
political subdivisions issued before January 1, 1988. The Fund intends to invest
only in Kansas obligations the interest on which is excludable from Kansas
taxable income. All remaining dividends (except for dividends, if any, derived
from interest paid on obligations of the United States, its territories and
possessions), including dividends derived from capital gains, will be includable
in the taxable income of individuals, trusts, estates and corporations.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains. Kansas taxes
long-term capital gains at the same rates as ordinary income, while restricting
the deductibility of capital losses. Dividends received by shareholders will be
exempt from the tax on intangibles imposed by certain counties, cities and
townships.
Minnesota State Taxation. Minnesota taxable net income is based
generally on federal taxable income. The portion of exempt-interest dividends
that is derived from interest income on Minnesota Tax Exempt Obligations is
excluded from the Minnesota taxable net income of individuals, estates and
trusts, provided that the portion of the exempt-interest dividends from such
Minnesota sources paid to all shareholders represents 95 percent or more of the
exempt-interest dividends paid by the respective Fund. Exempt-interest dividends
are not excluded from the Minnesota taxable income of corporations and financial
institutions. Dividends qualifying for federal income tax purposes as capital
gain dividends are to be treated by shareholders as long-term capital gains.
Minnesota has repealed the favorable treatment of long term capital gains, while
retaining restrictions on the deductibility of capital losses. Exempt interest
dividends subject to the federal alternative minimum tax will also be subject to
the Minnesota alternative minimum tax imposed on individuals, estates and
trusts.
Missouri State Taxation. The portion of exempt-interest dividends
that is derived from interest on Missouri Tax Exempt Obligations is excluded
from the taxable income of individuals, trusts, and estates and corporations
subject to the Missouri corporate income tax. All remaining dividends (except
dividends attributable to interest on obligations of the United States, its
territories and possessions), including dividends derived from capital gains,
will be includable in the taxable income of individuals, trusts, estates and
corporations. Dividends qualifying for federal income tax purposes as capital
gain dividends are to be treated by shareholders as long-term capital gains.
Missouri taxes long-term capital gains at the same rates as ordinary income,
while restricting the deductibility of capital losses.
New Mexico State Taxation. The portion of exempt-interest dividends
that is derived from interest on New Mexico Tax Exempt Obligations is excluded
from the taxable income of individuals, trusts, and estates, and of corporations
subject to the New Mexico corporate income tax. The Fund will provide
shareholders with an annual statement identifying income paid to shareholders by
source. All remaining dividends (except for dividends, if any, derived from
interest paid on obligations of the United States, its territories and
possessions), including dividends derived from capital gains, will be includable
in the taxable income of individuals, trusts, estates and corporations.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains. New Mexico taxes
long-term capital gains at the same rates as ordinary income, while restricting
the deductibility of capital losses.
North Dakota State Taxation. North Dakota taxable income is based
generally on federal taxable income. The portion of exempt-interest dividends
that is derived from interest income on North Dakota Tax Exempt Obligations is
excluded from the North Dakota taxable income of individuals, estates, trusts
and corporations. Exempt-interest dividends are not excluded from the North
Dakota taxable income of banks. Dividends qualifying for federal income tax
purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains under North Dakota law.
Oregon State Taxation. The portion of exempt-interest dividends that
is derived from interest on Oregon Tax Exempt Obligations is excluded from the
taxable income of individuals, trusts, and estates. All remaining
B-76
dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts and estates. Furthermore, all dividends, including
exempt-interest dividends, will be includable in the taxable income of
corporations subject to the Oregon corporation excise tax. Dividends qualifying
for federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Oregon taxes long-term capital gains at
the same rates as ordinary income, while restricting the deductibility of
capital losses.
Utah State Taxation. All exempt-interest dividends, whether derived
from interest on Utah Tax Exempt Obligations or the Tax Exempt Obligations of
any other state, are excluded from the taxable income of individuals, trusts and
estates. Any remaining dividends (except for dividends, if any, derived from
interest paid on obligations of the United States, its territories and
possessions), including dividends derived from capital gains, will be includable
in the taxable income of individuals, trusts and estates. Furthermore, all
dividends, including exemptinterest dividends, will be includable in the taxable
income of corporations subject to the Utah corporate franchise tax. Dividends
qualifying for federal income tax purposes as capital gain dividends are to be
treated by shareholders as long-term capital gains. Utah taxes long-term capital
gains at the same rates as ordinary income, while restricting the deductibility
of capital losses.
Washington State Taxation. Washington does not currently impose an
income tax on individuals or corporations. Therefore, dividends paid to
shareholders will not be subject to tax in Washington.
Wisconsin State Taxation. The Wisconsin Fund has received a ruling
from the Wisconsin Department of Revenue dated July 7, 1993 to the effect that
dividends paid by the Wisconsin Fund that are attributable to (1) interest
earned on certain higher education bonds issued by the State of Wisconsin,
certain bonds issued by the Wisconsin Housing and Economic Development
authority, Wisconsin Housing Finance Authority bonds, and public housing
authority bonds and redevelopment authority bonds issued by Wisconsin
municipalities, the interest on which is exempt from taxation by Wisconsin
statute, and (2) interest earned on obligations of the U. S. government or its
territories and possessions will not be included in the income of the Fund
shareholders subject to the Wisconsin personal income tax. Capital gain
dividends qualifying as long-term capital gains for federal tax purposes will be
treated as long-term capital gains for Wisconsin income tax purposes. Wisconsin
taxes long-term capital gains at the same rates as ordinary income, while
imposing limitations on the deductibility of capital losses similar to those
under federal law.
Wisconsin imposes an alternative minimum tax on individuals, trusts
and estates to the extent that such tax exceeds a taxpayer's regular tax
liability. Wisconsin's AMT is based on federal alternative minimum taxable
income, with certain adjustments. The Fund has received a ruling to the effect
that dividends paid by the Wisconsin Fund that are attributable to interest paid
on obligations issued by the State of Wisconsin or its agencies, the interest on
which is exempt from Wisconsin personal income tax under Wisconsin statute, and
on obligations of U. S. territories and possessions will not be subject to the
Wisconsin AMT when received by shareholders subject to the Wisconsin personal
income tax.
SPECIAL PURCHASE PLANS
Automatic Investment Plan. As a convenience to investors, shares may
be purchased through a preauthorized automatic investment plan. Such
preauthorized investments (at least $100) may be used to purchase shares of any
Fund at the public offering price next determined after such Fund receives the
investment (normally the 20th of each month, or the next business day
thereafter). Further information is available from the Underwriter.
Combined Purchase Privilege. The following persons (or groups of
persons) may qualify for reductions from the front end sales charge ("FESC")
schedule for Class A shares set forth in each Fund's prospectus by combining
purchases of any class of shares of any one or more of the Funds which bear a
FESC (and, in certain circumstances, purchases of FESC shares of certain other
open end investment companies) if the combined purchase of all such funds totals
at least $50,000.
(i) an individual, or a "company" as defined in Section
2(a)(8) of the 1940 Act;
B-77
(ii) an individual, his or her spouse and their children
under twenty-one, purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a
pension, profit-sharing or other employee benefit trust) created
pursuant to a plan qualified under Section 401 of the Code;
(iv) tax-exempt organizations enumerated in Section
501(c)(3) of the Code;
(v) employee benefit plans of a single employer or of
affiliated employers;
(vi) any organized group which has been in existence for
more than six months, provided that it is not organized for the
purpose of buying redeemable securities of a registered investment
company, and provided that the purchase is made through a central
administration, or through a single dealer, or by other means which
result in economy of sales effort or expense. An organized group
does not include a group of individuals whose sole organizational
connection is participation as credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer, or clients of an investment adviser.
Cumulative Quantity Discount (Right of Accumulation). A purchase of
Class A shares may qualify for a Cumulative Quantity Discount. The applicable
FESC will then be based on the total of:
(i) the investor's current purchase; and
(ii) the investor's gross amount previously invested of
the shares of FESC classes of the Funds held by the investor; and
(iii) the investor's gross amount previously invested of
shares of FESC classes of the Funds owned by another shareholder
eligible to participate with the investor in a "Combined Purchase
Privilege" (see above).
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through an investment dealer, when
each purchase is made the investor or dealer must provide the Fund whose shares
are being purchased with sufficient information to verify that the purchase
qualifies for the privilege or discount.
Letter of Intention. Investors may also obtain the reduced front end
sales charges shown in each Fund's prospectus by means of a written Letter of
Intention, which expresses the investor's intention to invest not less than
$50,000 (including certain "credits," as described below) within a period of 13
months in the Funds bearing a FESC. Each purchase of shares under a Letter of
Intention will be made at the public offering price applicable at the time of
such purchase to a single transaction of the dollar amount indicated in the
Letter. A Letter of Intention may include purchases of shares made not more than
90 days prior to the date that an investor signs a Letter; however, the 13-month
period during which the Letter is in effect will begin on the date of the
earliest purchase to be included. Investors qualifying for the Combined Purchase
Privilege described above may purchase shares under a single Letter of
Intention.
If, for example, on the date an investor signs a Letter of Intention
to invest at least $50,000 as set forth above and the investor and the
investor's spouse and children under twenty-one have previously invested $20,000
in shares which are still held by such persons, it will only be necessary to
invest a total of $30,000 during the 13 months following the first date of
purchase of such shares in order to qualify for the sales charges applicable to
investments of $50,000.
The Letter of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Letter of Intention is 5% of such amount. Shares purchased with the
first 5% of such amount will be held in escrow to secure payment of the higher
sales charge applicable to the shares actually purchased if the full amount
indicated is not purchased. When the full amount indicated has been purchased,
the escrow will be released. To the extent that an investor purchases more than
the dollar amount indicated on the Letter of Intention and qualifies for further
reduced sales charges, the sales charges will be adjusted for the entire amount
purchased at the end of the 13-month period. The difference in sales charges
will be used to purchase additional shares at the then current offering price
applicable to the actual amount of the aggregate purchases.
B-78
Investors electing to take advantage of the Letter of Intention
should carefully review the appropriate provisions on the authorization form
attached to each Prospectus.
Shares of other open end investment companies bearing a FESC will be
included with Voyageur fund shares bearing a FESC in a Combined Purchase
Privilege, Cumulative Quantity Discount or Letter of Intention only if such
shares are owned by customers of dealers that Voyageur or the Underwriter has
engaged to provide administration or accounting services to Fund omnibus
accounts in connection with the offering of the Funds as part of such other
investment companies' family of funds. Additionally, the maximum reduction of
the applicable Fund's FESC that may result from the inclusion of shares of such
other investment companies in a Combined Purchase Privilege, Cumulative
Quantity Discount or Letter of Intention shall be a reduction to the front-end
sales charge applicable to purchases of $500,000 but less than $1,000,000 (as
set forth in the sales charge tables in the prospectus).
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the net asset value of Fund shares is
summarized in the prospectus in "Determination of Net Asset Value." The public
offering price of Class A shares is the net asset value of Fund shares plus the
applicable front end sales charge, if any. The maximum front end sales charge is
3.90% of the net asset value (certain Funds have lower maximum sales charges).
The public offering price of Class B and Class C shares is the net asset value
of Fund shares.
The portfolio securities in which each Fund invests fluctuate in
value, and therefore, the net asset value per share of each Fund also
fluctuates. As of December 31, 1995, the net asset value per share of each Fund
which had commenced investment operations was calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Arizona Insured Tax Free Fund
Class A Net Assets ($238,113,646) = Net Asset Value Per Share ($11.15)
-------------------------------
Shares Outstanding (21,351,620)
Class B Net Assets ($2,047,794) = Net Asset Value Per Share ($11.14)
-------------------------------
Shares Outstanding (183,744)
Class C Net Assets ($541,104) = Net Asset Value Per Share ($11.15)
-------------------------------
Shares Outstanding (48,524)
Arizona Tax Free Fund
Class A Net Assets ($6,225,483) = Net Asset Value Per Share ($10.75)
-------------------------------
Shares Outstanding (578,894)
Class B Net Assets ($1,628,962) = Net Asset Value Per Share ($10.74)
-------------------------------
Shares Outstanding (151,607)
Class C Net Assets ($26,946) = Net Asset Value Per Share ($10.76)
-------------------------------
Shares Outstanding (2,505)
California Insured Tax Free Fund
Class A Net Assets ($33,860,198) = Net Asset Value Per Share ($10.65)
-------------------------------
Shares Outstanding (3,179,418)
Class B Net Assets ($6,028,655) = Net Asset Value Per Share ($10.65)
-------------------------------
Shares Outstanding (566,073)
Class C Net Assets ($53,471) = Net Asset Value Per Share ($10.65)
-------------------------------
Shares Outstanding (5,020)
B-79
California Tax Free Fund
Class A Net Assets ($1,012,062) = Net Asset Value Per Share ($10.64)
-------------------------------
Shares Outstanding (95,115)
Class B Net Assets ($127,958) = Net Asset Value Per Share ($10.65)
-------------------------------
Shares Outstanding (12,019)
Colorado Tax Free Fund
Class A Net Assets ($392,815,381) = Net Asset Value Per Share ($10.90)
-------------------------------
Shares Outstanding (36,030,584)
Class B Net Assets ($1,643,379) = Net Asset Value Per Share ($10.90)
-------------------------------
Shares Outstanding (150,774)
Class C Net Assets ($1,042,277) = Net Asset Value Per Share ($10.90)
-------------------------------
Shares Outstanding (95,610)
Florida Insured Tax Free Fund
Class A Net Assets ($242,425,038) = Net Asset Value Per Share ($10.94)
-------------------------------
Shares Outstanding (22,159,712)
Class B Net Assets ($2,814,292) = Net Asset Value Per Share ($10.94)
-------------------------------
Shares Outstanding (257,299)
Florida Limited Term Tax Free Fund
Class A Net Assets ($859,162) = Net Asset Value Per Share ($10.56)
-------------------------------
Shares Outstanding (81,392)
Class B Net Assets ($40,907) = Net Asset Value Per Share ($10.56)
-------------------------------
Shares Outstanding (3,875)
Class C Net Assets ($53,645) = Net Asset Value Per Share ($10.55)
-------------------------------
Shares Outstanding (5,083)
Florida Tax Free Fund
Class A Net Assets ($4,421,203) = Net Asset Value Per Share ($10.73)
-------------------------------
Shares Outstanding (412,140)
Class B Net Assets ($101,114) = Net Asset Value Per Share ($10.73)
-------------------------------
Shares Outstanding (9,424)
Class C Net Assets ($8,645) = Net Asset Value Per Share ($10.73)
-------------------------------
Shares Outstanding (806)
Idaho Tax Free Fund
Class A Net Assets ($13,540,265) = Net Asset Value Per Share ($11.02)
-------------------------------
Shares Outstanding (1,228,727)
Class B Net Assets ($1,977,479) = Net Asset Value Per Share ($11.01)
-------------------------------
Shares Outstanding (179,651)
Class C Net Assets ($789,300) = Net Asset Value Per Share ($11.02)
-------------------------------
Shares Outstanding (71,649)
B-80
Iowa Tax Free Fund
Class A Net Assets ($42,374,064) = Net Asset Value Per Share ($9.83)
-------------------------------
Shares Outstanding (4,308,823)
Class B Net Assets ($818,943) = Net Asset Value Per Share ($9.83)
-------------------------------
Shares Outstanding (83,299)
Class C Net Assets ($461,722) = Net Asset Value Per Share ($9.83)
-------------------------------
Shares Outstanding (46,987)
Kansas Tax Free Fund
Class A Net Assets ($10,677,403) = Net Asset Value Per Share ($10.73)
-------------------------------
Shares Outstanding (995,218)
Class B Net Assets ($676,949) = Net Asset Value Per Share ($10.74)
-------------------------------
Shares Outstanding (63,056)
Class C Net Assets ($39,591) = Net Asset Value Per Share ($10.72)
-------------------------------
Shares Outstanding (3,692)
Minnesota Insured Fund
Class A Net Assets ($307,734,067) = Net Asset Value Per Share ($10.73)
-------------------------------
Shares Outstanding (28,669,968)
Class B Net Assets ($4,654,955) = Net Asset Value Per Share ($10.72)
-------------------------------
Shares Outstanding (434,121)
Class C Net Assets ($3,166,049) = Net Asset Value Per Share ($10.73)
-------------------------------
Shares Outstanding (294,967)
Minnesota Limited Term Tax Free Fund
Class A Net Assets ($72,404,842) = Net Asset Value Per Share ($11.14)
-------------------------------
Shares Outstanding (6,502,237)
Class B Net Assets ($27,222) = Net Asset Value Per Share ($11.14)
-------------------------------
Shares Outstanding (2,444)
Class C Net Assets ($694,146) = Net Asset Value Per Share ($11.13)
-------------------------------
Shares Outstanding (62,344)
Minnesota Tax Free Fund
Class A Net Assets ($455,219,758) = Net Asset Value Per Share ($12.63)
-------------------------------
Shares Outstanding (36,054,473)
Class B Net Assets ($2,700,598) = Net Asset Value Per Share (12.62)
-------------------------------
Shares Outstanding (213,915)
Class C Net Assets ($2,318,788) = Net Asset Value Per Share ($12.63)
-------------------------------
Shares Outstanding (183,600)
Missouri Insured Tax Free Fund
Class A Net Assets ($50,211,155) = Net Asset Value Per Share ($10.54)
-------------------------------
Shares Outstanding (4,764,581)
B-81
Class B Net Assets ($6,194,756) = Net Asset Value Per Share ($10.54)
-------------------------------
Shares Outstanding (587,970)
Class C Net Assets ($20,366) = Net Asset Value Per Share ($10.54)
-------------------------------
Shares Outstanding (1,932)
National Insured Tax Free Fund
Class A Net Assets ($35,661,544) = Net Asset Value Per Share ($10.64)
-------------------------------
Shares Outstanding (3,351,541)
Class B Net Assets ($1,545,191) = Net Asset Value Per Share ($10.64)
-------------------------------
Shares Outstanding (145,243)
Class C Net Assets ($10,373) = Net Asset Value Per Share ($10.63)
-------------------------------
Shares Outstanding (976)
National Limited Term Tax Free Fund
Class A Net Assets ($1,229,925) = Net Asset Value Per Share ($10.16)
-------------------------------
Shares Outstanding (121,093)
National Tax Free Fund
Class A Net Assets ($1,274,041) = Net Asset Value Per Share ($10.48)
-------------------------------
Shares Outstanding (121,591)
Class B Net Assets ($157,382) = Net Asset Value Per Share ($10.48)
-------------------------------
Shares Outstanding (15,014)
Class C Net Assets ($48,218) = Net Asset Value Per Share ($10.48)
-------------------------------
Shares Outstanding (4,600)
New Mexico Tax Free Fund
Class A Net Assets ($21,402,272) = Net Asset Value Per Share ($10.89)
-------------------------------
Shares Outstanding (1,965,764)
Class B Net Assets ($605,465) = Net Asset Value Per Share ($10.89)
-------------------------------
Shares Outstanding (55,604)
North Dakota Tax Free Fund
Class A Net Assets ($36,096,088) = Net Asset Value Per Share ($11.00)
-------------------------------
Shares Outstanding (3,281,055)
Class B Net Assets ($374,954) = Net Asset Value Per Share ($11.00)
-------------------------------
Shares Outstanding (34,078)
Class C Net Assets ($20,301) = Net Asset Value Per Share ($11.00)
-------------------------------
Shares Outstanding (1,846)
Oregon Insured Tax Free Fund
Class A Net Assets ($21,590,287) = Net Asset Value Per Share ($10.05)
-------------------------------
Shares Outstanding (2,148,469)
Class B Net Assets ($2,785,629) = Net Asset Value Per Share ($10.05)
-------------------------------
Shares Outstanding (277,200)
B-82
Class C Net Assets ($249,786) = Net Asset Value Per Share ($10.05)
-------------------------------
Shares Outstanding (24,849)
Utah Tax Free Fund
Class A Net Assets ($4,141,500) = Net Asset Value Per Share ($11.04)
-------------------------------
Shares Outstanding (375,260)
Class B Net Assets ($362,605) = Net Asset Value Per Share ($11.04)
-------------------------------
Shares Outstanding (32,858)
Washington Insured Tax Free Fund
Class A Net Assets ($2,099,207) = Net Asset Value Per Share ($10.44)
-------------------------------
Shares Outstanding (201,131)
Class B Net Assets ($15,441) = Net Asset Value Per Share ($10.44)
-------------------------------
Shares Outstanding (1,479)
Class C Net Assets ($18,747) = Net Asset Value Per Share ($10.43)
-------------------------------
Shares Outstanding (1,797)
Wisconsin Tax Free Fund
Class A Net Assets ($26,448,679) = Net Asset Value Per Share ($9.78)
-------------------------------
Shares Outstanding (2,704,667)
Class B Net Assets ($724,828) = Net Asset Value Per Share ($9.77)
-------------------------------
Shares Outstanding (74,167)
Class C Net Assets ($72,979) = Net Asset Value Per Share ($9.79)
-------------------------------
Shares Outstanding (7,451)
</TABLE>
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Funds may refer to
"yield," "taxable equivalent yield," "average annual total return" and
"cumulative total return." Yield, taxable equivalent yield, average annual total
return and cumulative total return are calculated as follows. Performance data
is provided for Class B or Class C shares to the extent such shares were
outstanding during the periods indicated.
YIELD
Yield is computed by dividing the net investment income per share deemed
earned during the computation period by the maximum offering price per share on
the last day of the period, according to the following formula:
YIELD = 2 [ {( [a-b] / cd ) + 1 } (6th power) - 1]
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on the
last day of the period.
B-83
The yields for the Funds for the 30-day period ended December 31, 1995
(as adjusted for revised sales charges effective June 3, 1996) are as set forth
below:
30-Day Yield
------------------------
Absent Voluntary
Actual Fee Waivers
------ -----------
Arizona Insured Tax Free Fund - Class A 4.59% 4.38%
Arizona Insured Tax Free Fund - Class B 4.02% 3.76%
Arizona Insured Tax Free Fund - Class C 3.87% 3.74%
Arizona Tax Free Fund - Class A 5.18% 4.54%
Arizona Tax Free Fund - Class B 4.89% 3.93%
Arizona Tax Free Fund - Class C 4.65% 4.04%
California Insured Tax Free Fund - Class A 5.09% 4.80%
California Insured Tax Free Fund - Class B 4.91% 4.33%
California Insured Tax Free Fund - Class C 4.51% 4.27%
California Tax Free Fund - Class A 5.74% 5.08%
California Tax Free Fund - Class B 5.72% 4.58%
Colorado Tax Free Fund - Class A 4.68% 4.54%
Colorado Tax Free Fund - Class B 4.08% 3.88%
Colorado Tax Free Fund - Class C 3.95% 3.94%
Florida Insured Tax Free Fund - Class A 5.06% 4.71%
Florida Insured Tax Free Fund - Class B 4.86% 4.20%
Florida Limited Term Tax Free Fund - Class A 4.19% 3.68%
Florida Limited Term Tax Free Fund - Class B 3.52% 3.08%
Florida Limited Term Tax Free Fund - Class C 3.27% 2.93%
Florida Tax Free Fund - Class A 5.57% 4.76%
Florida Tax Free Fund - Class B 5.53% 3.97%
Florida Tax Free Fund - Class C 5.03% 4.24%
Idaho Tax Free Fund - Class A 5.40% 4.54%
Idaho Tax Free Fund - Class B 5.00% 3.98%
Idaho Tax Free Fund - Class C 4.74% 3.91%
Iowa Tax Free Fund - Class A 5.18% 4.90%
Iowa Tax Free Fund - Class B 4.71% 4.35%
Iowa Tax Free Fund - Class C 4.45% 4.33%
Kansas Tax Free Fund - Class A 5.248% 4.57%
Kansas Tax Free Fund - Class B 4.80% 4.02%
Kansas Tax Free Fund - Class C 4.58% 4.02%
Minnesota Insured Tax Free Fund - Class A 4.48% 4.44%
Minnesota Insured Tax Free Fund - Class B 4.12% 3.86%
Minnesota Insured Tax Free Fund - Class C 3.88% 3.86%
Minnesota Limited Term Tax Free Fund - Class A 3.82% 3.81%
Minnesota Limited Term Tax Free Fund - Class B 3.43% 3.19%
Minnesota Limited Term Tax Free Fund - Class C 3.17% 3.16%
Minnesota Tax Free Fund - Class A 4.61% 4.61%
Minnesota Tax Free Fund - Class B 4.28% 4.05%
Minnesota Tax Free Fund - Class C 4.04% 4.04%
Missouri Insured Tax Free Fund - Class A 5.11% 4.65%
Missouri Insured Tax Free Fund - Class B 4.88% 4.15%
Missouri Insured Tax Free Fund - Class C 4.37% 3.99%
National Insured Tax Free Fund - Class A 5.65% 5.18%
National Insured Tax Free Fund - Class B 5.49% 4.70%
National Insured Tax Free Fund - Class C 5.09% 4.55%
National Limited Term Tax Free Fund - Class A 5.00% 4.25%
National Tax Free Fund - Class A 5.46% 4.65%
B-84
National Tax Free Fund - Class B 5.19% 4.07%
National Tax Free Fund - Class C 4.82% 4.08%
New Mexico Tax Free Fund - Class A 5.31% 5.10%
New Mexico Tax Free Fund - Class B 4.88% 4.60%
North Dakota Tax Free Fund - Class A 4.66% 4.45%
North Dakota Tax Free Fund - Class B 4.38% 3.94%
North Dakota Tax Free Fund - Class C 3.85% 3.83%
Oregon Insured Tax Free Fund - Class A 4.86% 4.34%
Oregon Insured Tax Free Fund - Class B 4.60% 3.85%
Oregon Insured Tax Free Fund - Class C 4.15% 3.75%
Utah Tax Free Fund - Class A 5.66% 4.97%
Utah Tax Free Fund - Class B 5.18% 4.42%
Washington Insured Tax Free Fund - Class A 4.92% 4.07%
Washington Insured Tax Free Fund - Class B 4.41% 3.30%
Washington Insured Tax Free Fund - Class C 4.14% 3.42%
Wisconsin Tax Free Fund - Class A 4.64% 4.41%
Wisconsin Tax Free Fund - Class B 4.19% 3.89%
Wisconsin Tax Free Fund - Class C 3.88% 3.81%
TAXABLE EQUIVALENT YIELD
Taxable equivalent yield is computed by dividing that portion of the
yield of a Fund (as computed above) which is tax-exempt by one minus a stated
marginal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
The taxable equivalent yields for the Funds for the 30-day period
ended December 31, 1995 (as adjusted for revised sales charges effective June 3,
1996) are set forth below. These taxable equivalent yields are based on current
Federal marginal income tax rates combined with state marginal income tax rates,
if applicable. Each combined marginal rate assumes a single taxpayer and that
state income taxes paid are fully deductible for purposes of computing federal
taxable income. The combined marginal rates do not reflect federal rules
concerning the phase-out of personal exemptions and limitations on the allowance
of itemized deductions for certain high-income taxpayers. The highest state
marginal tax rate was used for each Federal taxable income bracket. State
marginal tax rates are those currently scheduled to be in effect for 1996. As of
the date of this Statement of Additional Information, many state legislatures
are in session and it is possible that tax rates in those states will be
changed. If tax rates were lowered, this would have the effect of reducing the
taxable equivalent yields shown below.
<TABLE>
<CAPTION>
ACTUAL
<S> <C> <C> <C> <C>
ARIZONA(1)
31.74% 34.59% 39.58% 42.98%
Arizona Insured Tax Free Fund - Class A 6.72% 7.02% 7.60% 8.05%
Arizona Insured Tax Free Fund - Class B 5.89% 6.15% 6.65% 7.05%
Arizona Insured Tax Free Fund - Class C 5.67% 5.92% 6.41% 6.79%
Arizona Tax Free Fund - Class A 7.59% 7.92% 8.57% 9.08%
Arizona Tax Free Fund - Class B 7.16% 7.48% 8.09% 8.58%
Arizona Tax Free Fund - Class C 6.81% 7.11% 7.70% 8.16%
CALIFORNIA(2)
34.70% 37.42% 41.95% 45.22%
California Insured Tax Free Fund - Class A 7.79% 8.13% 8.77% 9.29%
California Insured Tax Free Fund - Class B 7.52% 7.85% 8.46% 8.96%
California Insured Tax Free Fund - Class C 6.91% 7.21% 7.77% 8.23%
California Tax Free Fund - Class A 8.79% 9.17% 9.89% 10.48%
California Tax Free Fund - Class B 8.76% 9.14% 9.85% 10.44%
B-85
COLORADO (3)
31.60% 34.45% 39.20% 42.62%
Colorado Tax Free Fund - Class A 6.84% 7.14% 7.70% 8.16%
Colorado Tax Free Fund - Class B 5.96% 6.22% 6.71% 7.11%
Colorado Tax Free Fund - Class C 5.77% 6.03% 6.50% 6.88%
FLORIDA
28% 31% 36% 39.6%
Florida Insured Tax Free Fund - Class A 7.03% 7.33% 7.91% 8.38%
Florida Insured Tax Free Fund - Class B 6.75% 7.04% 7.59% 8.05%
Florida Limited Term Tax Free Fund - Class A 5.82% 6.07% 6.55% 6.94%
Florida Limited Term Tax Free Fund - Class B 4.89% 5.10% 5.50% 5.83%
Florida Limited Term Tax Free Fund - Class C 4.54% 4.74% 5.11% 5.41%
Florida Tax Free Fund - Class A 7.74% 8.07% 8.70% 9.22%
Florida Tax Free Fund - Class B 7.68% 8.01% 8.64% 9.16%
Florida Tax Free Fund - Class C 6.99% 7.29% 7.86% 8.33%
IDAHO(4)
33.90% 36.66% 41.25% 44.55%
Idaho Tax Free Fund - Class A 8.17% 8.53% 9.19% 9.74%
Idaho Tax Free Fund - Class B 7.56% 7.89% 8.51% 9.02%
Idaho Tax Free Fund - Class C 7.17% 7.48% 8.07% 8.55%
IOWA (5)
33.32% 35.90% 40.24% 43.39%
Iowa Tax Free Fund - Class A 7.77% 8.08% 8.67% 9.15%
Iowa Tax Free Fund - Class B 7.06% 7.35% 7.88% 8.32%
Iowa Tax Free Fund - Class C 6.67% 6.94% 7.45% 7.86%
KANSAS (6)
33.58% 36.35% 40.96% 44.28%
Kansas Tax Free Fund - Class A 7.89% 8.23% 8.88% 9.40%
Kansas Tax Free Fund - Class B 7.23% 7.54% 8.13% 8.61%
Kansas Tax Free Fund - Class C 6.90% 7.20% 7.76% 8.22%
MINNESOTA (7)
34.12% 36.87% 41.44% 44.73%
Minnesota Insured Fund - Class A 6.80% 7.10% 7.65% 8.11%
Minnesota Insured Fund - Class B 6.25% 6.53% 7.04% 7.45%
Minnesota Insured Fund - Class C 5.89% 6.15% 6.63% 7.02%
Minnesota Limited Term Tax Free Fund - Class A 5.80% 6.05% 6.52% 6.91%
Minnesota Limited Term Tax Free Fund - Class B 5.21% 5.43% 5.86% 6.21%
Minnesota Limited Term Tax Free Fund - Class C 4.81% 5.02% 5.41% 5.74%
Minnesota Tax Free Fund - Class A 7.00% 7.30% 7.87% 8.34%
Minnesota Tax Free Fund - Class B 6.50% 6.78% 7.31% 7.74%
Minnesota Tax Free Fund - Class C 6.13% 6.40% 6.90% 7.31%
MISSOURI(8)
31.16% 33.91% 38.51% 41.84%
Missouri Insured Tax Free Fund - Class A 7.42% 7.73% 8.31% 8.79%
Missouri Insured Tax Free Fund - Class B 7.09% 7.38% 7.94% 8.39%
Missouri Insured Tax Free Fund - Class C 6.35% 6.61% 7.11% 7.51%
B-86
NEW MEXICO(9)
33.69% 36.87% 41.44% 44.73%
New Mexico Tax Free Fund - Class A 8.01% 8.41% 9.07% 9.61%
New Mexico Tax Free Fund - Class B 7.36% 7.73% 8.33% 8.83%
NORTH DAKOTA(10)
30.72% 33.87% 39.07% 42.77%
North Dakota Tax Free Fund - Class A 6.73% 7.05% 7.65% 8.14%
North Dakota Tax Free Fund - Class B 6.32% 6.62% 7.19% 7.65%
North Dakota Tax Free Fund - Class C 5.56% 5.82% 6.32% 6.73%
OREGON(11)
34.48% 37.21% 41.76% 45.04%
Oregon Insured Tax Free Fund - Class A 7.42% 7.74% 8.34% 8.84%
Oregon Insured Tax Free Fund - Class B 7.02% 7.33% 7.90% 8.37%
Oregon Insured Tax Free Fund - Class C 6.33% 6.61% 7.13% 7.55%
UTAH(12)
32.38% 35.13% 39.72% 43.04%
Utah Tax Free Fund - Class A 8.37% 8.73% 9.39% 9.94%
Utah Tax Free Fund - Class B 7.66% 7.99% 8.59% 9.09%
WASHINGTON
28% 31% 36% 39.6%
Washington Insured Tax Free Fund - Class A 6.83% 7.13% 7.69% 8.15%
Washington Insured Tax Free Fund - Class B 6.13% 6.39% 6.89% 7.30%
Washington Insured Tax Free Fund - Class C 6.13% 6.39% 6.89% 7.30%
WISCONSIN(13)
32.99% 35.78% 40.44% 43.79%
Wisconsin Tax Free Fund - Class A 6.92% 7.23% 7.79% 8.25%
Wisconsin Tax Free Fund - Class B 6.25% 6.52% 7.03% 7.45%
Wisconsin Tax Free Fund - Class C 5.79% 6.04% 6.51% 6.90%
NATIONAL
28% 31% 36% 39.6%
National Insured Tax Free Fund - Class A 7.85% 8.19% 8.83% 9.35%
National Insured Tax Free Fund - Class B 7.63% 7.96% 8.58% 9.09%
National Insured Tax Free Fund - Class C 7.07% 7.38% 7.95% 8.43%
National Limited Term Tax Free Fund - Class A 6.94% 7.25% 7.81% 8.28%
National Tax Free Fund - Class A 7.58% 7.91% 8.53% 9.04%
National Tax Free Fund - Class B 7.21% 7.52% 8.11% 8.59%
National Tax Free Fund - Class C 6.69% 6.99% 7.53% 7.98%
ABSENT VOLUNTARY FEE WAIVERS
ARIZONA(1)
31.74% 34.59% 39.58% 42.98%
Arizona Insured Tax Free Fund - Class A 6.42% 6.70% 7.25% 7.68%
Arizona Insured Tax Free Fund - Class B 5.51% 5.75% 6.22% 6.59%
Arizona Insured Tax Free Fund - Class C 5.48% 5.72% 6.19% 6.56%
Arizona Tax Free Fund - Class A 6.65% 6.94% 7.51% 7.96%
Arizona Tax Free Fund - Class B 5.76% 6.01% 6.50% 6.89%
Arizona Tax Free Fund - Class C 5.92% 6.18% 6.69% 7.09%
B-87
CALIFORNIA(2)
34.70% 37.42% 41.95% 45.22%
California Insured Tax Free Fund - Class A 7.35% 7.67% 8.27% 8.76%
California Insured Tax Free Fund - Class B 6.63% 6.92% 7.46% 7.91%
California Insured Tax Free Fund - Class C 6.54% 6.82% 7.36% 7.80%
California Tax Free Fund - Class A 7.78% 8.12% 8.75% 9.27%
California Tax Free Fund - Class B 7.01% 7.32% 7.89% 8.36%
COLORADO (3)
31.60% 34.45% 39.20% 42.62%
Colorado Tax Free Fund - Class A 6.64% 6.93% 7.47% 7.91%
Colorado Tax Free Fund - Class B 5.67% 5.92% 6.38% 6.76%
Colorado Tax Free Fund - Class C 5.76% 6.01% 6.48% 6.87%
FLORIDA
28% 31% 36% 39.6%
Florida Insured Tax Free Fund - Class A 6.54% 6.83% 7.36% 7.80%
Florida Insured Tax Free Fund - Class B 5.83% 6.09% 6.56% 6.95%
Florida Limited Term Tax Free Fund - Class A 5.11% 5.33% 5.75% 6.09%
Florida Limited Term Tax Free Fund - Class B 4.28% 4.46% 4.81% 5.10%
Florida Limited Term Tax Free Fund - Class C 4.07% 4.25% 4.58% 4.85%
Florida Tax Free Fund - Class A 6.61% 6.90% 7.44% 7.88%
Florida Tax Free Fund - Class B 5.51% 5.75% 6.20% 6.57%
Florida Tax Free Fund - Class C 5.89% 6.14% 6.63% 7.02%
IDAHO (4)
33.90% 36.66% 41.25% 44.55%
Idaho Tax Free Fund - Class A 6.87% 7.17% 7.73% 8.19%
Idaho Tax Free Fund - Class B 6.02% 6.28% 6.77% 7.18%
Idaho Tax Free Fund - Class C 5.92% 6.17% 6.66% 7.05%
IOWA(5)
33.32% 35.90% 40.24% 43.39%
Iowa Tax Free Fund - Class A 7.35% 7.64% 8.20% 8.66%
Iowa Tax Free Fund - Class B 6.52% 6.79% 7.28% 7.68%
Iowa Tax Free Fund - Class C 6.49% 6.76% 7.25% 7.65%
KANSAS (6)
33.58% 36.35% 40.96% 44.28%
Kansas Tax Free Fund - Class A 6.88% 7.18% 7.74% 8.20%
Kansas Tax Free Fund - Class B 6.05% 6.32% 6.81% 7.21%
Kansas Tax Free Fund - Class C 6.05% 6.32% 6.81% 7.21%
MINNESOTA (7)
34.12% 36.87% 41.44% 44.73%
Minnesota Insured Fund - Class A 6.74% 7.03% 7.58% 8.03%
Minnesota Insured Fund - Class B 5.86% 6.11% 6.59% 6.98%
Minnesota Insured Fund - Class C 5.86% 6.11% 6.59% 6.98%
Minnesota Limited Term Tax Free Fund - Class A 5.78% 6.03% 6.51% 6.89%
Minnesota Limited Term Tax Free Fund - Class B 4.84% 5.05% 5.45% 5.77%
Minnesota Limited Term Tax Free Fund - Class C 4.80% 5.01% 5.40% 5.72%
Minnesota Tax Free Fund - Class A 7.00% 7.30% 7.87% 8.34%
Minnesota Tax Free Fund - Class B 6.15% 6.41% 6.92% 7.33%
Minnesota Tax Free Fund - Class C 6.13% 6.40% 6.90% 7.31%
B-88
MISSOURI(8)
31.16% 33.91 38.51% 41.84%
Missouri Insured Tax Free Fund - Class A 6.76% 7.04% 7.56% 8.00%
Missouri Insured Tax Free Fund - Class B 6.03% 6.28% 6.75% 7.14%
Missouri Insured Tax Free Fund - Class C 5.80% 6.04% 6.49% 6.86%
NEW MEXICO(9)
33.69% 36.87% 41.44% 44.73%
New Mexico Tax Free Fund - Class A 7.69% 8.08% 8.71% 9.23%
New Mexico Tax Free Fund - Class B 6.94% 7.29% 7.86% 8.32%
NORTH DAKOTA(10)
30.72% 33.87% 39.07% 42.77%
North Dakota Tax Free Fund - Class A 6.42% 6.73% 7.30% 7.78%
North Dakota Tax Free Fund - Class B 5.69% 5.96% 6.47% 7.00%
North Dakota Tax Free Fund - Class C 5.53% 5.79% 6.29% 6.69%
OREGON(11)
34.48% 37.21% 41.76% 45.04%
Oregon Insured Tax Free Fund - Class A 6.62% 6.91% 7.45% 7.90%
Oregon Insured Tax Free Fund - Class B 5.88% 6.13% 6.61% 7.00%
Oregon Insured Tax Free Fund - Class C 5.72% 5.97% 6.44% 6.82%
UTAH(12)
32.38% 35.13% 39.72% 43.04%
Utah Tax Free Fund - Class A 7.35% 7.66% 8.24% 8.73%
Utah Tax Free Fund - Class B 6.54% 6.81% 7.33% 7.76%
WASHINGTON
28% 31% 36% 39.6%
Washington Insured Tax Free Fund - Class A 5.65% 5.90% 6.36% 6.74%
Washington Insured Tax Free Fund - Class B 4.58% 4.78% 5.16% 5.46%
Washington Insured Tax Free Fund - Class C 5.13% 5.35% 5.77% 6.11%
WISCONSIN(13)
32.99% 35.78% 40.44% 43.79%
Wisconsin Tax Free Fund - Class A 6.58% 6.87% 7.40% 7.84%
Wisconsin Tax Free Fund - Class B 5.81% 6.06% 6.53% 6.92%
Wisconsin Tax Free Fund - Class C 5.69% 5.93% 6.40% 6.78%
NATIONAL
28% 31% 36% 39.6%
National Insured Tax Free Fund - Class A 7.19% 7.51% 8.09% 8.58%
National Insured Tax Free Fund - Class B 6.53% 6.81% 7.34% 7.78%
National Insured Tax Free Fund - Class C 6.32% 6.59% 7.11% 7.53%
National Limited Term Tax Free Fund - Class A 5.90% 6.16% 6.64% 7.04%
National Tax Free Fund - Class A 6.46% 6.74% 7.27% 7.70%
National Tax Free Fund - Class B 5.65% 5.90% 6.36% 6.74%
National Tax Free Fund - Class C 5.67% 5.91% 6.38% 6.75%
</TABLE>
(1) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 5.2% Arizona marginal rate and a 26.54%
federal marginal rate, (b) a 5.2% Arizona marginal rate and a 29.39%
federal
B-89
marginal rate, (c) a 5.6% Arizona marginal rate and a 33.98% federal
marginal rate, and (d) a 5.6%Arizona marginal rate and a 37.38% federal
marginal rate.
(2) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9.3% California marginal rate and (a) a 25.4%
federal marginal rate, (b) a 28.12% federal marginal rate, (c) a 32.65%
federal marginal rate, and (d) a 35.92% federal marginal rate.
(3) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 5% Colorado rate and (a) a 26.6% federal
marginal rate, (b) a 29.45% federal marginal rate, (c) a 34.20% federal
marginal rate, and (d) 37.62% federal marginal rate.
(4) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.20% Idaho tax rate and (a) a 25.70% federal
marginal rate, (b) a 28.46% federal marginal rate, (c) a 33.05% federal
marginal rate, and (d) a 36.35% federal marginal rate.
(5) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.39% Iowa marginal rate and a 25.93%
federal marginal rate, (b) a 7.11% Iowa marginal rate and a 28.8%
federal marginal rate, (c) a 6.63% Iowa marginal rate and a 33.61%
federal marginal rate, and (d) a 6.28% Iowa marginal rate and a 37.11%
federal marginal rate.
(6) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 7.75 Kansas marginal rate and (a) a 25.83%
federal marginal rate, (b)a 28.60% federal marginal rate, (c) a 33.21%
federal marginal rate, and (d) a 36.53% federal marginal rate.
(7) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.5% Minnesota marginal rate and (a) a 25.62%
federal marginal rate, (b) a 28.37% federal marginal rate, (c) a 32.94%
federal marginal rate, and (d) a 36.23% federal marginal rate.
(8) The four combined rates listed above assume that the taxpayer is
subject to (a) a 4.39% Missouri marginal rate and a 26.77% federal
marginal rate, (b) a 4.22% Missouri marginal rate and a 29.69% federal
marginal rate, (c) a 3.92% Missouri marginal rate and a 34.59% federal
marginal rate, and (d) a 3.71% Missouri marginal rate and a 38.13%
federal marginal rate.
(9) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.9% New Mexico marginal rate and a 25.79%
federal marginal rate, (b) a 8.5% New Mexico marginal rate and a 28.37%
federal marginal rate, (c) a 8.5% New Mexico marginal rate and a 32.94%
federal marginal rate, and (d) a 8.5% New Mexico marginal rate and a
36.23% federal marginal rate.
(10) The four combined rates listed above assume that the taxpayer is
subject to (a) 26.94%, (b) 29.71%, (c) 34.27%% and (d) 37.52% federal
marginal rates and elects to determine his or her North Dakota income
tax liability as an amount equal to 14% of his or her adjusted federal
income tax liability.
(11) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9% Oregon tax rate and (a) a 25.48% federal
marginal rate, (b) a 28.21% federal marginal rate, (c) a 32.76% federal
marginal rate, and (d) a 36.04% federal marginal rate.
(12) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 6.08% Utah marginal rate and a 26.30%
federal marginal rate, (b) a 5.98% Utah marginal rate and a 29.15%
federal marginal rate, (c) a 5.81% Utah marginal rate and a 33.91%
federal marginal rate, and (d) a 5.69% Utah marginal rate and a 37.35%
federal marginal rate.
(13) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 6.93% Wisconsin marginal rate and (a) a 26.06%
federal marginal rate, (b) a 28.85% federal marginal rate, (c) a 33.51%
federal marginal rate, and (d) a 36.86% federal marginal rate.
B-90
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is computed by finding the average
annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P ( 1 + T )(nth power) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the
end of the period of a
hypothetical $1,000 payment made
at the beginning of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The following table sets forth the average annual total return for
each Fund for the periods indicated and ended December 31, 1995 (as adjusted for
revised sales charges effective June 3, 1996):
<TABLE>
<CAPTION>
Average Annual Total Return
------------------------------------------------------------------------------------
Absent Voluntary
Actual Fee Waivers
-------------------------------------- -------------------------------------
Since Since
1 Year 5 Year Inception 1 Year 5 Year Inception
<S> <C> <C> <C> <C> <C> <C>
Arizona Insured Tax Free Fund
Class A (Inception 4/1/91) 14.63% ** 8.04% 14.31% ** 7.41%
Class B (Inception 3/10/95) ** ** 10.36% ** ** 10.08%
Class C (Inception 5/26/94) 18.10% ** 8.96% 17.90% ** 8.75%
Arizona Tax Free Fund
Class A (Inception 3/2/95) ** ** 9.02% ** ** 8.32%
Class B (Inception 6/29/95) ** ** 7.74% ** ** 7.14%
Class C (Inception 5/13/95) ** ** 9.43% ** ** 8.95%
California Tax Free Fund
Class A (Inception 3/2/95) ** ** 7.76% ** ** 7.07%
Class B (Inception 8/23/95) ** ** 9.52% ** ** 9.01%
California Insured Tax Free Fund
Class A (Inception 10/15/92) 15.99% ** 6.67% 15.56% ** 5.81%
Class B (Inception 3/1/94) 20.01% ** 5.05% 19.15% ** 4.03%
Class C (Inception 4/12/95) ** ** 7.77% ** ** 7.56%
Colorado Tax Free Fund
Class A (Inception 4/23/87) 16.02% 7.96% 8.18% 15.81% 7.91% 8.14%
Class B (Inception 3/22/95) ** ** 9.96% ** ** 9.68%
Class C (Inception 5/6/94) 19.44% ** 8.78% 19.44% ** 8.77%
Florida Tax Free Fund
Class A (Inception 3/2/95) ** ** 8.27% ** ** 7.40%
Class B (Inception 9/15/95) ** ** 5.10% ** ** 4.61%
Class C (Inception 4/22/95) ** ** 8.88% ** ** 8.20%
B-91
Florida Limited Term Tax Free Fund
Class A (Inception 5/1/94) 11.97% ** 6.01% 11.25% ** 5.23%
Class B (Inception 9/15/95) ** ** 1.13% ** ** 0.99%
Class C (Inception 3/23/95) ** ** 7.95% ** ** 7.62%
Florida Insured Tax Free Fund
Class A (Inception 1/1/92) 16.68% ** 7.53% 16.20% ** 6.87%
Class B (Inception 3/11/94) 20.76% ** 6.80% 19.77% ** 5.92%
Idaho Tax Free Fund
Class A (Inception 1/4/95) ** ** 13.08% ** ** 11.86%
Class B (Inception 3/16/95) ** ** 9.86% ** ** 8.81%
Class C (Inception 1/11/95) ** ** 15.81% ** ** 14.69%
Iowa Tax Free Fund
Class A (Inception 9/1/93) 16.27% ** 2.75% 15.84% ** 1.90%
Class B (Inception 3/24/95) ** ** 10.62% ** ** 10.25%
Class C (Inception 1/14/95) ** ** 19.66% ** ** 19.48%
Kansas Tax Free Fund
Class A (Inception 11/30/92) 14.66% ** 6.87% 13.67% ** 5.73%
Class B (Inception 4/8/95) ** ** 8.76% ** ** 8.06%
Class C (Inception 4/12/95) ** ** 8.29% ** ** 7.77%
Minnesota Limited Term Tax Free Fund
Class A (Inception 10/27/85) 7.95% 5.88% 5.96%# 7.94% 5.88% 5.96%#
Class B (Inception 8/15/95) ** ** 3.26% ** ** 3.15%
Class C (Inception 5/4//94) 10.18% ** 5.99% 10.17% ** 5.98%
Minnesota Tax Free Fund
Class A (Inception 2/27/84) 13.08% 7.34% 7.89%# + + 7.89%#
Class B (Inception 3/11/95) ** ** 9.95% ** ** 9.71%
Class C (Inception 5/4//94) 16.62% ** 8.14% + ** +
Minnesota Insured Fund
Class A (Inception 5/1/87) 13.12% 7.51% 7.52% 13.06% 7.21% 7.17%
Class B (Inception 3/7/95) ** ** 9.59% ** ** 9.31%
Class C (Inception 5/4//94) 16.63% ** 7.61% 16.59% ** 7.45%
Missouri Insured Tax Free Fund
Class A (Inception 11/2/92) 14.98% ** 6.33% 15.07% ** 5.46%
Class B (Inception 3/12/94) 19.18% ** 6.30% 18.14% ** 5.13%
Class C (Inception 11/11/95) ** ** 2.24% ** ** 2.15%
National Tax Free Fund
Class A (Inception 9/8/95) ** ** 3.54% ** ** 3.23%
Class B (Inception 9/15/95) ** ** 6.39% ** ** 6.01%
Class C (Inception 9/12/95) ** ** 7.37% ** ** 7.10%
National Insured Tax Free Fund
Class A (Inception 1/10/92) 16.11% ** 6.70% 15.42% ** 5.50%
Class B (Inception 5/26/94) 20.10% ** 10.33% 18.95% ** 9.02%
Class C (Inception 10/20/95) ** ** 3.21% ** ** 3.05%
National Limited Term Tax Free Fund
Class A (Inception 9/7/95) ** ** 0.71% ** ** 0.12%
New Mexico Tax Free Fund
Class A (Inception 10/5/92) 15.15% ** 7.07% 14.85% ** 6.28%
Class B (Inception 3/3/94) 18.84% ** 5.76% 18.42% ** 5.08%
North Dakota Tax Free Fund
Class A (Inception 4/1/91) 13.39% ** 7.78% 13.09% ** 7.12%
Class B (Inception 5/10/94) 17.24% ** 10.17% 16.60% ** 9.42%
Class C (Inception 7/29/95) ** ** 6.47% ** ** 6.46%
B-92
Oregon Insured Tax Free Fund
Class A (Inception 8/1/93) 14.26% ** 3.93% 13.50% ** 2.92%
Class B (Inception 3/12/94) 18.10% ** 6.00% 17.02% ** 4.82%
Class C (Inception 7/7/95) ** ** 6.35% ** ** 6.12%
Utah Tax Free Fund
Class A (Inception 10/5/92) 14.59% ** 7.94% 13.58% ** 6.85%
Class B (Inception 5/27/95) ** ** 6.60% ** ** 6.05%
Washington Insured Tax Free Fund
Class A (Inception 8/1/93) 15.45% ** 6.11% 14.19% ** 4.93%
Class B (Inception 10/24/95) ** ** 3.30% ** ** 3.09%
Class C (Inception 4/21/95) ** ** 8.13% ** ** 7.51%
Wisconsin Tax Free Fund
Class A (Inception 9/1/93) 13.33% ** 2.55% 13.00% ** 1.70%
Class B (Inception 4/22/95) ** ** 7.08% ** ** 6.83%
Class C (Inception 3/28/95) ** ** 8.06% ** ** 7.99%
</TABLE>
** Not in existence for the period.
+ There were no voluntary fee waivers during the period.
# Return is for the 10 year period ended December 31, 1995.
CUMULATIVE TOTAL RETURN
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = [((ERV-P)/P)100]
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period; and
P = initial payment of $1,000.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The following table sets forth the cumulative total return for
shares of each Fund for the period from inception to December 31, 1995 (as
adjusted for revised sales charges effective June 3, 1996):
Cumulative Return
Total Since Inception
Absent Voluntary
Actual Fee Waivers
Arizona Tax Free Fund
Class A (Inception 3/2/95) 9.02% 8.32%
Class B (Inception 6/29/95) 7.74% 7.14%
Class C (Inception 5/13/95) 9.43% 8.95%
Arizona Insured Tax Free Fund
Class A (Inception 4/1/91) 44.43% 40.47%
Class B (Inception 3/10/95) 10.36% 10.08%
Class C (Inception 5/26/94) 14.75% 14.40%
B-93
California Tax Free Fund
Class A (Inception 3/2/95) 7.76% 7.07%
Class B (Inception 8/23/95) 9.52% 9.01%
California Insured Tax Free Fund
Class A (Inception 10/15/92) 23.07% 19.89%
Class B (Inception 3/1/94) 9.47% 7.53%
Class C (Inception 4/12/95) 7.77% 7.56%
Colorado Tax Free Fund
Class A (Inception 4/23/87) 98.01% 97.52%
Class B (Inception 3/22/95) 9.96% 9.68%
Class C (Inception 5/6/94) 14.96% 14.96%
Florida Tax Free Fund
Class A (Inception 3/2/95) 8.27% 7.40%
Class B (Inception 9/15/95) 5.10% 4.61%
Class C (Inception 4/22/95) 8.88% 8.20%
Florida Insured Tax Free Fund
Class A (Inception 1/1/92) 33.67% 30.44%
Class B (Inception 3/1/94) 12.64% 10.98%
Florida Limited Term Tax Free Fund
Class A (Inception 5/1/94) 10.24% 8.89%
Class B (Inception 9/15/95) 1.13% 0.99%
Class C (Inception 3/23/95) 7.95% 7.62%
Idaho Tax Free Fund
Class A (Inception 1/4/95) 13.08% 11.86%
Class B (Inception 3/16/95) 9.86% 8.81%
Class C (Inception 1/11/95) 15.81% 14.69%
Iowa Tax Free Fund
Class A (Inception 9/1/93) 6.53% 4.49%
Class B (Inception 3/24/95) 10.62% 10.25%
Class C (Inception 1/4/95) 19.66% 19.48%
Kansas Tax Free Fund
Class A (Inception 11/30/92) 22.78% 18.77%
Class B (Inception 4/8/95) 8.76% 8.06%
Class C (Inception 4/12/95) 8.29% 7.77%
Minnesota Limited Term Tax Free Fund
Class A (Inception 10/27/85) 84.16% 84.14%
Class B (Inception 8/15/95) 3.26% 3.15%
Class C (Inception 4/30/94) 10.15% 10.14%
Minnesota Insured Fund
Class A (Inception 5/1/87) 87.59% 82.29%
Class B (Inception 3/7/95) 9.59% 9.31%
Class C ((Inception 5/4/94) 12.97% 12.69%
Minnesota Tax Free Fund
Class A (Inception 2/27/84) 182.87% 182.50%
Class B (Inception 3/11/95) 9.95% 9.71%
Class C (Inception 5/4/94) 13.91% 13.91%
Missouri Insured Tax Free Fund
Class A (Inception 11/2/92) 21.42% 18.32%
Class B (Inception 3/12/94) 11.68% 9.47%
Class C (Inception 11/11/95) 2.24% 2.15%
National Tax Free Fund
Class A (Inception 9/8/95) 3.54% 3.23%
Class B (Inception 9/15/95) 6.39% 6.01%
Class C (Inception 9/12/95) 7.37% 7.10%
B-94
National Insured Tax Free Fund
Class A (Inception 1/10/92) 29.42% 23.70%
Class B (Inception 5/26/94) 17.06% 14.85%
Class C (Inception 10/20/95) 3.21% 3.05%
National Limited Term Tax Free Fund
Class A (Inception 9/7/95) 0.71% 0.12%
New Mexico Tax Free Fund
Class A (Inception 10/5/92) 24.77% 21.82%
Class B (Inception 3/3/94) 10.80% 9.50%
North Dakota Tax Free Fund
Class A (Inception 4/1/91) 42.79% 38.65%
Class B (Inception 5/10/94) 17.29% 15.98%
Class C (Inception 7/29/95) 6.47% 6.46%
Oregon Insured Tax Free Fund
Class A (Inception 8/1/93) 9.78% 7.20%
Class B (Inception 3/12/94) 11.10% 8.89%
Class C (Inception 7/7/95) 6.35% 6.12%
Utah Tax Free Fund
Class A (Inception 10/5/92) 28.09% 23.97%
Class B (Inception 5/27/95) 6.60% 6.05%
Washington Insured Tax Free Fund
Class A (Inception 8/1/93) 15.40% 12.34%
Class B (Inception 10/24/95) 3.30% 3.09%
Class C (Inception 4/21/95) 8.13% 7.51%
Wisconsin Tax Free Fund
Class A (Inception 9/1/93) 6.05% 4.01%
Class B (Inception 4/22/95) 7.08% 6.83%
Class C (Inception 3/28/95) 8.06% 7.99%
MONTHLY CASH WITHDRAWAL PLAN
Any investor who owns or buys shares of any Fund valued at $10,000
or more at the current offering price may open a Withdrawal Plan and have a
designated sum of money paid monthly to the investor or another person. Shares
are deposited in a Withdrawal Plan account and all distributions are reinvested
in additional shares of such Fund at net asset value or distributed in cash.
Shares in a Withdrawal Plan account are then redeemed to make each withdrawal
payment. Deferred sales charges may apply to monthly redemptions of Class B and
Class C shares (or to redemptions of Class A shares in connection with initial
purchases of $1,000,000 or more which were not subject to a FESC). Redemptions
for the purpose of withdrawal are made on the 25th of the month (or on the
preceding business day if the 25th falls on a weekend or is a holiday) at that
day's closing net asset value and checks are mailed on the next business day.
Payments will be made to the registered shareholder. As withdrawal payments may
include a return on principal, they cannot be considered a guaranteed annuity or
actual yield of income to the investor. The redemption of shares in connection
with a Withdrawal Plan may result in a gain or loss for tax purposes. Continued
withdrawals in excess of income will reduce and possibly exhaust invested
principal, especially in the event of a market decline. The maintenance of a
Withdrawal Plan concurrently with purchases of additional Class A shares of a
Fund would normally be disadvantageous to the investor because of the FESC
payable on such purchases. For this reason, an investor may not maintain a plan
for the accumulation of Class A shares of a Fund (other than through
reinvestment of distributions) and a Withdrawal Plan at the same time. The cost
of administering Withdrawal Plans is borne by each Fund as an expense of all
shareholders. Each Fund or the Underwriter may terminate or change the terms of
the Withdrawal Plan at any time. The Withdrawal Plan is fully voluntary and may
be terminated by the shareholder at any time without the imposition of any
penalty.
Since the Withdrawal Plan may involve invasion of capital, investors
should consider carefully with their own financial advisers whether the
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in
their circumstances. The Funds make no recommendations or representations in
this regard.
B-95
ADDITIONAL INFORMATION
Information regarding certain record and beneficial ownership of the
Fund shares as of March 31, 1996 which equals or exceeds 5% of a Fund's shares
is available without charge by calling 800-553-2143.
Organizational costs in connection with start-up and initial
registration are being amortized over 60 months on an inverse acceleration
(sum-of-the-year's-digits) basis. If Voyageur redeems any or all of its shares
of any Fund prior to the end of such Fund's 60-month amortization period, the
redemption proceeds will be reduced by its pro rata portion of such Fund's
unamortized organizational costs. If a Fund liquidates prior to the date such
costs are fully amortized, Voyageur will bear all unamortized organizational
costs of such Fund.
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A., Sixth Street & Marquette Avenue,
Minneapolis, Minnesota 55479, acts as custodian of the Funds' assets and
portfolio securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, serves as counsel for the Funds.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as independent auditors for the Funds. The Financial Statements
and Financial Highlights for the Funds as of December 31, 1995, incorporated by
reference or included in this Registration Statement have been so incorporated
or included herein in reliance upon the report of the independent auditors and
upon the authority of said firm as experts in accounting and auditing.
LIMITATION OF DIRECTOR LIABILITY
Corporate Entities. Under Minnesota law, each director owes certain
fiduciary duties to each Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances). Minnesota law authorizes corporations to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of the fiduciary duty of "care". Minnesota law does
not, however, permit a corporation to eliminate or limit the liability of
directors (i) for any breach of the directors' duty of "loyalty" to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for
authorizing a dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions of Minnesota
securities law, or (iv) for any transaction from which the directors derived an
improper personal benefit. The Articles of Incorporation of each of the Funds
limits the liability of such Funds' directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the 1940 Act (which Act prohibits any provisions which purport to
limit the liability of directors arising from such directors' willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the 1940 Act and the rules and regulations
adopted thereunder.
B-97
Trust Entities. As described in the prospectus following the caption
"General Information," shares of the Funds are entitled to one vote per share
(with proportional voting for fractional shares) on such matters as shareholders
are entitled to vote. There will normally be no meetings of shareholders for the
purpose of electing Trustees, except insofar as elections are required under the
1940 Act in the event that (i) less than a majority of the Trustees have been
elected by shareholders, or (ii) if, as a result of a vacancy, less than
two-thirds of the Trustees have been elected by the shareholders, the vacancy
will be filled only by a vote of the shareholders. In addition, the Trustees may
be removed from office by a written consent signed by the holders of two-thirds
of the outstanding shares of the Funds and filed with the Funds' custodian or by
a vote of the holders of two-thirds of the outstanding shares of the Funds at a
meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten or more shareholders, who have been such for at
least six months, and who in the aggregate hold shares having a net asset value
of at least $25,000 or constituting 1% of the outstanding shares, stating that
such shareholders wish to communicate with the other shareholders for the
purpose of obtaining the signatures necessary to demand a meeting to consider
removal of a Trustee, the Funds have undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, each Trustee shall continue
to hold office and may appoint a successor.
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Funds. However, the
Funds' Agreement and Declaration of Trust disclaims shareholder liability for
acts or obligations of the Funds and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or executed by a
Fund or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of each Fund's property for all loss and expense of any
shareholder of such Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which such Fund would be
unable to meet its obligations.
SHAREHOLDER MEETINGS
None of the Funds is required under Minnesota law to hold annual or
periodically scheduled regular meetings of shareholders. Regular and special
shareholder meetings are held only at such times and with such frequency as
required by law. Minnesota corporation law provides for the Board of Directors
to convene shareholder meetings when it deems appropriate. Similar discretion is
vested in the Boards of Trustees of parent entities organized as Massachusetts
Business Trusts. In addition, if a regular meeting of shareholders has not been
held during the immediately preceding fifteen months, a shareholder or
shareholders holding three percent or more of the voting shares of certain Funds
may demand a regular meeting of shareholders of the Fund by written notice of
demand given to the chief executive officer or the chief financial officer of
the Fund. Within ninety days after receipt of the demand, a regular meeting of
shareholders must be held at the expense of the Fund. Additionally, the 1940 Act
requires shareholder votes for all amendments to fundamental investment policies
and restrictions and for amendments to investment advisory contracts and Rule
12b-1 distribution plans.
The audited Financial Statements and Financial Highlights for the
Funds for the fiscal year ended December 31, 1995 are incorporated herein by
reference from the annual report of each Fund as filed with the Securities and
Exchange Commission. Please call (800) 553-2143 to obtain a copy of the most
recent annual report of a Fund at no charge.
B-98
APPENDIX A
Descriptions of Bond Ratings
Description of Standard and Poor's Ratings Services ("S&P"), and
Moody's Investors Service, Inc. ("Moody's") ratings:
S&P's Ratings for Municipal Bonds
An S&P municipal bond rating is a current assessment of the
creditworthiness of an object with respect to a specific obligation. S&P's
letter ratings may be modified by the addition of a plus or minus sign, which is
used to show relative standing within the major rating categories, except in the
AAA (Prime Grade) category.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA
AAA is the highest rating assigned by S&P. An issuer's capacity to pay
interest and repay the principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A
Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB
Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B
Debt rated BB and B (as well as debt rated CCC, C and C) is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation within this category, B represents a somewhat
higher degree of speculation and C represents the highest degree of speculation
of these ratings.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal repayments.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
A-1
S&P Ratings for Municipal Notes
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to pay
principal and interest.
Moody's Ratings for Municipal Bonds
Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-2
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. A short-term rating designated VMIG, may also be assigned an issue having
a demand feature. The municipal obligations bearing the designation MIG 1/VMIG 1
are of the best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. The municipal obligations bearing the designation are
ample although not so large as in the preceding group.
Description of S&P A-1+
and
A-1 Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must possess overwhelming safety
characteristics regarding timely payment. Commercial paper rated A-1 must have a
degree of safety that is either overwhelming or very strong.
Description of
Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and will normally be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation and well established access
to a range of financial markets and assured sources of alternate liquidity.
APPENDIX B
General Characteristics and Risks
of Options and Futures
General. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," each Fund may purchase and sell options on
the securities in which it may invest and certain Funds may purchase and sell
options on futures contracts (as defined below) and may purchase and sell
futures contracts. The Funds intend to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Funds' investment
objectives, to seek to hedge against the effects of market conditions and to
seek to stabilize the value of its assets. The Funds will engage in hedging and
risk management transactions from time to time in Voyageur's discretion, and
may not necessarily be engaging in such transactions when movements in interest
rates that could affect the value of the assets of the Funds occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Funds will employ any of the
techniques or strategies described below. The Funds' ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the ' CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Funds do not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and
attendant risks, are discussed below.
Futures Contracts and Related Options. Certain Funds may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which certain Funds may invest. A "sale" of a futures
contract means the undertaking of a contractual obligation to deliver the
securities, or the cash value of an index, called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities, or cash value of an index, at a specified price during a specified
delivery period. Certain Funds may also purchase and sell (write) call and put
options on financial futures contracts. An option on a futures contract gives
the purchaser the right, in return for the premium paid, to assume a position in
a futures contract at a specified exercise price at any time during, or at the
termination of, the period specified in the terms of the option. Upon exercise,
the writer of the option delivers the futures contract to the holder at the
exercise price. The Funds would be required to deposit with its custodian
initial margin and maintenance margin with respect to put and call options on
futures contracts written by it.
Although some financial futures contracts by their terms call for
the actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. Certain
Funds' ability to establish and close out positions in futures contracts and
options on futures contracts will be subject to the liquidity of the market.
Although certain Funds generally will purchase or sell only those futures
contracts and options thereon for which there appears to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option thereon at any particular time. Where it
is not possible to effect a closing transaction in a contract or to do so at a
satisfactory price, certain Funds would have to make or take delivery under the
futures contract, or, in the case of a purchased option, exercise the option.
The Funds would be required to maintain initial margin deposits with respect to
the futures contract and to make variation margin payments until the contract is
closed. The Funds will incur brokerage fees when they purchase or sell futures
contracts.
At the time a futures contract is purchased or sold, the Funds must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts certain Funds may purchase or sell may range from
approximately 1 1/2% to 5% of the value of the securities (or the securities
index) underlying the contract. In certain circumstances, however, such as
during periods of high volatility, certain Funds may be required by an exchange
to increase the level of its initial margin payment. Initial margin requirements
may be increased generally in the future by regulatory action. An outstanding
futures contract is valued daily in a process known as "marking to market." If
the market value of the futures
B-1
contract has changed, certain Funds will be required to make or will be entitled
to receive a payment in cash or specified high quality debt securities in an
amount equal to any decline or increase in the value of the futures contract.
These additional deposits or credits are calculated and required on a daily
basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of
the futures contract certain Funds purchase or sell and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts purchased or sold by cetain Funds in a
hedging transaction, even if Voyageur correctly forecasts market trends certain
Funds' hedging strategy may not be successful. If this should occur, the Funds
could lose money on the futures contracts and also on the value of its portfolio
securities.
Although the Funds believe that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Funds'
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Funds seek
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Funds will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Funds may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
Options on Securities. Each Fund may purchase and sell (write)
options on securities, which options may be either exchange-listed or
over-the-counter options. The Funds may write call options only if the call
option is "covered." A call option written by a Fund is covered if the Fund owns
the securities underlying the option or has a contractual right to acquire them
or owns securities which are acceptable for escrow purposes. The Funds may write
put options only if the put option is "secured." A put option written by a Fund
is secured if the Fund, which is obligated as a writer of a put option, invests
an amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from
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the concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less than the
premium paid to purchase the option. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Each Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
Each Fund may purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
Each Fund may purchase and sell options that are exchange-traded or
that are traded over-the counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when a Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although each Fund will enter into OTC options only with dealers
that agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until a Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Funds' ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Funds may be unable to liquidate an OTC
option. In the case of options written by the Funds, the inability to enter into
a closing purchase transaction may result in material losses to the Funds.
Regulatory Restrictions. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the
Funds will
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maintain, in a segregated account, cash or liquid high-grade securities equal to
the value of such contracts. Compliance with such segregation requirements may
restrict the Funds' ability to invest in intermediate- and long-term Tax Exempt
Obligations.
The Funds intend to comply with CFTC regulations and avoid
"commodity pool operator" status. These regulations require that futures and
options positions be used (a) for "bona fide hedging purposes" (as defined in
the regulations) or (b) for other purposes so long as aggregate initial margins
and premiums required in connection with non-hedging positions do not exceed 5%
of the liquidation value of the Fund's portfolio. The Funds currently do not
intend to engage in transactions in futures contracts or options thereon for
speculation.
Accounting Considerations. When a Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When a Fund purchases an option, the premium paid by the Fund is recorded as an
asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by
certain Funds. an amount equal to the initial margin deposit is recorded as an
asset. The amount of the asset subsequently is adjusted to reflected changes in
the amount of the deposit as well as changes in the value of the contract.
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