<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1998
SECURITIES ACT FILE NO. 33-20580
INVESTMENT COMPANY ACT FILE NO. 811-5011
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 11
(CHECK APPROPRIATE BOX OR BOXES)
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 90
(CHECK APPROPRIATE BOX OR BOXES)
----------------
CMA CALIFORNIA MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ARTHUR ZEIKEL
CMA MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP FUND ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
JEFFREY S. ALEXANDER, ESQ.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
NORTH TOWER, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10281-1201
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX)
[X] immediately upon filing pursuant to paragraph (b), or
[_] on (date) pursuant to paragraph (b), or
[_] 60 days after filing pursuant to paragraph (a)(1), or
[_] on (date) pursuant to paragraph (a)(1), or
[_] 75 days after filing pursuant to paragraph (a)(2), or
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, par
value $.10 per share
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CMA CALIFORNIA MUNICIPAL MONEY FUND
CMA MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION
----------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table
Item 3. Condensed Financial
Information............ Financial Highlights; Yield Information
Item 4. General Description of
Registrant............. Investment Objectives and Policies;
Organization of the Trust
Item 5. Management of the Fund.. Fee Table; Management of the Trust;
Portfolio Transactions; Inside Back
Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other
Securities............. Organization of the Trust
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; Purchase of
Shares; Redemption of Shares; Inside
Back Cover Page
Item 8. Redemption or
Repurchase............. Fee Table; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Cover Page
Item 12. General Information and
History................ Not Applicable
Item 13. Investment Objectives
and Policies........... Investment Objectives and Policies
Item 14. Management of the Fund.. Management of the Trust
Item 15. Control Persons and
Principal Holders of
Securities............. Management of the Trust; General
Information--Additional Information
Item 16. Investment Advisory and
Other Services......... Management of the Trust; Purchase and
Redemption of Shares; General
Information
Item 17. Brokerage Allocation.... Portfolio Transactions
Item 18. Capital Stock and Other
Securities............. General Information--Description of
Series and Shares
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.......... Purchase and Redemption of Shares;
Determination of Net Asset Value
Item 20. Tax Status.............. Taxes
Item 21. Underwriters............ Purchase and Redemption of Shares
Item 22. Calculation of
Performance Data....... Yield Information
Item 23. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
CMA MULTI-STATE MUNICIPAL SERIES TRUST
CMA Arizona Municipal Money Fund CMA New Jersey Municipal Money Fund
CMA California Municipal Money Fund CMA New York Municipal Money Fund
CMA Connecticut Municipal Money Fund CMA North Carolina Municipal Money
Fund
CMA Massachusetts Municipal Money Fund CMA Ohio Municipal Money Fund
CMA Michigan Municipal Money Fund CMA Pennsylvania Municipal Money Fund
----------------
This document comprises the Prospectuses of CMA Arizona Municipal Money
Fund, CMA California Municipal Money Fund, CMA Connecticut Municipal Money
Fund, CMA Massachusetts Municipal Money Fund, CMA Michigan Municipal Money
Fund, CMA New Jersey Municipal Money Fund, CMA New York Municipal Money Fund,
CMA North Carolina Municipal Money Fund, CMA Ohio Municipal Money Fund and CMA
Pennsylvania Municipal Money Fund (the "CMA State Funds" or the "Funds"), ten
of the fourteen money market mutual funds (collectively, the "CMA Funds"), the
shares of which are offered to participants in the Cash Management Account(R)
("CMA" or "CMA account") financial service program of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") to provide a medium for the
investment of free credit cash balances held in CMA accounts.
----------------
A CMA account is a conventional Merrill Lynch cash securities account or
margin securities account ("Securities Account") which is linked to the CMA
Funds, to money market deposit accounts maintained with depository
institutions and to a Visa(R) card/check account ("Visa Account"). Merrill
Lynch markets its margin account under the name Investor CreditLine SM
service. Subscribers to the CMA service may automatically invest free credit
balances held in their CMA accounts in shares of one of the CMA Funds, or such
balances may be deposited automatically with a depository institution through
the Insured Savings SM Account (the "Insured Savings Account"). The CMA Funds
and the Insured Savings Account are collectively referred to as the "Money
Accounts."
Each CMA Fund is a no-load money market mutual fund seeking current income,
preservation of capital and liquidity available from investing in short-term
securities. The CMA Money Fund invests in money market securities generally;
the CMA Government Securities Fund invests in direct U.S. Government
obligations; the CMA Tax-Exempt Fund invests in tax-exempt securities and pays
dividends exempt from federal income taxation; the CMA Treasury Fund invests
in U.S. Treasury securities; and each of the CMA State Funds invests in tax-
exempt securities and pays dividends exempt from federal and a particular
state's (and, in certain instances, city's) income taxes.
Free credit balances held in CMA accounts will be invested automatically in
or deposited through the Money Account selected by the CMA subscriber as his
or her Primary Money Account. The subscriber may make manual investments in
any of the CMA Funds as described under "Purchase of Shares." The subscriber
may change the Primary Money Account designation at any time by following the
procedures set forth under "Purchase of Shares."
Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year for individuals (an additional $25 annual program
fee is charged for participation in the CMA Visa(R) Gold Program described in
the CMA Program Description). A different fee may be charged to certain group
plans and special accounts. Merrill Lynch reserves the right to change the fee
for the CMA service or the CMA Visa Gold Program at any time. As described
under "Purchase of Shares," shares of the CMA Funds may be purchased directly
through the Funds' Transfer Agent by investors who are not subscribers to the
CMA program. Shareholders of the CMA Funds not subscribing to the CMA program
will not be charged the CMA program fee but will not receive any of the
additional services available to CMA program subscribers.
----------------
The information in this document should be read in conjunction with the
description of the Merrill Lynch Cash Management Account program which is
furnished to all CMA subscribers. Reference is made to such description for
information with respect to the CMA program, including the fees related
thereto. Information concerning the other CMA Funds is contained in the
prospectus relating to each of such Funds and information concerning the
Insured Savings Account is contained in the Insured Savings Account Fact
Sheet. All CMA subscribers are furnished with the prospectuses of CMA Money
Fund, CMA Government Securities Fund, CMA Tax-Exempt Fund and CMA Treasury
Fund and the Insured Savings Account Fact Sheet. For more information about
the Merrill Lynch Cash Management Account program, call toll-free from
anywhere in the U.S., 1-800-CMA-INFO (1-800-262-4636).
<PAGE>
PROSPECTUS
JULY 28, 1998
CMA MULTISTATE MUNICIPAL SERIES TRUST
CMA Arizona Municipal Money Fund CMA New Jersey Municipal Money Fund
CMA California Municipal Money Fund CMA New York Municipal Money Fund
CMA Connecticut Municipal Money Fund CMA North Carolina Municipal Money
Fund
CMA Massachusetts Municipal Money CMA Ohio Municipal Money Fund
Fund
CMA Michigan Municipal Money Fund CMA Pennsylvania Municipal Money
Fund
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
CMA Multi-State Municipal Series Trust (the "Trust") consists of CMA Arizona
Municipal Money Fund (the "Arizona Fund"), CMA California Municipal Money Fund
(the "California Fund"), CMA Connecticut Municipal Money Fund (the
"Connecticut Fund"), CMA Massachusetts Municipal Money Fund (the
"Massachusetts Fund"), CMA Michigan Municipal Money Fund (the "Michigan
Fund"), CMA New Jersey Municipal Money Fund (the "New Jersey Fund"), CMA New
York Municipal Money Fund (the "New York Fund"), CMA North Carolina Municipal
Money Fund (the "North Carolina Fund"), CMA Ohio Municipal Money Fund (the
"Ohio Fund") and CMA Pennsylvania Municipal Money Fund (the "Pennsylvania
Fund") (together, the "Funds"). Each Fund is a non-diversified, no-load money
market mutual fund seeking current income (or value, in the case of property
taxes) exempt from federal income taxes, personal income taxes of the
designated state and, in certain instances, local personal income taxes, local
personal property taxes and/or state intangible personal property taxes. Each
Fund also seeks preservation of capital and liquidity. Each Fund seeks to
achieve its investment objectives by investing in a portfolio of short-term,
high quality obligations, the interest on which (or, in the case of property
taxes, the value of which) is exempt, in the opinion of counsel to the issuer,
from federal income taxes, personal income taxes of the designated state and,
in certain instances, local personal income taxes, local personal property
taxes and/or state intangible personal property taxes. The Funds may invest in
certain tax-exempt securities classified as "private activity bonds" that may
subject certain investors in the Funds to an alternative minimum tax. The
Funds also may invest in derivative or synthetic municipal instruments. See
"Investment Objectives and Policies--Portfolio Investments." All of the
investments of each Fund will be in securities with remaining maturities of
397 days (13 months) or less. The dollar-weighted average maturity of each
Fund's portfolio will be 90 days or less. Dividends are declared and
reinvested daily in the form of additional shares at net asset value. There
can be no assurance that the investment objectives of any Fund will be
realized. For more information on the Funds' investment objectives and
policies, please see "Investment Objectives and Policies" on page 9. AN
INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
EACH FUND SEEKS TO MAINTAIN A CONSTANT $1.00 PER SHARE NET ASSET VALUE. THERE
CAN BE NO ASSURANCE THAT ANY FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
Shares are offered at their net asset value. There is no minimum purchase
requirement for CMA program participants. Shares of a Fund also may be
purchased by individual investors maintaining accounts directly with the
Trust's Transfer Agent who do not subscribe to the CMA program. The minimum
initial purchase for non-CMA subscribers is $5,000 and the minimum subsequent
purchase is $1,000. Such investors will not receive any of the additional
services available to CMA program participants, such as the Visa Account or
the automatic investment of free credit balances. Each Fund has adopted a
distribution and shareholder servicing plan in compliance with Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). See "Purchase of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Trust and
each Fund that is relevant to making an investment in a Fund. This Prospectus
should be read carefully and retained for future reference. A statement
containing additional information about the Trust and each Fund, dated July
28, 1998 (the "Statement of Additional Information"), has been filed with the
Securities and Exchange Commission (the "Commission") and can be obtained
without charge by calling or writing to the Trust at the above telephone
number or address. The Commission maintains a Website (http://www.sec.gov)
that contains the Statement of Additional Information, material incorporated
by reference and other information about the Trust and each Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
<PAGE>
UNLESS OTHERWISE INDICATED, THE INFORMATION SET FORTH IN THIS PROSPECTUS IS
APPLICABLE TO EACH FUND. MANAGEMENT OF THE TRUST HAS CONSIDERED THE POSSIBILITY
THAT THE USE OF A COMBINED PROSPECTUS MAY SUBJECT A FUND OR FUNDS TO LIABILITY
FOR AN ALLEGED MISSTATEMENT RELATING TO ANOTHER FUND OR FUNDS. MANAGEMENT
BELIEVES THIS POSSIBILITY IS REMOTE.
FEE TABLE
<TABLE>
<CAPTION>
NEW NEW NORTH
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN JERSEY YORK CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
------- ---------- ----------- ------------- -------- ------ ---- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS) FOR THE
FISCAL YEAR ENDED
MARCH 31, 1998:
Management Fees(a).... 0.50% 0.43% 0.50% 0.50% 0.50% 0.48% 0.44% 0.50% 0.50% 0.50%
Rule 12b-1 Fees(b).... 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13
Other Expenses:
Dividend and Transfer
Agency Fees(c)...... 0.01 0.01 0.01 0.02 0.02 0.02 0.02 0.02 0.02 0.02
Other Fees........... 0.10 0.02 0.05 0.07 0.06 0.03 0.02 0.06 0.05 0.05
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Other Expenses. 0.11 0.03 0.06 0.09 0.08 0.05 0.04 0.08 0.07 0.07
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses............ 0.74% 0.59% 0.69% 0.72% 0.71% 0.66% 0.61% 0.71% 0.70% 0.70%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(a) See "Management of the Trust--Management and Advisory Arrangements"--page
25.
(b) See "Purchase of Shares"--page 18.
(c) See "Management of the Trust--Transfer Agency Services"--page 26.
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment, assuming
the operating expense ratio set forth above for each Fund and a 5% annual
return throughout the period:
<TABLE>
<CAPTION>
CUMULATIVE NORTH
EXPENSES ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK CAROLINA OHIO PENNSYLVANIA
PAYABLE FOR FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
THE PERIOD OF: ------- ---------- ----------- ------------- -------- ---------- -------- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year............ $ 8 $ 6 $ 7 $ 7 $ 7 $ 7 $ 6 $ 7 $ 7 $ 7
3 years........... $24 $19 $22 $23 $23 $21 $20 $23 $22 $22
5 years........... $41 $33 $38 $40 $40 $37 $34 $40 $39 $39
10 years.......... $92 $74 $86 $89 $88 $82 $76 $88 $87 $87
</TABLE>
MERRILL LYNCH CHARGES AN ANNUAL PROGRAM PARTICIPATION FEE, PRESENTLY $100 FOR
INDIVIDUALS, FOR THE CMA SERVICE (AN ADDITIONAL FEE, PRESENTLY $25, IS CHARGED
FOR PARTICIPATION IN THE CMA VISA GOLD PROGRAM). SHAREHOLDERS OF THE FUNDS
WHOSE ACCOUNTS ARE MAINTAINED DIRECTLY WITH THE TRUST'S TRANSFER AGENT AND WHO
ARE NOT SUBSCRIBERS TO THE CMA PROGRAM WILL NOT BE CHARGED THE CMA PROGRAM FEE
BUT WILL NOT RECEIVE ANY OF THE ADDITIONAL SERVICES AVAILABLE TO CMA PROGRAM
SUBSCRIBERS.
2
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that shareholders in the Funds will bear directly or
indirectly. THE EXAMPLE SET FORTH ABOVE ASSUMES REINVESTMENT OF ALL DIVIDENDS
AND DISTRIBUTIONS. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.
FINANCIAL HIGHLIGHTS
Financial statements for the fiscal year ended March 31, 1998 and the
independent auditors' report thereon for each Fund are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the financial statements of the
Funds audited by Deloitte & Touche LLP, independent auditors.
<TABLE>
<CAPTION>
ARIZONA FUND
------------------------------------------------------------
FOR THE
PERIOD
FOR THE FEBRUARY 8,
YEAR ENDED 1993+
MARCH 31, TO
----------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- -------
Investment
income--net..... .03 .03 .03 .03 .02 .002
-------- -------- -------- -------- ------- -------
Total from
investment
operations...... .03 .03 .03 .03 .02 .002
-------- -------- -------- -------- ------- -------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.002)
-------- -------- -------- -------- ------- -------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======= =======
TOTAL INVESTMENT
RETURN.......... 3.05% 2.86% 3.35% 2.83% 1.90% 1.83%*
======== ======== ======== ======== ======= =======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .74% .76% .58% .54% .59% .46%*
======== ======== ======== ======== ======= =======
Expenses........ .74% .76% .77% .85% .98% 1.15%*
======== ======== ======== ======== ======= =======
Investment
income--net..... 2.99% 2.80% 3.27% 2.84% 1.89% 1.86%*
======== ======== ======== ======== ======= =======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $213,277 $169,551 $137,520 $103,717 $73,414 $41,437
======== ======== ======== ======== ======= =======
<CAPTION>
CALIFORNIA FUND
------------------------------------------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 5,
FOR THE YEAR ENDED 1988+
MARCH 31, TO
-------------------------------------------------------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------
Investment
income--net..... .03 .03 .03 .03 .02 .02 .03 .05 .05 .04
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------
Total from
investment
operations...... .03 .03 .03 .03 .02 .02 .03 .05 .05 .04
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.02) (.03) (.05) (.05) (.04)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== =========== =========== =========== =========== =========== =========== ======
TOTAL INVESTMENT
RETURN.......... 3.06% 2.90% 3.15% 2.66% 1.93% 2.25% 3.51% 4.95% 5.61% 5.47%*
=========== =========== =========== =========== =========== =========== =========== =========== =========== ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .59% .60% .64% .63% .62% .63% .63% .62% .65% 64%*
=========== =========== =========== =========== =========== =========== =========== =========== =========== ======
Expenses........ .59% .60% .64% .63% .62% .63% .63% .62% .65% 72%*
=========== =========== =========== =========== =========== =========== =========== =========== =========== ======
Investment
income--net..... 3.00% 2.85% 3.11% 2.62% 1.91% 2.22% 3.42% 4.83% 5.44% .43%*
=========== =========== =========== =========== =========== =========== =========== =========== =========== ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $2,005,663 $1,565,802 $1,421,140 $1,168,234 $1,225,160 $1,014,800 $1,033,423 $1,163,288 $1,047,340 $702,698
=========== =========== =========== =========== =========== =========== =========== =========== =========== =======
</TABLE>
- ----
* Annualized.
+ Commencement of Operations.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CONNECTICUT FUND
---------------------------------------------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+
MARCH 31, TO
---------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Investment
income--net..... .03 .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- -------- --------
Total from
investment
operations...... .03 .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- -------- --------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN.......... 2.93% 2.81% 3.01% 2.54% 1.77% 2.20% 3.57%*
======== ======== ======== ======== ======== ======== ========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .69% .71% .72% .71% .70% .63% .41%*
======== ======== ======== ======== ======== ======== ========
Expenses........ .69% .71% .72% .71% .70% .73% .81%*
======== ======== ======== ======== ======== ======== ========
Investment
income--net..... 2.88% 2.76% 2.97% 2.53% 1.76% 2.17% 3.46%*
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $453,295 $339,931 $313,362 $260,398 $250,038 $231,431 $197,895
======== ======== ======== ======== ======== ======== ========
<CAPTION>
MASSACHUSETTS FUND
--------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 30,
FOR THE YEAR ENDED 1990+
MARCH 31, TO
--------------------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- ----------
Investment
income--net..... .03 .03 .03 .02 .02 .02 .04 .03
--------- --------- --------- --------- --------- --------- --------- ----------
Total from
investment
operations...... .03 .03 .03 .02 .02 .02 .04 .03
--------- --------- --------- --------- --------- --------- --------- ----------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.02) (.02) (.02) (.04) (.03)
--------- --------- --------- --------- --------- --------- --------- ----------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ==========
TOTAL INVESTMENT
RETURN.......... 3.03% 2.84% 3.04% 2.46% 1.74% 2.20% 3.69% 5.13%*
========= ========= ========= ========= ========= ========= ========= ==========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .72% .76% .76% .76% .78% .78% .85% .72%*
========= ========= ========= ========= ========= ========= ========= ==========
Expenses........ .72% .76% .76% .76% .78% .78% .87% .97%*
========= ========= ========= ========= ========= ========= ========= ==========
Investment
income--net..... 2.98% 2.78% 3.00% 2.43% 1.72% 2.15% 3.56% 4.92%*
========= ========= ========= ========= ========= ========= ========= ==========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $268,929 $200,598 $189,482 $161,076 $150,804 $132,302 $116,340 $84,613
========= ========= ========= ========= ========= ========= ========= ==========
</TABLE>
- -----
* Annualized.
+ Commencement of Operations.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
MICHIGAN FUND
---------------------------------------------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+
MARCH 31, TO
---------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Investment
income--net..... .03 .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- -------- --------
Total from
investment
operations...... .03 .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- -------- --------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.02) (.03 )
-------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN.......... 3.07% 2.90% 3.12% 2.57% 1.81% 2.24% 3.63%*
======== ======== ======== ======== ======== ======== ========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .71% .72% .73% .73% .72% .65% .54%*
======== ======== ======== ======== ======== ======== ========
Expenses........ .71% .72% .73% .73% .72% .74% .80%*
======== ======== ======== ======== ======== ======== ========
Investment
income--net..... 3.02% 2.84% 3.05% 2.54% 1.79% 2.22% 3.53%*
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $306,046 $272,969 $247,544 $220,171 $236,435 $200,200 $194,433
======== ======== ======== ======== ======== ======== ========
<CAPTION>
NEW JERSEY FUND
---------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 30,
FOR THE YEAR ENDED 1990+
MARCH 31, TO
--------------------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- -----------
Investment
income--net..... .03 .03 .03 .02 .02 .02 .03 .03
--------- --------- --------- --------- --------- --------- --------- -----------
Total from
investment
operations...... .03 .03 .03 .02 .02 .02 .03 .03
--------- --------- --------- --------- --------- --------- --------- -----------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.02) (.02) (.02) (.03) (.03 )
--------- --------- --------- --------- --------- --------- --------- -----------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ===========
TOTAL INVESTMENT
RETURN.......... 2.97% 2.83% 3.07% 2.52% 1.82% 2.21% 3.52% 5.03%*
========= ========= ========= ========= ========= ========= ========= ===========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .66% .68% .68% .71% .70% .70% .74% .64%*
========= ========= ========= ========= ========= ========= ========= ===========
Expenses........ .66% .68% .68% .71% .70% .70% .74% .76%*
========= ========= ========= ========= ========= ========= ========= ===========
Investment
income--net..... 2.92% 2.78% 3.02% 2.51% 1.80% 2.16% 3.42% 4.74%*
========= ========= ========= ========= ========= ========= ========= ===========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $799,997 $683,361 $610,285 $525,747 $441,846 $388,903 $350,058 $356,475
========= ========= ========= ========= ========= ========= ========= ===========
</TABLE>
* Annualized.
+ Commencement of Operations.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
NEW YORK FUND
----------------------------------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 5,
FOR THE YEAR ENDED 1988+
MARCH 31, TO
----------------------------------------------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Investment
income--net..... .03 .03 .03 .03 .02 .02 .03 .05 .05 .04
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations...... .03 .03 .03 .03 .02 .02 .03 .05 .05 .04
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.02) (.03) (.05) (.05) (.04)
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN.......... 3.09 % 2.94% 3.17% 2.59% 1.79% 2.19% 3.40% 4.85% 5.36% 5.09%*
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .61% .63% .64% .67% .67% .67% .68% .69% .71% .70%*
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
Expenses........ .61% .63% .64% .67% .67% .67% .68% .69% .72% .79%*
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
Investment
income--net..... 3.04% 2.88% 3.12% 2.59% 1.78% 2.16% 3.31% 4.73% 5.23% 5.14%*
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $1,556,021 $1,236,322 $1,132,264 $919,852 $772,760 $665,970 $625,768 $633,819 $544,197 $333,299
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
NORTH CAROLINA FUND
-----------------------------------------------------------------------
FOR THE
PERIOD
MAY 28,
FOR THE YEAR ENDED 1991 +
MARCH 31, TO
----------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- -----------
Investment
income--net..... .03 .03 .03 .03 .02 .02 .03
--------- --------- --------- --------- --------- --------- -----------
Total from
investment
operations...... .03 .03 .03 .03 .02 .02 .03
--------- --------- --------- --------- --------- --------- -----------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.02) (.03)
--------- --------- --------- --------- --------- --------- -----------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ===========
TOTAL INVESTMENT
RETURN.......... 3.02% 2.84% 3.12% 2.61% 1.85% 2.25% 3.51%*
========= ========= ========= ========= ========= ========= ===========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .71% .72% .69% .62% .61% .57% .45%*
========= ========= ========= ========= ========= ========= ===========
Expenses........ .71% .72% .74% .72% .71% .73% .83%*
========= ========= ========= ========= ========= ========= ===========
Investment
income--net..... 2.97% 2.79% 3.08% 2.58% 1.84% 2.20% 3.25%*
========= ========= ========= ========= ========= ========= ===========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $307,069 $274,180 $273,910 $278,704 $293,452 $235,384 $221,060
========= ========= ========= ========= ========= ========= ===========
</TABLE>
- -----
* Annualized.
+ Commencement of Operations.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
OHIO FUND
---------------------------------------------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+
MARCH 31, TO
---------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Investment
income--net..... .03 .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- -------- --------
Total from
investment
operations...... .03 .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- -------- --------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN.......... 3.15% 3.00% 3.26% 2.65% 1.88% 2.27% 3.66%*
======== ======== ======== ======== ======== ======== ========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .70% .71% .73% .74% .72% .74% .57%*
======== ======== ======== ======== ======== ======== ========
Expenses........ .70% .71% .73% .74% .72% .74% .82%*
======== ======== ======== ======== ======== ======== ========
Investment
income--net..... 3.09% 2.94% 3.21% 2.64% 1.86% 2.24% 3.52%*
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL
DATA:
Net assets, end
of period
(in thousands).. $394,715 $327,173 $282,187 $237,655 $213,655 $187,344 $192,173
======== ======== ======== ======== ======== ======== ========
<CAPTION>
PENNSYLVANIA FUND
---------------------------------------------------------------------------------
FOR THE
PERIOD
AUGUST 27,
FOR THE YEAR ENDED 1990+
MARCH 31, TO
--------------------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- -----------
Investment
income--net..... .03 .03 .03 .03 .02 .02 .03 .03
--------- --------- --------- --------- --------- --------- --------- -----------
Total from
investment
operations...... .03 .03 .03 .03 .02 .02 .03 .03
--------- --------- --------- --------- --------- --------- --------- -----------
Less dividends
from
investment
income--net..... (.03) (.03) (.03) (.03) (.02) (.02) (.03) (.03)
--------- --------- --------- --------- --------- --------- --------- -----------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ===========
TOTAL INVESTMENT
RETURN.......... 3.08% 2.92% 3.19% 2.65% 1.87% 2.29% 3.61% 5.03%*
========= ========= ========= ========= ========= ========= ========= ===========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .70% .71% .72% .71% .72% .72% .77% .75%*
========= ========= ========= ========= ========= ========= ========= ===========
Expenses........ .70% .71% .72% .71% .72% .72% .77% .80%*
========= ========= ========= ========= ========= ========= ========= ===========
Investment
income--net..... 3.03% 2.86% 3.13% 2.64% 1.85% 2.22% 3.47% 4.75%*
========= ========= ========= ========= ========= ========= ========= ===========
SUPPLEMENTAL
DATA:
Net assets, end
of period
(in thousands).. $443,012 $428,896 $416,729 $353,635 $336,853 $318,954 $243,225 $225,622
========= ========= ========= ========= ========= ========= ========= ===========
</TABLE>
- -----
* Annualized.
+ Commencement of Operations.
7
<PAGE>
YIELD INFORMATION
Set forth below are the annualized and compounded annualized yields for each
Fund for the indicated periods.
<TABLE>
<CAPTION>
NEW NEW NORTH
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN JERSEY YORK CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
------- ---------- ----------- ------------- -------- ------- ------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seven-Day Period
Ended
March 31, 1998
- -------------------
Annualized Yield... 2.97% 2.91% 2.85% 2.91% 2.97% 2.89% 2.95% 2.88% 3.07% 3.03%
Compounded
Annualized Yield.. 3.01% 2.95% 2.89% 2.95% 3.01% 2.93% 2.99% 2.92% 3.12% 3.08%
Average Maturity of
Portfolio at End
of Period......... 29 days 43 days 44 days 37 days 32 days 35 days 44 days 32 days 43 days 41 days
Seven-Day Period
Ended May 31, 1998
- -------------------
Annualized Yield... 3.10% 3.06% 2.98% 3.12% 3.11% 3.05% 3.10% 3.11% 3.19% 3.09%
Compounded
Annualized Yield.. 3.15% 3.11% 3.02% 3.17% 3.16% 3.10% 3.15% 3.16% 3.24% 3.14%
Average Maturity of
Portfolio at End
of Period......... 23 days 41 days 44 days 38 days 26 days 40 days 50 days 40 days 44 days 41 days
Thirty-Day Period
Ended May 31, 1998
- -------------------
Taxable Equivalent
Yield*............ 4.31% 4.25% 4.14% 4.33% 4.32% 4.24% 4.31% 4.32% 4.43% 4.29%
</TABLE>
- --------
*Based upon a federal income tax rate of 28%; does not take into account state
or local income taxes.
From time to time, each Fund may quote information regarding its yield for
certain seven-day periods and information as to the compounded annualized
yield for the same periods.
The yield of a Fund refers to the income generated by an investment in the
Fund over a stated seven-day period. This income is then annualized; that is,
the amount of income generated by the investment during that period is assumed
to be generated each seven-day period over a 52-week period and is shown as a
percentage of the investment. The compounded annualized yield is calculated
similarly but, when annualized, the income earned by an investment in a Fund
is assumed to be reinvested. The compounded annualized yield will be somewhat
higher than the yield because of the effect of the assumed reinvestment.
The yield on Fund shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by the Fund of future yields or rates of return on its shares.
A Fund's yield is affected by changes in interest rates on short-term tax-
exempt securities, average portfolio maturity, the types and quality of
portfolio securities held and operating expenses.
On occasion, each Fund may compare its yield to (i) the average yield
reported by the Bank Rate Monitor National Index(TM) for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas, (ii) yield data published by
Lipper Analytical Services, Inc., (iii) performance data published by
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune
Magazine, or (iv) historical yield data relating to other central asset
accounts similar to the CMA program. As with yield quotations, yield
8
<PAGE>
comparisons should not be considered indicative of a Fund's yield or relative
performance for any future period. Current yield information may not provide a
basis for comparison with bank deposits or other investments that pay a fixed
yield over a stated period of time. In addition, from time to time a Fund may
include its Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The investment objectives of each Fund are to seek current income (or value,
in the case of property taxes) exempt from federal and the designated state's
personal income taxes and in certain instances, local personal income taxes,
local personal property taxes and/or state intangible personal property taxes.
Each Fund also seeks preservation of capital and liquidity available from
investing in a portfolio of short-term, high quality tax-exempt securities.
Each Fund seeks to achieve its objectives by investing primarily in a
portfolio of obligations with remaining maturities of 397 days (13 months) or
less which are issued by or on behalf of the designated states, their
political subdivisions, agencies and instrumentalities, and obligations of
other qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam and issuers of derivative or synthetic municipal instruments
("Derivative Products"), the interest from which (or, in the case of property
taxes, the value of which) is exempt, in the opinion of counsel to the issuer,
from federal income taxes, the designated state's income taxes and in certain
instances, local personal income taxes, local personal property taxes and/or
state intangible personal property taxes. Such obligations are herein referred
to as "State Municipal Securities." The investment objectives of the Funds
described in this paragraph are fundamental policies of each Fund and may not
be changed without a vote of the majority of the outstanding shares of the
respective Fund.
The Funds ordinarily do not intend to realize investment income not exempt
from federal income taxes, the personal income taxes of the designated states
or, if applicable, local personal income or property taxes and/or state
intangible personal property taxes. However, to the extent that suitable State
Municipal Securities are not available for investment by a Fund, that Fund may
purchase high quality obligations with remaining maturities of 397 days (13
months) or less which are issued by other states, their agencies and
instrumentalities and derivative or synthetic municipal instruments, the
interest income on which is exempt, in the opinion of counsel to the issuer,
from federal taxes but not state or, where relevant, local taxes. Such
obligations, either separately or together with State Municipal Securities,
are herein referred to as "Municipal Securities."
Except during temporary defensive periods, each Fund will invest at least
65% of its total assets in State Municipal Securities and at least 80% of its
net assets in Municipal Securities. The New Jersey Fund will invest at least
80% of its total assets in New Jersey State Municipal Securities. However,
interest received on certain State Municipal Securities and Municipal
Securities which are classified as "private activity bonds" (in general, bonds
that benefit non-governmental entities) may be subject to an alternative
minimum tax. See "Taxes." The percentage of each Fund's net assets invested in
"private activity bonds" will vary during the year. Each Fund has the
authority to invest as much as 20% of its net assets in obligations that do
not qualify as State Municipal Securities or Municipal Securities. Such
obligations include taxable money market obligations, including repurchase
agreements and purchase and sale contracts, with maturities of 397 days (13
months) or less, and are referred to herein as "Taxable Securities." In
addition, each Fund except the New Jersey Fund reserves the right as a
defensive measure to invest temporarily more than 35% of its total assets in
Municipal Securities other than its respective State Municipal Securities and
more than 20% of its net assets in Taxable Securities when, in the opinion of
Fund Asset Management, L.P. (the "Manager"), prevailing market or financial
conditions warrant. The New Jersey Fund reserves the right as a defensive
measure to invest temporarily more than 20% of its total
9
<PAGE>
assets in Municipal Securities other than New Jersey Municipal Securities and
more than 20% of its net assets in Taxable Securities when, in the opinion of
the Manager, prevailing market or financial conditions warrant.
As noted above, each Fund may invest a portion of its assets in certain
otherwise tax-exempt securities which are classified, under the Internal
Revenue Code of 1986, as amended (the "Code"), as "private activity bonds." A
Fund's policy with respect to investments in "private activity bonds" is not a
fundamental policy of that Fund and may be amended by the Trustees of the
Trust without the approval of the Fund's shareholders. Each Fund may invest
more than 25% of its assets in Municipal Securities secured by bank letters of
credit. In view of this possible "concentration" in Municipal Securities with
bank credit enhancements, an investment in Fund shares should be made with an
understanding of the characteristics of the banking industry and the risks
that such an investment may entail. See "Other Factors."
The Funds are classified as non-diversified within the meaning of the
Investment Company Act, which means that a Fund is not limited by such Act in
the proportion of its assets that it may invest in obligations of a single
issuer. However, each Fund's investments will be limited so as to qualify as a
"regulated investment company" ("RIC") for purposes of the Code. See "Taxes."
To qualify, among other requirements, the Trust will limit each Fund's
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of each Fund's total assets will be invested
in the securities of a single issuer and (ii) with respect to 50% of the
market value of each Fund's total assets, not more than 5% of the market value
of such assets will be invested in the securities of a single issuer and the
respective Fund will not own more than 10% of the outstanding voting
securities of a single issuer. A fund which elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that a Fund assumes large positions in the obligations of a small number of
issuers, the Fund's yield may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in
the market's assessment of the issuers.
POTENTIAL BENEFITS
Investment in Fund shares offers several potential benefits. The Funds are
investment vehicles designed to be suitable for investors of designated states
seeking income (or value, in the case of property taxes) exempt from income
taxation by those states as well as federal income taxation and, where
applicable, local personal income taxation, local personal property taxation
and state intangible personal property taxation. Each Fund seeks to provide as
high a tax-exempt yield potential as is available from investments in the
short-term State Municipal Securities in which it invests utilizing
professional management and block purchases of securities. The Funds also
provide liquidity because of their redemption features. The investor also is
relieved of the burdensome administrative details involved in managing a
portfolio of municipal securities. These benefits are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the management fee, distribution fee and
operational costs of each Fund.
PORTFOLIO INVESTMENTS
The State Municipal Securities in which the Funds invest include municipal
notes, municipal commercial paper, municipal bonds with a remaining maturity
of 397 days (13 months) or less, variable rate demand obligations and
participations therein, and derivative or synthetic municipal instruments. The
Funds may invest in all types of municipal and tax-exempt instruments
currently outstanding or to be issued in the future which satisfy the short-
term maturity and quality standards of the Funds.
10
<PAGE>
Certain of the instruments in which the Funds invest, including Variable
Rate Demand Obligations ("VRDOs") and Derivative Products, effectively provide
the Funds with economic interests in long-term municipal bonds (or a portion
of the income derived therefrom), coupled with rights to demand payment of the
principal amounts of such instruments from designated persons (a "demand
right"). Under Commission rules, the Funds treat these instruments as having
maturities shorter than the stated maturity dates of the VRDOs or of the long-
term bonds underlying the Derivative Products (the "Underlying Bonds"). Such
maturities are sufficiently short-term to allow such instruments to qualify as
eligible investments for money market funds such as the Funds. A demand right
is dependent on the financial ability of the issuer of the demand right (or,
if the instrument is subject to credit enhancement, a bank or other financial
institution issuing a letter of credit or other credit enhancement supporting
the demand right), to purchase the instrument at its principal amount. In
addition, the right of a Fund to demand payment from the issuer of a demand
right may be subject to certain conditions, including the creditworthiness of
the Underlying Bond. If the issuer of a demand right is unable to purchase the
instrument, or if, because of conditions on the right of the Fund to demand
payment, the issuer of a demand right is not obligated to purchase the
instrument on demand, the Fund may be required to dispose of the instrument or
the Underlying Bond in the open market, which may be at a price which
adversely affects the Fund.
Variable Rate Demand Obligations. VRDOs are tax-exempt obligations which
utilize a floating or variable interest rate adjustment formula and provide an
unconditional right of demand to receive payment of the unpaid principal
balance plus accrued interest on a short notice period. The interest on a VRDO
is adjustable at periodic intervals to a rate calculated to maintain the
market value of the VRDO at approximately the par value of the VRDO on the
adjustment date. The adjustment may be based on an interest rate adjustment
index.
The Funds also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by
financial institutions, typically commercial banks ("institutions").
Participating VRDOs provide the Funds with specified undivided interests (up
to 100%) in the underlying obligations and the right to demand payment of the
unpaid principal balance plus accrued interest on the Participating VRDOs from
the institutions on a specified number of days' notice, presently not to
exceed 30 days. In addition, each Participating VRDO is backed by an
irrevocable letter of credit or similar commitment of the institution. The
Funds have undivided interests in the underlying obligations and thus
participate on the same basis as the institutions in such obligations except
that the institutions typically retain fees out of the interest paid on the
obligations for servicing the obligations, providing the letters of credit or
issuing the repurchase commitments.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities.
A VRDO with a demand notice period exceeding seven days will therefore be
subject to the Funds' restrictions on illiquid investments unless, in the
judgment of the Trustees, such VRDO is liquid. The Trustees may adopt
guidelines and delegate to the Managers the daily function of determining and
monitoring liquidity of such VRDOs. The Trustees, however, will retain
sufficient oversight and be ultimately responsible for such determinations.
The Trust has been advised by its counsel that the Funds should be entitled
to treat the income received on Participating VRDOs as interest from tax-
exempt obligations provided that certain conditions are met. It is presently
contemplated that each Fund will not invest more than a limited amount (not
more than 20%) of its total assets in Participating VRDOs.
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Derivative Products. The Funds may invest in a variety of Derivative
Products. Derivative Products are typically structured by a bank, broker-
dealer or other financial institution. A Derivative Product generally consists
of a trust or partnership through which a Fund holds an interest in one or
more Underlying Bonds coupled with a conditional right to sell ("put") that
Fund's interest in the Underlying Bonds at par plus accrued interest to a
financial institution (a "Liquidity Provider"). Typically, a Derivative
Product is structured as a trust or partnership which provides for pass-
through tax-exempt income. There are currently three principal types of
derivative structures: (1) "Tender Option Bonds," which are instruments which
grant the holder thereof the right to put an Underlying Bond at par plus
accrued interest at specified intervals to a Liquidity Provider; (2) "Swap
Products," in which the trust or partnership swaps the payments due on an
Underlying Bond with a swap counterparty who agrees to pay a floating
municipal money market interest rate; and (3) "Partnerships," which allocate
to the partners portions of income, expenses, capital gains and losses
associated with holding an underlying Bond in accordance with a governing
agreement. The Funds may also invest in other forms of short-term Derivative
Products eligible for investment by money market funds.
Investments in Derivative Products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of a Fund. For example, the tax-
exempt treatment of the interest paid to holders of Derivative Products is
premised on the legal conclusion that the holders of such Derivative Products
have an ownership interest in the Underlying Bonds. While each Fund receives
an opinion of legal counsel to the effect that the income from each Derivative
Product is tax-exempt at the federal and state level to the same extent as the
Underlying Bond, the Internal Revenue Service (the "IRS"), as well as the
taxing authorities of many states have not issued a ruling on this subject.
Were the IRS or any state taxing authority to issue an adverse ruling or take
an adverse position with respect to the taxation of Derivative Products, there
is a risk that the interest paid on such Derivative Products or, in the case
of property taxes, the value of such fund to the extent represented by such
Derivative Products, would be deemed taxable on the federal and/or state
level.
Municipal Lease Obligations. Also included within the general category of
the State Municipal Securities are participation certificates in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") entered into by the designated state
or a political subdivision thereof to finance the acquisition or construction
of equipment, land or facilities. Although lease obligations do not constitute
general obligations of the issuer for which the lessee's unlimited taxing
power is pledged, a lease obligation is frequently backed by the lessee's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "nonappropriation"
clauses which provide that the lessee has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "nonappropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult. Certain investments in lease obligations
may be illiquid. A Fund may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 10% of
such Fund's net assets. A Fund may, however, invest without regard to such
limitation in lease obligations which the Manager, pursuant to guidelines
which have been adopted by the Board of Trustees and subject to the
supervision of the Board, determines to be liquid. Pursuant to Guidelines
which apply to the Funds and other funds managed by the Manager (which funds
may be able to invest in lower rated obligations than the Funds), the Manager
will deem lease obligations liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings
Services ("Standard & Poor's") or Fitch IBCA, Inc. ("Fitch IBCA"). Unrated
lease obligations will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the unrated lease
obligations, the Manager must, among other things, also review the
creditworthiness of the municipality obligated to make payment under the lease
obligation and
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make certain specified determinations based on such factors as the existence
of a rating or credit enhancement such as insurance, the frequency of trades
or quotes for the obligation and the willingness of dealers to make a market
in the obligation.
SHORT-TERM MATURITY STANDARDS
All of the investments of the Funds will be in securities with remaining
maturities of 397 days (13 months) or less. The dollar-weighted average
maturity of each Fund's portfolio will be 90 days or less. For purposes of
this investment policy, an obligation will be treated as having a maturity
earlier than its stated maturity date if such obligation has technical
features which, in the judgment of the Manager, will result in the obligation
being valued in the market as though it has such earlier maturity.
The maturities of VRDOs (including Participating VRDOs) are deemed to be the
longer of (i) the notice period required before a Fund is entitled to receive
payment of the principal amount of the VRDO on demand or (ii) the period
remaining until the VRDO's next interest rate adjustment. If not redeemed by
the Funds through the demand feature, VRDOs mature on a specified date which
may range up to 30 years from the date of issuance.
QUALITY STANDARDS
Each Fund's portfolio investments in municipal notes and short-term tax-
exempt commercial paper will be limited to those obligations which are rated,
or issued by issuers who have been rated, in one of the two highest rating
categories for short-term municipal debt obligations by a nationally
recognized statistical rating organization (an "NRSRO") or, if not rated, will
be of comparable quality as determined under procedures approved by the
Trustees of the Trust. Each Fund's investments in municipal bonds (which must
have maturities at the date of purchase of 397 days (13 months) or less) will
be in issuers who have received from the requisite NRSROs a rating, with
respect to a class of short-term debt obligations that is comparable in
priority and security with the investment, in one of the two highest rating
categories for short-term obligations or, if not rated, will be of comparable
quality as determined by the Trustees of the Trust. Currently, there are three
NRSROs which rate municipal obligations: Fitch IBCA, Moody's and Standard &
Poor's. Certain tax-exempt obligations (primarily VRDOs and Participating
VRDOs) may be entitled to the benefit of letters of credit or similar credit
enhancements issued by financial institutions. In such instances, in assessing
the quality of such instruments, the Trustees and the Manager will take into
account not only the creditworthiness of the issuers, but also the
creditworthiness and type of obligation of the financial institution. The type
of obligation of the financial institution concerns, for example, whether the
letter of credit or similar credit enhancement being issued is conditional or
unconditional. The Funds also may purchase other types of municipal
instruments if, in the opinion of the Trustees or the Manager (as determined
in accordance with the procedures established by the Trustees), such
obligations are equivalent to securities having the ratings described above.
Taxable Securities in which the Funds invest will be rated, or will be
issued by issuers who have been rated, in one of the two highest rating
categories for short-term debt obligations by an NRSRO or, if not rated, will
be of comparable quality as determined by the Trustees of the Trust.
Currently, there are five NRSROs that rate Taxable Securities: Fitch IBCA,
Moody's, Standard & Poor's, Duff & Phelps Credit Ratings Co. and Thomson
BankWatch, Inc. The Funds may not invest in any security issued by a
depository institution unless such institution is organized and operating in
the United States, has total assets of at least $1 billion and is Federally
insured.
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Preservation of capital is a prime investment objective of the Funds, and,
while the types of Municipal Securities in which the Funds invest are not
completely risk free, such securities generally are considered by the Manager
to have low risk of the failure of issuers or credit enhancers to pay
principal, interest and repurchase price, if applicable. These securities have
a lower payment risk compared to lower rated obligations and generally to
longer term obligations which entail the risk of changing conditions over a
longer period of time.
SPECIAL CONSIDERATIONS AND RISK FACTORS
Each Fund ordinarily will invest at least 65% (80% in the case of the New
Jersey Fund) of its total assets in its respective State Municipal Securities
and, therefore, it is more susceptible to factors adversely affecting issuers
of Municipal Securities in such state than is a tax-exempt mutual fund that is
not concentrated in issuers of State Municipal Securities to this degree.
Because each Fund's portfolio will be comprised primarily of short-term, high
quality securities, each Fund is expected to be less subject to market and
credit risks than a fund that invests in longer-term or lower quality State
Municipal Securities. Set forth below are special considerations and risk
factors specific to each Fund.
The Arizona Fund. Over the past several decades, Arizona's economy has grown
faster than most other regions of the country, as measured by nearly every
major indicator of economic growth, including population, employment, and
aggregate personal income. Although the rate of growth slowed considerably
during the late 1980s and early 1990s, Arizona's efforts to diversify its
economy have enabled it to realize, and then sustain, increasing growth rates
in more recent years. Arizona continues to search for a new method to finance
its public school system, following the Arizona Supreme Court's 1994 ruling
that the current system is unconstitutional. The Manager does not believe that
the current economic conditions in Arizona will have a significant adverse
effect on the Arizona Fund's ability to invest in high quality Arizona State
Municipal Securities. See Appendix A, "Economic and Financial Conditions in
Arizona" in the Statement of Additional Information.
The California Fund. Currently, California's general obligation bonds have a
Standard & Poor's rating of A+, a Moody's rating of A1 and a Fitch IBCA rating
of AA-. No assurance can be given that such ratings will not be changed in the
future to reflect changes in the conditions of California's economy. See
Appendix B, "Economic and Financial Conditions in California" in the Statement
of Additional Information.
The Connecticut Fund. Connecticut's economy relies in part on activities
that may be adversely affected by cyclical change, and recent declines in
defense spending have had a significant impact on unemployment levels.
However, unemployment levels have started to improve. Also favorably noted is
Connecticut's personal wealth level which, despite the poverty of certain of
its largest cities, continues to rank among the highest in the nation in terms
of per capita income. The State has recorded General Fund surpluses in fiscal
years 1992 through 1997, but had accumulated a General Fund deficit totaling
$965.7 million through the end of fiscal year 1991. In 1991, such deficit was
funded by the issuance of General Obligation Economic Recovery Notes that were
to be payable no later than June 30, 1996, but certain of such notes have been
rescheduled to be paid over the four fiscal years ending June 30, 1999. The
State's general obligation bonds are rated AA- by Standard & Poor's, Aa3 by
Moody's and AA by Fitch IBCA. The Manager does not believe that the current
economic conditions in Connecticut will have a significant adverse effect on
the Connecticut Fund's ability to invest in high quality Connecticut State
Municipal Securities. See Appendix C, "Economic and Financial Conditions in
Connecticut" in the Statement of Additional Information.
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The Massachusetts Fund. Massachusetts is experiencing a strong and continued
economic recovery. The budgeted operating funds of Massachusetts ended fiscal
1994 with a surplus of revenues and other sources over expenditures and other
uses, and with aggregate ending fund balances of approximately $589.3 million.
Massachusetts ended fiscal 1995, 1996 and 1997 with positive closing fund
balances of $726.0 million, $1.172 billion and $1.394 billion, respectively.
As of May 5, 1998 and according to the Executive Office for Administration and
Finance, fiscal 1998 is expected to end with positive budgetary fund balances
totaling approximately $1.215 billion. Currently, Massachusetts' general
obligation bonds are rated by Standard & Poor's, Fitch IBCA and Moody's as AA-
, AA- and Aa3, respectively. From time to time, the rating agencies may
further change their ratings in response to budgetary matters or other
economic indicators. The Manager does not believe that the current economic
conditions in Massachusetts will have a significant adverse effect on the
Massachusetts Fund's ability to invest in high quality Massachusetts State
Municipal Securities. See Appendix D, "Economic and Financial Conditions in
Massachusetts" in the Statement of Additional Information.
The Michigan Fund. Michigan reported the General Fund in balance as of
September 30, 1997. The Michigan Budget and Economic Stabilization Fund had an
unreserved accrued balance of $579.1 million. The balance is net of a reserve
for future education funding of $572.6 million. Michigan has reported balanced
budgets and year-end General Fund surpluses for each of the last six fiscal
years. Economically, Michigan remains closely tied to the economic cycles of
the automobile industry. Current increased automobile production and an
increasingly diversified economy have led to an unemployment rate which, for
the last three years has been below the national average. Currently,
Michigan's general obligation bonds are rated Aa1 by Moody's, AA+ by Standard
& Poor's and AA+ by Fitch IBCA. The Manager does not believe that the current
economic conditions in Michigan will have a significant adverse effect on the
Michigan Fund's ability to invest in high quality Michigan State Municipal
Securities. See Appendix E, "Economic and Financial Conditions in Michigan" in
the Statement of Additional Information.
The New Jersey Fund. New Jersey has benefited from the national recovery.
Even if the nation's economic growth rate slows, New Jersey's economy should
have enough momentum to keep its trend line pointing upwards. Its growth
potential is not yet limited by the labor supply constraints affecting some
other parts of the country. Standard & Poor's, Moody's and Fitch IBCA have
assigned long-term ratings of AA+, Aa1, and AA+, respectively, to New Jersey
State general obligation bonds. The Manager does not believe that the current
economic conditions in New Jersey will have a significant adverse effect on
the New Jersey Fund's ability to invest in high quality New Jersey State
Municipal Securities. See Appendix F, "Economic and Financial Conditions in
New Jersey" in the Statement of Additional Information.
The New York Fund. In recent years, New York State, New York City and other
New York public bodies have encountered financial difficulties which could
have an adverse effect with respect to the performance of the New York Fund.
Currently, Moody's and Standard & Poor's rate New York State's general
obligation bonds A2 and A, respectively, and Moody's, Standard & Poor's and
Fitch IBCA rate New York City's general obligation bonds A3, BBB+ and A-,
respectively. The Manager does not believe that the current economic
conditions in New York will have a significant adverse effect on the New York
Fund's ability to invest in high quality New York State Municipal Securities.
See Appendix G, "Economic and Financial Conditions in New York" in the
Statement of Additional Information.
The North Carolina Fund. North Carolina's fiscal years 1996 and 1997 each
ended with a positive General Fund balance. By law, a portion of such positive
fund balance was required to be reserved in the General Fund
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of North Carolina as part of a "Savings Reserve" (subject to a maximum reserve
of 5% of the preceding fiscal year's operating appropriation). An additional
portion of such unreserved credit balance was reserved in the General Fund as
part of a "Reserve for Repair and Renovation of State Facilities" and certain
other required reserves, leaving the remaining unrestricted fund balance at
the end of each year available for future appropriations. Currently, Moody's,
Standard & Poor's and Fitch IBCA rate North Carolina's general obligation
bonds Aaa, AAA, and AAA, respectively. The Manager does not believe that the
current economic conditions in North Carolina will have a significant adverse
effect on the North Carolina Fund's ability to invest in high quality North
Carolina State Municipal Securities. See Appendix H, "Economic and Financial
Conditions in North Carolina" in the Statement of Additional Information.
The Ohio Fund. The Ohio State General Revenue Fund had a positive cash
balance at the end of April 1998, of $613.6 million. Economic activity in
Ohio, as in many other industrially developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Currently,
Ohio's general obligation bonds are rated AA+, Aa1 and AA+ by Fitch IBCA,
Moody's and Standard & Poor's, respectively. The Manager does not believe that
the current economic conditions in Ohio will have a significant adverse effect
on the Ohio Fund's ability to invest in high quality Ohio Municipal
Securities. See Appendix I, "Economic and Financial Conditions in Ohio" in the
Statement of Additional Information.
The Pennsylvania Fund. Many different social, environmental and economic
factors may affect the financial condition of Pennsylvania and its political
subdivisions. From time to time Pennsylvania and certain of its political
subdivisions have encountered financial difficulties which have adversely
affected their respective credit standings. Factors which may negatively
affect economic conditions in Pennsylvania include adverse changes in
employment rates, Federal revenue sharing laws and laws with respect to tax-
exempt financing. For fiscal 1997, assets of the Pennsylvania General Fund
increased $563.4 million and liabilities decreased $166.3 million to produce a
$729.7 million increase in the fund balance at June 30, 1997 (determined on a
GAAP basis). Revenues for fiscal 1998 are above estimates made at the time the
budget was enacted. Currently, Pennsylvania general obligation bonds are rated
AA- by Standard & Poor's, AA by Fitch IBCA, and Aa3 by Moody's. The Manager
does not believe that the current economic conditions in Pennsylvania will
have a significant adverse effect on the Pennsylvania Fund's ability to invest
in high quality Pennsylvania Municipal Securities. See Appendix J, "Economic
and Financial Conditions in Pennsylvania" in the Statement of Additional
Information.
OTHER FACTORS
Management of the Funds will endeavor to be as fully invested as reasonably
practicable in order to maximize the yield on each Fund's portfolio. Not all
short-term municipal securities trade on the basis of same day settlements
and, accordingly, a portfolio of such securities cannot be managed on a daily
basis with the same flexibility as a portfolio of money market securities
which can be bought and sold on a same day basis. There may be times when a
Fund has uninvested cash resulting from an influx of cash due to large
purchases of shares or the maturing of portfolio securities. A Fund also may
be required to maintain cash reserves or incur temporary bank borrowings to
make redemption payments which are made on the same day the redemption request
is received. Such inability to be invested fully would lower the yield on such
Fund's portfolio.
A Fund may invest more than 25% of the value of its total assets in
Municipal Securities which are related in such a way that an economic,
business or political development or change affecting one such security also
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would affect the other securities; for example, securities the interest upon
which is paid from revenues of similar types of projects. As a result, the
Funds may be subject to greater risk as compared to mutual funds that do not
follow this practice.
In view of the possible "concentration" of the Funds in Municipal Securities
secured by bank letters of credit or guarantees, an investment in a Fund
should be made with an understanding of the characteristics of the banking
industry and the risks which such an investment may entail. Banks are subject
to extensive governmental regulations which may limit both the amounts and
types of loans and other financial commitments which may be made and interest
rates and fees which may be charged. The profitability of the banking industry
is largely dependent on the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Furthermore, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations under a letter of credit.
Changes to the Code limit the types and volume of securities qualifying for
the Federal income tax exemption of interest with the result that the volume
of new issues of Municipal Securities has declined substantially. Such changes
may affect the availability of Municipal Securities for investment by the
Funds, which could have a negative impact on the yield of the portfolios. Each
Fund reserves the right to suspend or otherwise limit sales of its shares if,
as a result of difficulties in acquiring portfolio securities or otherwise, it
is determined that it is not in the interests of the Fund's shareholders to
issue additional shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Municipal Securities at times may be purchased or sold on a delayed delivery
basis or on a when-issued basis. These transactions arise when securities are
purchased or sold by a Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and
the interest rate are each fixed at the time the buyer enters into the
commitment. A Fund will make commitments to purchase such securities only with
the intention of actually acquiring the securities, but such Fund may sell
these securities prior to settlement date if it is deemed advisable. No new
when-issued commitments will be made if more than 40% of a Fund's net assets
would become so committed. Purchasing Municipal Securities on a when-issued
basis involves the risk that the yields available in the market when the
delivery takes place may actually be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligation generally will decrease. Each Fund will maintain a separate account
at the Trust's custodian consisting of cash or liquid Municipal Securities
(valued on a daily basis) equal at all times to the amount of the when-issued
commitment.
REPURCHASE AGREEMENTS
Each Fund may invest in Taxable Securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with a member bank
of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof which meets the creditworthiness standards
adopted by the Trustees. Under such agreements, the counterparty agrees, upon
entering into the contract, to repurchase the security at a mutually agreed
upon time and price, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period.
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INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of each Fund's assets and its activities which are fundamental
policies and may not be changed without the approval of the holders of a
majority of the respective Fund's outstanding shares as defined in the
Investment Company Act. Among the more significant restrictions, no Fund may:
(i) purchase any securities other than securities referred to under
"Investment Objectives and Policies" in the Statement of Additional
Information or herein; (ii) borrow amounts in excess of 20% of its total
assets taken at market value (including the amount borrowed), and then only
from banks as a temporary measure for extraordinary or emergency purposes; the
Funds will not purchase securities while borrowings are outstanding; (iii)
mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness any securities that it owns or holds except in connection with
certain specified transactions; (iv) invest in securities which cannot be
readily resold because of legal or contractual restrictions or which are not
otherwise readily marketable, including repurchase agreements maturing in more
than seven days, if, regarding all such securities, more than 10% of its total
assets (taken at market value at the time of each investment) would be
invested in such securities; and (v) invest more than 5% of its total assets
(taken at market value at the time of each investment) in industrial revenue
bonds where the entity supplying the revenues from which the issue is to be
paid, including predecessors, has a record of less than three years of
continuous operation.
In addition, to comply with tax requirements for qualification as "regulated
investment companies," the Funds' investments will be limited in a manner such
that, at the close of each quarter of each fiscal year, (a) no more than 25%
of each Fund's total assets are invested in the securities of a single issuer,
and (b) with regard to at least 50% of each Fund's total assets, no more than
5% of its total assets are invested in the securities of a single issuer. For
purposes of this restriction, the Funds will regard each state and each
political subdivision, agency or instrumentality of such state and each multi-
state agency of which such state is a member and each public authority which
issues securities on behalf of a private entity as a separate issuer, except
that if the security is backed only by the assets and revenues of a non-
governmental entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements.
Investors are referred to the Statement of Additional Information for a
complete description of the Funds' investment restrictions.
PURCHASE OF SHARES
PURCHASE OF SHARES BY CMA SUBSCRIBERS
CMA Program. The shares of the Funds are offered to participants in the CMA
program to provide a medium for the investment of free credit balances held in
CMA accounts. Persons subscribing to the CMA program will have these balances
invested in shares of a CMA State Fund or CMA Money Fund, CMA Government
Securities Fund, CMA Tax-Exempt Fund or CMA Treasury Fund (collectively, the
"CMA National Funds" and together with the CMA State Funds, the "CMA Funds")
depending on which CMA Fund has been designated by the participant as the
primary investment account (the "Primary Money Account"). Alternatively,
subscribers may designate the Insured Savings Account as their Primary Money
Account. As described in the CMA Program Description, a subscriber to the CMA
service may elect to have free credit balances in the CMA account deposited in
individual money market deposit accounts established for such subscriber at
designated depository institutions pursuant to the Insured Savings Account.
The CMA Funds and the Insured Savings
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Account are collectively referred to as the "Money Accounts." However, this
Prospectus does not purport to describe the other CMA Funds or the Insured
Savings Account and prospective participants in such CMA Funds or Insured
Savings Account are referred to the Prospectus with respect to each such CMA
Fund and the Fact Sheet with respect to the Insured Savings Account. All CMA
subscribers are furnished with the prospectuses of the CMA National Funds and
the Insured Savings Account Fact Sheet, as well as the CMA Program
Description. To the extent not inconsistent with information contained herein,
information set forth in the CMA Program Description with respect to the CMA
National Funds also is applicable to each CMA State Fund. Shareholders of a
CMA State Fund may also maintain positions in one or more of the CMA National
Funds or the Insured Savings Account but may not maintain positions in more
than one CMA State Fund at any given time.
Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year (an additional $25 annual program fee is charged
for participation in the CMA Visa(R) Gold Program described in the CMA Program
Description). A different fee may be charged to certain group plans and
special Accounts. Merrill Lynch reserves the right to change the fee for the
CMA service or the CMA Visa(R) Gold Program at any time. Shares of the CMA
Funds may also be purchased directly through the CMA Funds' Transfer Agent by
investors who are not subscribers to the CMA program. Shareholders of the CMA
Funds not subscribing to the CMA program will not be charged the CMA program
fee but will not receive any of the additional services available to CMA
program subscribers.
Purchase of shares of a CMA Fund designated as the Primary Money Account
will be made pursuant to the CMA automatic purchase procedures described
below. Purchases of shares of the CMA Funds also may be made pursuant to the
manual procedures described below. If a Fund exercises its right to suspend or
otherwise limit sales of its shares, as discussed under "Investment Objectives
and Policies--Other Factors," amounts that would have been applied to the
purchase of such Fund's shares will be applied to the purchase of shares of
one of the other CMA Funds or the Insured Savings Account depending on which
is designated by the participant as the secondary investment account (the
"Secondary Money Account"). However, dividends declared on shares of the CMA
Fund designated as the Primary Money Account will continue to be reinvested in
that Fund. If the participant has not designated a Secondary Money Account,
additional purchases through the CMA program will be made in shares of CMA
Tax-Exempt Fund rather than in shares of the CMA Fund designated as the
Primary Money Account.
Subscribers to the CMA service have the option to change the designation of
their Primary Money Account at any time by notifying their Merrill Lynch
financial consultants. At that time, a subscriber may instruct his or her
financial consultant to redeem shares of a CMA Fund designated as the Primary
Money Account and to transfer the proceeds to the newly-designated Primary
Money Account.
Merrill Lynch reserves the right to terminate a subscriber's participation
in the CMA program for any reason.
Shares of the Funds are offered continuously for sale by Merrill Lynch. The
purchase price for shares of each Fund is the net asset value per share
(normally $1.00) next determined after receipt by the Fund of an automatic or
manual purchase order in proper form. Shares purchased will receive the next
dividend declared after such shares are issued which will be immediately prior
to the 12 noon pricing on the following business day. A purchase order will
not be effective until cash in the form of Federal funds becomes available to
the Fund (see the next paragraph for information as to when free credit
balances held in CMA accounts become
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available to the Funds). There are no minimum investment requirements for CMA
subscribers other than for manual purchases.
Automatic Purchases of Fund Shares by CMA Subscribers. Free credit balances
arising in a CMA account are invested automatically in shares of the CMA Fund
designated as the Primary Money Account not later than the first business day
of each week on which either the New York Stock Exchange (the "NYSE") or New
York banks are open, which normally will be Monday. Free credit balances
arising from the following transactions will be invested automatically prior
to the automatic weekly sweeps. Free credit balances arising from the sale of
securities which do not settle on the day of the transaction (such as most
common and preferred stock transactions) and from principal repayments on debt
securities become available to such Fund and will be invested in shares on the
business day following receipt of the proceeds with respect thereto in the CMA
account. Proceeds from the sale of securities settling on a same day basis
will also be invested in shares on the next business day following receipt.
Free credit balances of $1,000 or more arising from cash deposits into a CMA
account, dividend and interest payments or any other source become available
to such Fund and are invested in shares on the next business day following
receipt in the CMA account unless such balance results from a cash deposit
made after the cashiering deadline of the Merrill Lynch office in which the
deposit is made, in which case the resulting free credit balances are invested
on the second following business day. A CMA participant desiring to make a
cash deposit should contact his or her Merrill Lynch financial consultant for
information concerning the local office's cashiering deadline, which is
dependent on such office's arrangements with its commercial banks. Free credit
balances of less than $1,000 are invested in shares in the automatic weekly
sweep.
Manual Purchases by CMA Subscribers. A subscriber to the CMA service may
make manual investments of $1,000 or more at any time in shares of a CMA Fund
not selected as his or her Primary Money Account. Manual purchases shall be
effective on the day following the day the order is placed with Merrill Lynch,
except that orders involving cash deposits made on the date of a manual
purchase shall become effective on the second business day thereafter if they
are placed after the cashiering deadline referred to in the preceding
paragraph. As a result, CMA customers who enter manual purchase orders which
include cash deposits made on that day after such cashiering deadline will not
receive the daily dividend which would have been received had their orders
been entered prior to the deadline. Since there is a three-day settlement
period applicable to the sale of most securities, delays may occur when an
investor is liquidating other investments for investment in a CMA Fund. In
addition, manual purchases of $500,000 or more can be made effective on the
same day the order is placed with Merrill Lynch provided that requirements as
to timely notification and transfer of a Federal funds wire in the proper
amount are met. CMA customers desiring further information on this method of
purchasing shares should contact their Merrill Lynch financial consultants.
All purchases of CMA Fund shares and dividend reinvestments will be
confirmed to CMA subscribers (rounded to the nearest share) in the CMA Account
Statement which is sent to all CMA participants monthly.
Merrill Lynch, in conjunction with another subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), offers a modified version of the CMA account which has
been designed for corporations and other businesses. This account, the Working
Capital Management SM account ("WCMA(R)"), provides participants with the
features of a regular CMA account and also optional lines of credit. A
brochure describing the WCMA program, as well as information concerning
charges for participation in the program, is available from Merrill Lynch.
20
<PAGE>
Participants in the WCMA program are able to invest funds in one or more
designated CMA Funds. Checks and other funds transmitted to a WCMA account
generally will be applied first, to the payment of pending securities
transactions or other charges in the participant's securities account, second,
to reduce outstanding balances in the lines of credit available through such
program and third, to purchase shares of the designated CMA Fund. To the
extent not otherwise applied, funds transmitted by Federal funds wire or an
automated clearinghouse service will be invested in shares of the designated
CMA Fund on the business day following receipt of such funds by Merrill Lynch.
Funds received in a WCMA account from the sale of securities will be invested
in the designated CMA Fund as described above. The amount payable on a check
received in a WCMA account prior to the cashiering deadline referred to above
will be invested on the second business day following receipt of the check by
Merrill Lynch. Redemptions of CMA Fund shares will be effected as described
below under "Redemption of Shares--Redemption of Shares by CMA Subscribers--
Automatic Redemptions" to satisfy debit balances, such as those created by
purchases of securities or by checks written against a bank providing checking
services to WCMA participants. WCMA participants that have a line of credit
will, however, be permitted to maintain a minimum CMA Fund balance; for
participants who elect to maintain such a balance, debits from check usage
will be satisfied through the line of credit so that such balance is
maintained. However, if the full amount of available credit is not sufficient
to satisfy the debit, it will be satisfied from the minimum balance.
From time to time, Merrill Lynch also may offer the Funds to participants in
certain other programs sponsored by Merrill Lynch. Some or all of the features
of the CMA Account may not be available in such programs. For more information
on the services available under such programs, participants should contact
their financial consultants.
PURCHASE OF SHARES BY NON-CMA SUBSCRIBERS
Shares of the Funds may be purchased by individual investors who are not
subscribers to the CMA program but who maintain accounts directly with Merrill
Lynch Financial Data Services, Inc., the Trust's transfer agent (the "Transfer
Agent"). Such shareholders will not be charged the CMA program fee, but will
not receive any of the additional services available to CMA program
participants such as the Visa Account or the automatic investment of free
credit balances. The minimum initial purchase for non-CMA subscribers is
$5,000 and the minimum subsequent purchase is $1,000. Investors desiring to
purchase shares directly through the Transfer Agent as described below should
contact Merrill Lynch Financial Data Services, Inc., P.O. Box 45290,
Jacksonville, Florida 32232-5290 or call (800) 221-7210.
Payment to the Transfer Agent. Investors who are not subscribers to the CMA
program may submit purchase orders directly by mail or otherwise to the
Transfer Agent. Purchase orders by mail should be sent to Merrill Lynch
Financial Data Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-
5290. Purchase orders which are sent by hand should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Investors opening a new account must enclose a completed
Purchase Application which is available from the Transfer Agent. Existing
shareholders should enclose the detachable stub from a monthly account
statement which they have received. Checks should be made payable to Merrill
Lynch, Pierce, Fenner & Smith Incorporated. Certified checks are not
necessary, but checks are accepted subject to collection at full face value in
U.S. funds and must be drawn in U.S. dollars on a U.S. bank. Payments for the
accounts of corporations, foundations and other organizations may not be made
by third party checks. Since there is a three-day settlement period applicable
to the sale of most securities, delays may occur when an investor is
liquidating other investments for investment in one of the Funds.
21
<PAGE>
The CMA Funds have been created for the purpose of being part of the CMA
program or as part of other Merrill Lynch central asset account programs, and
they do not offer certain typical money fund features such as exchange
privileges. There are money market funds which have investment objectives
similar to the CMA Funds and which offer check writing and exchange
privileges, including others sponsored by Merrill Lynch (Merrill Lynch,
however, does not sponsor money funds outside the CMA program which seek to
provide income exempt from state or city income taxes). Prior to making an
investment in any such money fund, an investor should obtain and read the
prospectus of such money market fund.
Shares of each Fund are offered continuously for sale by Merrill Lynch
without a sales load at a public offering price equal to the net asset value
(normally $1.00 per share) next determined after a purchase order becomes
effective. Share purchase orders are effective on the date Federal funds
become available to the selling Fund. If Federal funds are available to such
Fund prior to 12 noon on any business day, the order will be effective on that
day. Shares purchased will begin accruing dividends on the day following the
date of purchase.
----------------
The Trust has entered into a distribution agreement with Merrill Lynch, a
wholly-owned subsidiary of ML & Co. (the "Distribution Agreement"), pursuant
to which Merrill Lynch acts as the distributor for the Funds.
Each Fund has adopted a separate distribution and shareholder servicing plan
(each a "Distribution Plan") in compliance with Rule 12b-1 under the
Investment Company Act. Pursuant to each Distribution Plan, Merrill Lynch
receives a distribution fee from each Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of that Fund attributable to
subscribers to the CMA program and to investors maintaining securities
accounts at Merrill Lynch or maintaining accounts directly with the Transfer
Agent who are not subscribers to such program, except that the value of Fund
shares in accounts maintained directly with the Transfer Agent which are not
serviced by Merrill Lynch financial consultants will be excluded. Each
Distribution Plan reimburses Merrill Lynch only for actual expenses of the
respective Fund incurred during the fiscal year in which the fee is paid. The
distribution fees compensate Merrill Lynch financial consultants and other
directly involved branch office personnel for selling shares of the Funds and
for providing direct personal services to shareholders.
Set forth below are the fees paid by each Fund to Merrill Lynch pursuant to
its Distribution Plan for the year ended March 31, 1998.
<TABLE>
<CAPTION>
FEE PAID FOR
THE YEAR ENDED
MARCH 31, 1998
--------------
<S> <C>
Arizona Fund.................................................. $ 218,259
California Fund............................................... $2,160,142
Connecticut Fund.............................................. $ 454,599
Massachusetts Fund............................................ $ 283,055
Michigan Fund................................................. $ 351,653
New Jersey Fund............................................... $ 879,810
New York Fund................................................. $1,646,549
North Carolina Fund........................................... $ 340,553
Ohio Fund..................................................... $ 440,461
Pennsylvania Fund............................................. $ 513,883
</TABLE>
22
<PAGE>
REDEMPTION OF SHARES
Each Fund is required to redeem for cash all full and fractional shares of
such Fund. The redemption price of a Fund is the net asset value per share
next determined after receipt by the Transfer Agent of proper notice of
redemption as described in accordance with either the automatic or manual
procedures set forth below. If such notice is received by the Transfer Agent
prior to the determination of net asset value at 12 noon, New York time, on
any day that the NYSE or New York banks are open for business, the redemption
will be effective on such day. Payment of the redemption proceeds will be made
on the same day the redemption becomes effective. If the notice is received
after 12 noon, the redemption will be effective on the next business day and
payment will be made on such next day.
REDEMPTION OF SHARES BY CMA SUBSCRIBERS
Automatic Redemptions. Redemptions will be effected automatically by Merrill
Lynch to satisfy debit balances in the Securities Account created by activity
therein or to satisfy debit balances created by Visa card purchases, cash
advances or checks written against the Visa Account. Each CMA account will be
scanned automatically for debits each business day prior to 12 noon. After
application of any free credit balances in the account to such debits, shares
of the designated Fund will be redeemed at net asset value at the 12 noon
pricing, and funds deposited pursuant to the Insured Savings Account will be
withdrawn, to the extent necessary to satisfy any remaining debits in either
the Securities Account or the Visa Account. Automatic redemptions or
withdrawals will be made first from the participant's Primary Money Account
and then, to the extent necessary, from Money Accounts not designated as the
Primary Money Account. Unless otherwise requested, in those instances where
shareholders request transactions that settle on a "same-day" basis (such as
Federal funds wire redemptions, branch office checks, transfers to other
Merrill Lynch accounts and certain securities transactions) the Fund shares
necessary to effect such transactions will be deemed to have been transferred
to Merrill Lynch prior to the Fund's declaration of dividends on that day. In
such instances, shareholders will receive all dividends declared and
reinvested through the date immediately preceding the date of redemption.
Unless otherwise requested by the participant, redemptions or withdrawals from
non-Primary Money Accounts will be made in the order the Money Accounts were
established; thus, redemptions or withdrawals will first be made from the non-
Primary Money Account which the participant first established. Margin loans
through the Investor CreditLineSM service will be utilized to satisfy debits
remaining after the liquidation of all funds invested in or deposited through
Money Accounts, and shares of the Funds may not be purchased, nor may deposits
be made pursuant to the Insured Savings Account, until all debits and margin
loans in the account are satisfied.
As set forth in the current description of the CMA Program, it is expected
that participants whose Securities Accounts are margin accounts with or
through the Investor CreditLineSM service will be permitted to designate
minimum balances to be maintained in shares of a CMA Fund or in deposits made
pursuant to the Insured Savings Account (the "Minimum Money Accounts
Balance"). If a participant designates a Minimum Money Accounts Balance, the
shares or deposits representing such balance will not be redeemed or withdrawn
until loans equal to the available margin loan value of securities in the
Securities Account have been made. Participants considering the establishment
of a Minimum Money Accounts Balance should review the description of this
service contained in the description of the CMA program which is available
from Merrill Lynch.
Manual Redemptions. Shareholders who are subscribers to the CMA program may
redeem shares of a Fund directly by submitting a written notice of redemption
directly to Merrill Lynch, which will submit the requests to the Transfer
Agent. Cash proceeds from the manual redemption of Fund shares ordinarily will
be mailed to the shareholder at his or her address of record or on request,
mailed or wired (if $10,000 or more) to
23
<PAGE>
his or her bank account. Redemption requests should not be sent to a Fund or
the Transfer Agent. If inadvertently sent to a Fund or the Transfer Agent,
such redemption requests will be forwarded to Merrill Lynch. The notice
requires the signatures of all persons in whose names the shares are
registered, signed exactly as their names appear on their monthly statement.
The signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934 (the "1934 Act"), the existence and validity of which may
be verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority may be required. Shareholders desiring to effect manual redemptions
should contact their Merrill Lynch financial consultants.
All redemptions of Fund shares will be confirmed to CMA subscribers in the
CMA Account Statement which is sent to all CMA participants monthly.
REDEMPTION OF SHARES BY NON-CMA SUBSCRIBERS
Shareholders may redeem shares of a Fund held in a Merrill Lynch securities
account directly as described above under "Redemption of Shares--Redemption of
Shares by CMA Subscribers--Manual Redemptions."
Shareholders maintaining an account directly with the Transfer Agent, who
are not CMA program participants, may redeem shares of a Fund by submitting a
written notice by mail directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290.
Redemption requests which are sent by hand should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Cash proceeds from the manual redemption of Fund shares
will be mailed to the shareholder at his or her address of record. Redemption
requests should not be sent to a Fund or Merrill Lynch. If inadvertently sent
to a Fund or Merrill Lynch such redemption requests will be forwarded to the
Transfer Agent. The notice requires the signatures of all persons in whose
names the shares are registered, signed exactly as their names appear on their
monthly statement. The signature(s) on the redemption request must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the 1934 Act, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority may be required.
----------------
Shares of the Funds must be held in either a CMA account or through the
Transfer Agent. Shareholders who no longer maintain a CMA account will have
their shares automatically redeemed unless they elect to open an account for
such shares through the Transfer Agent. Such shareholders will no longer
receive any of the services available to CMA program participants.
At various times, a Fund may be requested to redeem shares, in manual or
automatic redemptions, with respect to which good payment has not yet been
received by Merrill Lynch. Such Fund may delay, or cause to be delayed, the
payment of the redemption proceeds until such time as it has assured itself
that good payment has been collected for the purchase of such shares.
Normally, this delay will not exceed 10 days. In addition, such Fund reserves
the right not to effect automatic redemptions where the shares to be redeemed
have been purchased by check within 15 days prior to the date the redemption
request is received.
24
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the Investment Company Act.
The Trustees of the Trust are responsible for the overall supervision of the
operations of the Funds and perform the various duties imposed on the
directors of investment companies by the Investment Company Act.
The Trustees of the Trust are:
Arthur Zeikel*--Chairman of the Manager and its affiliate, Merrill Lynch
Asset Management, L.P. ("MLAM"); Chairman and Director of Princeton Services,
Inc. ("Princeton Services"); and Executive Vice President of ML & Co.
Ronald W. Forbes--Professor of Finance, School of Business, State University
of New York at Albany.
Cynthia A. Montgomery--Professor of Competition and Strategy, Harvard
Business School.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.
Kevin A. Ryan--Professor of Education, Boston University; Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
- --------
* Interested person, as defined in the Investment Company Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager is owned and controlled by ML & Co., a financial services
holding company and the parent of Merrill Lynch. The Asset Management Group of
ML & Co. (which includes the Manager and an affiliate of the Manager, MLAM)
acts as the investment adviser for more than 100 registered investment
companies and provides investment advisory services to individual and
institutional accounts. As of June, 1998, MLAM and the Manager had a total of
approximately $489 billion in investment company and other portfolio assets
under management. This amount includes assets managed for certain affiliates
of the Manager.
The Management Agreement with the Manager (the "Management Agreement")
provides that, subject to the supervision of the Trustees, the Manager is
responsible for the actual management of each Fund's portfolio and constantly
reviews each Fund's holdings in light of its own research analysis and that
from other relevant sources. The responsibility for making decisions to buy,
sell or hold a particular security rests with the Manager, subject to the
review of the Board of Trustees. The Manager performs certain of the other
administrative services and provides all of the office space, facilities,
equipment and necessary personnel for portfolio management of the Funds.
As compensation for its services under the Management Agreement, the Manager
receives a fee from each Fund at the end of each month at the annual rates of
0.50% of the first $500 million of average daily net assets
25
<PAGE>
of the Fund, 0.425% of the average daily net assets in excess of $500 million
but not exceeding $1 billion and 0.375% of the average daily net assets in
excess of $1 billion.
The Management Agreement obligates each Fund to pay certain expenses
incurred in its operations, including, among other things, the management fee,
legal and audit fees, unaffiliated Trustees' fees and expenses, registration
fees, custodian and transfer agency fees, accounting and pricing costs and
certain of the costs of printing proxies, shareholder reports, prospectuses
and statements of additional information. Accounting services are provided to
the Funds by the Manager and each Fund reimburses the Manager for its costs in
connection with such services. The Manager may waive all or a portion of its
management fee and may voluntarily assume all or a portion of a Fund's
expenses. The Manager may discontinue or reduce the amount of such waiver or
assumption of expenses at any time without notice.
Set forth in the chart below is certain management fee and expense
information for each Fund for the year ended March 31, 1998.
<TABLE>
<CAPTION>
NEW NEW NORTH
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN JERSEY YORK CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
-------- ---------- ----------- ------------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fee
for the Year
Ended March 31,
1998........... $888,435 $7,429,249 $1,826,850 $1,148,245 $1,420,153 $3,390,860 $5,848,065 $1,381,698 $1,784,810 $2,072,950
Effective Fee
Rate as of
March 31, 1998. .50% .43% .50% .50% .50% .48% .44% .50% .50% .50%
Reimbursement
for Accounting
Services for
the Year Ended
March 31, 1998. $ 39,972 $ 134,365 $ 62,364 $ 48,947 $ 49,333 $ 79,096 $ 112,683 $ 52,391 $ 55,454 $ 66,136
Ratio of
Operating
Expenses to
Average Net
Assets (Net of
Reimbursement)
for the Year
Ended
March 31, 1998. .74% .59% .69% .72% .71% .66% .61% .71% .70% .70%
</TABLE>
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc., which is a subsidiary of ML &
Co., acts as the Trust's Transfer Agent pursuant to a Transfer Agency,
Shareholder Servicing Agency, and Proxy Agency Agreement (the "Transfer Agency
Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening and maintenance of shareholder accounts. Pursuant to the Transfer
Agency Agreement, the Transfer Agent receives a fee at the rate of $10.00 per
account and the Transfer Agent is entitled to reimbursement from each Fund for
certain transaction charges and out-of-pocket expenses incurred by it under
the Transfer Agency Agreement. Additionally, a $.20 monthly closed account
charge will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the
account is closed. At the end of the calendar year, no further fees will be
due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and
any other account representing the beneficial interest of a person on a
recordkeeping system, provided the recordkeeping system is maintained by a
wholly-owned subsidiary of ML & Co.
26
<PAGE>
Set forth below are the fees paid by each Fund, including out-of-pocket
expenses, to the Transfer Agent pursuant to the Transfer Agency Agreement for
the year ended March 31, 1998.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31, 1998
------------------
<S> <C>
Arizona Fund.............................................. $ 24,502
California Fund........................................... $216,686
Connecticut Fund.......................................... $ 45,897
Massachusetts Fund........................................ $ 52,669
Michigan Fund............................................. $ 55,103
New Jersey Fund........................................... $127,236
New York Fund............................................. $225,365
North Carolina Fund....................................... $ 50,229
Ohio Fund................................................. $ 60,851
Pennsylvania Fund......................................... $ 92,719
</TABLE>
PORTFOLIO TRANSACTIONS
The portfolio securities in which the Funds invest are traded primarily in
the over-the-counter market. Where possible, the Funds will deal directly with
the dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principals for their own accounts. On occasion,
securities may be purchased directly from the issuer. Such portfolio
securities generally are traded on a net basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of executing
portfolio transactions primarily will consist of dealer spreads and
underwriting commissions. Under the Investment Company Act, persons affiliated
with a Fund are prohibited from dealing with such Fund as a principal in the
purchase and sale of securities unless an exemptive order allowing such
transaction is obtained from the Commission. The Trust has obtained exemptive
relief permitting the Funds to engage in certain principal transactions with
Merrill Lynch involving high quality, short-term Municipal Securities subject
to certain conditions. In addition, the Trust may not purchase, or acquire
pursuant to a private placement in which Merrill Lynch serves as a placement
agent, State Municipal Securities for the Funds from any underwriting
syndicate of which Merrill Lynch is a member except pursuant to procedures
approved by the Trustees of the Trust which either comply with rules adopted
by the Commission or with interpretations of the Commission staff. An
affiliated person of the Trust may serve as its broker in over-the-counter
transactions on behalf of a Fund conducted for the Trust on an agency basis.
In allocating portfolio transactions, the Manager may take into consideration
the sale of shares of such Fund.
27
<PAGE>
Set forth below are the number of transactions engaged in by each Fund with
Merrill Lynch and the amount of securities involved for the year ended March
31, 1998.
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
TRANSACTIONS AMOUNT
------------ ------------
<S> <C> <C>
Arizona Fund....................................... 2 $ 2,199,920
California Fund.................................... 43 $614,691,167
Connecticut Fund................................... 78 $230,316,390
Massachusetts Fund................................. 21 $ 63,069,640
Michigan Fund...................................... 11 $ 52,517,640
New Jersey Fund.................................... 75 $258,735,910
New York Fund...................................... 6 $ 46,438,210
North Carolina Fund................................ 11 $ 41,825,550
Ohio Fund.......................................... 13 $ 76,400,000
Pennsylvania Fund.................................. 6 $ 30,400,000
</TABLE>
DIVIDENDS
All of the net income of each Fund is declared as dividends daily. Each
Fund's net income for dividend purposes is determined by the Manager at 12
noon, New York time, on each day during which the NYSE or New York banks are
open for business immediately prior to the determination of each Fund's net
asset value on that day (see "Determination of Net Asset Value"). Net income
of each Fund (from the time of the immediately preceding determination
thereof) consists of interest accrued and/or original issue discount earned,
less amortization of premium and the estimated expenses of the Fund (including
the fees payable to the Manager and Merrill Lynch) applicable to that dividend
period. Dividends of each Fund are declared and reinvested daily in the form
of additional full and fractional shares of that Fund at net asset value.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined by the Manager once daily,
immediately after the daily declaration of dividends, as of 12 noon, New York
time, on each business day during which the NYSE or New York banks are open
for business. It is anticipated that the net asset value of each Fund will
remain constant at $1.00 per share although this cannot be assured.
Each Fund values its portfolio securities based on their amortized cost.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the
instrument.
28
<PAGE>
TAXES
FEDERAL
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded RICs under the Code. As long as a Fund so qualifies, the
Fund (but not its shareholders) will not be subject to federal income tax to
the extent that it distributes its net investment income and net realized
capital gains. The Trust intends to cause the Funds to distribute
substantially all of such income.
To the extent that the dividends distributed to a Fund's shareholders are
derived from interest income exempt from federal income tax under Code Section
103(a) and are properly designated as "exempt-interest dividends" by the
Trust, they will be excludable from a shareholder's gross income for federal
income tax purposes. Exempt-interest dividends are included, however, in
determining the portion, if any, of a person's social security benefits and
railroad retirement benefits subject to federal income taxes. The Trust will
inform shareholders annually as to the portion of each Fund's distributions
which constitutes exempt-interest dividends. Interest on indebtedness incurred
or continued to purchase or carry Fund shares is not deductible for federal
income tax purposes to the extent attributable to exempt-interest dividends.
Persons who may be "substantial users" (or "related persons" of substantial
users) of facilities financed by industrial development bonds or private
activity bonds held by a Fund should consult their tax advisers before
purchasing Fund shares.
To the extent that any Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for federal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities ("capital gain dividends") are
taxable as long-term capital gains for federal income tax purposes, regardless
of the length of time the shareholder has owned Fund shares. Recent
legislation created additional categories of capital gains taxable at
different rates. Additional legislation eliminates the highest 28% category
for most sales of capital assets occurring after December 31, 1997. Generally
not later than 60 days after the close of each Fund's taxable year, the Trust
will provide the shareholders of each Fund with a written notice designating
the amounts of any exempt-interest dividends, ordinary income dividends or
capital gain dividends, as well as the amount of capital gain dividends in the
different categories of capital gain referred to above. Distributions by a
Fund, whether from exempt-interest income, ordinary income or capital gains,
will not be eligible for the dividends received deduction allowed to
corporations under the Code.
All or a portion of a Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of a Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital
asset). Any loss upon the sale or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If a Fund
pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
29
<PAGE>
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item
of "tax preference", which could subject certain investors in such bonds,
including shareholders of the Funds, to an alternative minimum tax. The Funds
will purchase such "private activity bonds", and the Trust will report to
shareholders within 60 days after each Fund's taxable year-end the portion of
its dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings", which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by a Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by such Fund.
A loss realized on a sale or exchange of shares of a Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment
of dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
If the value of assets held by a Fund declines, the Board of Trustees may
authorize a reduction in the number of outstanding shares in shareholders'
accounts so as to preserve a net asset value of $1.00 per share. After such a
reduction, the basis of eliminated shares would be added to the basis of
shareholders' remaining shares in such Fund, and any shareholders disposing of
shares at that time may recognize a capital loss.
Under certain Code provisions some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including any of the Funds) during the
taxable year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal or foreign taxes.
STATE
The State Municipal Securities in which each Fund invests consist of
obligations with remaining maturities of 397 days (13 months) or less which
are issued by or on behalf of the designated state, its political
subdivisions,
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<PAGE>
agencies and instrumentalities and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the Virgin Islands and Guam and
issuers of Derivative Products, the interest from which (or in the case of
property taxes, the value of which) is exempt, in the opinion of counsel to
the issuer, from federal income taxation and personal income taxation in the
designated state and, in certain circumstances, local personal income
taxation, local personal property taxation and/or state intangible personal
property taxes in the designated state.
Exempt-interest dividends attributable to interest income from State
Municipal Securities of a designated state generally will be exempt from state
personal income taxation (and certain other state or local taxes, where
applicable) to shareholders otherwise subject to personal income taxation or
other state or local taxes by such designated state. Shareholders subject to
income taxes or certain other state or local taxes, where applicable, by
states other than the Fund's designated state will realize a lower after-tax
rate of return than shareholders in the designated state since the dividends
distributed by a Fund generally will not be exempt, to any significant degree,
from income taxation or certain other state or local taxes, where applicable,
by any state other than that Fund's designated state. The Trust will inform
shareholders annually as to the portion of a Fund's distributions which
constitutes exempt-interest dividends and the portion which is not subject to
state income taxes (and, where applicable, local personal income taxes, local
personal property taxes and/or state intangible personal property taxes).
Interest on indebtedness incurred or continued to purchase or carry Fund
shares generally will not be deductible for state income tax purposes to the
extent attributable to interest income exempt from income taxation by the
designated state. Further limitations on the deductibility of such interest
may apply in some states.
The tax-exempt treatment of the interest paid to holders of Derivative
Products is premised on the legal conclusion that the holders of such
Derivative Products have an ownership interest in the Underlying Bonds. While
each Fund receives an opinion of legal counsel to the effect that the income
from each Derivative Product is tax-exempt at the federal and state level to
the same extent as the Underlying Bond, the Internal Revenue Service (the
"IRS") as well as the taxing authorities of many states have not issued a
ruling on this subject. Were the IRS or any state taxing authority to issue an
adverse ruling or take an adverse position with respect to the taxation of
Derivative Products, there is a risk that the interest paid on such Derivative
Products, or, in the case of property taxes the value of such fund to the
extent represented by such Derivative Products, would be deemed taxable on the
federal and/or state level.
The foregoing description relates generally to state personal income tax
issues; investors should consult with their tax advisers with respect to such
taxes, other state or local taxes that may apply and the availability of any
exemptions from other state or local taxes. Additional considerations relating
to taxation in the various states is set forth under "Taxes" in the Statement
of Additional Information.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on February 6, 1987
under the laws of Massachusetts. It is an open-end management investment
company comprised of separate series ("Series"), each of which is a separate
portfolio offering a separate class of shares to selected groups of
purchasers. Each of the Series is to be managed independently in order to
provide to shareholders who are residents of the state to which such Series
relates as high a level of income exempt from federal, state and (in certain
instances) local income taxes as is consistent with prudent investment
management. At the date of this Prospectus, the Arizona, California,
Connecticut, Massachusetts, Michigan, New Jersey, New York, North Carolina,
Ohio and Pennsylvania Funds are the only Series of the Trust offering their
shares to the public. The Trustees are
31
<PAGE>
authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of a single
class. Shareholder approval is not required for the authorization of
additional Series of the Trust.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares have equal voting rights, except that only shares of
the respective Series are entitled to vote on matters concerning only that
Series. The Declaration of Trust does not require that the Trust hold annual
meetings of shareholders. However, the Trust will be required to call special
meetings of shareholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of the Trust. The Trust also would be
required to hold a special shareholders' meeting to elect new Trustees at such
time as less than a majority of the Trustees holding office have been elected
by shareholders. The Declaration of Trust provides that a shareholders'
meeting may be called for any reason at the request of 10% of the outstanding
shares of the Trust or by a majority of the Trustees. Except as set forth
above, the Trustees shall continue to hold office and appoint successor
Trustees.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared by the respective Series and in the net
assets of such Series on liquidation or dissolution remaining after
satisfaction of outstanding liabilities. The obligations and liabilities of a
particular Series are restricted to the assets of that Series and do not
extend to the assets of the Trust generally. The shares of each Series, when
issued, will be fully paid and non-assessable by the Trust.
The Declaration of Trust establishing the Trust refers to the Trustees under
the Declaration of Trust collectively as Trustees, but not as individuals or
personally; and except for his or her own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or her other duties, no Trustee,
shareholder, officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim of the Trust but the "Trust Property"
(as defined in the Declaration of Trust) only shall be liable. A copy of the
Declaration of Trust, together with all amendments thereto, is on file in the
office of the Commonwealth of Massachusetts.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Trust could be
adversely affected if the computer systems used by the Manager or other Trust
service providers do not properly address this problem prior to January 1,
2000. The Manager has established a dedicated group to analyze these issues
and to implement any systems modifications necessary to prepare for the Year
2000. Currently, the Manager does not anticipate that the transition to the
21st century will have any material impact on its ability to continue to
service the Trust at current levels. In addition, the Manager has sought
assurances from the Trust's other service providers that they are taking all
necessary steps to ensure that their computer systems will accurately reflect
the Year 2000, and the Manager will continue to monitor the situation. At this
time, however, no assurance can be given that the Trust's other service
providers have anticipated every step necessary to avoid any adverse effect on
the Trust attributable to the Year 2000 Problem.
32
<PAGE>
SHAREHOLDER REPORTS AND INQUIRIES
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at (800)
221-7210.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to a Fund at the address or telephone
number set forth on the cover page of this Prospectus.
33
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<PAGE>
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<PAGE>
Manager
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch, Pierce, Fenner & Smith Incorporated
World Financial Center
North Tower
250 Vesey Street
New York, New York 10281
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45290
Jacksonville, Florida 32232-5290
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
Counsel
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Principal Office of the Trust
800 Scudders Mill Road
Plainsboro, New Jersey 08536
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Financial Highlights....................................................... 3
Yield Information.......................................................... 8
Investment Objectives and Policies......................................... 9
Purchase of Shares......................................................... 18
Redemption of Shares....................................................... 23
Management of the Trust.................................................... 25
Portfolio Transactions..................................................... 27
Dividends.................................................................. 28
Determination of Net Asset Value........................................... 28
Taxes...................................................................... 29
Organization of the Trust.................................................. 31
Shareholder Reports and Inquiries.......................................... 33
</TABLE>
No person has been authorized to
give any information or to make any
representations, other than those
contained in this Prospectus, in
connection with the offers
contained therein, and, if given or
made, such other information or
representations must not be relied
upon as having been authorized by
the Fund, the Manager or Merrill
Lynch, Pierce, Fenner & Smith
Incorporated. This Prospectus does
not constitute an offering in any
state in which such offering may
not lawfully be made.
Code #16817-0798
CMA MULTI-STATE MUNICIPAL SERIES TRUST
. ARIZONA
. CALIFORNIA
. CONNECTICUT
. MASSACHUSETTS
. MICHIGAN
. NEW JERSEY
. NEW YORK
. NORTH CAROLINA
. OHIO
. PENNSYLVANIA
Prospectus
The enclosed prospectus describes ten fully managed municipal money market
funds. Shares of the Funds are offered to participants in the Cash Management
Account(R) ("CMA(R) Account") program of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and to other individual investors who maintain accounts directly
with the Transfer Agent.
Investors should be aware that the Cash Management Account service is not a
bank account and that a shareholder's investment in a Fund is not insured by
any governmental agency. As with any investment in securities, the value of a
shareholder's investment in a Fund may fluctuate.
- --------------------------------------------------------------------------------
PRINCIPAL OFFICE OF THE TRUST:
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
JULY 28, 1998
LOGO MERRILL LYNCH
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CMA MULTI-STATE MUNICIPAL SERIES TRUST
CMA Arizona Municipal Money Fund CMA New Jersey Municipal Money Fund
CMA California Municipal Money Fund CMA New York Municipal Money Fund
CMA Connecticut Municipal Money Fund CMA North Carolina Municipal Money
Fund
CMA Massachusetts Municipal Money Fund CMA Ohio Municipal Money Fund
CMA Michigan Municipal Money Fund CMA Pennsylvania Municipal Money Fund
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
CMA Multi-State Municipal Series Trust (the "Trust") consists of CMA Arizona
Municipal Money Fund (the "Arizona Fund"), CMA California Municipal Money Fund
(the "California Fund"), CMA Connecticut Municipal Money Fund (the
"Connecticut Fund"), CMA Massachusetts Municipal Money Fund (the
"Massachusetts Fund"), CMA Michigan Municipal Money Fund (the "Michigan
Fund"), CMA New Jersey Municipal Money Fund (the "New Jersey Fund"), CMA New
York Municipal Money Fund (the "New York Fund"), CMA North Carolina Municipal
Money Fund (the "North Carolina Fund"), CMA Ohio Municipal Money Fund (the
"Ohio Fund") and CMA Pennsylvania Municipal Money Fund (the "Pennsylvania
Fund") (together, the "Funds"). Each Fund is a non-diversified, no-load money
market mutual fund seeking current income (or value, in the case of property
taxes) exempt from federal income taxes, the designated state's personal
income taxes and, in certain instances, local personal income taxes, local
personal property taxes and/or state intangible personal property taxes. Each
Fund also seeks preservation of capital and liquidity available from investing
in a portfolio of short-term, high quality obligations, the interest on which
(or, in the case of property taxes, the value of which) is exempt, in the
opinion of counsel to the issuer, from federal income taxes, personal income
taxes of the designated state and, in certain instances, local personal income
taxes, local personal property taxes and/or state intangible personal property
taxes. The Funds may invest in certain tax-exempt securities classified as
"private activity bonds" that may subject certain investors in the Funds to an
alternative minimum tax. The Funds also may invest in derivative or synthetic
municipal instruments. The Funds' shares are offered to participants in the
Cash Management Account(R) ("CMA" or "CMA account") financial service program
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") to
provide a medium for the investment of free credit balances held in CMA
accounts. A CMA account is a conventional Merrill Lynch cash securities or
margin securities account ("Securities Account") which is linked to the Funds
and certain other mutual funds (collectively, the "CMA Funds"), money market
deposit accounts maintained with depository institutions and to a Visa(R)
card/check account ("Visa Account"). Merrill Lynch markets its margin account
under the name Investor CreditLine SM service.
A customer of Merrill Lynch may subscribe to the CMA program with a minimum
of $20,000 in securities or cash. Subject to the conditions described in the
prospectus referred to below, free credit balances in the Securities Account
of CMA participants may be invested periodically in shares of one of the CMA
Funds or deposited with a depository institution through the Insured
Savings SM Account (the "Insured Savings Account"). This permits the
subscriber to earn a return on such funds pending further investment in other
aspects of the CMA program or utilization of the Visa Account. The shares of
the Funds also may be purchased by individual investors maintaining accounts
directly with the Transfer Agent who do not subscribe to the CMA program. The
minimum initial purchase for non-CMA subscribers is $5,000 and subsequent
purchases must be $1,000 or more.
Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year for individuals (an additional $25 annual program
fee is charged for participation in the CMA Visa(R) Gold Program described in
the CMA Program Description). A different fee may be charged to certain group
plans and special accounts. Merrill Lynch reserves the right to change the fee
for the CMA service or the CMA Visa Gold Program at any time.
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Funds dated July 28,
1998 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained without charge by calling or
writing to the Funds at the above telephone number or address. This Statement
of Additional Information has been incorporated by reference into the
Prospectus.
----------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS JULY 28, 1998.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund is a non-diversified, no-load money market mutual fund investing
primarily in short-term, high quality obligations the interest on which (or,
in the case of property taxes, the value of which) is exempt, in the opinion
of counsel to the issuer, from federal and the designated state's personal
income taxes and, in certain instances, local personal income taxes, local
personal property taxes and/or state intangible personal property taxes.
Reference is made to "Investment Objectives and Policies" in the Prospectus of
the Funds for a discussion of the investment objectives and policies of each
Fund.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
which means that the Fund is not limited by such Act in the proportion of its
assets that it may invest in obligations of a single issuer. However, each
Fund's investments will be limited so as to qualify as a "regulated investment
company" ("RIC") for purposes of the Internal Revenue Code of 1986, as amended
(the "Code"). See "Taxes."
As discussed in the Prospectus, the Funds may invest in variable rate demand
obligations ("VRDOs"). VRDOs are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the unpaid principal balance plus
accrued interest on a short notice period. The interest on a VRDO is
adjustable at periodic intervals to a rate calculated to maintain the market
value of the VRDO at approximately the par value of the VRDO on adjustment
date. The adjustment may be based on an interest rate adjustment index.
The Funds also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by
financial institutions, typically commercial banks ("institutions").
Participating VRDOs provide the Funds with a specified undivided interest (up
to 100%) of the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the Participating VRDOs from
the institution on a specified number of days' notice, presently not to exceed
30 days. In addition, each Participating VRDO is backed by an irrevocable
letter of credit or similar commitment of the institution. A Fund that invests
in a VRDO has an undivided interest in an underlying obligation and thus
participates on the same basis as the institution in such obligation, except
that the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit or
issuing the repurchase commitment.
Each Fund has been advised by counsel to the Trust that the interest
received on Participating VRDOs will be treated as interest from tax-exempt
obligations as long as such Fund does not invest more than a limited amount
(not more than 20%) of its total assets in such investments and certain other
conditions are met. It is contemplated that no Fund will invest more than a
limited amount of its total assets in Participating VRDOs.
The Funds can be expected to offer lower yields than longer-term municipal
bond funds because the types of securities in which the Funds will invest, as
described in the Prospectus (hereinafter referred to as "State Municipal
Securities" or "Municipal Securities"), have shorter maturities and therefore
tend to produce lower yields than longer-term municipal securities. Interest
rates in the short-term municipal securities market also may fluctuate more
widely from time to time than interest rates in the long-term municipal bond
market. Because the Funds invest solely in short-term securities, however, the
market value of each Fund's portfolio at any given time can be expected to
fluctuate less as a result of changes in interest rates. Because of the
interest rate adjustment formula on VRDOs (including Participating VRDOs), the
VRDOs are not comparable to fixed rate securities. A Fund's yield on VRDOs
will decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On
the other hand, during periods where prevailing interest rates have increased,
a Fund's yield on VRDOs will increase and its shareholders will have a reduced
risk of capital depreciation.
The Funds' portfolio investments in municipal notes and short-term tax-
exempt commercial paper will be limited to those obligations which are rated,
or issued by issuers who have been rated, in one of the two highest rating
categories for short-term municipal debt obligations by a nationally
recognized statistical rating
2
<PAGE>
organization (an "NRSRO") or, if not rated, will be of comparable quality as
determined by the Trustees of the Trust. The Funds' investments in municipal
bonds (which must have maturities at the date of purchase of 397 days (13
months) or less) will be in issuers who have received from the requisite
NRSROs a rating, with respect to a class of short-term debt obligations that
is comparable in priority and security with the investment, in one of the two
highest rating categories for short-term obligations or, if not rated, will be
of comparable quality as determined by the Trustees of the Trust. Currently,
there are three NRSROs which rate municipal obligations: Fitch IBCA, Inc.
("Fitch"), Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Ratings Services ("Standard & Poor's"). Certain tax-exempt obligations
(primarily VRDOs and Participating VRDOs) may be entitled to the benefit of
letters of credit or similar credit enhancements issued by financial
institutions and, in such instances, the Board of Trustees and Fund Asset
Management, L.P. (the "Manager") will take into account the obligation of the
financial institution in assessing the quality of such instrument. The Funds
may also purchase other types of tax-exempt instruments if, in the opinion of
the Trustees, such obligations are equivalent to securities having the ratings
described above. For a description of Municipal Securities and ratings, see
Appendix K-- "Information Concerning Municipal Securities".
PURCHASE OF MUNICIPAL SECURITIES ON A DELAYED DELIVERY OR WHEN-ISSUED BASIS
Municipal Securities may at times be purchased or sold on a delayed delivery
basis or on a when-issued basis. These transactions arise when securities are
purchased or sold by a Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and
the interest rate are each fixed at the time the buyer enters into the
commitment. The Fund will make commitments to purchase such securities only
with the intention of actually acquiring the securities, but the Fund may sell
these securities prior to settlement date if it is deemed advisable. No new
when-issued commitments will be made if more than 40% of a Fund's net assets
would become so committed. Purchasing Municipal Securities on a when-issued
basis involves the risk that the yields available in the market when the
delivery takes place may actually be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligation generally will decrease. The Funds will maintain separate accounts
at the Trust's custodian consisting of cash or liquid Municipal Securities
(valued on a daily basis) equal at all times to the amount of the when-issued
commitment.
TAXABLE MONEY MARKET SECURITIES
The Funds may invest in taxable money market securities subject to the
limitations set forth under "Investment Objectives and Policies" in the
Prospectus ("Taxable Securities"). The Taxable Securities in which the Funds
may invest consist of U.S. Government securities, U.S. Government agency
securities, domestic bank certificates of deposit and bankers' acceptances,
short-term corporate debt securities such as commercial paper and repurchase
agreements. These investments must have a stated maturity not in excess of 397
days (13 months) from the date of purchase.
The standards applicable to Taxable Securities in which the Funds invest are
essentially the same as those described above with respect to Municipal
Securities. The Funds may not invest in any security issued by a depository
institution unless such institution is organized and operating in the United
States, has total assets of at least $1 billion and is federally insured.
The Funds may invest in Taxable Securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with a member bank
of the Federal Reserve System or primary dealer in U.S. Government securities
or an affiliate thereof which meet the creditworthiness standards adopted by
the Board of Trustees. Under such agreements, the bank or primary dealer or an
affiliate thereof agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. Repurchase agreements
may be construed to be collateralized loans by the purchaser to the seller
secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, a Fund will require the seller to provide additional
collateral if the market value of the securities falls below the repurchase
price at
3
<PAGE>
any time during the term of the repurchase agreement. In the event of default
by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
such Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the collateral. In the event of a default
under a repurchase agreement that is construed to be a collateralized loan,
instead of the contractual fixed rate of return, the rate of return to such
Fund shall be dependent upon intervening fluctuations of the market value of
such security and the accrued interest on the security. In such event, such
Fund would have rights against the seller for breach of contract with respect
to any losses arising from market fluctuations following the failure of the
seller to perform.
In general, for federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements, even if the underlying securities are
tax-exempt securities, will not be considered tax-exempt interest.
From time to time, the Funds also may invest in money market securities
pursuant to purchase and sale contracts. While purchase and sale contracts are
similar to repurchase agreements, purchase and sale contracts are structured
so as to be in substance more like a purchase and sale of the underlying
security than is the case with repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of each Fund's assets and activities, which are fundamental
policies and may not be changed without the approval of the holders of a
majority of the respective Fund's outstanding shares (for this purpose a
majority of the shares means the lesser of (i) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are represented
or (ii) more than 50% of the outstanding shares). No Fund may: (1) purchase
any securities other than securities referred to under "Investment Objectives
and Policies" in the Prospectus and herein; (2) invest more than 5% of its
total assets (taken at market value at the time of each investment) in
industrial revenue bonds where the entity supplying the revenues from which
the issue is to be paid, including predecessors, has a record of less than
three years of continuous operation; (3) make investments for the purpose of
exercising control or management; (4) purchase securities of other investment
companies, except in connection with a merger, consolidation, acquisition or
reorganization; (5) purchase or sell real estate (provided that such
restriction shall not apply to Municipal Securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein), commodities or commodity contracts, interests in oil, gas
or other mineral exploration or development programs; (6) purchase any
securities on margin, except for use of short-term credit necessary for
clearance of purchases and sales of portfolio securities; (7) make short sales
of securities or maintain a short position or invest in put, call, straddle,
or spread options or combinations thereof; provided, however, that each Fund
shall have the authority to purchase Municipal Securities subject to put
options as set forth herein under "Investment Objectives and Policies" and
Appendix K--"Information Concerning Municipal Securities"; (8) make loans to
other persons, provided that each Fund may purchase a portion of an issue of
Municipal Securities (the acquisition of a portion of an issue of Municipal
Securities or bonds, debentures or other debt securities which are not
publicly distributed is considered to be the making of a loan under the
Investment Company Act); (9) borrow amounts in excess of 20% of its total
assets taken at market value (including the amount borrowed), and then only
from banks as a temporary measure for extraordinary or emergency purposes
including to meet redemptions and to settle securities transactions. (Usually
only "leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Funds will not borrow to increase income but only to meet
redemption requests which might otherwise require untimely dispositions of
portfolio securities. The Funds will not purchase securities while borrowings
are outstanding except to honor prior commitments. Interest paid on such
borrowings will reduce net income.); (10) mortgage, pledge, hypothecate or in
any manner transfer as security for indebtedness any securities owned or held
by the Fund except as may be necessary in connection with borrowings mentioned
in (9) above, and then such mortgaging, pledging or hypothecating may not
exceed 10% of its total assets, taken at market value; (11) invest
4
<PAGE>
in securities with legal or contractual restrictions on resale for which no
readily available market exists, including repurchase agreements maturing in
more than seven days, if, regarding all such securities, more than 10% of its
total assets (taken at market value), would be invested in such securities;
(12) act as an underwriter of securities, except to the extent that the Fund
technically may be deemed an underwriter when engaged in the activities
described in (8) above or insofar as the Fund may be deemed an underwriter
under the Securities Act of 1933 in selling portfolio securities; and (13)
purchase or retain the securities of any issuer, if those individual officers
and Trustees of the Trust, the Manager or any subsidiary thereof each owning
beneficially more than 1/2 of 1% of the securities of such issuer own in the
aggregate more than 5% of the securities of such issuer. In addition to the
foregoing, the Funds have undertaken with the State of Texas that they will
not invest in oil, gas or mineral leases.
In addition, to comply with tax requirements for qualification as a RIC,
each Fund's investments will be limited in a manner such that, at the close of
each quarter of each fiscal year, (a) no more than 25% of the Fund's total
assets are invested in the securities of a single issuer, and (b) with regard
to at least 50% of the Fund's total assets, no more than 5% of its total
assets are invested in the securities of a single issuer. For purposes of this
restriction, the Funds will regard each state and each political subdivision,
agency or instrumentality of such state and each multi-state agency of which
such state is a member and each public authority which issues securities on
behalf of a private entity as a separate issuer, except that if the security
is backed only by the assets and revenues of a non-government entity then the
entity with the ultimate responsibility for the payment of interest and
principal may be regarded as the sole issuer. These tax-related limitations
may be changed by the Trustees of the Trust to the extent necessary to comply
with changes to the federal tax requirements.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust,
including their ages and their principal occupations for at least the last
five years, is set forth below. Unless otherwise noted, the address of each
Trustee and executive officer is P.O. Box 9011, Princeton, New Jersey 08543-
9011.
Arthur Zeikel (66)--President and Trustee(1)(2)--Chairman of the Manager and
its affiliate Merrill Lynch Asset Management, L.P. ("MLAM")(which terms, as
used herein, include their corporate predecessors) since 1997; President of
the Manager and MLAM from 1977 to 1997; Chairman of Princeton Services, Inc.
("Princeton Services") since 1997 and Director thereof since 1993; President
of Princeton Services from 1993 to 1997; Executive Vice President of Merrill
Lynch & Co., Inc. ("ML & Co.") since 1990.
Ronald W. Forbes (57)--Trustee(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York
at Albany since 1989; Consultant, Urban Institute, Washington, D.C. since
1995.
Cynthia A. Montgomery (45)--Trustee(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate
School of Business Administration, The University of Michigan from 1979 to
1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.
Charles C. Reilly (66)--Trustee(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
5
<PAGE>
Kevin A. Ryan (65)--Trustee(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (60)--Trustee(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus of
New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company) and Alexander's Inc. (real estate company).
Terry K. Glenn (57)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and MLAM since 1983; President of Merrill Lynch Funds
Distributor, a division of Princeton Funds Distributor, Inc. ("MLFD") since
1986 and Director thereof since 1991; Executive Vice President and Director of
Princeton Services since 1993; President of Princeton Administrators, L.P.
since 1988.
Vincent R. Giordano (53)--Senior Vice President and Portfolio
Manager(1)(2)--Senior Vice President of the Manager and MLAM since 1984;
Senior Vice President of Princeton Services since 1993.
Edward J. Andrews (38)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1991; investment officer in the Private Banking
Division of Citibank, N.A. from 1982 to 1991.
Donald C. Burke (38)--First Vice President(1)(2)--First Vice President of
MLAM since 1997; Vice President of MLAM from 1990 to 1997; and Director of
Taxation of MLAM since 1990.
Peter J. Hayes (39)--First Vice President and Portfolio Manager(1)(2)--First
Vice President of MLAM since 1997; Vice President of MLAM from 1988 to 1997.
Kenneth A. Jacob (47)--First Vice President and Portfolio Manager(1)(2)--
First Vice President of MLAM since 1997; Vice President of MLAM from 1984 to
1997.
Kevin A. Schiatta (43)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1985.
Helen Marie Sheehan (38)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1991; Assistant Vice President of MLAM from 1989 to
1991; employee of MLAM since 1985.
Steven Lewis (35)--Vice President and Portfolio Manager(1)(2)--Assistant
Vice President of MLAM since 1995.
Darrin Sanfillippo (33)--Vice President and Portfolio Manager(1)(2)--
Assistant Vice President of MLAM since 1994.
Gerald M. Richard (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981;
Treasurer since 1984.
Robert Harris (46)--Secretary(1)(2)--Vice President of MLAM since 1984 and
attorney associated with MLAM since 1980; Secretary of MLFD since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser.
At June 30, 1998, the Trustees and officers of the Trust as a group (18
persons) owned an aggregate of less than 1% of the outstanding shares of
beneficial interest of each Fund. At such date, Mr. Zeikel, an officer
6
<PAGE>
and Trustee of the Trust, and the other officers of the Trust, owned less than
1% of the outstanding shares of common stock of ML & Co.
COMPENSATION OF TRUSTEES
Pursuant to the terms of its management agreement with the Trust (the
"Management Agreement"), the Manager pays all compensation of officers and
employees of the Trust as well as the fees of all Trustees of the Trust who
are affiliated persons of ML & Co. or its subsidiaries. The Trust pays each
Trustee who is not affiliated with the Manager (each a "non-affiliated
Trustee") a fee of $5,000 per year plus a fee of $500 per meeting attended and
pays all Trustees' actual out-of-pocket expenses relating to attendance at
meetings. The Trust also pays an annual fee of $2,000 to members of its Audit
and Nominating Committee, which consists of all of the non-affiliated
Trustees, and pays all Trustees' actual out-of-pocket expenses relating to
attendance at meetings. The Chairman of the Audit and Nominating Committee
receives an additional annual fee of $1,000 per year.
Set forth below is each Fund's share of the allocated fees and expenses paid
to the non-affiliated Trustees for the year ended March 31, 1998.
<TABLE>
<CAPTION>
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK NORTH CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
- ------- ---------- ----------- ------------- -------- ---------- -------- -------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,289 $12,389 $2,643 $1,585 $2,083 $5,383 $9,756 $2,114 $2,634 $3,216
</TABLE>
The following table sets forth for the fiscal year ended March 31, 1998
compensation paid by the Funds to the non-affiliated Trustees and for the
calendar year ended December 31, 1997 the aggregate compensation paid by all
registered investment companies advised by MLAM and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Trustees.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE TRUSTEES(/1/)
--------------- ------------ ------------------------ ----------------
<S> <C> <C> <C>
Arizona Fund
- ------------
Ronald W. Forbes(/1/).. $ 238.98 None $153,500
Cynthia A.
Montgomery(/1/)....... $ 238.98 None $153,500
Charles C. Reilly(/1/). $ 266.98 None $313,000
Kevin A. Ryan(/1/)..... $ 238.98 None $153,500
Richard R. West(/1/)... $ 238.98 None $299,000
California Fund
- ---------------
Ronald W. Forbes(/1/).. $2,408.86 None $153,500
Cynthia A.
Montgomery(/1/)....... $2,408.86 None $153,500
Charles C. Reilly(/1/). $2,697.39 None $313,000
Kevin A. Ryan(/1/)..... $2,408.86 None $153,500
Richard R. West(/1/)... $2,408.86 None $299,000
Connecticut Fund
- ----------------
Ronald W. Forbes(/1/).. $ 503.36 None $153,500
Cynthia A.
Montgomery(/1/)....... $ 503.36 None $153,500
Charles C. Reilly(/1/). $ 564.00 None $313,000
Kevin A. Ryan(/1/)..... $ 503.36 None $153,500
Richard R. West(/1/)... $ 503.36 None $299,000
Massachusetts Fund
- ------------------
Ronald W. Forbes(/1/).. $ 301.25 None $153,500
Cynthia A.
Montgomery(/1/)....... $ 301.25 None $153,500
Charles C. Reilly(/1/). $ 336.43 None $313,000
Kevin A. Ryan(/1/)..... $ 301.25 None $153,500
Richard R. West(/1/)... $ 301.25 None $299,000
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE TRUSTEES(1)
--------------- ------------ ------------------------ ----------------
<S> <C> <C> <C>
Michigan Fund
- -------------
Ronald W. Forbes(/1/).. $ 393.93 None $153,500
Cynthia A.
Montgomery(/1/)....... $ 393.93 None $153,500
Charles C. Reilly(/1/). $ 441.09 None $313,000
Kevin A. Ryan(/1/)..... $ 393.93 None $153,500
Richard R. West(/1/)... $ 393.93 None $299,000
New Jersey Fund
- ---------------
Ronald W. Forbes(/1/).. $1,040.59 None $153,500
Cynthia A.
Montgomery(/1/)....... $1,040.59 None $153,500
Charles C. Reilly(/1/). $1,167.25 None $313,000
Kevin A. Ryan(/1/)..... $1,040.59 None $153,500
Richard R. West(/1/)... $1,040.59 None $299,000
New York Fund
- -------------
Ronald W. Forbes(/1/).. $1,892.22 None $153,500
Cynthia A.
Montgomery(/1/)....... $1,892.22 None $153,500
Charles C. Reilly(/1/). $2,121.62 None $313,000
Kevin A. Ryan(/1/)..... $1,892.22 None $153,500
Richard R. West(/1/)... $1,892.22 None $299,000
North Carolina Fund
- -------------------
Ronald W. Forbes(/1/).. $ 404.02 None $153,500
Cynthia A.
Montgomery(/1/)....... $ 404.02 None $153,500
Charles C. Reilly(/1/). $ 452.94 None $313,000
Kevin A. Ryan(/1/)..... $ 404.02 None $153,500
Richard R. West(/1/)... $ 404.02 None $299,000
Ohio Fund
- ---------
Ronald W. Forbes(/1/).. $ 501.62 None $153,500
Cynthia A.
Montgomery(/1/)....... $ 501.62 None $153,500
Charles C. Reilly(/1/). $ 562.08 None $313,000
Kevin A. Ryan(/1/)..... $ 501.62 None $153,500
Richard R. West(/1/)... $ 501.62 None $299,000
Pennsylvania Fund
- -----------------
Ronald W. Forbes(/1/).. $ 615.17 None $153,500
Cynthia A.
Montgomery(/1/)....... $ 615.17 None $153,500
Charles C. Reilly(/1/). $ 690.22 None $313,000
Kevin A. Ryan(/1/)..... $ 615.17 None $153,500
Richard R. West(/1/)... $ 615.17 None $299,000
</TABLE>
- --------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (32 registered investment companies consisting of 45 portfolios);
Ms. Montgomery (32 registered investment companies consisting of 45
portfolios); Mr. Reilly (50 registered investment companies consisting of
63 portfolios); Mr. Ryan (32 registered investment companies consisting of
45 portfolios); and Mr. West (51 registered investment companies
consisting of 73 portfolios).
8
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus of the Funds for certain information
concerning the management and advisory arrangements of the Funds.
Subject to the supervision of the Trustees, the Manager is responsible for
the actual management of each Fund's portfolio and constantly reviews each
Fund's holdings in light of its own research analysis and that from other
relevant sources. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Manager, subject to the review of the
Board of Trustees. The Manager performs certain of the other administrative
services and provides all of the office space, facilities, equipment and
necessary personnel for portfolio management of the Funds.
Securities held by the Funds also may be held by, or be appropriate
investments for, other funds or clients (collectively referred to as
"clients") for which the Manager or MLAM acts as an investment adviser.
Because of different investment objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the security. If purchases or sales of securities for a Fund or other
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective clients
in a manner deemed equitable to all by the Manager or MLAM. To the extent that
transactions on behalf of more than one client of the Manager or MLAM during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
The Manager presently receives a fee from each Fund at the end of each month
at the annual rates of 0.50% of the first $500 million of average daily net
assets of the Fund, 0.425% of the average daily net assets in excess of $500
million but not exceeding $1 billion and 0.375% of the average daily net
assets in excess of $1 billion.
In the interest of minimizing expenses of the Funds, the Manager may agree
voluntarily to assume a portion of the expenses of a Fund. The Manager may
discontinue or reduce such assumption of expenses at any time without notice.
Set forth below are the total management fees paid by each Fund to the
Manager and total management fees waived by the Manager for the years ended
March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
TOTAL FEE VOLUNTARILY TOTAL FEE VOLUNTARILY TOTAL FEE VOLUNTARILY
MANAGEMENT WAIVED BY MANAGEMENT WAIVED BY MANAGEMENT WAIVED BY
FEE MANAGER FEE MANAGER FEE MANAGER
---------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund............ $ 888,435 $-- $ 752,072 $-- $ 613,484 $ 229,188
California Fund......... $7,429,249 $-- $6,413,612 $-- $5,570,525 $ --
Connecticut Fund........ $1,826,850 $-- $1,550,354 $-- $1,393,151 $ --
Massachusetts Fund...... $1,148,245 $-- $ 938,904 $-- $ 864,244 $ --
Michigan Fund........... $1,420,153 $-- $1,255,849 $-- $1,202,870 $ --
New Jersey Fund......... $3,390,860 $-- $2,990,679 $-- $2,760,878 $ --
New York Fund........... $5,848,065 $-- $5,150,683 $-- $4,591,599 $ --
North Carolina Fund..... $1,381,698 $-- $1,331,895 $-- $1,326,840 $ 137,989
Ohio Fund............... $1,784,810 $-- $1,508,892 $-- $1,290,786 $ --
Pennsylvania Fund....... $2,072,950 $-- $2,013,273 $-- $1,939,951 $ --
</TABLE>
The Management Agreement obligates the Manager to provide investment
advisory services, to furnish administrative services, office space and
facilities for management of the affairs of the Trust and each Fund and to pay
all compensation of and furnish office space for officers and employees of the
Trust, as well as the fees of all Trustees of the Trust who are affiliated
persons of ML & Co. or any of its subsidiaries. Except for certain expenses
incurred by Merrill Lynch (see "Purchase and Redemption of Shares"), each Fund
pays all other expenses incurred in its operations and a portion of the
Trust's general administrative expenses allocated on the basis of the asset
size of the respective Fund. Expenses that will be borne directly by the Funds
include redemption expenses, expenses of portfolio transactions, expenses of
registering the shares under Federal and state securities laws, pricing costs
(including the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional
9
<PAGE>
information (except to the extent paid for by Merrill Lynch), fees for legal
and auditing services, Commission fees, interest, certain taxes, and other
expenses attributable to a particular Series. Expenses which will be allocated
on the basis of asset size of the respective Funds include fees and expenses
of non-interested Trustees, state franchise taxes, costs of printing proxies
and other expenses relating to shareholder meetings and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust and have been allocated among the Funds in a manner deemed
equitable by the Trustees. Depending upon the nature of a lawsuit, litigation
costs may be assessed to the specific Fund to which the lawsuit relates or
allocated on the basis of the asset size of the respective Funds. The Trustees
have determined that this is an appropriate method of allocation of expenses.
For information as to the distribution fee paid by the Funds to Merrill
Lynch pursuant to the Distribution Agreement, see "Purchase and Redemption of
Shares."
Duration and Termination. Unless earlier terminated as described below, each
Management Agreement will continue in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
voting shares of the respective Fund and (b) by a majority of the Trustees who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable
and may be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of the shareholders of the respective
Fund.
PURCHASE AND REDEMPTION OF SHARES
Reference is made to "Purchase of Shares" and to "Redemption of Shares" in
the Prospectus of the Funds for certain information as to the purchase and
redemption of Fund shares.
The Trust has entered into separate distribution agreements on behalf of
each Fund with Merrill Lynch as distributor (each, a "Distribution
Agreement"). Each Distribution Agreement obligates Merrill Lynch to pay
certain expenses in connection with the offering of the shares of each Fund.
After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, Merrill
Lynch will pay for the printing and distribution of copies thereof used in
connection with the offering to investors. Merrill Lynch also will pay for
other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreements described above.
Each Fund has adopted a separate distribution and shareholder servicing plan
(each, a "Distribution Plan") in compliance with Rule 12b-1 under the
Investment Company Act. Pursuant to each Distribution Plan, Merrill Lynch
receives a monthly distribution fee from each Fund at the annual rate of
0.125% of average daily net assets of each Fund attributable to subscribers to
the CMA program and to investors maintaining securities accounts with Merrill
Lynch or maintaining accounts directly with the Transfer Agent who are not
subscribers to such program, except that the value of Fund shares in accounts
maintained directly with the Transfer Agent which are not serviced by Merrill
Lynch financial consultants will be excluded. The Distribution Plans reimburse
Merrill Lynch only for actual expenses incurred in the fiscal year in which
the fees are paid. The distribution fees principally compensate Merrill Lynch
financial consultants and other Merrill Lynch personnel for selling shares of
the Funds and for providing direct and personal services to shareholders. The
distribution fees are not compensation for the administrative and operational
services rendered to the Funds or their shareholders by Merrill Lynch which
are covered by the Management Agreements (see "Management of the Trust--
Management and Advisory Arrangements") between the Trust on behalf of each
Fund and the Manager. The Trustees believe that the Funds' expenditures under
the Distribution Plans benefit the Funds and their shareholders by providing
better shareholder services and by facilitating the sale and distribution of
Fund shares.
10
<PAGE>
Set forth below are the distribution fees paid by each Fund to Merrill Lynch
pursuant to their respective Distribution Plans for the years ended March 31,
1998, 1997 and 1996. All of the amounts expended were allocated to Merrill
Lynch personnel and to related administrative costs.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C> <C>
Arizona Fund............................... $ 218,259 $ 185,231 $ 152,808
California Fund............................ $2,160,142 $1,819,326 $1,565,337
Connecticut Fund........................... $ 454,599 $ 383,286 $ 347,816
Massachusetts Fund......................... $ 283,055 $ 228,987 $ 215,451
Michigan Fund.............................. $ 351,653 $ 308,843 $ 299,263
New Jersey Fund............................ $ 879,810 $ 759,664 $ 701,300
New York Fund.............................. $1,646,549 $1,405,157 $1,244,612
North Carolina Fund........................ $ 340,553 $ 326,935 $ 330,722
Ohio Fund.................................. $ 440,461 $ 372,783 $ 322,038
Pennsylvania Fund.......................... $ 513,883 $ 496,888 $ 483,744
</TABLE>
Among other things, the Distribution Plans provide that Merrill Lynch shall
provide and the Trustees of the Trust shall review quarterly reports of the
distribution expenses made by Merrill Lynch. The Distribution Plans further
provide that, so long as the Distribution Plans remain in effect, the
selection and nomination of Trustees of the Trust who are not "interested
persons" of the Trust as defined in the Investment Company Act ("Independent
Trustees") shall be committed to the discretion of the Independent Trustees
then in office. A Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Trustees or by the vote
of the holders of a majority of the outstanding voting securities of the
respective Fund. Finally, a Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund thereunder without shareholder
approval, and all material amendments are required to be approved by vote of
the Trustees of the Trust, including a majority of the Independent Trustees,
cast in person at a meeting called for that purpose.
The right to receive payment with respect to any redemption of Fund shares
may be suspended by a Fund for a period of up to seven days. Suspensions of
more than seven days may not be made except (1) for any period (a) during
which the New York Stock Exchange (the "NYSE") is closed other than customary
weekend and holiday closings or (b) during which trading on the NYSE is
restricted; (2) for any period during which an emergency exists as a result of
which (a) disposal by such Fund of securities owned by it is not reasonably
practicable or (b) it is not reasonably practicable for such Fund fairly to
determine the value of its net assets; or (3) for such other periods as the
Commission may by order permit for the protection of security holders of such
Fund. The Commission may determine the conditions under which (i) trading
shall be deemed to be restricted and (ii) an emergency shall be deemed to
exist within the meaning of clause (2) above.
Merrill Lynch has offered the CMA program since September 1977. While no
significant problems have occurred to date, no predictions can be made as to
the rate of purchases and redemptions of shares which will result from the
automatic features of the CMA program. The portfolio securities of the Funds
are highly liquid and each Fund has the right to borrow up to 20% of its total
assets on a temporary basis to meet unexpected redemptions. Nevertheless, an
erratic redemption pattern could force the Manager to invest in securities or
maintain an average portfolio maturity which might lessen the yield that would
otherwise be available to the Funds.
PORTFOLIO TRANSACTIONS
The Funds have no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policies
established by the Trustees and officers of the Trust, the Manager is
primarily responsible for each Fund's portfolio decisions and the placing of
each Fund's portfolio transactions. In placing orders, it is the policy of the
Trust to obtain the best net results taking into account such factors as
11
<PAGE>
the price of the securities and the firm's risk in positioning the securities
involved. While the Manager generally seeks reasonably competitive spreads or
commissions, the Funds will not necessarily be paying the lowest spread or
commission available. The Trust's policy of investing in securities with short
maturities will result in high portfolio turnover.
The securities in which the Funds invest are traded in the over-the-counter
("OTC") market. Where possible, the Funds will deal directly with the dealers
who make a market in the securities involved except in those circumstances
where better prices and execution are available elsewhere. Such dealers
usually are acting as principals for their own accounts. On occasion,
securities may be purchased directly from the issuer. The Municipal Securities
in which the Funds invest generally are traded on a net basis and normally do
not involve either brokerage commissions or transfer taxes. The cost of
executing portfolio securities transactions of the Funds primarily will
consist of dealer spreads and underwriting commissions. Under the Investment
Company Act, persons affiliated with the Trust are prohibited from dealing
with the Trust or any Fund as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained
from the Commission. Since OTC transactions are usually principal
transactions, affiliated persons of the Trust may not serve as the Funds'
dealer in connection with such transactions, except pursuant to the exemptive
order described below. Without the relief provided by the exemptive order
described below, the Funds could purchase municipal securities from
underwriting syndicates of which Merrill Lynch was a member under certain
conditions in accordance with the provisions of a rule adopted under the
Investment Company Act. In 1987, the Commission issued an exemptive order to
one of the CMA Funds which permits the Funds to engage in certain principal
transactions with Merrill Lynch in tax-exempt securities subject to certain
conditions. An affiliated person of the Trust may serve as its broker in OTC
transactions conducted on an agency basis.
Set forth below are the number of principal transactions each Fund engaged
in with Merrill Lynch and the aggregate amount of those transactions during
the years ended March 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE NUMBER OF AGGREGATE
TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT*
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund............ 2 $ 2.2 5 $ 5.8 3 $ 10.0
California Fund......... 43 $614.7 29 $ 364.4 27 $ 137.9
Connecticut Fund........ 78 $230.3 42 $ 99.3 16 $ 46.8
Massachusetts Fund...... 21 $ 63.1 39 $ 75.1 12 $ 27.4
Michigan Fund........... 11 $ 52.5 7 $ 20.0 7 $ 52.0
New Jersey Fund......... 75 $258.7 31 $ 88.4 10 $ 39.1
New York Fund........... 6 $ 46.4 7 $ 71.4 2 $ 12.2
North Carolina Fund..... 11 $ 41.8 -- $ -- 6 $ 13.6
Ohio Fund............... 13 $ 76.4 17 $ 52.1 1 $ 2.2
Pennsylvania Fund....... 6 $ 30.4 3 $ 17.3 4 $ 17.7
</TABLE>
- --------
* in millions
The Trustees of the Trust have considered the possibility of recapturing for
the benefit of the Funds expenses of possible portfolio transactions, such as
dealers' spreads and underwriting commissions, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. After
considering all factors deemed relevant, the Trustees made a determination not
to seek such recapture. The Trustees will reconsider this matter from time to
time. The Manager has arranged for the Trust's custodian to receive any tender
offer solicitation fees on behalf of each Fund payable with respect to
portfolio securities of such Fund.
The Funds do not expect to use one particular dealer, but, subject to
obtaining the best execution, dealers who provide supplemental investment
research to the Manager may receive orders for transactions by the Funds.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information.
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DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund for the purpose of pricing orders for the
purchase and redemption of shares is determined by the Manager at 12 noon, New
York time, on each business day during which the NYSE or New York banks are
open for business, immediately after the daily declaration of dividends. As a
result of this procedure, net asset value is determined each business day
except for days on which both the NYSE and New York banks are closed. Both the
NYSE and New York banks are closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. The net asset value of a Fund is determined by adding
the value of all securities and other assets in the portfolio, deducting its
liabilities and dividing by the number of shares outstanding. It is
anticipated that the net asset value per share of each Fund will remain
constant at $1.00 per share, but no assurance can be offered in this regard.
Each Fund values its portfolio securities based on their amortized cost in
accordance with the terms of a rule adopted by the Commission. This involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the
price a Fund would receive if it sold the instrument.
In accordance with the Commission regulations applicable to the valuation of
its portfolio securities, each Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days (13 months) or less, and invest only in
securities determined by the Trustees to be of high quality with minimal
credit risks. In addition, the Trustees have established procedures designed
to stabilize, to the extent reasonably possible, each Fund's price per share
as computed for the purpose of sales and redemptions at $1.00. The Trustees
will review periodically each Fund's portfolio holdings to determine whether a
deviation exists between the net asset value calculated using market
quotations and that calculated on an amortized cost basis. In the event the
Trustees determine that a deviation exists with respect to any Fund that may
result in material dilution or other unfair results to investors or existing
shareholders, such Fund will take such corrective action which it regards as
necessary and appropriate, including the reduction of the number of
outstanding shares of the Fund by having each shareholder proportionately
contribute shares to the Fund's capital; the sale of portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends; or establishing a net asset value
per share by using available market quotations. If the number of outstanding
shares is reduced in order to maintain a constant net asset value of $1.00 per
share, the shareholders will contribute proportionately to such Fund's
capital. Each shareholder will be deemed to have agreed to such contribution
by such shareholder's investment in the Fund.
Since the net income of each Fund is determined and declared as a dividend
immediately prior to each time the net asset value of such Fund is determined,
the net asset value per share of each Fund normally remains at $1.00 per share
immediately after each such dividend declaration. Any increase in the value of
a shareholder's investment in a Fund, representing the reinvestment of
dividend income, is reflected by an increase in the number of shares of such
Fund in the account, and any decrease in the value of a shareholder's
investment may be reflected by a decrease in the number of shares in the
account. See "Taxes" below.
YIELD INFORMATION
Each Fund normally computes its annualized yield by determining the net
income for a seven-day base period for a hypothetical pre-existing account
having a balance of one share at the beginning of the base period, dividing
the net income by the net asset value of the account at the beginning of the
base period to obtain the base period return, multiplying the result by 365
and then dividing by seven. Under this calculation, the yields on Fund shares
reflect realized gains and losses on portfolio securities. In accordance with
regulations adopted by the Commission, each Fund is required to disclose its
annualized yield for certain seven-day base periods in a
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standardized manner which does not take into consideration any realized or
unrealized gains or losses on portfolio securities. The Commission also
permits the calculation of a standardized effective or compounded yield. This
is computed by compounding the unannualized base period return which is done
by adding one to the base period return, raising the sum to a power equal to
365, dividing by seven and subtracting one from the result. This compounded
yield calculation also excludes realized and unrealized gains or losses on
portfolio securities.
The yield on Fund shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by a Fund of future yields or rates of return on its shares.
The yield is affected by such factors as changes in interest rates on short-
term Municipal Securities, average portfolio maturity, the types and quality
of portfolio securities held and operating expenses.
TAXES
FEDERAL
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded RICs under the Code. As long as a Fund so qualifies, the
Fund (but not its shareholders) will not be subject to federal income tax to
the extent that it distributes its net investment income and net realized
capital gains. The Trust intends to cause the Funds to distribute
substantially all of such income.
As discussed in the Prospectus for the Funds, the Trust has a number of
Series, each referred to herein as a "Fund". Each Fund is treated as a
separate corporation for federal income tax purposes, and therefore is
considered to be a separate entity in determining its treatment under the
rules for RICs described in the Prospectus. Losses in one Fund do not offset
gains in another Fund, and the requirements (other than certain organizational
requirements) for qualifying for RIC status will be determined at the Fund
level rather than at the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of RICs, such as the Funds, that pay
exempt-interest dividends.
The Trust intends to qualify each Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of a Fund's taxable year, at least 50% of the value of its
total assets consists of obligations exempt from Federal income tax ("tax-
exempt obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by a Fund which are
attributable to interest on tax-exempt obligations and designated by the Trust
as exempt-interest dividends in a written notice mailed to such Fund's
shareholders within 60 days after the close of the Fund's taxable year. To the
extent that the dividends distributed to a Fund's shareholders are derived
from interest income exempt from Federal income tax under Code Section 103(a)
and are properly designated as exempt-interest dividends, they will be
excludable from a shareholder's gross income for federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion,
if any, of a person's social security benefits and railroad retirement
benefits subject to federal income taxes. Interest on indebtedness incurred or
continued to purchase or carry shares of RICs paying exempt-interest
dividends, such as the Funds, will not be deductible by the investor for
federal income tax purposes to the extent attributable to exempt-interest
dividends. Shareholders are advised to consult their tax advisers with respect
to whether exempt-interest dividends retain the exclusion under Code Section
103(a) if a shareholder would be treated as a "substantial user" or "related
person" under Code Section 147(a) with respect to property financed with the
proceeds of an issue of "industrial development bonds" or "private activity
bonds", if any, held by a Fund.
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To the extent that any Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for federal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities ("capital gain dividends") are
taxable as long-term capital gains for federal income tax purposes, regardless
of the length of time a shareholder has owned a Fund's shares. Recent
legislation creates additional categories of capital gains taxable at
different rates. Additional legislation eliminates the highest 28% category
for most sales of capital assets occurring after December 31, 1997. Generally
not later than 60 days after the close of each Fund's taxable year, the Trust
will provide the shareholders of each Fund with a written notice designating
the amounts of any exempt-interest dividends, ordinary income dividends or
capital gain dividends, as well as the amount of capital gain dividends in the
different categories of capital gain referred to above. Distributions by a
Fund, whether from exempt-interest income, ordinary income or capital gains,
will not be eligible for the dividends received deduction allowed to
corporations under the Code.
All or a portion of a Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of a Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital
asset). Any loss upon the sale or exchange of Fund shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If a Fund
pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item
of "tax preference", which could subject certain investors in such bonds,
including shareholders of a Fund, to an alternative minimum tax. The Funds
will purchase such "private activity bonds", and the Trust will report to
shareholders within 60 days after each Fund's taxable year-end the portion of
the Fund's dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings", which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by a Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by such Fund.
A loss realized on a sale or exchange of shares of a Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment
of dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
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Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including any of the Funds) during the
taxable year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal or foreign taxes.
STATE
Arizona. Exempt-interest dividends from the Arizona Fund will not be subject
to Arizona income tax for shareholders who are Arizona residents to the extent
that the dividends are attributable to interest earned on Arizona State
Municipal Securities. To the extent that the Arizona Fund's distributions are
derived from interest on its taxable investments or from an excess of net
short-term capital gains over net long-term capital losses, such distributions
are considered ordinary income for Arizona income tax purposes. Distributions,
if any, of net long-term capital gains from the sale of securities are taxable
as ordinary income for Arizona purposes.
California. Exempt-interest dividends will not be subject to California
personal income tax for California resident individuals to the extent
attributable to interest from California State Municipal Securities, and such
exempt-interest dividends will also be excludable from the income base used in
calculating the California corporate income tax to the extent attributable to
interest on California State Municipal Securities. Exempt-interest dividends
paid to a corporate shareholder subject to California state corporate
franchise tax will be taxable as ordinary income. Distributions of capital
gain dividends will be treated as long-term capital gains which are taxed at
ordinary income tax rates for California state income tax purposes.
Connecticut. Dividends paid by the Connecticut Fund are not subject to the
Connecticut personal income tax on individuals, trusts and estates, to the
extent that they qualify as exempt-interest dividends for federal income tax
purposes that are derived from obligations issued by or on behalf of the State
of Connecticut or its political subdivisions, instrumentalities, authorities,
districts, or similar public entities created under Connecticut law
("Connecticut Obligations") or obligations the interest on which states are
prohibited from taxing by federal law. Other Connecticut Fund dividends and
distributions, whether received in cash or additional shares, are subject to
this tax, except that distributions qualifying as capital gain dividends for
federal income tax purposes are not subject to the tax to the extent they are
derived from Connecticut Obligations. Dividends and distributions paid by the
Connecticut Fund that constitute items of tax preference for purposes of the
federal alternative minimum tax, other than exempt-interest dividends not
subject to the Connecticut personal income tax, could cause liability for the
net Connecticut minimum tax, applicable to investors subject to the
Connecticut personal income tax who are required to pay the federal
alternative minimum tax. Interest on indebtedness incurred to purchase or
carry Fund shares will not reduce taxable income under the Connecticut
personal income tax except to the extent it may reduce the taxpayer's federal
adjusted gross income.
Dividends paid by the Fund, including those that qualify as exempt-interest
dividends for federal income tax purposes, are taxable for purposes of the
Connecticut Corporation Business Tax. However, 70% (100% if the investor owns
at least 20% of the total voting power and value of the Fund's shares) of
amounts that are treated
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as dividends and not as exempt-interest dividends or capital gain dividends
for federal income tax purposes are deductible for purposes of this tax, but
no deduction is allowed for expenses related thereto.
No local income taxes or state or local intangible personal property taxes
are imposed in Connecticut.
Massachusetts. Under existing Massachusetts law, as long as the
Massachusetts Fund qualifies as a separate RIC under the Code, (i) the
Massachusetts Fund will not be liable for any personal income or corporate
excise tax in the Commonwealth of Massachusetts and (ii) shareholders of the
Massachusetts Fund who are subject to Massachusetts personal income taxation
will not be required to include in their Massachusetts taxable income that
portion of dividends paid by the Massachusetts Fund that is identified in a
year-end statement as (a) exempt-interest dividends directly attributable to
interest that is received by the Massachusetts Fund on obligations issued by
the Commonwealth of Massachusetts, a political subdivision thereof, or any
instrumentality of either of the foregoing, and that is exempt from
Massachusetts taxation, or (b) dividends attributable to interest received by
the Massachusetts Fund on obligations of the United States, interest on which
is exempt from state taxation (collectively, "Massachusetts-exempt
dividends").
Any capital gains distributed by the Massachusetts Fund (except for capital
gains on certain Massachusetts State Municipal Securities which are
specifically exempt by statute), or gains realized by a shareholder on a
redemption or sale of shares of the Massachusetts Fund, will be subject to
Massachusetts personal income taxation. The portion of any deduction (e.g., an
interest deduction) otherwise available to a shareholder, which relates or is
allocable to Massachusetts-exempt dividends received by the shareholder, will
not be deductible for Massachusetts personal income tax purposes.
In the case of any corporate shareholder subject to the Massachusetts
corporate excise tax, distributions received from the Massachusetts Fund, and
any gain on the sale or other disposition of Massachusetts Fund shares, will
be includable in the corporation's Massachusetts gross income and taxed
accordingly. Interest on indebtedness incurred or continued to purchase or
carry Fund shares will not be deductible in calculating the income component
of the Massachusetts corporate excise tax.
Michigan. Shareholders who are subject to the Michigan income tax or single
business tax will not be subject to the Michigan income tax or single business
tax on exempt-interest dividends to the extent such dividends are attributable
to interest on Michigan State Municipal Securities. To the extent the
distributions from the Michigan Fund are attributable to sources other than
interest on Michigan State Municipal Securities, such distributions,
including, but not limited to, long-term or short-term capital gains, but
excluding any such capital gains from obligations of the United States or of
its possessions, will not be exempt from Michigan income tax or the single
business tax.
The intangibles tax was totally repealed effective January 1, 1998.
New Jersey. To the extent distributions are derived from interest or gains
on New Jersey State Municipal Securities, such distributions will be exempt
from New Jersey personal income tax. In order to pass through tax-exempt
interest for New Jersey personal income tax purposes, the New Jersey Fund,
among other requirements, must have not less than 80% of the aggregate
principal amount of its investments invested in New Jersey State Municipal
Securities at the close of each quarter of the tax year (the "80% Test"). For
purposes of calculating whether the 80% Test is satisfied, financial options,
futures, forward contracts and similar financial instruments relating to
interest-bearing obligations are excluded from the principal amount of the New
Jersey Fund's investments. The New Jersey Fund intends to comply with this
requirement so as to enable it to pass through tax-exempt interest. In the
event the New Jersey Fund does not so comply, distributions by the New Jersey
Fund will be taxable to shareholders for New Jersey personal income tax
purposes. Interest on indebtedness incurred or continued to purchase or carry
New Jersey Fund shares is not deductible either for Federal income tax
purposes or New Jersey personal income tax purposes to the extent attributable
to exempt-interest dividends. Exempt-interest dividends and gains paid to a
corporate shareholder will be subject to the New Jersey corporation business
(franchise) tax and, if applicable, the New Jersey corporation income tax.
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Under present New Jersey law, a RIC, such as the New Jersey Fund, pays a
flat tax of $250 per year. The New Jersey Fund might be subject to the New
Jersey corporation business (franchise) tax for any taxable year in which it
does not qualify as a RIC.
On February 21, 1997, the Tax Court of New Jersey ruled against the Director
of the Division of Taxation holding against the New Jersey requirement that
fund investors pay state taxes on interest their funds earned from U.S.
government securities if the 80% Test was not met. As a result of the court
decision, the State of New Jersey could be forced to pay substantial amounts
in tax refunds to state residents who are mutual fund investors. At this time,
the effect of this litigation cannot be evaluated.
New York. The portion of exempt-interest dividends equal to the proportion
which the New York Fund's interest on New York State Municipal Securities
bears to all of the New York Fund's tax-exempt interest (whether or not
distributed) will be exempt from New York State and New York City personal
income taxes. To the extent the New York Fund's distributions are derived from
interest on taxable investments or from gain from the sale of investments or
are attributable to the portion of the New York Fund's tax-exempt interest
that is not derived from New York State Municipal Securities, they will
constitute taxable income for New York State and New York City personal income
tax purposes. Capital gain dividends paid by the New York Fund are treated as
capital gains which are taxed at ordinary income tax rates. Distributions paid
to a corporate shareholder from investment income and capital gains of the New
York Fund, including exempt-interest dividends, will be subject to New York
State corporate franchise and New York City corporation income tax.
North Carolina. Distributions of exempt-interest dividends, to the extent
attributable to interest on North Carolina State Municipal Securities and to
interest on direct obligations of the United States (including territories
thereof), are not subject to North Carolina individual or corporate income
tax. Distributions of gains attributable to the disposition of certain
obligations of the State of North Carolina and its political subdivisions
issued prior to July 1, 1995 are not subject to North Carolina individual or
corporate income tax; however, for such obligations issued after June 30,
1995, distributions of gains attributable to disposition will be subject to
North Carolina individual or corporate income tax. Any loss upon the sale or
exchange of shares of the North Carolina Fund held for six months or less will
be disallowed for North Carolina income tax purposes to the extent of any
exempt-interest dividends received by the shareholder, even though some
portion of such dividends actually may have been subject to North Carolina
income tax. Except for income exempted from North Carolina income tax as
described herein, the North Carolina Fund's distributions will generally
constitute taxable income for taxpayers subject to North Carolina income tax.
An investment in the North Carolina Fund by a corporate shareholder
generally would be included in the capital stock, surplus and undivided
profits base in computing the North Carolina franchise tax.
Ohio. Exempt-interest dividends are exempt from taxes levied by the State of
Ohio and its subdivisions and therefore will not be subject to Ohio personal
income tax and will be excludable from the net income base used in calculating
the Ohio corporate franchise tax to the extent attributable to interest from
Ohio State Municipal Securities. To the extent that the Ohio Fund's
distributions are derived from interest on its taxable investments or, subject
to certain exceptions, from an excess of net short-term capital gains over net
long-term capital losses, such distributions are considered ordinary income
subject to the Ohio personal income tax and the Ohio corporate franchise tax.
Subject to certain exceptions, distributions, if any, of net long-term capital
gains are also subject to the Ohio personal income tax and the Ohio corporate
franchise tax.
Distributions treated as investment income or as capital gains for federal
income tax purposes, including exempt-interest dividends, may be subject to
local taxes imposed by certain cities within Ohio. Additionally, the value of
shares of the Fund will be included in (i) the net worth measure of the issued
and outstanding shares of corporations and financial institutions for purposes
of computing the Ohio corporate franchise tax, (ii) the value of the property
included in the gross estate for purposes of the Ohio estate tax, (iii) the
value of capital and surplus for purposes of the Ohio domestic insurance
company franchise tax and (iv) the value of shares of and capital employed by
dealers in intangibles for purpose of the Ohio tax on dealers in intangibles.
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Pennsylvania. To the extent distributions from the Pennsylvania Fund are
derived from interest on Pennsylvania State Municipal Securities, such
distributions will be exempt from the Pennsylvania personal income tax.
However, distributions attributable to capital gains derived by the
Pennsylvania Fund as well as distributions derived from investments other than
Pennsylvania State Municipal Securities will be taxable for Pennsylvania
personal income tax purposes. In the case of residents of the City of
Philadelphia, distributions which are derived from interest on Pennsylvania
State Municipal Securities or which are designated as capital gain dividends
for federal income tax purposes will be exempt from the Philadelphia School
District investment income tax.
Shares of the Pennsylvania Fund will be exempt from the personal property
taxes imposed by various Pennsylvania municipalities to the extent the
Pennsylvania Fund's portfolio securities consist of Pennsylvania State
Municipal Securities on the annual assessment date.
Other Pennsylvania counties, cities and townships generally do not tax
individuals on unearned income.
As a result of a pronouncement by the Pennsylvania Department of Revenue, an
investment in the Pennsylvania Fund by a corporate shareholder will apparently
qualify as an exempt asset for purposes of the single asset apportionment
fraction available in computing the Pennsylvania capital stock/foreign
franchise tax to the extent that the portfolio securities of the Pennsylvania
Fund comprise investments in Pennsylvania and/or United States Government
Securities that would be exempt assets if owned directly by the corporation.
To the extent exempt-interest dividends are excluded from taxable income for
federal corporate income tax purposes (determined before net operating loss
carryovers and special deductions), they will not be subject to the
Pennsylvania corporate net income tax.
Under prior Pennsylvania law, in order for the Pennsylvania Fund to qualify
to pass through to investors income exempt from Pennsylvania personal income
tax, the Pennsylvania Fund was required to adhere to certain investment
restrictions. In order to comply with this and other Pennsylvania law
requirements previously in effect, the Pennsylvania Fund adopted, as a
fundamental policy, a requirement that it invest in securities for income
earnings rather than trading for profit and that, in accordance with such
policy, it not vary its portfolio investments except to: (i) eliminate unsafe
investments or investments not consistent with the preservation of capital or
the tax status of the investments of the Pennsylvania Fund; (ii) honor
redemption orders, meet anticipated redemption requirements and negate gains
from discount purchases; (iii) reinvest the earnings from portfolio securities
in like securities; (iv) defray normal administrative expenses; or (v)
maintain a constant net asset value pursuant to, and in compliance with, an
order or rule of the United States Securities & Exchange Commission.
Pennsylvania has enacted legislation which eliminates the necessity for the
foregoing investment policies. Since such policies are fundamental policies of
the Pennsylvania Fund, which can only be changed by the affirmative vote of a
majority (as defined under the Investment Company Act) of the outstanding
shares, the Pennsylvania Fund continues to be governed by such investment
policies.
----------------
The foregoing is a general and abbreviated summary of the tax laws for the
designated states as presently in effect. For the complete provisions,
reference should be made to the applicable state tax laws. The state tax laws
described above are subject to change by legislative, judicial, or
administrative action either prospectively or retroactively. Shareholders of
each Fund should consult their tax advisers about other state and local tax
consequences of their investment in such Fund.
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GENERAL INFORMATION
DESCRIPTION OF SERIES AND SHARES
The Declaration of Trust provides that the Trust shall comprise separate
Series each of which will consist of a separate portfolio that will issue a
separate class of shares. Presently, the Arizona, California, Connecticut,
Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio and
Pennsylvania Funds are the only Series of the Trust offering their shares to
the public. The Trustees are authorized to create an unlimited number of full
and fractional shares of beneficial interest, par value $0.10 per share, of a
single class and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests in the Series. Shareholder approval is not necessary for the
authorization of additional Series of the Trust. All shares have equal voting
rights, except that only shares of the respective Series are entitled to vote
on the matters concerning only that Series. Each issued and outstanding share
is entitled to one vote and to participate equally in dividends and
distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. There normally will be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders'
meeting for the election of Trustees. Shareholders may, in accordance with the
terms of the Declaration of Trust, cause a meeting of shareholders to be held
for the purpose of voting on the removal of Trustees.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights and
will be freely transferable. Holders of shares of any Series are entitled to
redeem their shares as set forth elsewhere herein and in the Prospectus.
Shares do not have cumulative voting rights and the holders of more than 50%
of the shares of the Trust voting for the election of Trustees can elect all
of the Trustees if they choose to do so and in such event the holders of the
remaining shares would not be able to elect any Trustees. No amendment may be
made to the Declaration of Trust without the affirmative vote of a majority of
the outstanding shares of the Trust.
The Manager provided the initial capital for each Fund by purchasing 100,000
shares of each Fund. Such shares were acquired for investment and can only be
disposed of by redemption. Excepting the Arizona Fund, the organizational
expenses of each Fund were paid by the respective Fund and were amortized over
a period not exceeding five years from such Fund's commencement of operations.
The organizational expenses of the Arizona Fund ($35,700) were paid by the
Arizona Fund and are being amortized over a period not exceeding five years.
The proceeds realized by the Manager on the redemption of any of the shares
initially purchased by it will be reduced by the proportionate amount of
unamortized organizational expenses which the number of shares redeemed bears
to the number of shares initially purchased.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101 (the "Custodian"), acts as custodian of the Funds' assets. The Custodian
is responsible for safeguarding and controlling each Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest on each Fund's investments.
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), a
subsidiary of ML & Co., P.O. Box 45290, Jacksonville, Florida 32232-5290, acts
as the Trust's transfer agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The independent
auditors are responsible for auditing the annual financial statements of the
Funds.
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LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of each Fund ends on March 31 of each year. The Trust sends
to each Fund's shareholders at least semi-annually reports showing the
respective Fund's portfolio and other information. An annual report,
containing financial statements audited by independent auditors, is sent to
shareholders each year. After the end of each year, shareholders will receive
federal and the designated state's (and, if applicable, city's) income tax
information regarding ordinary income dividends and capital gain dividends.
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at (800) 221-7210.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the
exhibits relating thereto, which each Fund has filed with the Commission under
the Securities Act of 1933, as amended, and the Investment Company Act, to
which reference is hereby made.
The Declaration of Trust establishing the Trust refers to the Trustees under
the Declaration of Trust collectively as Trustees, but not as individuals or
personally; and except for his or her own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or her other duties, no Trustee,
shareholder, officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim of the Trust but the "Trust Property"
(as defined in the Declaration of Trust) only shall be liable. A copy of the
Declaration of Trust, together with all amendments thereto, is on file in the
office of the Commonwealth of Massachusetts.
To the knowledge of the Funds, no person owned beneficially 5% or more of
any Fund's shares on June 30, 1998.
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APPENDIX A
ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF ARIZONA AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON STATISTICS PROVIDED BY STATE AGENCIES AND OTHER
INDEPENDENT SOURCES, HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED
DURING THE YEAR. THE FUND HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.
Over the past several decades, the State of Arizona's (sometimes referred to
herein as the "State") economy has grown faster than most other regions of the
country, as measured by nearly every major indicator of economic growth,
including population, employment, and aggregate personal income. Although the
rate of growth slowed considerably during the late 1980s and early 1990s, the
State's efforts to diversify its economy have enabled it to realize, and then
sustain, increasing growth in more recent years. While jobs in industries such
as mining and agriculture have diminished in relative importance to the
State's economy over the past two decades, substantial growth has occurred in
the areas of aerospace, high technology, light manufacturing, government and
the service industry. Other important industries that contributed to the
State's growth in past years, such as construction and real estate, have
rebounded from substantial declines during the late 1980s and early 1990s,
and, like the rest of the State, are experiencing positive growth.
Arizona's strong economy, warm climate, and reasonable cost of living have
encouraged many people to move to the State in recent years. Between 1990 and
1995, the State ranked second in the country in population growth, and
Maricopa County, the State's most populous county, had the single largest
population inflow (in absolute terms) of any county in the country during that
period. Since 1991, as a result of both the State's relatively good economy
and the troubles experienced in surrounding areas, like California, the
State's population has experienced consistent growth, including an increase of
126,000, or 2.9%, in 1996 alone and a substantially similar percentage
increase in 1997. Population growth is expected to continue at approximately
the 1996 level for the foreseeable future.
Part of the State's popularity in recent years can be attributed to the
favorable job climate. Following 1994's near record 6.7% employment rate
increase, the State achieved employment rate increases of 6.1% in 1995, 5.6%
in 1996 and 4.4% in 1997. The service sector of the economy, which now
represents approximately 29% of all jobs in the State, continues to show
significant growth. For 1997, Arizona ranked second in the country for job
growth, and the Phoenix-Mesa metropolitan area ranked first among all United
States metropolitan areas for job growth. Notwithstanding recent lay offs by
Motorola and Intel, two large Phoenix area employers, a relatively sound
United States economy, a stronger economy in California (which historically
has been a prime market for Arizona goods and services), and continued growth
in retail trade, manufacturing and services should enable the State to realize
positive, albeit more modest, job growth in 1997. The 1996 unemployment rate
was 5.5%, and the 1997 unemployment rate was 4.7%.
The State's economic growth in recent years has enabled Arizonans to realize
substantial gains in personal income. While the State's per capita personal
income generally varies between 5% and 15% below the national average due to
such factors as the chronic poverty on the State's Indian reservations, the
State's relatively high numbers of retirees and children, and the State's
below-average wage scale, the State's aggregate personal income grew nearly
5.3% during 1996 to approximately $84.5 billion and is estimated to have
reached $100.8 billion in 1997.
The gains in per capita personal income during this period led to continued
strong growth in retail sales. While the retail sales growth rates of 8.8% in
1995, 5.9% in 1996, and an estimated 5.1% in 1997, were lower than the 12.0%
growth rate in 1994, the State's strong employment and personal income figures
should provide for continued growth in future years.
The State government's fiscal situation has improved substantially in recent
years. After experiencing several years of budget shortfalls requiring mid-
year adjustments, the State has had significant budget surpluses each year
since 1993, including a $593.3 million surplus for the fiscal year ended June
30, 1997. On May 8, 1998, the Arizona State Senate gave final approval to a
$5.9 billion state budget that reduces taxes by more than $120 million. The
budget includes a 16% reduction in the vehicle license tax, a $30 million or
2.5% cut in
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individual income taxes, and $10 million in corporate income taxes that
reduces the corporate rate from 9 percent to 8 percent. Although an amendment
to the State's Constitution requiring a 2/3 majority vote in both houses of
the Legislature to enact any tax or fee increase limits the State's ability to
raise additional revenue when needed, the State has placed in excess of $375
million of its surplus revenues in a rainy-day fund to mitigate this risk.
In July 1994, a sharply divided Arizona Supreme Court ruled that the State's
system for financing public education itself created substantial disparities
in facilities among school districts and therefore violated the provisions of
Article XI, (S) 1 of the Arizona Constitution, which require the Legislature
to establish and maintain "a general and uniform public school system." The
Court remanded the case to the Superior Court "to determine whether, within a
reasonable time, legislative action has been taken [to correct this
situation]." In response to a subsequent motion for clarification, the Supreme
Court ordered that, pending such legislative action or further order of the
Supreme Court, "which would have prospective application only," the public
school system "continue under existing statutes, and the validity and
enforceability of past and future acts, bonded indebtedness and obligations
incurred under applicable statutes, as long as they are in force and effect,
are assured."
The Arizona Legislature, in 1996 and 1997, appropriated $30 and $100
million, respectively to address the capital needs of less affluent or faster
growing districts. In the interim, a Superior Court judge ordered that State
funding of public schools be terminated as of June 30, 1998 if the financing
system is not satisfactorily revamped by that time. In July, 1997, the same
judge ruled that the 1996 and 1997 appropriations for capital improvements do
not constitute a satisfactory revision of the system. This decision was upheld
by the Arizona Supreme Court in October 1997. The third special session of the
Legislature recently adopted House Bill 2003, titled "Students FIRST." It has
been amended by Senate Bills 1120 and 1114 of the second regular session. The
effect of the bill would be to replace general obligation bonding as a method
of funding school capital needs with a centralized state funded system.
Districts would have the ability to exercise the local option to not
participate in the school capital funding system. Additionally, it establishes
school building adequacy requirements, a school building renewal formula, a
mechanism for curing existing deficiencies in school buildings and replaces
the capital levy revenue limit with a weighted per pupil soft capital
allocation. The total appropriation for the fiscal year 1998-1999 is $357.2
million. Oral arguments were presented to the Arizona Supreme Court in early
June, 1998, for a determination of the bill's constitutionality. On June 16,
1998, the Supreme Court of Arizona struck down Students FIRST as
unconstitutional and gave the legislature until August 15, 1998 (60 days) to
remedy the problem. It is unclear what the eventual outcome will be. However,
since debt service on school district bonds is levied and collected directly
by the counties on behalf of the school districts, any termination of State
funding of public schools would not directly affect the payment of debt
service on any school district's bonds but would have a significant, albeit
unquantifiable, effect on its operations and maintenance budget and,
ultimately, its operational viability and continued existence.
Maricopa County is the State's most populous and prosperous county,
accounting for nearly 60% of the State's population and a substantial majority
of its wage and salary employment and aggregate personal income. Within its
borders lie the City of Phoenix, the State's largest city and the seventh
largest city in the United States, and the Cities of Scottsdale, Tempe, Mesa,
Glendale, Chandler and Peoria, as well as the Towns of Paradise Valley and
Gilbert. Good transportation facilities, a substantial pool of available
labor, a variety of support industries and a warm climate have helped make
Maricopa County a major business center in the southwestern United States.
Once dependent primarily on agriculture, Maricopa County has substantially
diversified its economic base. Led by the service sector, which includes
transportation, communications, public utilities, hospitality and
entertainment, trade, finance, insurance, real estate and government, the
County achieved overall employment growth rates of 6.3% in 1995, 4.6% in 1996,
and 4.5% in 1997. In addition, several large, publicly-traded companies, such
as The Dial Corp., Phelps Dodge and MicroAge, have their headquarters in
Maricopa County, while others, such as Motorola, Intel and Honeywell, conduct
major operations there. Metropolitan Phoenix ranked first nationally among 39
major job markets (of 750,000 or more) in job growth for 1994, 1995, 1996 and
1997. Already home to a variety of professional sports teams, including the
Phoenix Suns (basketball), the Arizona Cardinals (football) and the Phoenix
Coyotes (hockey), the County was awarded one of two new major league baseball
franchises; the Arizona Diamondbacks began play in 1998. A state of the art
domed stadium was constructed in downtown Phoenix as a venue for the new
baseball franchise.
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Pima County is the State's second most populous county, and includes the
City of Tucson. Traditionally, Pima County's economy has been based primarily
upon manufacturing, mining, government, agriculture, tourism, education and
finance. Hughes Missile Systems division of Hughes Aircraft and several large
mining companies, including BHP Copper, ASARCO and Phelps Dodge, anchor the
non-public sector of the Tucson economy. During the past decade, Pima County,
and Tucson in particular, has become a base for hundreds of computer software
companies, as well as a number of companies operating in the areas of
environmental technology, bioindustry and telecommunications. Pima County has
experienced a significant drop in the rate of job growth from 7.0% in 1994 to
2.3% in 1995, 1.8% in 1996, and 2.5% in 1997; however, positive job growth is
projected to continue at approximately the 1996-97 rates.
In 1994, two special purpose irrigation districts, formed for the purpose of
issuing bonds to finance the purchase of Colorado River water from the Central
Arizona Project ("CAP"), filed for bankruptcy under Chapter 9 of the United
States Bankruptcy Code due to the districts' inability to collect tax revenues
in amounts and at times sufficient to service their bonded indebtedness. The
financial problems that led to the districts' default arose from a combination
of the unexpectedly high cost of constructing the CAP and delivering the water
to the districts, plummeting land values in the late 1980s and early 1990s,
resulting in a need to increase property taxes in order to pay the districts'
bonds, and the refusal by many landowners in the districts to accept the
increased tax burden. In June 1995, a bankruptcy plan was confirmed for one
district which paid bondholders 57% of their claims and placed an additional
42% in new 8% bonds maturing in seven years. Proceedings with respect to the
second district ultimately resulted in confirmation of a plan of
reorganization but the plan is currently on appeal and certain elements of the
plan are subject to continuing litigation, the outcome of which may or may not
affect the viability of the confirmed plan. A third district encountered
similar difficulties but was able to restructure its bonded indebtedness
outside the bankruptcy court on terms substantially similar to the plan
confirmed in the second district.
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APPENDIX B
ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF CALIFORNIA AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE
OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF CALIFORNIA ISSUERS, HOWEVER,
IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE FUND HAS
NOT INDEPENDENTLY VERIFIED THE INFORMATION.
GENERAL ECONOMIC CONDITIONS
The economy of the State of California (sometimes referred to herein as the
"State") 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.
California's July 1, 1997 population of over 32.9 million represented over
12% of the total United States population. As of July 1, 1990, the population
of 29,944,000 represented an increase of over 6 million persons, or 26%,
during the decade of the 1980's.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 census, 96% of the State's population resided in the 23
Metropolitan Statistical Areas in the State. As of July 1, 1997, the 5-county
Los Angeles area accounted for 49%, with 16.0 million residents. The 10-county
San Francisco Bay Area represented 21%, with a population of 6.9 million.
From 1990-1993, the State suffered through a severe recession, the worst
since the 1930's, heavily influenced by large cutbacks in defense/aerospace
industries and military base closures and by a major drop in real estate
construction. California's economy has been recovering and growing steadily
since the start of 1994. The current economic expansion is marked by strong
growth in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production;
growth is also strong in other business services, both nonresidential and
residential construction and local education. The Asian economic crisis is
expected to have dampening effects on the State's economy, as exports to the
region will be reduced further (declines had appeared already in 1997) and the
trade deficit will increase. However, some impacts of the Asian situation
could benefit California, as services will be needed to handle imports, and
lower interest rates should help the construction industry. Furthermore,
exports to other regions, such as Mexico and elsewhere in Latin America, have
grown rapidly, taking up some of the slack from Asia.
THE STATE
Fiscal Years Prior to 1995-1996. The State's budget problems in recent years
were caused by a combination of external economic conditions and a structural
imbalance in that the largest general fund programs--K-14 education, health,
welfare and corrections--were increasing faster than the revenue base, driven
by the State's rapid population growth. These pressures are expected to
continue as population trends maintain strong demand for health and welfare
services, as the school age population continues to grow, and as the State's
corrections program responds to a "Three Strikes" law enacted in 1994, which
requires mandatory life prison terms for certain third-time felony offenders.
In addition, the State's health and welfare programs are in a transition
period as a result of recent federal and state welfare reform initiatives.
As a result of these factors and others, and especially because a severe
recession between 1990-1994 reduced revenues and increased expenditures for
social welfare programs, from the late 1980's until 1992-93, the State had a
period of budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Starting in
the 1990-91 Fiscal Year and for each fiscal year thereafter, each budget
required multibillion dollar actions to bring projected
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revenues and expenditures into balance. The State Legislature and Governor
agreed on the following principal steps to produce Budget Acts in the years
1991-92 to 1994-95, although not all these actions were taken in each year.
1. significant cuts in health and welfare program expenditures;
2. transfers of program responsibilities and funding from the State to
local governments (referred to as "realignment"), coupled with some
reduction in mandates on local government;
3. transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing State funding for schools under
Proposition 98 (discussed below);
4. reduction in growth of support for higher education programs, coupled
with increases in student fees, through the 1994-95 Fiscal Year;
5. maintenance of the minimum Proposition 98 funding guarantee for K-14
schools, and the disbursement of additional funds to keep a constant
level of about $4,200 per K-12 pupils through the 1993-94 Fiscal Year;
6. revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
7. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to illegal immigrants, although during this time frame, most of
the additional aid requested by the Administration was not received; and
8. various one-time adjustments and accounting changes.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "'borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget
for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller issued registered warrants to pay a variety of
obligations representing prior years' or continuing appropriations, and
mandates from court order. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and warrants. Between July 1
and September 4, 1992, when the budget was adopted, the State Controller
issued a total of approximately $3.8 billion of registered warrants.
For several years during the recession, the State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession
of notes and revenue anticipation warrants were issued in the period from June
1992 to July 1994, often needed to pay previously maturing notes or warrants.
These borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year, as noted earlier.
The last and largest of these borrowings was $4.0 billion of revenue
anticipation warrants which were issued in July, 1994 and matured on April 25,
1996.
1995-96 Fiscal Year. 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 year. Expenditures were budgeted at $43.4 billion, a
4% increase. The Budget Act also projected Special Fund revenues of $12.7
billion and appropriated Special Fund expenditures of $13.0 billion.
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Final data for the 1995-96 Fiscal Year showed revenues and transfers of
$46.1 billion, some $2 billion over the original fiscal year estimate, which
was attributed to the strong economic recovery. Expenditures also increased,
to an estimated $45.4 billion, as a result of the requirement to expend
revenues for schools under Proposition 98, and among other things, failure of
the federal government to enact welfare reform during the fiscal year and to
budget new aid for illegal immigrant costs, both of which had been counted on
to allow reductions in State costs. SFEU had a small negative balance of about
$87 million at June 30, 1996, all but eliminating the accumulated budget
deficit from the early 1990's. Available internal borrowable resources
(available cash, after payment of all obligations due) on June 30, 1996 was
about $3.8 billion, representing a significant improvement in the State's cash
position, and ending the need for deficit borrowing over the end of the fiscal
year. The State's improved cash position allowed it to repay the $4.0 billion
Revenue Anticipation Warrant issue on April 25, 1996, and to issue only $2.0
billion of revenue anticipation notes during the fiscal year, which matured on
June 28, 1996.
The 1995-96 Budget Act included substantial additional funding under
Proposition 98 for schools and community colleges (about $1.0 billion general
fund and $1.2 billion total above 1994-95 levels). Because of higher than
projected revenues in 1994-95, an additional $561 million ($92 per K-12 ADA)
was appropriated to the 1994-95 Proposition 98 entitlement. A large part of
this was a block grant of about $50 per pupil for any one-time purpose. For
the first time in several years, a full 2.7 percent cost of living allowance
was funded. The budget was based on the settlement of the CTA v. Gould
litigation. Cuts in health and welfare costs totaled about $220 million,
almost $700 million less than had been anticipated, because of the failure by
the federal government to approve certain of these actions in a timely manner.
The federal government also failed to appropriate all but $31 million of an
anticipated $500 million in new federal aid for incarceration and health care
costs of illegal immigrants. Funding from the general fund for the University
of California was increased by $106 million and for the California State
University system by $97 million, with no increases in student fees.
1996-97 Fiscal Year. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Governor vetoed
about $82 million of appropriations (both general fund and Special Fund). With
the signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The Department of
Finance projected that, on June 30, 1997, the State's available internal
borrowing (cash) resources would be $2.9 billion, after payment of all
obligations due by that date, so that no cross-fiscal year borrowing will be
needed.
Revenues. The Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased in over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting
in January 1, 1997. As a result, revenues for the Fiscal Year were estimated
to total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.
Expenditures. The Budget Act contained general fund appropriations totaling
$47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
The following are principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (general fund) and $1.65 billion total
above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2%) was funded.
The Proposition 98 increases have brought K-12 expenditures to almost
$4,800 per pupil (also called "per ADA" or "Average Daily Attendance"), an
almost 15% increase over the level prevailing during the recession years.
Community colleges will receive an increase in funding of $157 million for
1996-97 out of this $1.6 billion total.
Because of the higher than projected revenues in 1995-96, an additional
$1.1 billion ($190 per K-12 ADA and $145 million for community colleges)
was appropriated and retroactively applied towards the
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1995-96 Fiscal Year Proposition 98 guarantee, bringing K-12 expenditures in
that year to over $4,600 per ADA. These new funds were appropriated for a
variety of purposes, including block grants, allocations for each school
site, facilities for class size reduction, and a reading initiative.
Similar retroactive increases totaling $230 million, based on final figures
on revenues and State population growth, were made to the 1991-92 Fiscal
Year and the 1994-95 Fiscal Year Proposition 98 guarantees, most of which
was allocated to each school site.
2. The Budget Act assumed savings of approximately $660 million in health
and welfare costs which required changes in federal law, including federal
welfare reform. The Budget Act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by
October 1, 1996. These cuts totaled approximately $163 million of the
anticipated $660 million savings.
3. The Budget Act includes a 4.9% increase in funding for the University
of California ($130 million general fund) and the California State
University system ($101 million general fund), with no increases in student
fees, maintaining the second year of the Governor's four-year "Compact"
with the State's higher education units.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the general fund. (For
purposes of cash flow projections, the State Department of Finance expects
$540 million of this amount to be received during the 1996-97 Fiscal Year.)
5. General fund support for the State Department of Corrections was
increased by about 7% over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new programs
included in the Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime.
1997-98 Fiscal Year. Once the pension payment eliminated essentially all the
"increased" revenue in the budget, final agreement was reached within a few
weeks on the welfare package and the remainder of the budget. The Legislature
passed the Budget Bill on August 11, 1997, along with numerous related bills
to implement its provisions. Agreement was not finally reached, however, on
one aspect of the budget plan, concerning the Governor's proposal for a
comprehensive educational testing program.
On August 18, 1997, the Governor signed the Budget Act, but vetoed about
$314 million of specific spending items, primarily in health and welfare and
education areas from both the General Fund and Special Funds. The Governor
announced that he was prepared to restore about $200 million of education
spending upon satisfactory completion of legislation on the education testing
program.
The Budget Act anticipates General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and
expenditures of $52.8 billion (an 8.0 percent increase from the 1996-97
levels). On a budgetary basis, the budget reserve (SFEU) is projected to
decrease from $408 million at June 30, 1997 to $112 million at June 30, 1998.
As of January 9, 1998, the State Director of Finance estimated a reserve of
$329 million at June 30, 1998. (The expenditure figure assumes restoration of
$200 million in vetoed funding.) The Budget Act also includes Special Fund
expenditures of $14.4 billion (as against estimated Special Fund revenues of
$14.0 billion), and $2.1 billion of expenditures from various Bond Funds. The
State has implemented its normal annual cash flow borrowing program, issuing
$3 billion of notes which mature on June 30, 1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which have exceeded initial budgeted amounts. Part of the nearly $1.75
billion in increased spending is allocated to prior fiscal years. Funds are
provided to fully pay for the cost-of-living increase component of
Proposition 98, and to extend class size reduction and reading initiatives.
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2. The Budget Act reflects the $1.235 billion pension case judgment
payment, and brings funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts. There is no provision for any additional
payments relating to this court case.
3. Continuing the third year of a four-year "compact" which the
Administration has made with higher education units, funding from the
General Fund for the University of California and California State
University has increased by about 6 percent ($121 million and $107 million,
respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing generally the grant
levels from prior years, as part of the initial implementation of the new
CalWORKs program.
6. Unlike prior years, this Budget Act does not depend on federal budget
actions. About $300 million in federal funds, already included in the
federal FY 1997 and 1998 budgets, are included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contains no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately
$500 million.
Federal Welfare Reform. Congress passed and the President signed (on August
22, 1996) the Personal Responsibility and Work Opportunity Act of 1996 (the
"Law") making a fundamental reform of the current welfare system. Among many
provisions, the Law includes: (i) conversion of Aid to Families with Dependent
Children from an entitlement program to a block grant titled Temporary
Assistance for Needy Families ("TANF"), with lifetime time limits on TANF
recipients, work requirements and other changes; (ii) provisions denying
certain federal welfare and public benefits to legal noncitizens, allowing
states to elect to deny additional benefits (including TANF) to legal
noncitizens, and generally denying almost all benefits to illegal immigrants;
and (iii) changes in the Food Stamp program, including reducing maximum
benefits and imposing work requirements.
As part of the 1997-98 Budget Act legislative package, the State Legislature
and Governor agreed on a comprehensive reform of the State's public assistance
programs to implement the new federal Law. The new basic State welfare program
is called California Work Opportunity and Responsibility to Kids Act
("CalWORKs"), which replaces the former Aid to Families with Dependent
Children (AFDC) and Greater Avenues to Independence (GAIN) programs effective
January 1, 1998. Consistent with the federal Law, CalWORKs contains new time
limits on receipt of welfare aid, both lifetime as well as for any current
time on aid. Administration of the new Welfare-to-Work programs will be
largely at the county level, and counties are given financial incentives for
success in this program.
Although the longer-term impact of the new federal Law and CalWORKs cannot
be determined until there has been some experience, the State does not
presently anticipate that these new programs will have any adverse financial
impact on the General Fund. Overall TANF grants from the federal government
are expected to equal or exceed the amounts the State would have received
under the old AFDC program.
Subsequent Events. The Department of Finance released updated estimates for
the 1997-98 Fiscal Year on January 9, 1998 as part of the Governor's 1998-99
Fiscal Year Budget Proposal. Total revenues and transfers are projected at
$52.9 billion, up approximately $360 million from the Budget Act projection.
Expenditures for the fiscal year are expected to rise approximately $200
million above the original Budget Act, to $53.0 billion. The balance in the
budget reserve, the SFEU, is projected to be $329 million at June 30, 1998,
compared to $461 million at June 30, 1997.
Proposed 1998-99 Fiscal Year Budget. In January 1998, the Governor released
his Budget Proposal for the 1998-99 Fiscal Year which was revised in May 1998
(the "Governor's Budget"). The Governor's Budget projects General Fund
revenues and transfers of $57.8 billion, a $3.2 billion increase (5.9%) over
revised 1997-98 revenues. This revenue increase takes into account reduced
revenues of approximately $600 million from the 1997 tax cut package, but also
assumes approximately $500 million additional revenues primarily associated
with capital gains realizations. The Governor's Budget notes, however, that
capital gains activity and the resultant revenues derived from it are very
hard to predict.
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Total General Fund expenditures for 1998-99 are recommended at $58.2
billion, an increase of $5.2 billion (9.8%) above the revised 1997-98 level.
The Governor's Budget includes funds to pay the interest claim relating to the
court decision on pension fund payments, PERS v. Wilson described below. The
Governor's Budget projects that the State will carry out its normal intra-year
cash flow external borrowing in 1998-99, in an estimated amount of $3.0
billion. The Governor's Budget projects that budget reserve will be $1.6
billion at June 30, 1999, slightly lower than the projected level at June 30,
1998.
The Governor's Budget projects Special Fund revenues of $14.7 billion and
Special Fund expenditures of $15.2 billion in the 1998-99 Fiscal Year. A total
of $3.2 billion of bond fund expenditures are also proposed.
Pursuant to Article IV, Section 13(c) of the Constitution of the State of
California, the State Legislature is required to adopt its budget for the
upcoming fiscal year (July 1-June 30) by midnight of June 15th, and in the
absence of which, the Legislature may not send to the Governor for
consideration any bill appropriating funds for expenditure during the fiscal
year for which the budget bill is to be enacted, except emergency bills or
appropriations for the salaries and expenses of the Legislature.
For the current fiscal year, as has been true since the late 1980's, the
State Legislature has not adhered to this deadline and to date, has not
adopted the State budget. Due to the Legislature's failure to comply with this
constitutional requirement, the Howard Jarvis Taxpayers Association sought an
injunction in a Los Angeles Superior Court to prohibit the State from making
certain types of payments in the absence of an adopted budget. On July 21,
1998, the preliminary injunction was issued. Under the terms of the injunction
order, until such time as the budget has been adopted, the State may not make
any payments from the State treasury for Fiscal Year 1998-99 except for the
following:
(1) salaries and expenses of the Legislature;
(2) payments pursuant to the emergency legislation enacted by AB 2776 and
AB 1301, respectively, for back interest earnings on deferred employer
retirement contributions and appropriation of funds relating to trial
court funding;
(3) payments pursuant to appropriations enacted in response to future
emergency bills recommended by the Governor;
(4) payments pursuant to specific 1997-98 appropriations enacted prior to
July 1, 1998, specifically for expenditures to be made in 1998-99; and
(5) "minimum wages" and "overtime wages" for employees covered by the Fair
Labor Standards Act for work done prior to the date of the order.
On July 22, 1998, the Legislature unanimously passed an $18.9 billion
emergency-spending bill to cover the costs of, among others, bond payments,
paychecks for state workers, retirement pensions, prisons, school and welfare
payments from July 1st through August 5th. In addition, the State Controller
has authorized the Attorney General to file a writ of mandate with the
California Supreme Court requesting that the lower court decision be
overturned and/or the preliminary injunction be stayed.
LOCAL GOVERNMENTS
The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 incorporated 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. Counties, in particular, have had fewer options to
raise revenues than many other local governmental entities, and have been
required to maintain many services.
The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996 (see "Federal Welfare Reform"
above). Under the CalWORKs program, counties are given
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flexibility to develop their own plans, consistent with State law, to
implement Welfare-to-Work and to administer many of its elements and their
costs for administrative and support services are capped at 1996-97 levels.
Counties are also given financial incentives if, at the individual county
level or statewide, the CalWORKs program produces savings associated with
specified Welfare-to-Work outcomes; counties may also suffer penalties for
failing to meet federal standards. Under CalWORKs, counties will still be
required to provide "general assistance" aid to certain persons who cannot
obtain welfare from other programs.
Historically, funding for the State's trial court system was divided between
the State and the counties. However, Chapter 850, Statues of 1997, implements
a restructuring of the State's trial court funding system. In 1997-98, funding
for the courts, with the exception of costs for facilities, local judicial
benefits, and revenue collection, was consolidated at the State level. The
county contribution for both their general fund and fine and penalty amounts
is capped at the 1994-95 level and becomes part of the Trial Court Trust Fund,
which supports all trial court operations. The State assumes responsibility
for future growth in trial court funding. This consolidation is intended to
streamline the operation of the courts, provide a dedicated revenue source,
and relieve fiscal pressure on the counties.
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 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. Orange County
implemented significant reductions in services and personnel, and continues to
face fiscal constraints in the aftermath of its bankruptcy, which has been
caused by large investment losses in its pooled investment funds.
On November 5, 1996, voters approved Proposition 218, entitled the "Right to
Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges
and assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments to changes through local initiatives.
Proposition 218 does not affect the State or its ability to levy or collect
taxes. There are a number of ambiguities concerning the Proposition and its
impact on local governments and their bonded debt which will require
interpretation by the courts or the State Legislature. The State Legislature
Analyst estimated that enactment of Proposition 218 would reduce local
government revenues statewide by over $100 million a year, and that over time
revenues to local government would be reduced by several hundred million
dollars.
In May 1996, a taxpayer filed an action (the "Rider Case") against the City
of San Diego ("San Diego") and the San Diego Convention Center Expansion
Authority (the "Authority") challenging the validity of a lease revenue
financing involving a lease having features similar to leases commonly used in
California lease-based financings such as certificates of participation. In
the Rider Case, the plaintiffs maintain that voter approval is required for
the San Diego lease (a) since the lease constituted indebtedness prohibited by
Article XVI, Section 18 of the California Constitution without a two-thirds
vote of the electorate, and (b) since San Diego was prohibited under its
charter from issuing bonds without a two-thirds vote of the electorate, and
the power of the Authority, a joint powers' authority, one of the members of
which is San Diego, to issue bonds is no greater than the power of San Diego.
In response to San Diego's motion for summary judgment, the trial court
rejected the plaintiffs' arguments and ruled that the lease was
constitutionally valid and that the Authority's related lease revenue bonds
did not require voter approval. The plaintiffs appealed the matter to the
Court of Appeals for the Fourth District, which likewise affirmed the validity
of the lease and of the lease revenue bond financing arrangements. The
plaintiffs then filed a petition for review with the California State Supreme
Court, and, on April 2, 1997, the California Supreme Court granted the
plaintiffs' petition for review. A decision from the State Supreme Court is
expected sometime during the 1998 calendar year.
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CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LEGISLATION
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies, Article XIIIA,
provides that the maximum ad valorem tax on real property cannot exceed 1% of
the "full cash value" of the property and effectively prohibits the levying of
any other ad valorem tax on real property for general purposes. However, on
May 3, 1986, Proposition 46, an amendment to Article XIIIA, was approved by
the voters of the State of California, creating a new exemption under Article
XIIIA permitting an increase in ad valorem taxes on real property in excess of
1% for bonded indebtedness approved by two-thirds of the voters voting on the
proposed indebtedness, "Full cash value" is defined as "the County Assessor's
valuation of real property as shown on the 1975-76 Fiscal Year tax bill under
"full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The "full cash value" is subject to annual adjustment to
reflect increases (not to exceed 2%) or decreases in the consumer price index
or comparable local data, or to reflect reductions in property value caused by
damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has
financial responsibility for providing. To the extent that the revenues of the
State and/or local government exceed its appropriations, the excess revenues
must be rebated to the public either directly or through a tax decrease.
Expenditures for voter-approved debt services are not included in the
appropriations limit.
At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund
and be expended solely for purposes of instructional improvement and
accountability. Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public schools and
community colleges. Commencing with the 1988-89 Fiscal Year, money to be
applied by the State for the support of school districts and community college
districts shall not be less than the greater of: (i) the amount which, as a
percentage of the State general fund revenues which may be appropriated
pursuant to Article XIIIB, equals the percentage of such State general fund
revenues appropriated for school districts and community college districts,
respectively, in the 1986-87 Fiscal Year or (ii) the amount required to insure
that the total allocations to school districts and community college districts
from the State general fund proceeds of taxes appropriated pursuant to Article
XIIIB and allocated local proceeds of taxes shall not be less than the total
amount from these sources in the prior year, adjusted for increases in
enrollment and adjusted for changes in the cost of living pursuant to the
provisions of Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirements
for one year. As a result of Proposition 98, funds that the State might
otherwise make available to its political subdivisions may be allocated
instead to satisfy such minimum funding level.
During the recent recession, general fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from
Proposition 98 sources stayed almost constant at approximately $4,220 from the
1991-92 Fiscal Year to the 1993-94 Fiscal Year.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay
$935 million by forgiveness of the amount owed, while schools will
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repay $825 million. The State share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count either as appropriations that count toward
satisfying the Proposition 98 guarantee, or as appropriations from "below" the
current base. Repayments are spread over the eight-year period of the 1994-95
Fiscal Year through the 2001-02 Fiscal Year to mitigate any adverse fiscal
impact.
Substantially increased general fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen
or a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of
all students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and
certain other parties. The measure also prohibits a school district from
providing education to a student it does not verify as either a United States
citizen or a person legally admitted to the United States. The State
Legislative Analyst estimates that verification costs could be in the tens of
millions of dollars on a statewide level (including verification costs
incurred by other local governments), with first-year costs potentially in
excess of $100 million.
The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving federal education funds,
which total $2.3 billion annually to California school districts. The
Secretary of the United States Department of Education has indicated that the
reporting requirements in Proposition 187 could jeopardize the ability of
school districts to receive these funds.
Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a
District Court judge struck down the central provisions of Proposition 187 by
ruling that parts of Propositions 187 conflict with federal power over
immigration. The ruling concluded that states may not enact their own schemes
to "regulate immigration or devise immigration regulations which can parallel
or purport to supplement Federal immigration law." As a consequence of the
ruling, students may not be denied public education and may not be asked about
their immigration status when enrolling in public schools. Further, the ruling
struck down the requirements of Proposition 187 that teachers and district
employees report information on the immigrant status of students, parents and
guardians. An appeal has been filed.
Article XIIIA, Article XIIIB and a number of other propositions were adopted
pursuant to California's constitutional initiative process. From time to time,
other initiative measures could be adopted by California voters. The adoption
of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.
Pending Litigation. The State is a party to numerous legal proceedings, many
of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.
The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to the state-mandated costs. The action involves an appeal
by the Director of Finance from a 1984 decision by the State Board of Control
(now succeeded by the Commission on State Mandates). The Board of Control
decided in favor of local school districts' claims for reimbursement for
special education programs for handicapped students. The case was then brought
to the trial court by the State and later remanded to the Commission on State
Mandates for redetermination. The Commission on State Mandates has since
expanded the claim to include supplemental claims filed by seven other
educational institutions; the issuance of a final consolidated decision is
anticipated
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sometime in early 1997. To date, the Legislature has not appropriated funds.
The liability to the State, if all potentially eligible school districts
pursue timely claims, has been estimated by the Department of Finance at more
than $1 billion.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J. B. Stringfellow, Jr., et. al., the State is seeking recovery
for post costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $300 million to $800 million.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs.
Potential liability to the remaining 300 plaintiffs, from claims filed, ranges
from $800 million to $1.5 billion. An appeal has been filed.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and
Tobacco Products Surtax Fund for years ended June 30, 1990, through June 30,
1995 for programs which were allegedly not health education or tobacco-related
disease research. If the State loses, the general fund and funds from other
sources would be used to reimburse the Cigarette and Tobacco Products Surtax
Fund for approximately $166 million.
The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al., where the plaintiffs are challenging the legality of various budget
action transfers and appropriations from particular special funds for years
ended June 30, 1995, and June 30, 1996. The plaintiffs allege that the
transfers and appropriations are contrary to the substantive law establishing
the funds and providing for interest accruals to the funds, violate the single
subject requirement of the State Constitution, and is an invalid "special
law." Plaintiffs seek to have monies totaling approximately $335 million
returned to the special funds.
The State is a defendant in two related cases, Beno vs. Sullivan (Beno) and
Welch v. Anderson (Welch), concerning reductions in Aid to Families with
Dependent Children ("AFDC") grant payments. In the Beno case, plaintiffs seek
to invalidate AFDC grant reductions and in the Welch case, plaintiffs contend
that AFDC grant reductions are not authorized by state law. The Beno case
concerns the total grant reductions while the Welch case concerns the period
of time the State did not have a waiver for those reductions. The State's
potential liability for retroactive AFDC grant reductions is estimated at $831
million if the plaintiffs are awarded the full amount in both cases.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
("PERS") beginning in the 1992-93 Fiscal Year. On January 11, 1995, the
Sacramento County Superior Court entered a judgment finding that the
legislation unconstitutionally impaired the vested contract rights of PERS
members. The judgment provides for issuance of a writ of mandate directing
State defendants to disregard the provisions of the legislation, to implement
the statute governing employer contributions that existed before the changes
in the legislation were found to be unconstitutional and to transfer to PERS
the contributions that are unpaid to date. On February 19, 1997, the State
Court of Appeals affirmed the decision of the Superior Court, and the Supreme
Court subsequently refused to hear the case, making the Court of Appeals'
ruling final. On July 30, 1997, the Controller transferred $1.235 billion from
the General Fund to PERS in repayment of the principal amount determined to
have been improperly deferred. Subsequent State payments to PERS will be made
on a quarterly basis. No prejudgment interest has been paid in accordance with
the trial court ruling that there was insufficient evidence that money for
that purpose had been appropriated and was available. No post-judgment
interest was ordered. PERS has filed a claim with the State Board of Control
in the amount of $308 million for the accrued interest on the judgment. PERS
also seeks interest on the unpaid accrued interest amount. The State Board of
Control approved this claim in March 1998.
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APPENDIX C
ECONOMIC AND FINANCIAL CONDITIONS IN CONNECTICUT
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF CONNECTICUT AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL EFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE
OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF CONNECTICUT ISSUERS;
HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE
FUND HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to herein as the "State"). The State's
manufacturing industry is diversified, with transportation equipment
(primarily aircraft engines, helicopters and submarines) the dominant
industry, followed by non-electrical machinery, fabricated metal products and
electrical machinery. As a result of a rise in employment in service-related
industries and a decline in manufacturing employment, however, manufacturing
accounted for only 17.39% of total non-agricultural employment in Connecticut
in 1996. Defense-related business represents a relatively high proportion of
the manufacturing sector. On a per capita basis, defense awards to Connecticut
have traditionally been among the highest in the nation, and reductions in
defense spending have had a substantial adverse impact on Connecticut's
economy.
The average annual unemployment rate in Connecticut increased from a low of
3.0% in 1988 to a high of 7.6% in 1992 and, after a number of important
changes in the method of calculation, was reported to be 5.8% in 1996. Average
per capita personal income of Connecticut residents increased in every year
from 1987 to 1996, rising from $21,592 to $33,875. However, pockets of
significant unemployment and poverty exist in several Connecticut cities and
towns.
At the end of the 1990-1991 fiscal year, the General Fund had an accumulated
unappropriated deficit of $965,712,000. For the six fiscal years ended June
30, 1997, the General Fund ran operating surpluses, based on the State's
budgetary method of accounting, of approximately $110,200,000, $113,500,000,
$19,700,000, $80,500,000, $250,000,000, and $262,600,000, respectively.
General Fund budgets for the biennium ending June 30, 1999, were adopted in
1997. General Fund expenditures and revenues are budgeted to be approximately
$9,550,000,000 and $9,700,000,000 for the 1997-1998 and 1998-1999 fiscal
years, respectively, an increase of more than 35% from the budgeted
expenditures of approximately $7,008,000,000 for the 1991-1992 fiscal year.
During 1991 the State issued a total of $965,710,000 Economic Recovery
Notes. The notes were to be payable no later than June 30, 1996, but as part
of the budget adopted for the biennium ending June 30, 1997, payment of the
notes scheduled to be paid during the 1995-1996 fiscal year was rescheduled to
be made over the four fiscal years ending June 30, 1999. The outstanding notes
were $157,055,000 as of December 1, 1997.
The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of December 1, 1997, the State had authorized direct
general obligation bond indebtedness totaling $11,460,239,000, of which
$10,159,950,000 had been approved for issuance by the State Bond Commission
and $9,181,272,000 had been issued. As of December 1, 1997, State direct
general obligation indebtedness outstanding was $6,475,986,251.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University is authorized to issue bonds totaling
$962,000,000 to finance the improvements. The University's bonds will be
secured by a State debt service commitment, the aggregate amount of which is
limited to $382,000,000 for bonds issued in the four fiscal years ending June
30, 1999, and $580,000,000 for bonds issued in the six fiscal years ending
June 30, 2005.
In addition, the State has limited or contingent liability on a significant
amount of other bonds. Such bonds have been issued by the following quasi-
public agencies: the Connecticut Housing Finance Authority, the
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Connecticut Development Authority, the Connecticut Higher Education
Supplemental Loan Authority, the Connecticut Resources Recovery Authority and
the Connecticut Health and Educational Facilities Authority. Such bonds have
also been issued by the cities of Bridgeport and West Haven and the
Southeastern Connecticut Water Authority. As of December 1, 1997, the amount
of bonds outstanding on which the State has limited or contingent liability
totaled $4,000,900,000.
In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport). The
total cost of the program through June 30, 2002, is currently estimated to be
$12.3 billion, to be met from federal, state, and local funds. The State
expects to finance most of its $5.1 billion share of such cost by issuing $4.6
billion of special tax obligation ("STO") bonds. The STO bonds are payable
solely from specified motor fuel taxes, motor vehicle receipts, and license,
permit and fee revenues pledged therefor and credited to the Special
Transportation Fund, which was established to budget and account for such
revenues.
As of July 1, 1998, the General Assembly had authorized $4,489,200,000 of
such STO bonds, of which $3,894,700,000 new money borrowings had been issued.
It is anticipated that additional STO bonds will be authorized annually in
amounts necessary to finance and to complete the infrastructure program. Such
additional bonds may have equal rank with the outstanding bonds provided
certain pledged revenue coverage requirements are met. The State expects to
continue to offer bonds for this program.
The State's general obligation bonds are rated AA- by Standard & Poor's and
Aa3 by Moody's. On March 17, 1995, Fitch Investor Services, Inc. reduced its
ratings of the State's general obligation bonds from AA+ to AA.
The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of
the following cases might have a significant impact on the State's financial
position: (i) a class action by the Connecticut Criminal Defense Lawyers
Association claiming a campaign of illegal surveillance activity and seeking
damages and injunctive relief; (ii) an action on behalf of all persons with
traumatic brain injury who have been placed in certain State hospitals,
claiming that their constitutional rights are violated by placement in State
hospitals alleged not to provide adequate treatment and training, and seeking
placement in community residential settings with appropriate support services;
(iii) litigation involving claims by Indian tribes to a portion of the State's
land area; and (iv) an action by certain students and municipalities claiming
that the State's formula for financing public education violates the State's
Constitution and seeking a declaratory judgment and injunctive relief.
As a result of litigation on behalf of black and Hispanic school children in
the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and
ethnic segregation in the Hartford public schools. The fiscal impact of this
decision might be significant but is not determinable at this time.
General obligation bonds issued by municipalities are payable primarily from
ad valorem taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of
these is the City of Bridgeport, which filed a bankruptcy petition on June 7,
1991. The State opposed the petition. The United States Bankruptcy Court for
the District of Connecticut held that Bridgeport has authority to file such a
petition but that its petition should be dismissed on the grounds that
Bridgeport was not insolvent when the petition was filed. State legislation
enacted in 1993 prohibits municipal bankruptcy filings without the prior
written consent of the Governor.
In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities finance projects by issuing
bonds that are not considered to be debts of the municipality.
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Such bonds may be repaid only from revenues of the financed project, the
revenues from which may be insufficient to service the related debt
obligations.
Regional economic difficulties, reductions in revenues and increases in
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. Difficulties in payment of debt
service on borrowings could result in declines, possibly severe, in the value
of their outstanding obligations, increases in their future borrowing costs,
and impairment of their ability to pay debt service on their obligations.
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APPENDIX D
ECONOMIC AND FINANCIAL CONDITIONS IN MASSACHUSETTS
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE COMMONWEALTH OF MASSACHUSETTS AND DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE
SUMMARY IS BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY
AVAILABLE OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF MASSACHUSETTS
ISSUERS; HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE
YEAR. THE FUND HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.
While economic growth in the Commonwealth of Massachusetts (sometimes
referred to herein as the "Commonwealth") slowed considerably during the
recession of 1990-1991, indicators such as retail sales, housing permits,
construction, and employment levels suggest a strong and continued economic
recovery. As of June 1998, the Commonwealth's unadjusted unemployment rate was
3.5% as compared to a national average of 4.7%. Per capita personal income in
the Commonwealth is currently higher than the national average.
In fiscal 1996, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 5.7% over the prior fiscal year to
$17.328 billion. Expenditures increased by 3.9% over the prior fiscal year to
$16.881 billion. As a result, the Commonwealth ended fiscal year 1996 with a
positive closing fund balance of $1.172 billion.
In fiscal 1997, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 4.9% over the prior fiscal year to
$18.170 billion. Expenditures increased by 6.3% over the prior fiscal year to
$17.949 billion. As a result, the Commonwealth ended fiscal year 1997 with a
positive closing fund balance of $1.394 billion.
Budgeted revenues and other sources in fiscal 1998, which ended June 30,
1998, were estimated as of May 5, 1998 by the Executive Office for
Administration and Finance to be approximately $18.909 billion, including tax
revenues of $13.3 billion. It is estimated that fiscal 1998 budgeted
expenditures will be $18.930 billion and that fiscal 1998 will end with fund
balances of $1.215 billion.
On July 21, 1998, Acting Governor Cellucci signed into law the fiscal 1999
budget, which includes a $770 million tax cut, the largest in Massachusetts
history. The $19.55 billion budget substantially increases funding for
education, child care and worker training.
Standard & Poor's and Moody's have rated the Commonwealth's general
obligation bonds as AA- and Aa3, respectively. Fitch IBCA has recently rated
the Commonwealth's bonds as AA-. From time to time, agencies may change their
ratings.
Growth of tax revenues in the Commonwealth is limited by law. Tax revenues
in fiscal years 1993 through 1997 were lower than the limits set by law, and
the Executive Office for Administration and Finance estimates that state tax
revenues in fiscal 1998 will not reach the limits imposed by law. In addition,
legislation enacted in December, 1989 imposes a limit on the amount of
outstanding direct bonds of the Commonwealth. The law further provides that
bonds to be refunded from the proceeds of Commonwealth refunding bonds are to
be excluded from outstanding direct bonds upon the issuance of the refunding
bonds. The limit did not apply to certain fiscal recovery bonds issued in 1990
to fund the 1990 operating deficit, the final maturity of which was paid on
December 1, 1997. In January, 1990, legislation was enacted to impose a limit
on debt service appropriations in Commonwealth budgets beginning in fiscal
1991. The law provides that no more than 10% of the total appropriations in
any fiscal year may be expended for payment of interest and principal on
general obligation debt of the Commonwealth. This limit did not apply to the
fiscal recovery bonds.
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Certain of the Commonwealth's cities, counties and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or financial
difficulties of the Commonwealth, could adversely affect the market values and
marketability of outstanding obligations issued by the Commonwealth or its
public authorities or municipalities.
On December 13, 1996 Middlesex County, the Commonwealth's most populous
county, defaulted on $4.5 million in unrated county hospital revenue
anticipation notes. Following the default, the noteholders, together with
certain other creditors of the County, initiated legal action to attach County
assets valued at $20 million in satisfaction of various obligations of the
County. On July 11, 1997 then Governor Weld signed legislation that
immediately abolished the Middlesex County government. The legislation also
eliminates Worcester and Hampden County governments on July 1, 1998 (or
sooner, if such county defaults on a bond or note) and sets the stage for the
abolition of the entire county system by 1999. In general, all liabilities,
debts, leases and contracts of an abolished county which are in force
immediately before the transfer date would become obligations of the
Commonwealth.
In Massachusetts, the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2", an initiative petition adopted by the voters of
the Commonwealth on November 4, 1980, limits the power of Massachusetts cities
and towns and certain tax-supported districts and public agencies to raise
revenue from property taxes to support their operations, including the payment
of certain debt service. Proposition 2 1/2 required many cities and towns to
reduce their property tax levels to a stated percentage of the full and fair
cash value of their taxable real estate and personal property and limited the
amount by which the total property taxes assessed by a city or town might
increase from year to year. Although Proposition 2 1/2 will continue to
constrain local property tax revenues, significant capacity exists for
overrides in nearly all cities and towns.
To offset shortfalls experienced by local governments as a result of the
implementation of Proposition 2 1/2, the government of the Commonwealth
increased direct local aid from the 1981 level of $1.632 billion to $3.246
billion in fiscal 1996. Fiscal 1997 expenditures for direct local aid were
$3.558 billion, which is an increase of approximately 9.6% above the 1996
level. It is estimated that fiscal 1998 expenditures for direct local aid will
be $3.912 billion, which is an increase of approximately 9.9% above the fiscal
1997 level.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant--estimated to be approximately $6.720
billion as of January 1, 1996 on the basis of certain actuarial assumptions
regarding, among other things, future investment earnings, annual inflation
rates, wage increases and cost of living increases. No assurance can be given
that these assumptions will be realized. The legislature adopted a
comprehensive pension bill addressing the issue in January 1988, which
requires the Commonwealth, beginning in fiscal year 1989, to fund future
pension liabilities currently and amortize the Commonwealth's unfunded
liabilities over 40 years in accordance with funding schedules prepared by the
Secretary for Administration and Finance and approved by the legislature. The
amounts required for funding of current pension liabilities in fiscal years
1998, 1999, 2000 and 2001 are estimated to be $1.046 billion, $1.059 billion,
$1.073 billion and $1.088 billion, respectively. Pension funding legislation
was revised in July, 1997, as part of the fiscal 1998 budget, to include an
accelerated pension funding schedule that would eliminate the Commonwealth's
unfunded liability by 2018 rather than 2028.
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APPENDIX E
ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF MICHIGAN AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE
OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF MICHIGAN ISSUERS; HOWEVER,
IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE FUND HAS
NOT INDEPENDENTLY VERIFIED THE INFORMATION.
Economic activity in the State of Michigan (sometimes referred to herein as
the "State") has tended to be more cyclical than in the nation as a whole. The
State's efforts to diversify its economy have proven successful, as reflected
by the fact that the share of employment in the State in the durable goods
sector has fallen from 33.1% in 1960 to 16.3% in 1997. The service sector now
represents 27.41% of the State's economy. Any substantial national economic
downturn is likely to have an adverse effect on the economy of the State and
on the revenues of the State and some of its local governmental units.
Historically the average monthly unemployment rate in the State has been
higher than the average figures for the United States. For the last three
years, the unemployment rate in the State has been at or below the national
average. During 1997, the average monthly unemployment rate in the State was
estimated at 4.2% compared to a national average of 4.9%.
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures, overcapacity and labor disputes. Such actions could adversely
affect State revenues and the financial impact on the local units of
government in the areas in which plants are closed could be more severe. The
impact on the financial condition of the municipalities in which the plants
are located may be more severe than the impact on the State itself.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year the State
refunded approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of
taxes so long as revenues are expected to amount to less than the revenue
limit and authorizes exceeding the limit for emergencies. The State
Constitution further provides that the proportion of State spending paid to
all local units' total spending may not be reduced below the proportion in
effect for the 1978-79 fiscal year. The Constitution requires that if spending
does not meet the required level in a given year, an additional appropriation
for local units is required for the following fiscal year. The State
Constitution also requires the State to finance any new or expanded activity
of local units mandated by State law. Any expenditures required by this
provision would be counted as State spending for local units for purposes of
determining compliance with the provisions stated above.
The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for
State operating purposes, short- and long-term debt for the purposes of making
loans to school districts and long-term debt for voter approved purposes. In
addition to the foregoing, the State authorizes special purpose agencies and
authorities to issue revenue bonds payable from designated revenues and fees.
Revenue bonds are not obligations of the State and in the event of shortfalls
in self-supporting revenues, the State has no legal obligation to appropriate
money to these debt service payments. The State's Constitution also directs or
restricts the use of certain revenues.
The State finances its operations through the State's General Fund and
Special Revenue Funds. The General Fund receives revenues of the State that
are not specifically required to be included in the Special Revenue Fund.
General Fund revenues are obtained approximately 56% from the payment of State
taxes and 45% from federal and non-tax revenue sources. The majority of the
revenues from State taxes are from the State's personal income tax, single
business tax, use tax, sales tax and various other taxes. Approximately two-
thirds of total General Fund expenditures are for State support of public
education and for social services programs.
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Other significant expenditures from the General Fund provide funds for law
enforcement, general State government, debt service and capital outlay. The
State Constitution requires that any prior year's surplus or deficit in any
fund must be included in the next succeeding year's budget for that fund.
In recent years, the State of Michigan has reported its financial results in
accordance with generally accepted accounting principles. For each of the last
six fiscal years the State ended the fiscal year with its General Fund in
balance after transfers in 1993-1996 from the General Fund to the Budget
Stabilization Fund. The balance in the Budget Stabilization Fund to $1.15
billion as of September 30, 1997, of which $572.6 million was reserved for
future education funding as described in the next paragraph. In all but one of
the last six fiscal years the State has borrowed between $500 million and $900
million for cash flow purposes. It borrowed $900 million in each of the 1996,
1997 and 1998 fiscal years.
In November of 1997, the State Legislature adopted legislation to provide
for the funding of claims of local school districts, some of whom had alleged
in a lawsuit, Durant v State of Michigan, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution.
Under this legislation, the State paid to school districts which were
plaintiffs in the suit approximately $212 million from the Budget
Stabilization Fund on April 15, 1998, and will be required to pay to other
school districts from the Budget Stabilization Fund (i) an additional $32
million per year in the fiscal years 1998-99 through 2007-08, and (ii) up to
an additional $40 million per year in the fiscal years 1998-99 through 2012-
13.
Amendments to the Michigan Constitution which placed limitations on
increases in State taxes and local ad valorem taxes (including taxes used to
meet debt service commitments on obligations of taxing units) were approved by
the voters of the State of Michigan in November 1978 and became effective on
December 23, 1978. To the extent that obligations in the Fund are tax
supported and are for local units and have not been voted by the taxing unit's
electors, the ability of the local units to levy debt service taxes might be
affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units
unless the impact of the census is changed by State law. No assurance can be
given that any such State law will be enacted. In the 1991 fiscal year, the
State deferred certain scheduled payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
later dates, similar future deferrals could have an adverse impact on the cash
position of some local units. Additionally, while total State revenue sharing
payments have increased in each of the last five years, the State has reduced
revenue sharing payments to municipalities below the level otherwise provided
under formulas in each of those years.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place
an annual cap on property assessment increases for all property taxes.
Companion legislation also cut the State's income tax rate from 4.6% to 4.4%,
reduced some property taxes for school operating purposes and shifted the
balance of school funding sources among property taxes and state revenues,
some of which are being provided from new or increased State taxes. The
legislation also contains other provisions that may reduce or alter the
revenues of local units of government and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted,
investors should be alert to the potential effect of such measures upon the
operations and revenues of Michigan local units of government.
In addition, in 1998 the State legislature adopted a package of State tax
cuts, including a phase-out of the intangibles tax, an increase in exemption
amounts for personal income tax, and reductions in the single business tax.
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The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of
these proceedings could, if unfavorably resolved from the point of view of the
State, substantially affect State or local programs or finances. These
lawsuits involve programs generally in the areas of corrections, highway
maintenance, social services, tax collection, commerce and budgetary
reductions to school districts and governmental units and court funding.
Currently, the State's general obligation bonds are rated Aa1 by Moody's,
AA+ by Standard & Poor's and AA+ by Fitch IBCA. The State received upgrades in
January, 1998 from Standard & Poor's, in March, 1998 from Moody's and in
April, 1998 from Fitch IBCA.
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APPENDIX F
ECONOMIC AND FINANCIAL CONDITIONS IN NEW JERSEY
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF NEW JERSEY AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE
OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF NEW JERSEY ISSUERS, HOWEVER,
IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE FUND HAS
NOT INDEPENDENTLY VERIFIED THE INFORMATION.
New Jersey (sometimes referred to herein as the "State") personal income tax
rates were reduced so that beginning with the tax year 1996, personal income
tax rates are, depending upon a taxpayer's level of income and filing status,
30%, 15% or 9% lower than 1993 tax rates.
The State operates on a fiscal year beginning July 1 and ending June 30. For
example, "Fiscal Year 1999" refers to the State's fiscal year beginning July
1, 1998 and ending June 30, 1999.
The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made.
The largest part of the total financial operations of the State is accounted
for in the General Fund. Revenues received from taxes and unrestricted by
statute, most federal revenue and certain miscellaneous revenue items are
recorded in the General Fund.
The State's undesignated General Fund balance was $569 million for Fiscal
Year 1995, $442 million for Fiscal Year 1996, and $281 million for Fiscal Year
1997. For the Fiscal Year 1998 and the Fiscal Year 1999, the balance in the
undesignated General Fund is estimated to be $269 million and $144 million,
respectively.
The State finances capital projects primarily through the sale of the
general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. Certain State tax revenues and certain other
fees are pledged to meet the principal, interest payments and if provided,
redemption premium payments, if any, required to pay the debt fully. No
general obligation debt can be issued by the State without prior voter
approval, except that no voter approval is required for any law authorizing
the creation of a debt for the purpose of refinancing all or a portion of
outstanding debt of the State, so long as such law requires that the
refinancing provide a debt service savings. All appropriations for capital
projects and all proposals for State bond authorizations are subject to the
review and recommendation of the New Jersey Commission on Capital Budgeting
and Planning.
The State has extensive control over school districts, cities, counties and
local financing authorities. State laws impose specific limitations on local
appropriations, with exemptions subject to state approval. The State shares
the proceeds of a number of taxes, with funds going primarily for local
education programs, homestead rebates, medicaid and welfare programs. Certain
bonds are issued by localities, but supported by direct state payments.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural
areas with selective commercial agriculture. After enjoying an extraordinary
boom during the mid-1980s, New Jersey, as well as the rest of the Northeast,
slipped into a slowdown well before the onset of the national recession which
officially began in July 1990 (according to the National Bureau of Economic
Research). By the beginning of the national recession of 1990-1991,
construction activity had already been declining in New Jersey for nearly two
years, growth had tapered off markedly in the service sectors and the long-
term downward trend of factory employment had accelerated, partly because of a
leveling off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities, trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment
from a peak of 3,689,800 in 1989 to a low of 3,457,900 in
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1992. This loss was followed by an employment gain of 255,600 from May 1992 to
June 1997, a recovery of 97.5% of the jobs lost during the recession.
Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 8.5%
during 1992 (according to the U.S. Bureau of Labor Statistics and the New
Jersey Department of Labor, Division of Labor Market and Demographic
Research). Since then, the unemployment rate fell to an average of 6.2% in
1996, and 5.5% for the six month period from January 1997 through June 1997.
For the recovery period as a whole, May 1992 to June 1997, service-producing
employment in New Jersey has expanded by 283,500 jobs. Hiring has been
reported by food stores, wholesale distributors, trucking and warehousing
firms, security and commodity brokers, business and engineering/management
service firms, hotels/hotel-casinos, social service agencies and health care
providers other than hospitals. Employment growth was particularly strong in
business services and its personnel supply component with increases of 17,300
and 7,500, respectively, in the 12-month period ended June 1997.
In the manufacturing sector, employment losses slowed between 1992 and 1994.
After an average annual job loss of 33,500 from 1989 through 1992, New
Jersey's factory job losses fell to 13,300 during 1993 and 7,300 during 1994.
During 1995 and 1996, however, manufacturing job losses increased slightly to
10,100 and 13,900, respectively, reflecting a slowdown in national
manufacturing production activity.
Conditions have slowly improved in the construction industry, where
employment has risen by 18,600 since its low in May 1992. Between 1992 and
1996, this sector's hiring rebound was driven primarily by increased
homebuilding and nonresidential projects. During 1996 and the first five
months of 1997, public works projects and homebuilding became the growth
segments while nonresidential construction lessened but remained positive.
Nonresidential construction activity, as measured by contract awards, grew
by 19.6% in 1994, 3.0% in 1995 and 7.0% in 1996. More recently, nonresidential
building construction contracts increased by 45.8% in the first five months of
1997 compared with the same period in 1996.
Residential construction contracts, despite monthly fluctuations, increased
by 17.1% for the first five months of 1997 as compared to the first five
months of 1996 ($989 million and $845 million, respectively). Nonbuilding or
infrastructure construction rose robustly by 64.0% during this period. Helped
by these increases, total construction contracts rose by 41.0% when comparing
the first five months of 1996 and 1997.
The rising economic trend experienced in the State has led to higher retail
sales, which showed steady growth from 1992 through 1996, including a 3.8%
increase from 1995 to 1996. The higher retail sales, in turn, produced steady
increases in retail trade jobs (both full and part time). Retail trade
employment has risen by nearly 49,000 since a May 1992 low point. From
December 1996 to June 1997, the number of retail jobs rose by 8,700.
Total new vehicle registrations (new passenger cars and light trucks and
vans) rose in 1994 by 5.8%, declined by 4.4% in 1995, then rose 2.6% in 1996.
Through May 1997 however, total new vehicle registrations rose by 2.8%
compared to the same time period in 1996.
Unemployment in the State through June 1997 has been receding. According to
the U.S. Bureau of Labor Statistics, the jobless rate dropped from 6.8% in
1994 to 6.4% in 1995 and to 6.2% in 1996. Subsequently, it has dropped to 5.5%
for the first six months of 1997.
The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, declined from 3.9% during calendar years 1991 and 1992 to 3.3%
during 1993 and then averaged 3.2% throughout 1994, 1995 and 1996. As of July
1, 1997, the State's unemployment insurance trust fund balance stood at $2.2
billion.
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The State has benefited from the national recovery. New Jersey's recovery is
in its sixth year and appears to be sustainable now that the national economy
has "soft landed." While the latest national indicators show that economic
growth accelerated during the first quarter of this year, the inflation rate
remained low.
Business investment expenditures and consumer spending have increased
substantially in the nation as well as in the State. Capital and consumer
spending may very well continue to rise due to the sustained character of the
recovery, although the interest-sensitive homebuilding industry may provide
only a moderate amount of stimulus both nationally and in New Jersey. It is
expected that the employment and income growth that has and is taking place
will lead to further growth in consumer outlays. Reasons for cautious optimism
in New Jersey include increasing employment levels, a low jobless rate, and a
higher-than-national level of per capita personal income.
Even if the nation's economic growth rate slows from the robust 5.9% growth
in the first quarter of 1997, the State's economy should have enough momentum
to keep its trend line pointing upwards. Its growth potential is not yet as
limited by the labor supply constraints affecting some other parts of the
country.
Looking further ahead, prospects for New Jersey appear favorable. While
growth is likely to be slower than in the nation, the locational advantages
that have served New Jersey well for many years will still be there.
Structural changes that have been going on for years can be expected to
continue, with job creation concentrated most heavily in the service
industries.
Tort, Contract and Other Claims. At any given time, there are various
numbers of claims and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1,
et seq.). The State does not formally estimate its reserve representing
potential exposure for these claims and cases. The State is unable to estimate
its exposure for these claims and cases.
The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the
alleged disposal of hazardous waste. Claimants in such matters are seeking
recovery of monetary damages or other relief which, if granted, would require
the expenditure of funds. The State is unable to estimate its exposure for
these claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, et seq.). An independent study estimated an aggregate potential
exposure of $90,800,000 for tort and medical malpractice claims pending as of
June 30, 1997. In addition, at any given time, there are various numbers of
contract and other claims against the University of Medicine and Dentistry,
seeking recovery of monetary damages or other relief which, if granted, would
require the expenditure of funds. The State is unable to estimate its exposure
for these claims.
Abbott v. Burke. On January 6, 1997 the Education Law Center filed a motion
in aid of litigants' rights with the Supreme Court of New Jersey in Abbott v.
Burke. In 1994 the Supreme Court ruled in Abbott v. Burke that the State had
to enact a funding formula that would close the spending gap between poor
urban school districts and wealthy suburban districts by fiscal year 1998. On
December 20, 1996 the Comprehensive Education Improvement and Financing Act
("CEIFA") was enacted. CEIFA is a departure from the mechanisms of previous
funding formulas. The CEIFA is centered upon the Core Curriculum Content
Standards--a
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comprehensive description of what all students should know and be able to
accomplish upon completion of a thirteen year public education.
On May 14, 1997, the Supreme Court rendered a decision in Abbott v. Burke
and held that the CEIFA was unconstitutional as applied to the 28 Abbott
districts. The Court ordered the State to appropriate additional funds,
beginning in the 1997-98 school year, so that each Abbott district would be
able to spend at the average of the wealthy suburban districts. In addition,
the Court remanded the matter to the Superior Court to oversee a directive to
the Commissioner of Education to study and report on the special educational
needs of students in the Abbott districts and the facilities needs in those
districts.
The Superior Court issued its recommendations to the Supreme Court in its
report on January 22, 1998. In its Report, the Superior Court recommended
additional supplemental programs be implemented at an estimated cost of $312
million and indicated that the facilities needs identified by the Department
of Education were estimated to require between $1.8-$2.4 billion in repairs
and new construction costs. The Supreme Court heard arguments on the matter on
March 2, 1998. The Supreme Court rendered its decision on May 21, 1998. The
Supreme Court determined and directed that the Commissioner implement
substantially all of the Recommendations of the Commissioner of Education as
part of his proposal for whole-school reform. He was further ordered to
prescribe procedures and standards to enable individual schools to adopt
additional or extended supplemental programs and to seek and obtain the funds
necessary to implement these programs for which they have demonstrated a
particularized need. Additionally, the Court directed implementation of the
facilities plan and timetable proposed by the Commissioner; secure funds to
cover the complete cost of remediating identified life-cycle and
infrastructure deficiencies in Abbot school buildings as well as the cost of
providing the space necessary to house Abbott students adequately; and
promptly initiate effective managerial responsibility over school
construction, including necessary funding measures and fiscal reforms, such as
may be achieved through amendment of legislation. The Court did not order any
appropriation of funds.
A related action, Buena Regional Commercial Township et al. v. New Jersey
Department of Education et al., was filed in Superior Court, Chancery
Division, Cumberland County. This lawsuit was filed on December 9, 1997, on
behalf of 17 rural school districts seeking the same type of relief as has
been mandated to be provided to the poor urban school districts in Abbott v.
Burke. The plaintiffs requested a declaratory judgement stating that the
chancery court retain jurisdiction, pending the remanding of the matter to the
Commissioner of Education for a hearing. The petition was then amended to
include three more rural districts for a total of 20. The State and plaintiffs
have entered into a consent order to transfer the matter to the Commissioner
of Education for resolution. The chancery court will not retain jurisdiction.
The State is unable at this time to estimate its exposure for these claims and
intends to defend both suits vigorously.
Verner Stubaus, et al. v. State of New Jersey, et al. Plaintiffs, 25 middle
income school districts, have filed a complaint alleging that the State's
system of funding for their schools is violative of the constitutional rights
of equal protection and a thorough and efficient education. The complaint was
filed on April 20, 1998 and the State defendants have not yet been served. The
State will vigorously defend this matter.
Cleary v. Waldman. This case involves the spousal impoverishment provisions
of the Medicare Catastrophic Coverage Act ("MCCA"). Under this provision, the
spouse of an institutionalized husband or wife, is allowed to have sufficient
funds to live in the community, called the monthly needs allowance.
The State in determining a spouse's monthly needs allowance, uses a system
called the "income first" rule. If a community spouse does not have sufficient
funds to meet the monthly needs allowance, an institutionalized spouse is
allowed to shift his or her income to the community spouse to make up the
difference. If the institutionalized spouse's income is insufficient to meet
the monthly needs allowance, then the institutionalized spouse is allowed to
shift resources to the community spouse to generate income to make up the
difference.
A class action was brought in federal court in which plaintiffs' argue that
the income first rule is disallowed under the MCCA. Rather plaintiffs claim
that the MCCA mandates the use of what is called the "resource-first"
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rule. Under this scheme, before income is shifted from the institutionalized
spouse to the community spouse to meet the monthly needs allowance, resources
must be shifted first and income generated from these resources used to meet
the monthly needs allowance.
Estimates of exposure if a court were to find that the MCCA only allows the
"resource-first" rule has been estimated in the area of $50 million per year
from both State and Federal sources combined.
Plaintiffs filed for a preliminary injunction arguing that, under federal
law, only the resource first rule was allowed under the MCCA. The State
opposed the motion and the New Jersey Association of Health Care Facilities
and the New Jersey Association for Non-Profit Homes for the Aging moved for
intervenor status, opposing the plaintiffs' motion. The court granted the
motion of intervention and denied the motion for preliminary injunction,
finding that plaintiffs were unlikely to prevail on the merits since New
Jersey's methodology was at least a permissible application of the federal
law.
Subsequently, plaintiffs filed for class certification which was granted on
March 25, 1996. On March 26, 1997, Plaintiffs filed a Notice of Appeal to the
Court of Appeals for the Third Circuit. Briefing on plaintiffs' application
for preliminary injunction has been completed. The matter was argued before
the Third Circuit on January 27, 1998 and no decision has been rendered. The
State intends to vigorously defend this action.
United Hospitals et al. v. State of New Jersey and William Waldman. This
case represents a challenge by 18 New Jersey hospitals to Medicaid hospital
reimbursement since February, 1995. The matter was filed in the Appellate
Division of the Superior Court of New Jersey in January, 1997. The hospitals
challenge all of the following: (i) whether the State complied with certain
federal requirements for Medicaid reimbursement; (ii) whether the State's
reimbursement regulations, N.J.A.C. 10:52-1 et. seq., are arbitrary,
capricious and unreasonable; (iii) whether the Department of Human Services
(DHS) incorrectly calculated the rates; (iv) whether DHS denied hospitals of a
meaningful appeal process; (v) whether the 1996-7 State Appropriations Act
(L.1996, c.42) violates the New Jersey Constitution with respect to the
provision for Medicaid reimbursement to hospitals; and (vi) whether DHS
violated the Medicaid State Plan, filed with the U.S. Department of Health and
Human Services, in implementing hospital rates in 1995 and 1996. The State
intends to vigorously defend this action.
Currently, the State's general obligation bonds are rated AA+ by Standard &
Poor's, Aa1 by Moody's, and AA+ by Fitch IBCA. From time to time agencies may
change their ratings.
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APPENDIX G
ECONOMIC CONDITIONS IN NEW YORK
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF NEW YORK CITY (THE "CITY") OR NEW YORK STATE (THE "STATE" OR "NEW
YORK") AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH FACTORS.
OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED PRIMARILY UPON ONE OR
MORE OF THE MOST RECENT PUBLICLY AVAILABLE OFFERING STATEMENTS RELATING TO
DEBT OFFERINGS OF STATE ISSUERS, HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT
BE UPDATED DURING THE YEAR. THE FUND HAS NOT INDEPENDENTLY VERIFIED THIS
INFORMATION.
The State, some of its agencies, instrumentalities and public authorities
and certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for
or the market value of the New York Municipal Bonds in which the Fund invests.
NEW YORK CITY
General. More than any other municipality, the fiscal health of New York
City ("City") has a significant effect on the fiscal health of the State. The
City's current financial plan assumes that after noticeable improvements in
the City's economy during calendar years 1997 and 1998, economic growth will
slow, with local employment increasing modestly through fiscal year 2002.
For each of the 1981 through 1997 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating
results as reported in accordance with generally accepted accounting
principles ("GAAP"), after discretionary transfers. The City has been required
to close substantial gaps between forecast revenues and forecast expenditures
in order to maintain balanced operating results. There can be no assurance
that the City will continue to maintain balanced operating results as required
by State law without reductions in City services or entitlement programs or
tax or other revenue increases that could adversely affect the City's economic
base.
The most recent quarterly modification to the City's financial plan for the
1998 fiscal year (July 1, 1997 through June 30, 1998) submitted to the New
York State Financial Control Board (the "Control Board") on June 23, 1998 (the
"1998 Modification"), projects a balanced budget in accordance with GAAP for
the 1998 fiscal year.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's financial plan, including the City's current financial plan for the
1999 through 2002 fiscal years (the "1999-2002 Financial Plan", "Financial
Plan" or "City Financial Plan"). The City's projections set forth in the City
Financial Plan are based on various assumptions and contingencies that are
uncertain and may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets.
The City's financing program for fiscal years 1999 through 2002 contemplates
the issuance of $5.2 billion of general obligation bonds and $5.4 billion of
bonds to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority") to finance City capital projects. In 1997,
the State enacted the New York City Transitional Finance Authority Act (the
"Finance Authority Act"), which created the Transitional Finance Authority, to
assist the City in keeping the City's indebtedness within the forecast level
of the constitutional restrictions on the amount of debt the City is
authorized to incur. In a challenge to the constitutionality of the Finance
Authority Act, the State trial court, by summary judgment on November 25,
1997, held the Finance Authority Act to be constitutional. Plaintiffs have
appealed the decision. In addition, the City issues revenue notes and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes, New York City
Municipal Water Finance Authority (the "Water Authority") bonds and
Transitional Finance Authority bonds
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will be subject to prevailing market conditions. The City's planned capital
and operating expenditures are dependent upon the sale of its general
obligation bonds and notes, and the Water Authority and Transitional Finance
Authority bonds.
1999-2002 Financial Plan. On June 26, 1998 the City released the City
Financial Plan for the 1999 through 2002 fiscal years, which relates to the
City and certain entities which receive funds from the City. The City
Financial Plan reflects changes as a result of the City's expense and capital
budgets for the 1999 fiscal year, which were adopted in June 1998, and changes
subsequent to the adopted budget. The City Financial Plan projects revenues
and expenditures for the 1999 fiscal year balanced in accordance with GAAP,
and project gaps of $1.9 billion, $2.7 billion and $2.3 billion for the 2000
through 2002 fiscal years, respectively, after implementation of a gap closing
program to reduce agency expenditures by approximately $380 million in each of
fiscal years 2000 through 2002.
In connection with the Financial Plan, the City has outlined a gap-closing
program for fiscal years 2000, 2001 and 2002 to eliminate the respective
projected remaining budget gaps for such fiscal years. This program, which is
not specified in detail, assumes for the 2000, 2001 and 2002 fiscal years,
respectively, additional agency programs to reduce expenditures or increase
revenues; savings from privatization initiatives and asset sales; additional
Federal and State aid; additional entitlement cost containment initiatives;
and the availability of funds in the City's General Reserve.
The 1998 Modification and the 1999-2002 Financial Plan include proposed
discretionary transfers in the 1998 fiscal year of approximately $2.0 billion
to pay certain debt service costs and subsidies due in the 1999 fiscal year,
and a proposed discretionary transfer in the 1999 fiscal year of $465 million
to pay debt service due in fiscal year 2000. In addition, the Financial Plan
reflects enacted and proposed tax reduction programs totaling $975 million,
$1.172 billion and $1.259 million in fiscal years 2000 through 2002,
respectively, including the elimination of the City sales tax on all clothing
as of December 1, 1999, the expiration of the 12.5% personal income tax
surcharge on December 31, 1998, the extension of current tax reductions for
owners of cooperative and condominium apartments starting in fiscal year 2000
and a personal income tax credit for child care and for resident holders of
Subchapter S corporations starting in fiscal year 2000, which are subject to
State legislative approval, and reduction of the commercial rent tax
commencing in fiscal year 2000.
Assumptions. The 1999-2002 Financial Plan is based on numerous assumptions,
including the condition of the City's and the region's economy and a modest
employment recovery and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The 1999-2002 Financial Plan is subject to
various other uncertainties and contingencies relating to, among other
factors, the extent, if any, to which wage increases for City employees exceed
the annual wage costs assumed for the 1999 through 2002 fiscal years;
continuation of projected interest earnings assumptions for pension fund
assets and current assumptions with respect to wages for City employees
affecting the City's required pension fund contributions; the willingness and
ability of the State to provide the aid contemplated by the Financial Plan and
to take various other actions to assist the City; the ability of Health and
Hospitals Corporation ("HHC"), the Board of Education ("BOE") and other such
agencies to maintain balanced budgets; the willingness of the Federal
government to provide the amount of Federal aid contemplated in the Financial
Plan; the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlement programs; the ability of the City to implement cost reduction
initiatives; the success with which the City controls expenditures; the impact
of conditions in the real estate market on real estate tax revenues and
unanticipated expenditures that may be incurred as a result of the need to
maintain the City's infrastructure. Certain of these assumptions have been
questioned by the City Comptroller and other public officials.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharges which
is scheduled to expire on December 31, 1999; (ii) collection of the projected
rent payments for the City's airports, which may depend on the successful
completion of negotiations with The Port Authority of New York and New Jersey
(the "Port Authority") or the enforcement of the City's
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rights under the existing leases through pending legal actions; and (iii)
State and Federal approval of the State and Federal gap-closing actions
proposed by the City in the Financial Plan. In addition, the economic and
financial condition of the City may be affected by various financial, social,
economic and political factors which could have a material effect on the City.
Municipal Unions. The Financial Plan reflects the costs of the settlements
and arbitration awards with certain municipal unions and other bargaining
units, which together represent approximately 93% of the City's workforce, and
assumes that the City will reach agreement with its remaining municipal unions
under terms which are generally consistent with such settlements and
arbitration awards. These contracts are approximately five years in length and
have a total cumulative net increase of 13%. Assuming the City reaches similar
settlements with its remaining municipal unions, the cost of all settlements
for all City-funded employees, as reflected in the Financial Plan, would total
$459 million and $1.2 billion in the 1998 and 1999 fiscal years, respectively,
and exceed $2 billion in every fiscal year after the 1999 fiscal year. The
Financial Plan provides no additional wage increases for City employees after
their contracts expire in fiscal years 2000 and 2001.
Intergovernmental Aid. The City depends on the State for aid both to enable
the City to balance its budget and to meet its cash requirements. There can be
no assurance that there will not be reductions in State aid to the City from
amounts currently projected; that State budgets will be adopted by the April 1
statutory deadline, or interim appropriations enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in reductions or delays in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.
Year 2000 Computer Matters. The year 2000 presents potential operational
problems for computerized data files and computer programs which may recognize
the year 2000 as the year 1900, resulting in possible system failures or
miscalculations. In December 1996, the City's Year 2000 Project Office was
established to develop a project methodology, coordinate the efforts of City
agencies, review plans and oversee implementation of year 2000 projects. At
that time, the City also evaluated the capabilities of the City's Integrated
Financial Management System and Capital Projects Information System, which are
the City's central accounting, budgeting and payroll systems, identified the
potential impact of the year 2000 on these systems, and developed a plan to
replace these systems with a new system which is expected to be year 2000
compliant prior to December 31, 1999. The City has also performed an
assessment of its other critical computer systems in connection with making
them year 2000 compliant, and the City's agencies have developed and begun to
implement both strategic and operational plans for non-compliant application
systems. In addition, the City Comptroller is conducting audits of the
progress of City agencies in achieving year 2000 compliance. While these
efforts may involve additional costs beyond those assumed in the Financial
Plan, the City believes, based on currently available information, that such
additional costs will not be material.
Certain Reports. The City's financial plans have been the subject of
extensive public comment and criticism. From time to time, the Control Board
staff, the Office of the State Deputy Comptroller (the "OSDC"), the City
Comptroller, the City's Independent Budget Office (the "IBO") and others issue
reports and make public statements regarding the City's financial condition,
commenting on, among other matters, the City's financial plans, projected
revenues and expenditures and actions by the City to eliminate projected
operating deficits. Some of these reports and statements have warned that the
City may have underestimated certain expenditures and overestimated certain
revenues and have suggested that the City may not have adequately provided for
future contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of
its expenditure increases and to provide necessary services.
On June 26, 1998, the City Comptroller issued a report on the adopted budget
for the 1999 fiscal year. The report identified a possible surplus of up to
$806 million. Potential risks include greater overtime spending and additional
expenditures as a result of pension supplementation legislation and other
pension legislation, if signed by the Governor and approved by the City
Council in September 1998. The report also noted that the City
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Comptroller will begin writing off outstanding education aid receivables that
are ten years past due, which are approximately $39 million in the 1999 fiscal
year, and which would increase in subsequent fiscal years.
On May 21, 1998, the City Comptroller issued a report on the City's
financial plan released on April 24, 1998 (the "April Financial Plan"). The
report noted that the April Financial Plan contains a number of uncertainties,
including the continuation of securities industry profits, international
developments, such as the financial crisis in Asia, Japan's stagnant economy
and the European union, and the growth of the City's operating and debt
service expenditures. In addition, the report noted that the City's current
labor reserve continues to exclude funding for wage increases for certain
organizations, such as HHC, although certain of these organizations have
indicated that they will have difficulty in funding those labor increases.
On May 19, 1998, the staff of the OSDC issued a report on the City's
Executive Budget for the 1999 fiscal year. The report noted that, since the
City's fiscal health remains tied to Wall Street's fortunes, an increase in
interest rates or further developments in the East Asian economic crisis
represent a risk to the outlook for the 1999 fiscal year. In addition, the
report identified several risks during the April Financial Plan period,
including a possible change in the assumptions and methodology used to compute
City pension contributions that could affect pension costs, and possible
legislation that will supplement the benefits of retirees to help offset the
impact of inflation. Additional issues identified in the report which could
affect the City's projections for fiscal years 2000 through 2002 include the
assumptions in the April Financial Plan that the 12.5% personal income tax
surcharge will be extended and that the Mayor's proposed tax reduction program
will be implemented.
In addition, the staff of the OSDC noted in a separate report on child care
services in the City, released on December 18, 1997, that, if the State
implements the Federal requirement that Temporary Assistance for Needy
Families ("TANF") recipients who have received benefits for two years or more
undertake work assignments, as many as 33,500 additional children may require
child care, at a cost of between $135 million and $225 million beginning in
fiscal year 2000, depending upon the method for providing child care services.
The report noted that, while the State will receive Federal funds as part of
its welfare surpluses that could be used for this purpose, it remains to be
seen whether such funds will be shared with the City and other localities. The
report noted that the City expects a large reduction in the percentage of the
TANF recipients receiving benefits for two or more years. In its report on the
January 1998 modification to the City's financial plan, OSDC revised its
estimates upward, indicating that as many as 36,600 additional children may
require child care, at a cost of between $145 million and $245 million,
beginning in fiscal year 2000, depending on the method for providing child
care services, due to a slower than projected decline in the TANF caseload.
On May 21, 1998, the staff of the Control Board issued a report reviewing
the City's 1998 fiscal year. The report noted that the City is likely to end
the 1998 fiscal year with approximately $2 billion in its Budget Stabilization
Account. However, the report noted that, the City still faces gaps of
approximately $1.5 billion in fiscal years 2000 and 2002 and exceeding $2.1
billion in fiscal year 2001, which is an indication of ongoing structural
imbalance. In addition, the report noted that the City will face significant
challenges in the future, including the fact that (i) the April Financial Plan
makes no provision for additional labor costs after the expiration of the
City's current labor contracts starting in calendar year 2000 and (ii) the
City's extensive capital needs require more resources at the same time that a
rising debt level and debt service burden should be contained. Moreover, the
report noted that the City's particularly volatile mix of taxes on business
and personal income responds quickly to changes in the economy and in the
financial markets.
On May 15, 1998, the IBO released a report on the City's Executive Budget
for the 1999 fiscal year. In its report, the IBO estimated a balanced budget
for the 1998 fiscal year, a surplus in the 1999 fiscal year and a gap of $1.6
billion for fiscal year 2000, after taking into account prepayments of debt
service in the 1999 fiscal year. With respect to fiscal years 2001 and 2002,
the report estimated gaps of $2.2 billion and $1.8 billion, respectively. The
report noted that, while the strength of the local economy is helping the City
in the near term, large projected gaps for fiscal years 2001 and 2002, at this
point in the business cycle, could be an omen of difficult times ahead.
Moreover, the report noted the April Financial Plan removes the debt service
of the Transitional Finance Authority and the personal income tax revenues
dedicated to paying such debt service from
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the Financial Plan. The report notes that if Transitional Finance Authority
debt service were included in City projected debt service, City debt service
would increase from approximately 16% of tax revenues in the 1998 fiscal year
to approximately 19% in fiscal year 2002.
On October 31, 1996, the IBO released a report assessing the costs that
could be incurred by the City in response to the 1996 Welfare Act. The report
noted that if the requirement that all recipients work after two years of
receiving benefits is enforced, these additional costs could be substantial
starting in 1999, reflecting costs for worker training and supervision of new
workers and increased child care costs. The report noted that decisions to be
made by the State which will have a significant impact on the City budget
include the allocation of block grant funds between the State and New York
local governments such as the City and the division between the State and its
local governments of welfare costs not funded by the Federal government.
Finally, the report noted that the new welfare law's most significant fiscal
impact is likely to occur in the years 2002 and beyond, reflecting the full
impact of the lifetime limit on welfare participation which only begins to be
felt in 2002 when the first recipients reach the five-year limit and are
assumed to be covered by Home Relief, which has recently been replaced by the
Safety Net Assistance program. In a subsequent report, the IBO noted that the
State had enacted the Welfare Reform Act of 1997 which, among other things,
requires the City to achieve work quotas and other work requirements and
requires all able-bodied recipients to work after receiving assistance for two
years.
Seasonal Financing Requirements. The City since 1981 has fully satisfied its
seasonal financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. The Financial Plan currently
provides for $850 million of seasonal financing in fiscal year 1999. The City
issued $1.075 billion in short-term obligations in fiscal year 1998 to finance
the City's projected cash flow needs for the 1998 fiscal year. The City issued
$2.4 billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those
expected early in such fiscal years.
Ratings. As of July 10, 1998, Moody's Investors Service, Inc. ("Moody's")
rated the City's outstanding general obligation bonds A3, Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's") rated such bonds BBB+ and Fitch IBCA, Inc. ("Fitch") rated such bonds
A-. On July 10, 1995, Standard & Poor's revised downwards its ratings on
outstanding general obligation bonds of the City from A- to BBB+. In February
1998, Standard & Poor's placed its BBB+ rating of City bonds on CreditWatch
with positive implications. Moody's rating of City bonds was revised in
February 1998 to A3 from Baa1. Such ratings reflect only the view of Moody's,
Standard & Poor's and Fitch, from which an explanation of the significance of
such ratings may be obtained. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised
downward or withdrawn entirely. Any such downward revision or withdrawal could
have an adverse effect on the market prices of City bonds.
Outstanding Indebtedness. As of March 31, 1998, the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$26.6 and $3.7 billion of outstanding net long-term debt. As of March 25,
1998, the Water Authority had approximately $8.1 billion of aggregate
principal amount of outstanding bonds, inclusive of subordinate second
resolution bonds, and $600 million aggregate principal amount of outstanding
commercial paper notes.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and
Federal regulations require the City's water supply to meet certain standards
to avoid filtration. The City's water supply now meets all technical standards
and the City has taken the position that increased regulatory, enforcement and
other efforts to protect its water supply, will prevent the need for
filtration. On May 6, 1997, the U.S. Environmental Protection Agency granted
the City a filtration avoidance waiver through April 15, 2002 in response to
the City's adoption of certain watershed regulations. The estimated
incremental cost to the City of implementing this Watershed Memorandum of
Agreement, beyond
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investments in the watershed which are planned independently, is approximately
$400 million. The City has estimated that if filtration of the upstate water
supply system is ultimately required, the construction expenditures required
could be between $4 billion and $5 billion. Such an expenditure could cause
significant increases in City water and sewer charges.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability
to carry out the City Financial Plan. As of June 30, 1997, the City estimated
its potential future liability on account of outstanding claims to be
approximately $3.5 billion.
NEW YORK STATE
Current Economic Outlook. The national economy has maintained a robust rate
of growth during the past six quarters as the expansion, which is well into
its seventh year, continues. The State economy has also continued to expand,
but growth remains somewhat slower than in the nation. The State's forecast of
its economy shows continued expansion during the 1998 and 1999 calendar years.
Employment growth in the State has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility,
defense and banking industries. Government downsizing has also moderated these
job gains. The State expects employment growth to slow during the course of
1998 and 1999. The financial and business service sectors are expected to
continue to do well, while employment in the manufacturing and government
sectors will post only small, if any, declines. On an average annual basis,
the employment growth in the State was 1.3 percent for 1997 and is projected
to be 1.5 percent and 1.0 percent for 1998 and 1999, respectively. On the
national level, employment growth was 2.3 percent for 1997 and is projected to
be 2.5 percent and 1.5 percent for 1998 and 1999, respectively.
On an average annual basis, the State unemployment rate is expected to drop
through 1998 and 1999 reaching 5.9 percent for 1999 as compared to the 6.3
percent level of 1997. For the nation as a whole, the unemployment rate was
5.0 percent for 1997 and is projected to decline to 4.7 percent in 1998 before
returning back to the 1997 level for 1999.
Personal income in the State is expected to record moderate gains in 1998
(5.1 percent)--down from the 5.8 percent levels achieved by both the State and
the nation for the previous year. This level is below the 5.3 percent
projected national personal income growth for 1998. Personal income growth in
the State is expected to decline to 4.4 percent for 1999, the same level as
projected for the nation.
The 1998-1999 Fiscal Year. The State's current fiscal year commenced on
April 1, 1998 and ends on March 31, 1999. On January 20, 1998 the Governor
presented his 1998-1999 Executive Budget (the "Executive Budget") to the
Legislature. The State's budget for the 1998-1999 fiscal year was not adopted
by the April 1 statutory deadline. Prior to adoption of the budget, the
Legislature enacted necessary appropriations for state-supported debt service.
On April 18, 1998, the State Legislature passed a State budget for the State's
1998-1999 fiscal year, and on April 25, 1998 the Governor vetoed certain of
the increased spending initiatives in the budget passed by the State
Legislature. The Legislature had not overridden any of the Governor's vetoes
as of the start of the legislative recess on June 19, 1998. The State's
financial plan for the 1998-1999 fiscal year (the "1998-1999 Financial Plan")
reflects the impact of the Legislature's and Governor's actions through June
26, 1998.
The 1998-1999 Financial Plan is projected to be balanced on a cash basis in
the General Fund. (The General Fund is the principal operating fund of the
State. It is the State's largest fund and receives almost all State taxes. In
the State's 1998-1999 fiscal year, the General Fund is expected to account for
approximately 70.1 percent of
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total State Funds disbursements.) Previously, the 1997-1998 Financial Plan had
projected a potential budget imbalance of up to $1.68 billion for the 1998-
1999 fiscal year. Total General Fund receipts, including transfers from other
funds, are projected to be $37.56 billion, an increase of over $3 billion from
the $34.55 billion recorded in the 1997-1998 fiscal year. Total General Fund
disbursements, including transfers to support capital projects, debt service
and other funds, are estimated at $36.78 billion., This represents an increase
of $2.43 billion or 7.1 percent from 1997-1998.
The State Division of the Budget estimates that the 1998-1999 Financial Plan
includes approximately $64 million in non-recurring resources or savings.
In terms of receipts, the transfer of a portion of the budget surplus
recorded in 1997-1998 to 1998-1999 exaggerates the "real" growth in State
receipts from year to year by depressing reported 1997-1998 figures and
inflating 1998-1999 projections. Conversely, the incremental cost of tax
reductions newly effective in 1998-1999 and the impact of statutes earmarking
certain tax receipts to other funds work to depress apparent growth below the
underlying growth in receipts attributable to expansion of the State economy.
On an adjusted basis, State tax revenues in the 1998-1999 fiscal year are
projected to grow at approximately 7.5 percent, following an adjusted growth
of roughly nine percent in the 1997-1998 fiscal year.
Net personal income tax collections are projected to reach $21.24 billion,
nearly $3.5 billion above the reported 1997-1998 collection total. This tax
continues to account for over half of the State's General Fund receipts base.
User tax collections are projected to reach $7.14 billion in fiscal year 1998-
1999, an increase of $107 million over the 1997-1998 fiscal year. The 1998-
1999 Financial Plan projects business tax receipts to decline slightly in
1998-1999, falling to $4.96 billion, $91 million less than received in the
prior fiscal year. The decline in this category is largely attributable to
scheduled tax reductions and expected slowing in profit growth. The 1998-1999
Financial Plan projects General Fund receipts to be received from the
following sources in the following proportions: i) personal income tax: 56.6
percent, ii) user taxes and fees: 19.0 percent, iii) business taxes 13.2
percent, iv) other taxes: 2.7 percent (includes estate and gift taxes), and v)
miscellaneous receipts: 8.5 percent (includes investment income, medical
provider assessments and minor federal grants).
In terms of disbursements, the 1998-1999 Financial Plan projects General
Fund disbursements to be allocated to the following categories in the
following proportions: i) grants to local government: 68.4 percent, ii) state
operations: 18.2 percent, iii) debt service: 6.0 percent, iv) general State
charges: 6.0 percent (includes contributions to pension systems and health
insurance for State employees) and v) capital/other: 1.4 percent.
The 1998-1999 Financial Plan projects spending of $25.14 billion for grants
to local government, an increase of $1.88 billion or 8.1 percent over the
prior year. The largest annual increases are for educational programs,
Medicaid, other health and social welfare program, and community project
grants. State operations spending is projected at $6.70 billion, an increase
of $511 million or 8.3 percent from the prior year.
Future Fiscal Years. The Executive Budget projected budget gaps of
approximately $1.7 billion in 1999-2000 growing to approximately $3.7 billion
in 2000-2001. These gaps were projected after assuming unspecified savings
actions totaling $600 million in 1999-2000 and $800 million in 2000-2001.
Moreover, the State's projections for 1999-2000 also assume $250 million in
additional receipts from the settlement of State claims against the tobacco
industry. As a result of the budget passed by the State Legislature and the
vetoes of the Governor of certain increased spending in the State budget
passed by the Legislature, the potential imbalance in the 1999-2000 fiscal
year is expected to be roughly $1.3 billion, or about $400 million less than
previously projected. Consistent with past practice, the projections do not
include any costs associated with new collective bargaining agreements after
the expiration of the current round of contracts at the end of the 1998-1999
fiscal year.
The STAR program, which dedicates a portion of personal income tax receipts
to fund school tax reductions, has a significant impact on General Fund
receipts. STAR is projected to reduce personal income tax revenues available
to the General Fund by an estimated $1.3 billion in the 2000-2001 fiscal year.
Measured from
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the 1998-1999 base, scheduled reductions to estate and gift, sales and other
taxes, reflecting tax cuts enacted in the 1997-1998 and 1998-1999 fiscal
years, will lower General Fund taxes and fees by an estimated $1.8 billion in
the 2000-2001 fiscal year. The fiscal effects of tax reductions adopted in the
last several fiscal years (including 1998-1999) are projected to grow more
substantially beyond the 1998-1999 fiscal year, with the incremental annual
cost of all currently enacted tax reductions estimated at over $4 billion by
the time they are fully effective in State fiscal year 2002-2003. Disbursement
projections for the out years currently assume additional outlays for i)
school aid, ii) Medicaid, iii) welfare reform, iv) mental health community
reinvestment, and v) other multi-year spending commitments in law.
Special Considerations. On February 3, 1998, the New York State Comptroller
issued a report which noted that a significant cause for concern is the budget
gaps in the 1999-2000 and 2000-2001 fiscal years, which the State Comptroller
projected at $2.6 billion and $4.8 billion, respectively, reflecting
uncertainty concerning the receipt by the State of $250 million of funds from
the tobacco settlement assumed for each of such fiscal years, as well as the
unspecified actions assumed in the State's projections. The State Comptroller
also stated that if the economy slows, the size of the gaps would increase.
According to the State Division of the Budget, uncertainties with regard to
the economy present the largest potential risk to budget balance in New York
State. The Executive Budget identifies various risks, including either a
financial market or broader economic correction during the State's financial
plan period, which risks are heightened by the relatively lengthy expansion
currently underway, and the financial turmoil in Asia. In addition, the
Executive Budget notes that a normal forecast error of one percentage point in
the expected growth rate could raise or lower receipts by over $1 billion by
the last year of the projection period, and that funding is not included for
any costs associated with new collective bargaining agreements after the
expiration of the current contracts at the end of the 1998-1999 fiscal year.
Furthermore, the securities industry is more important to the New York economy
than the national economy, and a significant deterioration in stock market
performance could ultimately produce adverse changes in wage and employment
levels.
The State's financial plans and the Executive Budget are based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and State economies. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, Federal financial and monetary policies, the availability of credit
and the condition of the world economy, any of which could have an adverse
effect on the State. There can be no assurance that the State economy will not
experience worse-than-predicted results in the remainder of the 1998-1999
fiscal year and subsequent fiscal years, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
An additional risk to the State Financial Plan arises from the potential
impact of federal disallowances now pending against the State, which could
adversely affect the State's projections of receipts. The State Financial Plan
assumes no federal disallowance or other federal actions that could affect
State finances, but has reserves in the event of such an action.
Despite recent budgetary surpluses recorded by the State, actions affecting
the level of receipts and disbursements, the relative strength of the State
and regional economy, and actions by the federal government have helped to
create projected structural budget gaps for the State. To address a potential
imbalance in a given fiscal year, the State would be required to take actions
to increase receipts and/or reduce disbursements as it enacts the budget for
that year, and, under the State Constitution, the Governor is required to
propose a balanced budget each year.
Owing to these and other factors, the State may fact substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
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Year 2000 Computer Matters. New York State is currently addressing "Year
2000" data processing compliance issues. In 1996, the State created the Office
of Technology ("OFT") to help address statewide technology issues, including
the Year 2000 issue. OFT has estimated that investments of at least $140
million will be required to bring approximately 350 State mission-critical and
high-priority computer systems not otherwise scheduled for replacement into
Year 2000 compliance, and the State is planning to spend $100 million in the
1998-1999 fiscal year for this purpose. Work has been completed on roughly 20
percent of these mission-critical and high-priority systems. All remaining
unfinished mission-critical and high-priority systems have at least 40 percent
or more of the work completed. Contingency planning is underway for those
systems which may be non-compliant prior to failure dates.
Prior Fiscal Years. The State ended its 1997-1998 fiscal year balanced on a
cash basis, with a reported General Fund cash surplus of $2.04 billion
resulting from revenue growth and lower spending on welfare, Medicaid, and
other entitlement programs. General Fund receipts and transfers from other
funds for the 1997-1998 fiscal year (including net tax refund reserve account
activity) totaled $34.55 billion, an annual increase of $1.51 billion, or 4.57
percent over the 1996-1997 fiscal year. General Fund disbursements and
transfers to other funds were $34.35 billion, an annual increase of $1.45
billion or 4.41 percent. The State closed a budget gap of approximately $2.3
billion for the 1997-1998 fiscal year. Gap-closing actions included cost
containment in State Medicaid, the use of the $1.4 billion 1996-1997 fiscal
year budget surplus to finance 1997-1998 fiscal year spending, control on
State agency spending and other actions.
The State ended its 1996-1997 fiscal year balanced on a cash basis, with a
1996-1997 General Fund cash surplus as reported by the State Division of the
Budget of approximately $1.42 billion that was used to finance the 1997-1998
Financial Plan. The surplus resulted primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. General
Fund receipts and transfers from other funds for the 1996-1997 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the 1995-1996 fiscal
year (excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-1997 fiscal year, an increase of 0.7 percent from the 1995-1996 fiscal
year.
The State ended its 1995-1996 fiscal year in balance, with a reported 1995-
1996 General Fund cash surplus of $445 million. General Fund receipts and
transfers from other funds totaled $32.81 billion, a decrease of 1.1 percent
from the 1994-1995 levels. General Fund disbursements and transfers to other
funds totaled $32.68 billion for the 1995-1996 fiscal year, a decrease of 2.2
percent from the 1994-1995 levels. Prior to adoption of the State's 1995-1996
fiscal year budget, the State had projected a potential budget gap of
approximately $5 billion, which was closed primarily through spending
reductions, cost containment measures, State agency actions and local
assistance reforms.
The State ended its 1994-1995 fiscal year with the General Fund in balance.
General Fund receipts and transfers from other funds totaled $33.16 billion,
an increase of 2.9 percent from the 1993-1994 levels. General Fund
disbursements and transfers to other funds totaled $33.40 billion, an increase
of 4.7 percent from the 1993-1994 levels.
Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. As of June
1995, LGAC had issued bonds to provide net proceeds of $4.7 billion completing
the program. The impact of LGAC's borrowing is that the State is able to meet
its cash flow needs without relying on short-term seasonal borrowing.
Provisions prohibiting the State from returning to a reliance upon cash flow
manipulation to balance its budget will remain in bond covenants until the
LGAC bonds are retired.
Financing Activities. State financing activities include general obligation
debt of the State and State-guaranteed debt, to which the full faith and
credit of the State has been pledged, as well as lease-purchase and
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contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.
As of March 31, 1998, the total amount of outstanding general obligation
debt was approximately $5.033 billion, including $293.6 million in Bond
Anticipation Notes. The total amount of moral obligation debt was
approximately $1.390 billion (down from $3.272 as of March 31, 1997), and
$24.015 billion of bonds issued primarily in connection with lease-purchase
and contractual-obligation financing of State capital programs were
outstanding.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurring of debt which
apply to the State itself, and may issue bonds and notes within the amounts
of, and as otherwise restricted by, their legislative authorization. As of
December 31, 1997, there were 17 public authorities that had outstanding debt
of $100 million or more, and the aggregate outstanding debt, including
refunding bonds, of all State public authorities was $84 billion, up from
$75.4 billion as of September 30, 1996. The State's access to the public
credit markets could be impaired and the market price of its outstanding debt
may be adversely affected if any of its public authorities were to default in
their respective obligations.
Ratings. Currently, Moody's and Standard & Poor's rate the State's
outstanding general obligation bonds A2 and A, respectively. Standard & Poor's
revised its ratings upward from A- to A on August 28, 1997. Ratings reflect
only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency
furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings may have an effect on the market price
of the New York State Municipal Securities in which the Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and
other alleged violations of State and Federal laws. State programs are
frequently challenged on State and Federal constitutional grounds. Adverse
developments in legal proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced State Financial Plan in
any given fiscal year. There can be no assurance that an adverse decision in
one or more legal proceedings would not exceed the amount the State reserves
for the payment of judgments or materially impair the State's financial
operations. In its audited financial statements for the fiscal year ended
March 31, 1997, the State reported its estimated liability for awarded and
anticipated unfavorable judgments at $364 million.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1998-1999 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1998-1999 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers
Board") by the State in 1984. The Yonkers Board is charged with oversight of
the fiscal affairs of Yonkers. Future actions taken by the Governor or the
State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
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APPENDIX H
ECONOMIC AND FINANCIAL CONDITIONS IN NORTH CAROLINA
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF NORTH CAROLINA AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. THESE FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE
OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF NORTH CAROLINA ISSUERS;
HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE
FUND HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.
The State of North Carolina (the "State") has three major operating funds:
the General Fund, the Highway Fund and the Highway Trust Fund. The State
derives most of its revenue from taxes, including individual income tax,
corporation income tax, sales and use taxes, corporation franchise tax,
alcoholic beverage tax, insurance tax, inheritance tax, tobacco products tax
and soft drink tax (currently being phased out). The State receives other non-
tax revenues which are also deposited in the General Fund. The most important
are Federal funds collected by State agencies, university fees and tuitions,
interest earned by the State Treasurer on investments of General Fund moneys
and revenues from the judicial branch. The proceeds from the motor fuel tax,
highway use tax and motor vehicle license tax are deposited in the Highway
Fund and the Highway Trust Fund.
Fiscal year 1996 ended with a positive General Fund balance of approximately
$573.4 million. An additional $153.1 million was available from a reserved
fund balance. Of this aggregate amount, $77.3 million was reserved in a
Savings Reserve (bringing the total reserve to $500.9 million) and $130.0
million was reserved in a Reserve for Repair and Renovation of State
Facilities (bringing the total reserve to $151.3 million after prior
withdrawals). An additional $47.1 million was transferred to a newly-created
Clean Water Management Trust Fund, $39.5 million was reserved in a Capital
Improvement Reserve and $26.2 million was transferred to newly-created Federal
Retiree Refund and Administration Accounts, leaving an unrestricted General
Fund balance at June 30, 1996 of approximately $406.1 million.
Fiscal year 1997 ended with a positive General Fund balance of approximately
$874.8 million. Along with additional reserves, $135 million was reserved in
the Reserve for Repair and Renovation of State Facilities, in addition to a
supplemental reserve of $39.3 million for repairs and renovations (bringing
the total reserve to $221.2 million after prior withdrawals). An additional
$49.4 million was transferred to the Clean Water Management Trust Fund
(bringing the total reserve to $49.4 million after prior withdrawals) and $115
million and $156 million were reserved in newly-created Disaster Relief and
Intangible Tax Refund Reserves, respectively. The Disaster Relief Reserve was
used to cover disaster relief funds spent during fiscal year 1997. An
additional $61 million was reserved for the State to acquire the shares of the
North Carolina Railroad Company not held by the State. No additional amounts
were transferred to the Savings Reserve for the year (the existing balance of
$500.9 million having met the statutory reserve requirements). After
additional reserves, the unreserved General Fund balance at the end of fiscal
year 1997 was approximately $318.7 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles. Based on a modified accrual basis,
the General Fund balance at June 30, 1996 and 1997 was $1,422.1 million and
$1,703.9 million, respectively.
On August 28, 1997, the North Carolina General Assembly adopted the biennium
budget for 1997 to 1999. The $11.4 billion budget for fiscal 1998 included a
7.6% increase in spending over the fiscal year 1997 budget. Highlights of the
new budget included increased spending for education, with $181 million in
funding for teacher pay raises averaging 6.5% and $92 million to implement the
newly-enacted Excellent Schools Act, which raises teacher salaries to the
national average over four years and requires teachers at low-performing
schools to pass competency tests. Money was also reserved for schools that
achieve or surpass academic goals, school technology funds, new school buses,
staff development programs, community college job training programs, and other
education purposes. The General Assembly also passed a welfare reform program,
adopted a streamlined
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process for cleaning up brownfields for reuse as industrial and commercial
sites, and cut the North Carolina sales tax on food by 1% beginning in 1998.
The General Assembly adjusted downward the General Fund appropriation
support for the continuation budgets by $425.4 million and $242.2 million in
fiscal years 1998 and 1999, respectively, and authorized continuation funding
of $10,439.4 million for fiscal year 1998 and $10,957.5 million for fiscal
year 1999. The adjustments included reductions of expenditures resulting from
supporting revenue sources being reclassified from tax and nontax revenues to
departmental receipts, increases in departmental receipts and federal
receipts, reductions of projected operating costs, and other efficiencies and
savings. Increases of $798.7 million for fiscal year 1998 and $574.5 million
for fiscal year 1999 were approved for operating budgets.
Under the State's constitutional and statutory scheme, the Governor is
required to prepare and propose a biennial budget to the General Assembly. The
General Assembly is responsible for considering the budget proposed by the
Governor and enacting the final budget. In enacting the final budget, the
General Assembly may modify the budget proposed by the Governor as it deems
necessary. The Governor is responsible for administering the budget enacted by
the General Assembly.
The State budget is based upon a number of existing and assumed State and
non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and the
activities of the State's General Assembly. Such factors are subject to change
which may be material and affect the budget. The Congress of the United States
is considering a number of matters affecting the Federal government's
relationship with state governments that, if enacted into law, could affect
fiscal and economic policies of the states, including the State.
During recent years, the State has moved from an agricultural to a service
and goods-producing economy. According to the North Carolina Employment
Security Commission (the "Employment Security Commission"), in July 1997, the
State ranked tenth among the states in non-agricultural employment and eighth
in manufacturing employment. The Employment Security Commission estimated the
State's seasonally adjusted unemployment rate in April 1998 to be 3.5% of the
labor force, as compared with an unemployment rate of 4.3% nationwide.
The following are certain cases pending in which the State faces the risk of
either a loss of revenue or an unanticipated expenditure which, in the opinion
of the Department of State Treasurer, would not materially adversely affect
the State's ability to meet its financial obligations.
Bailey case--State Tax Refunds--State Retirees. On May 8, 1998, in Bailey,
et. al. v. State of North Carolina, the North Carolina Supreme Court held that
the act of the General Assembly that repealed a tax exemption on State and
local government retirement benefits was an unconstitutional impairment of
contract and a taking of property without just compensation. Accordingly,
retirement benefits that were vested before August 1989 were held to be exempt
from State income taxation. In addition, the North Carolina Supreme Court
ruled that recovery of taxes previously paid by retirees on those benefits was
not limited to retirees who paid the tax under protest or requested a refund
within the time periods specified by statute.
Potential refunds and interest are estimated by the State to be $352.68
million through December 31, 1997, with respect to refunds, and through June
30, 1998, with respect to interest. Until this matter is resolved, any
additional potential refunds and interest will continue to accrue. In addition
to refunds and interest, the State will be unable to continue to tax the
applicable retirement benefits, thus reducing future revenue. The case was
remanded by the North Carolina Supreme Court for administration and further
orders to carry out the decision. Under the initial order of the trial judge,
the State would offset its liabilities to improperly taxed retirees by
allowing tax credits to eligible retirees to be applied against future State
income taxes, or in the case of eligible retirees who are deceased, no longer
residents of the State, or who have no tax liability, to be paid in whole to
such retirees or their estates.
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Patton Case--Federal Retirees. Federal retirees in Patton, et. al. v. State
of North Carolina, filed a class action suit in Wake County Superior Court in
1995 seeking monetary relief for taxes paid since 1989. This case was brought
in anticipation of a favorable outcome for the plaintiffs in the Bailey case.
The federal retirees allege that a result in the Bailey case that exempts
State and local retirement benefits from State income taxes would require a
similar exemption for federal retirement benefits under the United States
Supreme Court's 1989 decision in Davis v. Michigan. In Davis, the United
States Supreme Court ruled that a Michigan income tax statute that taxed
federal retirement benefits while exempting those paid by state and local
governments violated the constitutional doctrine of intergovernmental tax
immunity. At the time of the Davis decision, North Carolina law contained
similar exemptions in favor of state and local retirees. Those exemptions were
repealed prospectively, beginning with the 1989 tax year by the act of the
General Assembly held unconstitutional in Bailey. The Patton case was being
held in abeyance pending the outcome in Bailey. Now that Bailey has been
decided, the case is expected to proceed. Potential refunds and interest have
been estimated by the State to be $585.09 million through June 30, 1997. Until
this matter is resolved, any additional potential refunds and interest have
continued and will continue to accrue.
Smith Case--This class action, Smith et. al. v. State of North Carolina, is
related to litigation in Fulton Corporation v. Faulkner, a case filed by a
single taxpayer and decided by the United States Supreme Court in 1996
regarding the constitutionality of certain taxes previously collected by the
State on intangible personal property. The remaining class of plaintiffs in
this action consist of taxpayers who paid the tax in question, but failed to
comply with the North Carolina tax refund statute. On February 21, 1996, the
United States Supreme Court held in Fulton that the State's intangibles tax on
shares of stock in non-North Carolina corporations (by then repealed) violated
the Commerce Clause of the United States Constitution because it discriminated
against stock issued by corporations that do all or part of their business
outside of North Carolina.
In June 1997 the trial court dismissed the claims of this class of
plaintiffs. An appeal of the dismissal is now pending before the North
Carolina Supreme Court. The principal issue in the appeal is whether the
plaintiffs are entitled to a refund on the intangibles tax paid,
notwithstanding their failure to comply with the requirements of the tax
refund statute. A second class action was filed in January 1998 by the same
plaintiffs, claiming an entitlement to a refund under a separate theory. The
plaintiffs claim that they are entitled to refunds of $80 million for tax year
1990 and $131.75 million for tax years 1991-94.
In its 1996 Short Session, the North Carolina General Assembly approved
State general obligation bonds in the amount of $950 million for highways and
$1.8 billion for schools. These bonds were approved by the voters of the State
in November 1996. In March, 1997, the State issued $450 million of the
authorized school bonds (Public School Building Bonds). In November 1997, the
State issued $250 million of the authorized highway bonds (Highway Bonds). In
March 1998, the State issued an additional $450 million of the authorized
school bonds (Public School Building Bonds). The offering of the remaining
$1.6 billion of these authorized bonds is anticipated to occur over the next
two to five years.
Currently, Moody's, Standard & Poor's and Fitch IBCA rate North Carolina
general obligation bonds Aaa, AAA, and AAA, respectively.
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APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN OHIO
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF OHIO AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION
OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED
PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE OFFERING
STATEMENTS RELATING TO DEBT OFFERINGS OF OHIO ISSUERS, HOWEVER, IT HAS NOT
BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE FUND HAS NOT
INDEPENDENTLY VERIFIED THE INFORMATION.
The State of Ohio (the "State") operates on a fiscal biennium for its
appropriations and expenditures. The State finances the majority of its
operations through the State's General Revenue Fund (the "GRF"). The GRF is
funded mainly by the State's personal income tax, sales and use tax, various
other taxes and grants from the Federal government. The State is precluded by
law from ending a fiscal year or a biennium in a deficit position. In 1981,
the State created the Budget Stabilization Fund (the "BSF") for purposes of
cash management.
The GRF ending fund and cash balances for the State's 1984-85 through 1996-
97 bienniums were as follows:
<TABLE>
<CAPTION>
ENDING FUND ENDING CASH
BEGINNING ENDING BALANCE BALANCE
BIENNIUM JULY 1 JUNE 30 (IN THOUSANDS) (IN THOUSANDS)
-------- --------- ------- -------------- --------------
<S> <C> <C> <C> <C>
1984-85................... 1983 1985 $297,600 $ 849,900
1986-87................... 1985 1987 226,300 632,700
1988-89................... 1987 1989 475,100 784,268
1990-91................... 1989 1991 135,365 326,576
1992-93................... 1991 1993 111,013 393,634
1994-95................... 1993 1995 928,000 1,312,200
1996-97................... 1995 1997 834,900 1,400,000
</TABLE>
State and national fiscal uncertainties during the 1992-93 biennium required
several actions to achieve GRF positive ending balances. To allow time to
complete the resolution of differences, an interim appropriations act was
enacted effective July 1, 1991; the general appropriations act for the entire
biennium was then passed on July 11 and signed by the Governor of the State on
July 26 and included a $200 million transfer from the BSF to the GRF. In
Fiscal Year 1992, when the State's Office of Budget and Management ("OBM")
projected an imbalance in GRF resources and expenditures, the Governor ordered
most State agencies to reduce GRF appropriations spending in the final six
months of Fiscal Year 1992 by a total of approximately $184 million. (Debt
service and lease rental obligations were not affected by the order.) Then,
with General Assembly authorization, in June 1992 the entire $100.4 million
BSF balance and additional amounts from certain other funds were transferred
to the GRF. Other revenue and spending actions resolved the remaining GRF
imbalance for Fiscal Year 1992.
As a first step toward addressing a projected Fiscal Year 1993 GRF
shortfall, then estimated by OBM at approximately $520 million, the Governor
ordered, effective July 1, 1992, selected reductions in Fiscal Year 1993 GRF
appropriations spending totaling $300 million. Appropriations for debt service
(including lease rental appropriations) were expressly excluded from the
Governor's cutback orders. Subsequent executive and legislative actions--
including tax revisions that produced an additional $194.5 million and
additional appropriations spending reductions totalling approximately $50
million--provided for positive biennium-ending GRF balances. As a first step
toward BSF replenishment, $21 million was deposited in the BSF.
The GRF budget for the 1994-95 biennium provided for total GRF expenditures
of approximately $30.7 billion, with Fiscal Year 1994 expenditures 9.2% higher
than in Fiscal Year 1993, and Fiscal Year 1995 expenditures 6.6% higher than
in Fiscal Year 1994. As noted above, the GRF ended the 1994-95 biennium with a
fund balance of $928 million and cash balance of $1,312.2 million. As an
additional step toward BSF replenishment, OBM transferred $260.3 million to
the BSF at the end of Fiscal Year 1994 and $535.2 million in July 1995.
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For the 1996-97 biennium, GRF appropriations approximated $33.5 billion. At
the end of Fiscal Year 1996, the following transfers were made from the GRF:
$100 million for elementary and secondary school computer network purposes,
$30 million for a new transportation infrastructure fund, and $400.8 million
for temporary personal income tax reductions. At the end of the biennium, the
GRF had fund and cash balances of $834.9 million and $1,400 million,
respectively, which allowed $250 million to be applied to school building
construction and renovation, $94.4 million for a school computer network,
$44.2 million for school textbooks and instructional materials and a distance
learning program, $34.4 million to be transferred to the BSF, and the $262.9
million balance to an income tax reduction fund.
The General Appropriations Act for the 1998-99 biennium, passed by the
General Assembly and, with selected vetoes, approved by the Governor in June
1997, provides for total GRF biennial expenditures of approximately $36.1
billion, an increase of 7.8% over the previous appropriations act. The Act
increases spending for primary and secondary education, higher education, and
rehabilitation and corrections, and provides for a 4.5% personal income tax
reduction in 1998. Legislation passed in the spring of 1998 increased the GRF
Fiscal Year 1999 appropriation level for elementary and secondary education,
with the increase to be funded in part by mandated small (0.5-3%) percentage
reductions in State appropriations for various State agencies and
institutions; expressly exempt from those deductions are all appropriations
for debt service including lease rental payments.
As of the end of April 1998, the GRF had a cash balance of $613.6 million,
and the BSF had a fund balance of $862.7 million.
Litigation pending in federal district court and in the Ohio Court of Claims
contests the Ohio Department of Human Services' ("ODHS") former Medicaid
financial eligibility rules for married couples where one spouse is living in
a nursing facility and the other spouse resides in the community. ODHS
promulgated new eligibility rules effective January 1, 1996. It is appealing
an order of the Federal court directing it to provide notice to persons
potentially affected by the former rules from 1990 through 1995. It is not
possible at this time to state whether this appeal will be successful or,
should plaintiffs prevail, the period, beyond the current fiscal year, during
which necessary additional Medicaid expenditures would have to be made.
Plaintiffs have estimated total additional Medicaid expenditures at $600
million for the retroactive period and, based on current law, it is estimated
that the State's share of those additional expenditures is approximately $240
million. The Court of Claims has certified the action as a class action.
Because the schedule of GRF cash receipts and disbursements do not precisely
coincide, temporary GRF cash flow deficiencies may occur in some months of a
Fiscal Year. Statutory provisions provide for effective management of these
temporary GRF cash deficiencies by permitting the adjustment of payment
schedules and the use of a "Total Operating Fund" (the "TOF"). The State has
not and does not do external revenue anticipation borrowing.
The TOF includes the total consolidated cash balances, revenues,
disbursements and transfers of the GRF and several other specified funds
(including the BSF). The TOF cash balance at April 30, 1998 was $5.7377
billion. Those cash balances are consolidated only for the purpose of meeting
cash flow requirements, and, except for the GRF, a positive cash balance must
be maintained for each discrete fund included in the TOF. The GRF is permitted
to incur a temporary cash deficiency by drawing upon the available
consolidated cash balance in the TOF. The amount of that permitted GRF cash
deficiency at any time is limited to 10% of GRF revenues for the then
preceding Fiscal Year (raised from 7% by December 1992 legislation in order to
better avoid the need for even short delays in payments).
The State has encountered (and planned for) some monthly GRF cash flow
deficiencies in all recent Fiscal Years. For example, GRF cash flow
deficiencies have ranged from occurring in 10 months of Fiscal Year 1992 (with
$743,140,000 being the highest) to four months in Fiscal Year 1995 (the
highest being $337,964,000). OBM reports the GRF had cash flow deficiencies in
seven months of Fiscal Year 1996 and in four months of Fiscal Year 1997.
Current OBM estimates project cash flow deficiencies for five months of Fiscal
Year 1998.
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All cash flow deficiencies have been within the TOF limitations discussed
above. Often, the GRF balancing steps described above ameliorated deficiencies
in later months of a Fiscal Year, significantly assisting in producing the
projected positive year-end GRF balances.
The State's Constitution directs or restricts the use of certain revenues.
Highway fees and excise taxes, including gasoline taxes, are limited in use to
highway-related purposes including the payment of interest on certain
securities issued for purposes related to the State's highways. Not less than
50% of the receipts from State income and estate and inheritance taxes must be
returned to the political subdivisions and school districts where such
receipts originated. Since 1987 all net State lottery profits are allocated to
elementary, secondary, vocational and special education program purposes.
Under the current financial structure, Ohio's public school districts
receive a major portion (state-wide aggregate approximately 44% in recent
years) of their operating moneys from State subsidy programs (the primary
portion of which is known as the "Foundation Program") distributed in
accordance with statutory formulas that take into account both local needs and
local taxing capacity. The Foundation Program amounts have steadily increased
in recent years, including small aggregate increases even in those Fiscal
Years in which appropriations cutbacks were imposed. The State's
appropriations for school funding in the current 1998-99 biennium total $11.6
billion and represent a 18.3% increase over the preceding biennium. School
districts also rely heavily upon receipts from locally voted taxes. In part
because of provisions of some State laws, some school districts have
experienced varying degrees of difficulty in meeting mandated and
discretionary increased costs.
Litigation, similar to that in other states, has been pending questioning
the constitutionality of Ohio's system of school funding. The Ohio Supreme
Court concluded in a decision released March 24, 1997 that major aspects of
the system (including the Foundation Program and certain borrowing programs)
are unconstitutional. The Court also ordered the State to provide for and fund
sufficiently a system complying with the Ohio Constitution, but staying its
order for one year to allow time for responsive corrective actions by the
General Assembly. In response to a State motion for reconsideration and
clarification, the Court on April 25, 1997 indicated that property taxes may
still play a role in, but "can no longer be the primary means" of, school
funding. The Court also confirmed that contractual repayment provisions of
certain debt obligations issued for school funding will remain valid after the
stay terminates.
As part of its response, the General Assembly has increased State funding
for public schools, as discussed. In addition, the General Assembly placed two
issues on the May 1998 primary ballot. Both were defeated by the voters. One
was a constitutional amendment authorizing additional State debt issuing
capacity and the other an increase in the State sales tax. The constitutional
amendment would have authorized State general obligation debt to pay costs of
school facilities throughout the State and of facilities of state supported
and assisted institutions of higher education. The sales tax proposal would
have increased the State sales and use tax from 5% to 6%, estimated to
generate over $1 billion; one-half of increased revenues would have been
applied to pay costs of school operations and facilities, and the other half
to additional homestead property tax relief.
Federal courts have ruled that the State shared joint liability with the
local school districts for segregation in public schools in Cincinnati,
Cleveland, Columbus, Dayton and Lorain. Subsequent trial court orders directed
that remedial costs be shared equally by the State and the respective local
districts. For that purpose the following amounts have been expended:
$75,752,659 in the 1992-93 biennium; $119,382,294 in the 1994-1995 biennium,
and $144,759,340 in the 1996-97 biennium. $50,400,000 has been appropriated
for Fiscal Year 1998 with additional funds for Fiscal Year 1999. A recent
settlement agreement in one desegregation case is reducing annual state
payments to one district.
The State's Constitution expressly provides that the State General Assembly
has no power to pass laws impairing the obligations of contracts.
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At the present time, the State does not levy any ad valorem taxes on real or
tangible personal property. Local taxing districts and political subdivisions
currently levy such taxes. The State's Constitution limits the amount of the
aggregate levy of ad valorem property taxes, without a vote of the electors or
municipal charter provision, to 1% of true value in money. Statutes also limit
the amount of the aggregate levy, without a vote or charter provision.
Economic activity in the State, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation
as a whole. Although manufacturing (including auto-related manufacturing)
remains an important part of the State's economy, the greatest growth in Ohio
employment in recent years, consistent with national trends, has been in the
nonmanufacturing area. Ohio ranked fourth in the nation in 1991 gross state
product derived from manufacturing. That income was 26.3% of total Ohio gross
state product, compared to 17.1% of that total being from "services". In
addition, agriculture and "agribusiness" continue as important elements of the
Ohio economy. Ohio continues as a major "headquarters" state. Of the top 500
corporations (industrial and service) as reported in 1998 by Fortune magazine,
30 had headquarters in Ohio, placing Ohio fifth as "headquarters" state for
corporations. Payroll employment in Ohio, in the diversifying employment base,
showed a steady upward trend until 1979, then decreased until 1982. It reached
an all-time high in the summer of 1993 after a slight decrease early in 1992
and then decreased slightly, and reached a new high in 1996. Growth in recent
years has been concentrated among nonmanufacturing industries, with
manufacturing employment tapering off since its 1969 peak. Nonmanufacturing
industries now employ approximately 79.0% of all payroll workers (non-
agricultural) in Ohio. Historically, the average monthly unemployment rate in
Ohio has been higher than the average figures for the U.S., although in recent
years, the average unemployment rate in Ohio has been lower than the national
rate. Ohio has been below the national rate through April 1998, as well.
Ohio's 1990 decennial census population of over 10,840,000 indicated a 0.5%
population growth since 1980 and Ohio as ranking seventh among the states in
population. In 1980 it ranked sixth. The State's 1995 population was estimated
at 11,157,000, still seventh in the U.S.
Currently, the State's general obligation bonds are rated Aa1, AA+ and AA+
by Moody's, Standard & Poor's and Fitch IBCA, respectively.
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APPENDIX J
ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE COMMONWEALTH OF PENNSYLVANIA AND DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE
SUMMARY IS BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY
AVAILABLE OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF PENNSYLVANIA
ISSUERS; HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE
YEAR. THE FUND HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to herein as the "Commonwealth") and its political
subdivisions, such as social, environmental and economic conditions, many of
which are not within the control of such entities. Pennsylvania and certain of
its counties, cities and school districts and public bodies (most notably the
City of Philadelphia, sometimes referred to herein as the "City") have from
time to time in the past encountered financial difficulties which have
adversely affected their respective credit standings. Such difficulties could
affect outstanding obligations of such entities, including obligations held by
the Fund.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and Federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
For the five year period from fiscal 1993 through fiscal 1997, revenues and
other sources (determined on a "GAAP" basis) increased by an average annual
rate of 4.7%. Intergovernmental revenues increased by an average annual rate
of 8.5% due, in part, to an accounting change. Tax revenues during this period
increased an average of 4.1% as modest economic growth, low inflation rates
and several tax rate reductions and other tax reduction measures constrained
growth of tax revenues. The tax reduction measure followed a $2.7 billion tax
increase adopted for the 1992 fiscal year.
Expenditures and other uses during the fiscal 1993 through fiscal 1997
period rose at an average annual rate of 4.9%, led by increases of 13.8% for
protection of persons and property. This high rate of increase reflects the
costs to acquire staff and operate expanded prison facilities to house a
larger prison population. Efforts to control costs for various social welfare
programs and the presence of favorable economic conditions have led to a
modest 5.7% increase for public health and welfare costs for the five year
period.
The fund balance at June 30, 1997 totaled $1,364.7 billion, a $729.7 million
increase over the $635.2 million balance at June 30, 1996.
The fiscal 1996 unappropriated surplus (prior to transfer to the Tax
Stabilization Reserve Fund) was $183.8 million, $65.5 million above estimate.
Expenditures and encumbrances from Commonwealth revenues, including $113
million of supplemental appropriations (but excluding pooled financing
expenditures) totaled $16,074.7 million. Expenditures exceeded available
revenues and lapses by $253.2 million. The difference was funded from a
planned partial drawdown of the $437 million fiscal year adjusted beginning
unappropriated surplus.
Commonwealth revenues (prior to tax refunds) for fiscal 1996 increased by
$113.9 million over the prior year to $16,338.5 million (representing a growth
rate of 0.7%). Tax rate reductions and other tax law changes substantially
reduced the amount and rate of revenue growth for the fiscal year. It is
estimated the tax changes enacted for the fiscal year reduced Commonwealth
revenues by $283.4 million.
For GAAP purposes, the fiscal 1996 fund balance was drawn down $53.1 million
to $635.2 million. A planned drawdown of the budgetary unappropriated surplus
during the fiscal year contributed to expenditures and other uses exceeding
revenues and other sources by $28.0 million. As a result, the unreserved fund
balance
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declined by $61.1 million, reducing the balance to $381.8 million at the end
of fiscal 1996. Total revenues and other sources increased by 8.7% for the
fiscal year, led by a 24.2% increase in intergovernmental revenues (due mainly
to an accounting change). Expenditures and other uses increased by 8.6% for
fiscal 1996.
The unappropriated balance of Commonwealth revenues increased during the
1997 fiscal year by $432.9 million to $591.4 million (prior to reserves for
transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal
year. Higher than estimated revenues and slightly lower expenditures than
budgeted caused the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1997 operations were $88.7 million representing the normal fifteen
percent of the ending unappropriated balance, plus an additional $100 million
authorized by the General Assembly when it enacted the fiscal 1998 budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 million (3.4%) above the estimate made at the time
the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1% over tax
revenues in fiscal 1996. This rate of increase was not adjusted for legislated
tax reductions that affected receipts during both of those fiscal years and
therefor understates the actual underlying rate of growth of tax revenue
during fiscal 1997. Non-tax revenues were $19.8 million (5.8%) over estimate
mostly due to higher than anticipated interest earnings.
Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to
the estimate made in February 1997 with the presentation of the Governor's
fiscal 1998 budget request. Total expenditures represent an increase over
fiscal 1996 expenditures of 1.7%. Lapses of appropriation authority during the
fiscal year totaled $200.6 million compared to an estimate of $100 million.
The higher amount of appropriation lapses was used to support an additional
$79.8 million in fiscal 1997 supplemental appropriations over the February
1997 estimate. Supplemental appropriations for fiscal 1997 totaled $169.3
million.
For GAAP purposes, assets increased $563.4 million and liabilities declined
$166.3 million to produce a $729.7 million increase in the fund balance at
June 30, 1997. Total revenues and other services rose 3.5% for fiscal 1997. An
increase of 5.5% in tax revenue aided by an improving state economy was
partially offset by a $175.2 million decline in intergovernmental revenues.
Expenditures and other uses increased by 1% for the fiscal year.
The budget for fiscal 1998 was enacted in May 1997. Commonwealth revenues
for the fiscal year at that time were estimated to be $17,435.4 million before
reserves for tax refunds. That estimate represented an increase over estimated
fiscal 1997 Commonwealth revenues of 1.0%. Although fiscal 1997 revenues
exceeded the estimate, the adopted fiscal 1998 budget revenue estimate remains
unchanged and represents a 0.7% increase over actual fiscal 1997 revenues.
Fiscal 1998 estimates for Commonwealth revenues are based on an economic
forecast for national economic growth to slow through the remainder of
calendar year 1997. A growth rate of just above 1.0% is anticipated to be
maintained for the last two quarters of the fiscal year and result in a 1.2%
growth rate in real gross domestic product for the second calendar quarter of
1998 over the second quarter of 1997. This anticipated rate of economic growth
is a result of anticipated slowing of gains in consumer spending, business
investment and residential housing. Inflation is projected to remain modest
and the unemployment rate is expected to reach 6.0% by the second calendar
quarter of 1998.
The rate of anticipated growth of Commonwealth revenues is also affected by
the enactment of tax reductions and tax revenue dedications effective for the
1998 fiscal year. Excluding these newly enacted changes, revenues are
projected to increase by 2.4% during fiscal 1998. Tax reductions enacted for
the 1998 fiscal year budget totaled an estimated $170.6 million, including
$16.2 million that is reflected in higher projected tax refunds. Major changes
to taxes enacted for fiscal 1998 include: (i) the repeal of the sales and use
tax on computer services ($79.1 million); (ii) an increase in the amount of
income that is exempt from the personal
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income tax for low-income families ($25.4 million); (iii) enactment of a
research and development tax credit program for business ($15.0 million); (iv)
conforming state tax laws to federal laws for subchapter S corporations and
limited liability companies ($16.3 million); and various other miscellaneous
changes.
The reserve for tax refunds for fiscal 1998 has been increased by 21.3% to
$655.0 million. A portion of the additional reserves reflect tax refund
liabilities that are expected to result in cash payments in a subsequent
fiscal year.
Appropriations enacted for fiscal 1998 are 3.7% ($618 million) above
appropriations enacted for fiscal 1997 (including supplemental
appropriations). Major funding increases provided by the fiscal 1998 budget
include: (i) $166 million of appropriations for elementary and secondary
education plus an estimated $51 million in reduced employer retirement
contributions payable by local school districts due a reduction in the
contribution rate; (ii) $42 million for higher education institutions plus $16
million for student scholarships; (iii) $70 million for higher caseload,
utilization, and cost of nursing home care; (iv) $60 million for economic
development assistance through programs providing incentive grants and loans;
and (v) $38 million for corrections including $17 million for operating costs
for new and expended facilities. The balance of the increase is spread over
many other departments and program operations.
Through January, 1998, Commonwealth revenues are $211.4 million or 2.4%
above estimate. In the Governor's proposed fiscal 1999 budget, the estimate of
Commonwealth revenues anticipated for 1998 was increased by $231.1 million.
From a review of expenditure projections for fiscal 1998, $100.6 million of
supplemental appropriations have been identified. The cost of the supplemental
appropriations will be appropriated from an estimated $190 million of
expenditure lapses projected to occur during the fiscal year. The amount of
appropriation lapses over the amount of supplemental appropriations and
estimated additional revenue to be received are projected to permit the fund
to close 1998 with an unappropriated surplus balance of $330.1 million (prior
to transfers to the Tax Stabilization Reserve Fund). According to a
Pennsylvania Department of Revenue release regarding May, 1998 collections,
fiscal year-to-date General Fund collections total $16.4 billion, which is
$576.4 million, or 3.6%, above estimate.
The enacted fiscal 1999 budget for the General Fund is nearly $18 billion,
an increase of $699 million (4%) over fiscal 1998. The budget includes an
estimated $221.8 million in tax reductions. Among the tax reductions included
in the budget is an expansion of tax forgiveness for working families,
provisions excluding gain from the sale of a qualified principal residence
from the personal income tax, a reduction in the capital stock/franchise tax
rate, an extension of the corporate net income tax net operating loss
carryover from three years to ten years, and increase in the job creation tax
credit, various sales and use tax exemption provisions, and various other tax-
related provisions.
Pennsylvania had historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector,
including trade, medical and the health services, education and financial
institutions.
Nonagricultural employment in Pennsylvania over the ten years ending in 1996
increased at an annual rate of 1.03%. This compares to a 0.41% rate for the
Middle Atlantic region and a 1.8% rate for the United States as a whole during
the period 1986 through 1996. For the three years ending in 1996, employment
in the Commonwealth has increased 3.6%, as compared to 3.0% growth in the
Middle Atlantic region. The unemployment rate in Pennsylvania for January 1998
stood at a seasonally adjusted rate of 4.6%. The seasonally adjusted national
unemployment rate for January 1998 was 4.7%.
The current Constitutional provisions pertaining to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate-approved debt,
(iii) debt for capital projects subject to an aggregate debt limit of 1.75
times the annual average tax revenues
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of the preceding five fiscal years and (iv) tax anticipation notes payable in
the fiscal year of issuance. All debt except tax anticipation notes must be
amortized in substantial and regular amounts.
Debt service on all bonded indebtedness of Pennsylvania, except that issued
for highway purposes or the benefit of other special revenue funds, is payable
from Pennsylvania's General Fund, which receives all Commonwealth revenues
that are not specified by law to be deposited elsewhere. As of June 30, 1997,
the Commonwealth had $4,795.1 million of general obligation debt outstanding.
Other state-related obligations include "moral obligations." Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance
Agency (the "PHFA"), an agency of the Commonwealth which provides financing
for housing for lower and moderate income families, and The Hospitals and
Higher Education Facilities Authority of Philadelphia, a municipal authority
organized by the City of Philadelphia to, among other things, acquire and
prepare various sites for use as intermediate care facilities for the mentally
retarded. PHFA's bonds, but not its notes, are partially secured by a capital
reserve fund required to be maintained by PHFA in an amount equal to the
maximum annual debt service on its outstanding bonds in any succeeding
calendar year. PHFA is not permitted to borrow additional funds as long as any
deficiency exists in the capital reserve fund.
The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. Some of those leases and their respective lease payments are, with
the Commonwealth's approval, pledged as security for debt obligations issued
by certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law
to appropriate or otherwise provide monies from which the lease payments are
to be made. The obligations to be paid from such lease payments are not bonded
debt of the Commonwealth.
Certain Commonwealth-created organizations have statutory authorization to
issue debt for which Commonwealth appropriations to pay debt service thereon
are not required. The debt of these organizations is funded by assets of, or
revenues derived from, the various projects financed and is not an obligation
of the Commonwealth. Some of these organizations, however, are indirectly
dependent on Commonwealth operating appropriations. In addition, the
Commonwealth maintains pension plans covering all state employees, public
school employees and employees of certain state-related organizations. For
their fiscal years ended in 1997 the State Employees' Retirement System had no
accrued unfunded liability (or surplus) and the Public School Employees'
Retirement System had a total unfunded actuarial accrued surplus of $1,663
million.
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of the Pennsylvania Intergovernmental
Cooperation Authority (the "PICA") to assist Philadelphia in remedying fiscal
emergencies was enacted by the Pennsylvania General Assembly and approved by
the Governor in June, 1991. PICA is designed to provide assistance through the
issuance of funding debt and to make factual findings and recommendations to
Philadelphia concerning its budgetary and fiscal affairs. At this time,
Philadelphia is operating under a five year fiscal plan approved by PICA on
May 20, 1997.
PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
Cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
The audited General Fund balance of Philadelphia as of June 30, 1997 shows a
surplus of approximately $128.8 million.
No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired
December 31, 1994. PICA's authority to issue debt for the purpose of financing
a cash flow deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,102.4 million in
Special Revenue Bonds outstanding as of December 31, 1997.
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There is various litigation pending against the Commonwealth, its officers
and employees. In 1978, the Pennsylvania General Assembly approved a limited
waiver of sovereign immunity. Damages for any loss are limited to $250,000 for
each person and $1 million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against the
Commonwealth are pending.
The following are among the cases with respect to which the Office of
Attorney General and the Office of General Counsel have determined that, an
adverse decision may have a material effect on government operations of the
Commonwealth:
Baby Neal v. Commonwealth, et al.
In 1990, the American Civil Liberties Union and other various named
plaintiffs filed an action against the Commonwealth in federal court seeking
an order that would require the Commonwealth to provide additional funding for
child welfare services. No figures for the amount of funding sought are
available. A similar lawsuit filed in the Commonwealth Court of Pennsylvania
was resolved through a court approved settlement which provides, among other
things, for more Commonwealth funding for such services in fiscal year 1991
and a commitment to pay Pennsylvania counties $30 million over five years. In
December 1994, the Third Circuit Court of Appeals reversed the District
Court's denial of the plaintiff's motion for class certification in the
federal action with respect to the interests of 16 minor plaintiffs. As a
result, the District Court has recently certified the class and the parties
have resumed discovery.
County of Allegheny v. Commonwealth of Pennsylvania
On December 7, 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system is in conflict with
the Pennsylvania Constitution. However, judgment was stayed in order to afford
the General Assembly an opportunity to enact appropriate funding legislation
consistent with its opinion. On December 7, 1992, the State Association of
County Commissioners filed a new action in mandamus seeking to compel the
Commonwealth to comply with the Supreme Court's decision in County of
Allegheny. The Court issued the writ on July 26, 1996, and appointed a special
master to devise and submit a plan for implementation. Following the issuance
of the writ, the President Pro Tempore of the Senate and the Speaker of the
House filed a petition seeking reconsideration from the Court. On January 28,
1997, the Supreme Court granted an extension of time within which the special
master must file his report and announced the establishment of a committee
comprised of members of the Executive Department, the Legislative Department
and the special master, to develop an implementation plan. On July 26, 1997,
the "Interim Report of the Master" was filed setting forth a state funding
proposal. Objections to the report were due by September 1, 1997. The General
Assembly has yet to consider legislation implementing the Pennsylvania Supreme
Court's judgment.
Fidelity Bank v. Commonwealth of Pennsylvania
On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed an action
challenging the constitutional validity of a 1989 amendment increasing the
bank shares tax and related legislation. The Commonwealth Court ruled in favor
of the Commonwealth finding no constitutional deficiencies in the tax
increase, but invalidating one element of the legislation which provided a
credit to new banks (the "new bank tax credit"). Fidelity, the Commonwealth
and certain intervener banks appealed to the Pennsylvania Supreme Court.
However, pursuant to a Settlement Agreement dated as of April 21, 1995, the
Commonwealth agreed to enter a credit in favor of Fidelity in the amount of
$4,100,000 in settlement of the constitutional and non-constitutional issues.
The credit represents approximately 5% of the potential claim of Fidelity, had
the constitutional issues been resolved in its favor.
Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.
Notwithstanding the foregoing settlements, other banks have filed petitions
challenging the validity of the 1989 tax increase. One of these banks, Royal
Bank of Pennsylvania, filed a stipulation of facts and proceeded
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forward on behalf of the other banks. The issues in these cases include those
which were adjudicated by Fidelity, although not brought to resolution by the
Pennsylvania Supreme Court.
On January 8, 1998, the Commonwealth Court ruled in favor of the
Commonwealth and against Royal Bank, upholding the validity of the tax
increase. Royal Bank of Pennsylvania has filed exceptions to the Commonwealth
Court decision.
Pennsylvania Association of Rural and Small Schools v. Casey
In January 1991, an association of rural and small schools and several other
parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the U.S. District Court for the Middle District of Pennsylvania.
The federal court case has been indefinitely stayed pending resolution of the
state court case. In the state case, trial and post-trial briefing has been
completed and oral argument was heard on September 8, 1997.
On July 9, 1998, Commonwealth Court Judge Dan Pellegrini ruled that the
State formula used to fund public schools is constitutional and does not
discriminate against poor school districts. The petitioners will have 10 days
to file motions challenging the ruling. Otherwise, the case is appealable to
the Pennsylvania Supreme Court.
Austin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the U.S. District Court for the Eastern District of Pennsylvania on
behalf of inmate populations in various Pennsylvania correctional
institutions, challenging the conditions of confinement and seeking injunctive
relief. On January 17, 1995, the Court approved a Settlement Agreement between
the parties, pursuant to which the Commonwealth paid $1.3 million in
attorney's fees to the plaintiffs' attorneys, with an additional $100,000 to
be paid upon dismissal of a preliminary injunction relating to certain health
issues. The parties are presently complying with monitoring provisions
outlined in the Settlement Agreement. The monitoring phase will expire on
January 8, 1998. The attorney's fees for the 3-year monitoring period will not
exceed $60,000 in any one year.
Envirotest Systems Partners
On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
("Envirotest") and the Commonwealth of Pennsylvania entered into a Settlement
Agreement pursuant to which the parties settled all claims which Envirotest
might have against the Commonwealth arising from the suspension of an
emissions testing program. Under the Settlement Agreement, Envirotest is to
receive $145 million, with interest at 6% per annum, in payments of $25
million in 1995 and $40 million each in 1996, 1997 and 1998. An additional $11
million may be required to be paid in 1998 depending on the results of
property liquidations by Envirotest. Pursuant to a Consent to Assignment
entered into in November 1996, Envirotest has assigned its right, title and
interest in the base settlement.
Pennsylvania Human Relations Commission v. School District of Philadelphia, et
al. v. Commonwealth of Pennsylvania, et al.
On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of
Philadelphia, were joined as additional respondents in an enforcement action
commenced in Commonwealth Court in 1973 by the Pennsylvania Human Relations
Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The enforcement action was pursued to remedy
unintentional conditions of segregation in the public schools of Philadelphia.
The Commonwealth and the City were joined in the "remedial phase" of the
proceeding "to determine their liability, if any, to pay additional costs
necessary to remedy the unlawful conditions found to exist in the Philadelphia
public schools."
On February 28, 1996, the School District of Philadelphia filed a third-
party complaint against the Commonwealth of Pennsylvania asking Commonwealth
Court to require the Commonwealth to "supply such funding as is necessary for
full compliance with the November 28, 1994 and other remedial orders of the
Commonwealth Court." In addition, a group of interveners on March 4, 1996
filed a third-party complaint
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against the Commonwealth of Pennsylvania and the City of Philadelphia
requesting Commonwealth Court to declare that "it is the obligation of the
Commonwealth and the City to supply the additional funds identified as
necessary for the District to fully comply with the orders of the Commonwealth
Court," and to require the Commonwealth and the City to supply such additional
funding as is necessary for the District to comply with the orders.
On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the
Commonwealth's and City's preliminary objections seeking dismissal of the
claims against them. The Commonwealth and the City thereafter filed answers to
the complaints, asserting numerous defenses. The Commonwealth also asserted a
cross-claim against the City of Philadelphia claiming that if any party is
liable, sole liability rests with the City; in the alternative, the
Commonwealth argued that if it is held to be liable, it has a right of
indemnity of contribution against the City.
Trial commenced on May 30, 1996. During the course of the trial, upon motion
of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996 assumed
extraordinary plenary jurisdiction and directed Judge Smith to conclude the
proceedings within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion.
On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to
which judgment was entered in favor of the School District of Philadelphia and
the interveners and against the Commonwealth of Pennsylvania and the Governor
of Pennsylvania. Judgment was also entered in favor of the City of
Philadelphia and the Mayor of Philadelphia with respect to the intervener's
claim and on the cross-claim filed by the Commonwealth and Governor. The Judge
ordered the Commonwealth and Governor to submit a plan to the Court within 30
days detailing the means by which the Commonwealth will effectuate the
transfer of additional funds payable to the School District of Philadelphia to
enable it to comply with the remedial order during fiscal year 1996-1997 and
any future years during which the School District establishes its fiscal
incapacity to fund the remedial programs. Judge Smith specifically found that
"[b]ecause of the lack of adequate funds to comply with the remedial order,
the School District is entitled to additional resources for 1996-1997 of $45.1
million."
On August 30, 1996, the Commonwealth filed exceptions to the Findings of
Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a
Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional
Statement.
On September 10, 1996, the Pennsylvania Supreme Court issued an order
granting the Commonwealth's Motion to Vacate and directed its Prothonotary to
establish a briefing schedule and date for oral argument. It also issued a
further order limiting the issues to be addressed and stated that the
Commonwealth Court is divested of jurisdiction of the matter and all further
proceedings in the Commonwealth Court are stayed pending further order of the
Supreme Court. The Supreme Court retained jurisdiction in the matter. On
January 28, 1997, the Supreme Court issued an Order directing the parties to
brief certain specific issues relative to the lower court proceedings.
Ridge v. State Employees' Retirement Board
On December 29, 1993, Joseph H. Ridge, a former judge of the Allegheny Court
of Common Pleas, filed in the Commonwealth Court a Petition for Review in the
Nature of Complaint in Mandamus and for a Declaratory Judgment against the
State Employees' Retirement Board alleging that the use of gender distinct
actuarial factors for benefits based upon his pre-August 1, 1983 service
violates the equal protection and equal rights clauses of the Pennsylvania
Constitution. The lawsuit requests that the petitioner's benefits be "topped
up" to equal those that a similarly situated female would be receiving. A
decision adverse to the Retirement Board could be applicable to other members
of the State Employees' Retirement System and Public School Employees'
Retirement System. The Commonwealth Court granted the Retirement Board's
preliminary objection to Judge Ridge's claims for punitive damages, attorney's
fees and compensatory damages (other than a recalculation of his pension
benefits should he prevail). On November 20, 1996, the Commonwealth Court
heard oral arguments
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en banc on Judge Ridge's motion for judgment of the pleadings. On February 17,
1997, the Commonwealth Court denied Judge Ridge's motion for judgment on the
pleadings.
Yesenia Marrerro, et al. v. Commonwealth, et al.
On February 24, 1997, five residents of the City of Philadelphia, on their
own behalf, and on behalf of their school-aged children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, filed in the Commonwealth Court a civil action for declaratory
judgment against the Commonwealth of Pennsylvania, the General Assembly of
Pennsylvania, the presiding officers of the General Assembly, the Governor of
Pennsylvania, the State Board of Education, the Department of Education, and
the Secretary of Education, claiming that the statutory education financing
system is unconstitutional as applied to the School District of Philadelphia
and that the system of funding public education violates the constitutional
mandate to provide a thorough and efficient system of education in the City of
Philadelphia. The lawsuit also alleges that a scheme for financing public
education precludes the Commonwealth from providing the constitutionally
required "thorough and efficient system of public education" in the
circumstances faced by the School District of Philadelphia, and that the
defendants have failed to provide the School District of Philadelphia with
resources and other assistance necessary to provide all of its students with
the quality of education to which they are constitutionally entitled. Among
other things, the petitioners seek a declaration that the legislature must
amend the present or enact new education legislation so as to assure that
education funding for the School District of Philadelphia accounts and makes
adequate provision for the greater and special educational challenges and
needs of students in the School District in order to address their
disadvantage. The respondents filed preliminary objections seeking dismissal
of the action. After briefs were filed, the Commonwealth Court heard oral
arguments on September 10, 1997. The Court granted respondent's preliminary
objections and dismissed the case on the grounds that the issues it presented
are non-justiciable. An appeal is expected.
Currently, Pennsylvania general obligation bonds are rated AA- by Standard &
Poor's, AA by Fitch IBCA, and Aa3 by Moody's. There can be no assurance that
the economic conditions on which these ratings are based will continue or that
particular bond issues will not be adversely affected by changes in economic
or political conditions.
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APPENDIX K
INFORMATION CONCERNING MUNICIPAL SECURITIES
A. DESCRIPTION OF MUNICIPAL SECURITIES
Municipal Securities include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining of funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to finance various facilities
operated for private profit. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from Federal
income tax.
The two principal classifications of Municipal Securities are "general
obligation" bonds and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the repayment of principal and the payment of interest.
Revenue or special obligation bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as from
the user of the facility being financed. Industrial development bonds are in
most cases revenue bonds and do not generally constitute the pledge of the
credit or taxing power of the issuer of such bonds. The repayment of the
principal of and the payment of interest on such industrial revenue bonds
depends solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. The Fund's
portfolio may include "moral obligation" bonds which are normally issued by
special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its debt service obligations from current revenues, it may draw
on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of a state or municipality.
Yields on Municipal Securities are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Fund invests to meet their obligations for
the payment of interest and the repayment of principal when due. There are
variations in the risks involved in holding Municipal Securities, both within
a particular classification and between classifications, depending on numerous
factors. Furthermore, the rights of holders of Municipal Securities and the
obligations of the issuers of such Municipal Securities may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions
affecting the rights of creditors generally, and such laws, if any, which may
be enacted by Congress or state legislatures affecting specifically the rights
of holders of Municipal Securities.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the ability of the Fund to pay
"exempt-interest dividends" would be affected adversely and the Fund would re-
evaluate its investment objective and policies and consider changes in its
structure. See "Taxes".
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B. RATINGS OF MUNICIPAL SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in 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
payment 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.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established
cash flows"; MIG 2/VMIG2 denotes "high quality" with ample margins of
protection; MIG 3/VMIG3 notes are of "favorable quality . . . but . . .
lacking the undeniable strength of the preceding grades"; MIG 4/VMIG4 notes
are of "adequate quality . . . [p]rotection commonly regarded as required of
an investment security is present . . . there is specific risk."
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DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning 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.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S") MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation, 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 obligors or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's 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 circumstances.
The ratings are based, in varying degrees, on the following considerations:
I.
Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;
II.
Nature of and provisions of the obligation; and
III.
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 Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment
on the obligation is extremely strong.
AA
Debt rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
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A Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still
strong.
BBB Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment to the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
significant speculative characteristics. "BB" indicates the
B least degree of speculation and "C" the highest degree of
speculation. While such bonds will likely have some quality and
CCC protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
CC
C
D Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
A-1
This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2
Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3
Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUED CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
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--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus "+"
designation.
SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3
Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest-preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA'--"BBB' categories; short-term "F1'--
"F3') indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB'--"D'; short-term "B'--"D') either signal a higher probability of default
or that a default has already occurred. Ratings imply no specific prediction
of default probability.
Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch credit and other ratings are not recommendations to buy, sell, or hold
any security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of any payments of any security. The ratings are based on
information obtained from issuers, other obligors, underwriters, their
experts, and other sources Fitch believes to be reliable. Fitch does not audit
or verify the truth or accuracy of such information. Ratings may be changed or
withdrawn as a result of changes in, or the unavailability of, information or
for other reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other
corporate entities and the securities they issue, as well as municipal and
other public finance entities, and securities backed by receivables or other
financial assets, and counterparties. When applied to an entity, these long-
and short-term ratings assess its general creditworthiness on a senior basis.
When applied to specific issues and programs, these ratings take into account
the relative preferential position of the holder of the security and reflect
the terms, conditions, and covenants attaching to that security.
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as
well as developments in the economic and political environment that might
affect the issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
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liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization, as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the "DDD'
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure.
Variable rate demand obligations and other securities which contain a demand
feature will have a dual rating, such as "AAA/F1+'. The first rating denotes
long-term ability to make principal and interest payments. The second rating
denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
Investment Grade
AAA Highest credit quality. "AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA' ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
Speculative Grade
BB Speculative. "BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change overtime; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. "B' ratings indicate that significant credit risk
is present, but a limit margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic
environment.
CCC High default risk. Default is a real possibility. Capacity for meeting
CC financial commitments is solely reliant upon sustained, favorable
C business or economic developments. A "CC' rating indicates that default
of some kind appears probable. "C' ratings signal imminent default.
DDD Default. Securities are not meeting current obligations and are extremely
DD speculative. "DDD' designates the highest potential for recovery of
D amounts outstanding on any securities involved. For U.S. corporates, for
example, "DD' indicates expected recovery 50%-90% of such outstandings,
and "D' the lowest recovery potential, i.e. below 50%.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
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F2
Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B
Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D
Default. Denotes actual or imminent payment default.
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Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA' long-term
rating category, to categories below "CCC', or to short-term ratings other
than "F1'.
"NR' indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingWatch: Ratings are placed on RatingWatch to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingWatch is typically resolved over a
relatively short period.
K-7
<PAGE>
- -------------------------------------------------------------------------------
CMA ARIZONA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA ARIZONA MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA Arizona Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 31, 1998, the related state-
ments of operations for the year then ended and changes in net assets for each
of the years in the two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Arizona Munic-
ipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with gen-
erally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 5, 1998
FS-1
<PAGE>
<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Arizona-- $ 700 Apache County, Arizona, IDA, IDR (Tucson Electric Power--Springerville
98.1% Project), VRDN, Series C, 3.85% due 12/15/2018 (a) $ 700
10,500 Apache County, Arizona, IDA, PCR (Tucson Electric Power), VRDN, Series A,
3.75% due 5/15/1998 (a)(e) 10,500
Arizona Educational Loan Marketing Corp., Educational Loan Revenue Bonds,
VRDN, AMT, Series A (a):
5,400 3.75% due 3/01/2015 (c) 5,400
3,200 3.75% due 12/01/2020 3,200
2,400 Arizona Health Facilities Authority, Hospital Systems Revenue Bonds (Northern
Arizona Healthcare), VRDN, AMT, Series B, 3.65% due 10/01/2026 (a)(c) 2,400
290 Arizona Health Facilities Authority Revenue Bonds (Arizona Voluntary Hospital
Federation), VRDN, Series B, 3.65% due 10/01/2015 (a)(d) 290
6,000 Cochise County, Arizona, Pollution Control Corp., Solid Waste Disposal
Revenue Bonds (Arizona Electric Power Cooperative, Inc. Project), AMT,
3.55% due 9/01/1998 6,000
Coconino County, Arizona, Pollution Control Corp., Arizona Public Service
Revenue Bonds, VRDN, AMT, Series A (a):
6,710 3.80% due 12/01/2031 6,710
12,600 (Navajo Project), 3.80% due 10/01/2029 12,600
1,850 Coconino County, Arizona, Unified School District No. 1 (Flagstaff), TAN,
Series A, 4.40% due 6/30/1998 1,852
Maricopa County, Arizona, IDA, IDR (Citizens Utility), CP:
1,465 3.55% due 5/12/1998 1,465
7,500 3.60% due 7/09/1998 7,500
Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds, VRDN, AMT (a):
6,200 (Privado Park Apartments Project), Series A, 3.80% due 12/15/2033 6,200
5,200 (Vista Ventana Apartments Project), Series D, 3.80% due 12/15/2033 5,200
Maricopa County, Arizona, Pollution Control Corp., PCR, CP (Southern California
Edison--Palo Verde Project):
2,300 Series D, 3.45% due 6/12/1998 2,300
3,700 Series E, 3.50% due 4/06/1998 3,700
1,200 Series E, 3.55% due 7/14/1998 1,200
Maricopa County, Arizona, School District, TAN:
2,000 No. 06 (Washington Elementary), Series C, 4.60% due 6/30/1998 2,004
1,000 No. 08 (Osborn), UT, Series A, 4.40% due 6/30/1998 1,001
3,000 No. 40 (Glendale), UT, Series B, 4.80% due 6/30/1998 3,007
2,000 No. 66 (Roosevelt Elementary), Series B, 4.80% due 6/30/1998 2,004
4,000 Maricopa County, Arizona, Unified High School District, No. 210 (Phoenix Project
of 1995), UT, Series B, 8% due 7/01/1998 4,040
</TABLE>
Portfolio Abbreviations for CMA Arizona Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TAN Tax Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-2
<PAGE>
<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Arizona Maricopa County, Arizona, Unified School District, TAN:
(continued) $ 5,000 No. 11 (Peoria), UT, Series A, 4.40% due 6/30/1998 $ 5,006
2,000 No. 41 (Gilbert), Series C, 4.60% due 6/30/1998 2,004
3,000 No. 69 (Paradise Valley), Series C, 4.60% due 6/30/1998 3,006
1,000 No. 93 (Cave Creek), UT, Series A, 4.40% due 6/30/1998 1,001
2,500 No. 97 (Deer Valley), UT, Series A, 4.40% due 6/30/1998 2,503
Mohave County, Arizona, IDA, IDR (Citizens Utilities Co. Project), AMT:
5,000 CP, 3.80% due 4/07/1998 5,000
5,400 CP, 3.60% due 5/15/1998 5,400
2,090 VRDN, 3.75% due 5/01/2032 (a) 2,090
4,120 Navajo County, Arizona, IDA, IDR (Citizens Utilities Co. Project), VRDN, AMT,
3.75% due 5/01/2032 (a) 4,120
7,000 Phoenix, Arizona, Civic Improvement Corporation, Wastewater System Lease
Revenue Bonds, VRDN, 3% due 7/01/2003 (a) 7,000
1,000 Phoenix, Arizona, GO, UT, 6.50% due 7/01/1998 1,007
Phoenix, Arizona, IDA, IDR, VRDN, AMT (a):
4,535 (Laich Industries Corp. Project), 3.85% due 9/01/2016 4,535
1,500 Refunding (V.A.W. of America, Inc.), 3.85% due 2/01/2012 1,500
Phoenix, Arizona, IDA, M/F Housing Revenue Bonds, VRDN (a):
3,000 (Heather Ridge Apartments Project), AMT, Series A, 3.80% due 12/15/2037 (f) 3,000
8,420 (Mariners Poinnte Apartments Project), AMT, Series A, 3.95% due 10/01/2023 8,420
4,000 Refunding (Paradise Lakes Apartments Project), 3.85% due 7/01/2025 4,000
7,770 (Sunset Ranch), COP, 3.80% due 12/01/2027 7,770
1,100 Phoenix, Arizona, VRDN, UT, Series 95-2, 3.70% due 6/01/2020 (a) 1,100
Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds, VRDN (a):
1,000 (Brush Wellman Inc., Project), 3.80% due 9/01/2009 1,000
1,650 (Tucson Retirement Center), 3.45% due 1/01/2009 1,650
Pima County, Arizona, IDA, M/F Housing Revenue Bonds, VRDN (a):
1,000 (Quail Ridge Apartments), AMT, Series B, 3.80% due 12/15/2033 1,000
6,790 Refunding (Eastside Place Apartments), 3.75% due 5/01/2027 6,790
5,000 Refunding (La Cholla Apartments Project), 3.70% due 12/01/2025 5,000
Pima County, Arizona, Unified School District, UT, Series A (d):
500 No. 06 (Marana Project of 1997), 3.75% due 7/01/1998 500
1,000 No. 10 (Amphitheater Projects of 1994), 7% due 7/01/1998 1,009
7,100 Pinal County, Arizona, IDA, Hospital Revenue Bonds (Casa Grande Regional
Medical Center), VRDN, 3.70% due 12/01/2022 (a) 7,100
2,700 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corp.),
VRDN, 3.65% due 12/01/2009 (a) 2,700
400 Pinal County, Arizona, IDA, PCR (Newmont Mining Corp.), DATES, VRDN,
3.65% due 12/01/2009 (a) 400
2,380 Santa Cruz County, Arizona, IDA, IDR (Citizens Utilities), CP, 3.55% due 5/12/1998 2,380
5,900 Tempe, Arizona, Excise Tax Revenue Bonds, VRDN, 3.70% due 7/01/2023 (a) 5,900
Yavapai County, Arizona, IDA, IDR (Citizens Utilities), CP, AMT:
100 3.50% due 4/07/1998 100
3,300 3.80% due 4/07/1998 3,300
4,500 3.55% due 8/14/1998 4,500
1,600 Yavapai County, Arizona, IDA, IDR, Refunding (Kachina Pointe Project), VRDN,
3.45% due 1/01/2009 (a) 1,600
</TABLE>
FS-3
<PAGE>
<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Arizona $ 810 Yuma and La Paz Counties, Arizona, Community District, Revenue Refunding
(concluded) Bonds (Arizona Western College), UT, 6.20% due 7/01/1998 (b) $ 815
2,000 Yuma, Arizona, IDA, IDR (Meadowcraft Inc., Project), VRDN, 3.85% due
11/01/2012 (a) 2,000
3,625 Yuma, Arizona, IDA, M/F Housing Revenue Bonds (El Encanto Apartments),
VRDN, Series A, 3.50% due 11/01/2008 (a) 3,625
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank:
1.1% 1,235 CP, 3.10% due 4/09/1998 1,235
1,200 Refunding, VRDN, 3.375% due 12/01/2015 (a)(c) 1,200
Total Investments (Cost--$211,539*)--99.2% 211,539
Other Assets Less Liabilities--0.8% 1,738
--------
Net Assets--100.0% $213,277
========
<FN>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in
effect at March 31, 1998.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)Prerefunded.
(f)FNMA Collateralized.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
</TABLE>
FS-4
<PAGE>
<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$211,539,074) (Note 1a) $ 211,539,074
Cash 52,253
Interest receivable 1,543,955
Prepaid registration fees and other assets (Note 1d) 340,567
--------------
Total assets 213,475,849
--------------
Liabilities:
Payables:
Investment adviser (Note 2) $ 91,550
Distributor (Note 2) 58,040 149,590
--------------
Accrued expenses and other liabilities 49,570
--------------
Total liabilities 199,160
--------------
Net Assets $ 213,276,689
==============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 21,331,822
Paid-in capital in excess of par 191,986,330
Accumulated realized capital losses--net (Note 4) (41,463)
--------------
Net Assets--Equivalent to $1.00 per share based on 213,318,217 shares of
beneficial interest outstanding $ 213,276,689
==============
See Notes to Financial Statements.
</TABLE>
FS-5
<PAGE>
<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium earned $ 6,619,245
Expenses:
Investment advisory fees (Note 2) $ 888,435
Distribution fees (Note 2) 218,259
Registration fees (Note 1d) 58,957
Professional fees 50,484
Accounting services (Note 2) 39,972
Transfer agent fees (Note 2) 24,502
Custodian fees 16,478
Amortization of organization expenses (Note 1d) 6,503
Pricing fees 3,394
Trustees' fees and expenses 1,289
Other 559
--------------
Total expenses 1,308,832
--------------
Investment income--net 5,310,413
Realized Loss on Investments--Net (Note 1c) (5,210)
--------------
Net Increase in Net Assets Resulting from Operations $ 5,305,203
==============
See Notes to Financial Statements.
</TABLE>
FS-6
<PAGE>
<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 5,310,413 $ 4,215,621
Realized loss on investments--net (5,210) (29,558)
-------------- --------------
Net increase in net assets resulting from operations 5,305,203 4,186,063
-------------- --------------
Dividends to Shareholders (Note 1e):
Investment income--net (5,310,413) (4,215,621)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (5,310,413) (4,215,621)
-------------- --------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 823,452,683 811,252,304
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) 5,310,334 4,215,615
-------------- --------------
828,763,017 815,467,919
Cost of shares redeemed (785,032,055) (783,407,673)
-------------- --------------
Net increase in net assets derived from beneficial interest transactions 43,730,962 32,060,246
-------------- --------------
Net Assets:
Total increase in net assets 43,725,752 32,030,688
Beginning of year 169,550,937 137,520,249
-------------- --------------
End of year $ 213,276,689 $ 169,550,937
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.05% 2.86% 3.35% 2.83% 1.90%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .74% .76% .58% .54% .59%
======== ======== ======== ======== ========
Expenses .74% .76% .77% .85% .98%
======== ======== ======== ======== ========
Investment income--net 2.99% 2.80% 3.27% 2.84% 1.89%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $213,277 $169,551 $137,520 $103,717 $ 73,414
======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
FS-7
<PAGE>
CMA ARIZONA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA Arizona Municipal Money Fund (the "Fund") is part of CMA Multi-
State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company Act of 1940,
FS-8
<PAGE>
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the Fund. The
distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares
of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the
administrative and operational services rendered to the Fund
by MLPF&S in processing share orders and administering shareholder
accounts.
CMA ARIZONA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $41,000, of which $6,000 expires in 2004, $30,000
expires in 2005 and $5,000 expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
FS-9
<PAGE>
- -------------------------------------------------------------------------------
CMA CALIFORNIA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA CALIFORNIA MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA California Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 31, 1998, the related state-
ments of operations for the year then ended and changes in net assets for each
of the years in the two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA California Mu-
nicipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with gen-
erally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 8, 1998
FS-10
<PAGE>
- -------------------------------------------------------------------------------
CMA California Municipal Money Fund
Schedule of Investments as of March 31, 1998 (In Thousands)
===============================================================================
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note la)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California-- $ 13,000 Abag Finance Authority for Nonprofit Corporations, California
93.0% (University of California Project), VRDN, 3.60% due 12/01/2001 (a).......... $13,000
10,435 California HFA, M/F Housing Revenue Bonds, VRDN, AMT, Series III-C,
3.55% due 8/01/2039 (a)..................................................... 10,435
4,740 California HFA, Revenue Bonds, COP, VRDN, UT, Series STP-249,
3.70% due 8/01/2028 (a)..................................................... 4,740
California Health Facilities Financing Authority Revenue Bonds, VRDN (a):
2,100 (Adventist Hospital), Series B, 3.35% due 9/01/2028 (b)............... 2,100
13,840 (Pooled Loan Program), Series 85-B, 3.40% due 10/01/2010 (c).......... 13,840
2,300 (Pooled Loan Program), Series A, 3.40% due 6/01/2007.................. 2,300
3,600 Refunding (Sutter Health Hospital), Series B, 3.60%
due 7/01/2012 (d)..................................................... 3,600
14,850 Refunding (Sutter Health Hospital), Series C, 3.60%
due 7/01/2022 (e)..................................................... 14,850
6,600 (Scripps Memorial Hospital), Series A, 3.40% due 12/01/2005 (b)....... 6,600
8,530 (Scripps Memorial Hospital), Series B, 3.40% due 12/01/2015 (b)....... 8,530
5,600 California Pollution Control Financing Authority, Environmental
Improvement Revenue Bonds (Atlantic), VRDN, 3.65% due 12/01/2032 (a)........ 5,600
California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric):
5,200 CP, Series D, 3.45% due 5/08/1998..................................... 5,200
8,100 CP, Series E, 3.35% due 5/01/1998..................................... 8,100
23,000 CP, Series E, 3.25% due 5/12/1998..................................... 23,000
5,900 CP, Series E, 3.40% due 7/14/1998..................................... 5,900
11,400 VRDN, AMT, Series D, 3.60% due 1/01/2010 (a).......................... 11,400
5,000 VRDN, Series F, 3.60% due 11/01/2026 (a).............................. 5,000
California Pollution Control Financing Authority, PCB (Southern
California Edison Co.), CP:
8,000 Series A, 3.65% due 2/28/2008......................................... 8,000
13,000 Series B, 3.65% due 2/28/2008......................................... 13,000
8,700 Series C, 3.65% due 2/28/2008......................................... 8,700
15,700 Series D, 3.40% due 6/15/1998......................................... 15,700
California Pollution Control Financing Authority, Resource
Recovery Revenue Bonds, VRDN, AMT (a):
3,300 (Atlantic Richfield Company Project), Series A, 3.70%
due 12/01/2024........................................................ 3,300
9,900 (Delano Project), 3.70% due 8/01/2019................................. 9,900
11,900 (Delano Project), 3.70% due 8/01/2019................................. 11,900
22,200 (Delano Project), Series 1991, 3.70% due 8/01/2019.................... 22,200
7,800 (Honey Lake Power Project), 3.70% due 9/01/2018....................... 7,800
15,400 Refunding (Ultra Power Malaga Project), Series A, 3.70%
due 4/01/2017......................................................... 15,400
4,300 Refunding (Ultra Power Malaga Project), Series B, 3.70%
due 4/01/2017......................................................... 4,300
15,200 Refunding (Ultra Power Rocklin Project), Series A, 3.70%
due 6/01/2017......................................................... 15,200
8,600 Refunding (Ultra Power Rocklin Project), Series B, 3.70%
due 6/01/2017......................................................... 8,600
6,700 California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Martinez Refining), VRDN, AMT, Series A,
3.60% due 10/01/2031 (a).................................................... 6,700
==================================================================================================================================
</TABLE>
Portfolio Abbreviations for CMA California Municipal Money Fund
ACES(SM) Adjustable Convertible Extended Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Financing Agency
IDR Industrial Development Revenue Bonds
M/F Multi-Family
MSTR Municipal Securities Trust Receipts
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
TAN Tax Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-11
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Schedule of Investments as of March 31, 1998 (Continued) (in Thousands)
================================================================================
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California $ 25,000 California Public Capital Improvements Financing Authority Revenue Bonds
(continued) (Pooled Loan Project), Series D, 3.60% due 6/15/1998 ...................... $ 25,000
California State Economic Development Financing Authority, IDR, VRDN (a):
4,000 (Harvel Plastics Inc. Project), 3.90% due 3/01/2010 ................. 4,000
5,000 (Kuhnash Properties/Arkay Project), AMT, 3.65% due 4/01/2017 ........ 5,000
94,675 California State, GO, CP, 4.50% due 6/30/1998 94,852
California State, MSTR, VRDN (a):
8,700 Series SGA 58, 3.70% due 6/01/2026 (c) .............................. 8,700
4,470 Series SGA 72, 3.70% due 6/01/2017 (c) .............................. 4,470
1,000 Series SGB 15, 3.70% due 8/01/2019 .................................. 1,000
6,235 California State, VRDN, UT, Series 1996 SG-84, 3.70% due 3/01/2020 (a)(e) . 6,235
California Statewide Community Development Authority, M/F Revenue Bonds,
VRDN, AMT (a):
10,000 (Canyon Creeks Apartments), Series C, 3.50% due 8/15/2025 (f) ....... 10,000
3,660 (Greenback Manor Apartments), Series A, 3.70% due 2/01/2028 ......... 3,660
4,200 (Kimberly Woods), Series B, 3.50% due 6/15/2025 (f) ................. 4,200
1,900 California Statewide Community Development Authority Revenue Bonds,
COP (Saint Joseph's Health Systems Group), VRDN, 3.60% due 7/01/2024 (a) .. 1,900
10,300 California Statewide Community Development Authority Solid Waste
Facilities Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT,
3.70% due 12/15/2024 (a) .................................................. 10,300
116,000 California Transportation Finance Authority, VRDN, 3.60%
due 10/01/2027 (a)(e) ..................................................... 116,000
Chula Vista, California, IDR, Refunding (San Diego Gas and Electric Co.),
VRDN, AMT (a):
13,500 Series A, 3.70% due 3/01/2023 ....................................... 13,500
17,200 Series B, 3.70% due 12/01/2021 ...................................... 17,200
Chula Vista, California, IDR (San Diego Gas & Electric Co.), CP, AMT,
Series D:
10,000 3.25% due 4/01/1998 ................................................. 10,000
20,000 3.55% due 6/10/1998 ................................................. 20,000
20,000 3.35% due 6/12/1998 ................................................. 20,000
10,000 3.50% due 7/14/1998 ................................................. 10,000
10,000 Contra Costa County, California, CP, 3.15% due 4/01/1998 .................. 10,000
Eagle Tax-Exempt Trust, VRDN (a):
14,800 California HFA, M/F, Series 1994 C-7, 3.62% due 8/01/2023 ........... 14,800
9,300 California State, Series 95, Class 0151, 3.62% due 11/01/2020 ....... 9,300
9,500 California State, Series 95, Class 0501, 3.43% due 2/01/2006 ........ 9,500
15,300 Series 1994 C-6, 3.62% due 8/01/2017 ................................ 15,300
East Bay, California, Municipal Utility District, Wastewater Treatment
System Revenue Bonds, CP:
13,800 3.35% due 6/10/1998 ................................................. 13,800
7,550 3.45% due 6/11/1998 ................................................. 7,550
18,600 3.40% due 7/14/1998 ................................................. 18,600
7,050 Fontana, California, M/F Housing Revenue Bonds (Springtime Apartments
Project), VRDN, Series A, 3.70% due 12/01/2016 (a) ........................ 7,050
12,150 Fremont, California, Unified School District (Alameda County), MSTR, VRDN,
UT, Series SGA-37, 3.65% due 8/01/2020 (a)(b) ............................. 12,150
Golden Empire Schools Financing Authority, California, Revenue Refunding
Bonds, VRDN (a):
8,800 (Golden Empire Project), Series B, 3.45% due 12/01/2024 ............. 8,800
11,100 (Kern High School District), Series A, 3.45% due 12/01/2024 ......... 11,100
6,620 Highland, California, Redevelopment Agency, M/F Housing Revenue Bonds
(Jeffery Court Senior Apartments), VRDN, 3.65% due 3/01/2028 (a) .......... 6,620
</TABLE>
FS-12
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Schedule of Investments as of March 31, 1998 (Continued) (in Thousands)
================================================================================
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California $ 20,000 Kern County, California, Superintendent of Schools, COP, VRDN, Series A,
(continued) 3.65% due 12/01/2021 (a) .................................................. $ 20,000
18,985 Loma Linda, California, M/F Housing Revenue Bonds (Loma Linda Springs
Apartments), VRDN, 3.40% due 7/01/2019 (a) ................................ 18,985
Long Beach, California, Harbor Revenue Bonds, CP, AMT, Series A:
17,000 3.55% due 6/10/1998 ................................................. 17,000
16,500 3.60% due 6/19/1998 ................................................. 16,500
25,000 Long Beach, California, TRAN, 4.50% due 10/08/1998 ........................ 25,086
3,000 Los Angeles, California, Department of Airports, Airport Revenue
Municipal Trust Bonds, VRDN, AMT, Series SG-61, 3.67%
due 5/15/2020 (a)(c) ...................................................... 3,000
Los Angeles, California, Department of Water and Power Revenue Bonds, CP:
24,700 3.20% due 4/01/1998 ................................................. 24,700
10,000 3.20% due 5/01/1998 ................................................. 10,000
7,200 3.30% due 5/14/1998 ................................................. 7,200
4,900 3.30% due 6/12/1998 ................................................. 4,900
20,000 3.40% due 6/15/1998 ................................................. 20,000
11,000 3.50% due 7/14/1998 ................................................. 11,000
4,300 3.55% due 7/14/1998 ................................................. 4,300
4,005 Los Angeles, California, Department of Water and Power, Revenue Bonds
(Electric Plant), MSTR, VRDN, Series SGA-6, 3.65% due 11/15/2019 (a) ...... 4,005
5,000 Los Angeles, California, Harbor Department Revenue Bonds, VRDN, AMT,
Series SG-59, 3.67% due 8/01/2026 (a)(b) .................................. 5,000
5,200 Los Angeles, California, M/F Housing Revenue Bonds (Casden Project),
VRDN, Series K, 3.55% due 7/01/2010 (a) 5,200 Los Angeles,
California, M/F Housing Revenue Refunding Bonds, VRDN (a):
12,660 (Canyon Creek Project), Series C, 3.45% due 12/01/2010 .............. 12,660
8,340 (Mountainback Apartment Project), Series B, 3.45% due 12/01/2010 .... 8,340
Los Angeles, California, Unified School District, TRAN:
8,400 Series A, 4.50% due 7/01/1998 ....................................... 8,414
12,445 Series B, 4.50% due 10/01/1998 ...................................... 12,485
14,300 Los Angeles, California, Wastewater System Revenue Bonds, CP, 3.45%
due 6/10/1998 ............................................................. 14,300
15,000 Los Angeles County, California, CP, 2.90% due 4/01/1998 ................... 15,000
Los Angeles County, California, Capital Asset Leasing Corporation,
Leasehold Revenue Bonds, CP:
5,000 3.40% due 4/14/1998 ................................................. 5,000
14,250 3.30% due 5/01/1998 ................................................. 14,250
8,200 3.35% due 5/01/1998 ................................................. 8,200
6,500 3.70% due 6/10/1998 ................................................. 6,500
3,000 Los Angeles County, California, Local Education Agency, COP, TRAN,
Series B, 4.50% due 9/30/1998 (e) ......................................... 3,008
Los Angeles County, California, Metropolitan Transportation Authority,
Revenue Bonds, VRDN (a)(e):
33,675 Series SGB-1, 3.70% due 7/01/2025 ................................... 33,675
13,000 Series SGB-2, 3.70% due 7/01/2021 ................................... 13,000
5,400 Series SGB-3, 3.70% due 7/01/2016 ................................... 5,400
Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Bonds, VRDN (a):
12,530 Series SG-46, 3.70% due 7/01/2017 (d) ............................... 12,530
43,000 Series SG-55, 3.70% due 7/01/2018 (b) ............................... 43,000
1,000 Los Angeles County, California, Public Works Financing Authority,
Lease Revenue Refunding Bonds (Master Refunding Project), Series A,
4% due 3/01/1999 (e) ...................................................... 1,004
</TABLE>
FS-13
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Schedule of Investments as of March 31, 1998 (Continued) (in Thousands)
================================================================================
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Metropolitan Water District (Southern California), CP, Series B:
(continued) $ 7,400 3.15% due 4/01/1998 ................................................. $ 7,400
21,800 3.45% due 6/10/1998 ................................................. 21,800
1,600 3.40% due 7/14/1998 ................................................. 1,600
10,000 Metropolitan Water District (Southern California), Waterworks Revenue
Bonds, VRDN, Series C, 3.05% due 7/01/2028 (a) ............................ 10,000
7,435 Monrovia, California, Unified School District, MSTR, VRDN, Series 1997
SGA-70, 3.65% due 8/01/2022 (a)(b) ........................................ 7,435
13,570 Port Oakland, California, Revenue Bonds, MSTR, VRDN, AMT, Series 1997
SG-112, 3.67% due 11/01/2025 (a)(b) ....................................... 13,570
7,570 Redlands, California, COP, Refunding (Sewer Facilities Project), VRDN,
3.30% due 9/01/2017 (a)(c) ................................................ 7,570
Redlands, California, M/F Housing Revenue Bonds, VRDN, Series A (a):
3,300 (Orange Village Apartments Project), AMT, 3.70% due 8/01/2018 ....... 3,300
12,500 Refunding (Parkview Terrace Project), 3.35% due 2/01/2016 ........... 12,500
Regents of the University of California, CP:
25,000 3.15% due 4/06/1998 ................................................. 25,000
15,521 Series B, 3.20% due 4/01/1998 ....................................... 15,521
8,000 Series B, 3.20% due 5/01/1998 ....................................... 8,000
26,500 Series B, 3.40% due 5/01/1998 ....................................... 26,500
20,000 Series B, 3.55% due 7/14/1998 ....................................... 20,000
Riverside County, California, COP (Riverside County Public
Facilities), ACES (a):
5,353 Series A, 3.45% due 12/01/2015 ...................................... 5,353
2,475 Series D, 3.45% due 12/01/2015 ...................................... 2,475
9,970 Riverside County, California, School Financing Authority, RAN, 4.50%
due 10/01/1998 ............................................................ 10,000
4,300 Roseville, California, Finance Authority, Hospital Lease Revenue Bonds
(Roseville Hospital), VRDN, Series A, 3.35% due 10/01/2014 (a) ............ 4,300
20,000 Sacramento, California, City Unified School District, TRAN, 4.25%
due 12/01/1998 ............................................................ 20,058
5,760 Sacramento, California, Municipal Utility District, Electric Revenue
Bonds, VRDN, Series SGB-4, 3.70% due 8/15/2021 (a)(d) ..................... 5,760
7,000 Sacramento County, California TRAN, 4.50% due 9/30/1998 ................... 7,022
7,444 Sacramento Municipal Utility District, California, CP, 3.50%
due 5/08/1998 ............................................................. 7,444
3,700 San Bernardino, California, M/F Housing Revenue Refunding Bonds
(Village Crossing), VRDN, Series A, 3.65% due 2/01/2027 (a) ............... 3,700
6,000 San Bernardino County, California, Residential Mortgage Revenue
Refunding Bonds (Ramona Garden), VRDN, Series A, 3.40% due 2/01/2017 (a) .. 6,000
2,000 San Diego, California, IDR, Refunding (San Diego Gas & Electric), CP,
Series A, 3.40% due 6/15/1998 ............................................. 2,000
San Diego, California, M/F Housing Authority Revenue Bonds, VRDN (a):
7,540 (La Cima Apartments), Series K, 3.35% due 12/01/2008 ................ 7,540
17,050 (Nobel Court Apartments), 3.35% due 12/01/2008 ...................... 17,050
4,000 San Diego, California, Sewer Revenue Bonds, VRDN, Series SG-14, 3.62%
due 5/15/2020 (a)(b) ...................................................... 4,000
27,280 San Diego, California, TAN, Series A, 4.50% due 9/30/1998 ................. 27,364
3,000 San Diego, California, Unified School District, TRAN, Series B,
4.75% due 1/29/1999 ....................................................... 3,029
29,960 San Diego County, California, TRAN, 4.50% due 9/30/1998 ................... 30,052
</TABLE>
FS-14
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Schedule of Investments as of March 31, 1998 (Concluded) (in Thousands)
================================================================================
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California San Francisco, California, City and County Airports Commission
(concluded) (San Francisco International Airport), VRDN (a):
$ 16,555 MSTR, AMT, Series SG-116, 3.67% due 5/01/2026 ....................... $ 16,555
3,800 MSTR, AMT, Series SGA-56, 3.70% due 5/01/2026 (b) ................... 3,800
3,645 Series SG-88, MSTR, 3.62% due 5/01/2021 (c) ......................... 3,645
12,590 Series SG-113, 3.62% due 5/01/2026 (c) .............................. 12,590
San Joaquin County, California, Transportation Authority, Sales Tax
Revenue Bonds, CP:
10,000 3.15% due 5/01/1998 ................................................. 10,000
5,000 3.40% due 5/01/1998 ................................................. 5,000
San Jose, California, M/F Housing Revenue Bonds, VRDN, Series A (a):
13,000 (Siena at Renaissance), AMT, 3.60% due 12/01/2029 ................... 13,000
6,360 (Timberwood), 3.40% due 2/01/2020 ................................... 6,360
2,000 San Jose-Santa Clara, California, Water Financing Authority, Sewer
Revenue Bonds, VRDN, Series SG-49, 3.62% due 11/15/2020 (a)(c) ............ 2,000
5,400 Santa Barbara County, California, TRAN, Series A, 4.50% due 10/01/1998 .... 5,419
8,690 Santa Clara County, California, TRAN, 4.75% due 10/01/1998 ................ 8,728
5,325 Santa Rosa, California, M/F Housing Revenue Bonds (Oak Creek Apartments
Project), VRDN, AMT, Series A, 3.70% due 6/01/2018 (a) .................... 5,325
3,550 Simi Valley, California, Community Redevelopment Agency, M/F Housing
Revenue Bonds (Ashlee Manor Project), VRDN, AMT, Series A, 3.70% due
10/01/2017 (a) ............................................................ 3,550
12,000 Simi Valley, California, M/F Housing Revenue Bonds (Shadowridge
Apartments), VRDN, 3.70% due 9/01/2019 (a) ................................ 12,000
8,290 Southern California Public Power Authority, Power Project Revenue Bonds,
VRDN, Series 90-A, 3.70% due 1/01/2007 (a) ................................ 8,290
3,100 Southern California Public Power Authority, Transmission Project Revenue
Refunding (Southern Transmission), VRDN, 3.25% due 7/01/2019 (a) .......... 3,100
State of California, CP:
15,000 3.10% due 4/13/1998 ................................................. 15,000
22,800 3.10% due 4/13/1998 ................................................. 22,800
35,800 3.45% due 4/16/1998 ................................................. 35,800
5,000 3.10% due 4/17/1998 ................................................. 5,000
12,000 3.40% due 4/20/1998 ................................................. 12,000
27,300 3.45% due 4/20/1998 ................................................. 27,300
17,500 3.65% due 5/01/1998 ................................................. 17,500
27,600 Victor Valley, California, Community College District, COP (Capital
Improvement Financing Project), VRDN, 3.65% due 12/01/2024 (a) ............ 27,600
- ---------------------------------------------------------------------------------------------------------------------------
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank Revenue Bonds:
6.3% 14,160 3.25% due 4/09/1998 ................................................. 14,160
18,000 3.15% due 4/13/1998 ................................................. 18,000
10,000 3.25% due 4/15/1998 ................................................. 10,000
75,000 Puerto Rico Commonwealth, TRAN, Series A, 4.50% due 7/30/1998 ............. 75,204
8,760 Puerto Rico, Electric Power Authority, Power Revenue Bonds, MSTR, VRDN,
Series SGA-43, 3.60% due 7/01/2022 (a)(b) ................................. 8,760
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$1,990,953)--99.3% ............................... 1,990,953
Other Assets Less Liabilities--0.7% ....................................... 14,710
----------
Net Assets--100.0% ........................................................ $2,005,663
==========
==========================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the interest rate in effect at March 31,
1998.
(b) MBIA Insured.
(c) FGIC Insured.
(d) AMBAC Insured.
(e) FSA Insured.
(f) FNMA Collateralized.
See Notes to Financial Statements.
FS-15
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Statement of Assets and Liabilities as of March 31, 1998
================================================================================
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$1,990,952,978*) (Note 1a) ... $ 1,990,952,978
Cash ................................................................. 31,500
Receivables:
Interest .......................................................... $ 14,415,331
Securities sold ................................................... 25,763 14,441,094
------------
Prepaid registration fees and other assets (Note 1d) ................. 1,798,072
---------------
Total assets ......................................................... 2,007,223,644
---------------
Liabilities:
Payables:
Investment adviser (Note 2) ....................................... 733,683
Distributor (Note 2) .............................................. 565,625 1,299,308
------------
Accrued expenses and other liabilities ............................... 261,504
---------------
Total liabilities .................................................... 1,560,812
---------------
Net Assets ........................................................... $ 2,005,662,832
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized ................................ $ 200,662,264
Paid-in capital in excess of par ..................................... 1,805,958,716
Accumulated realized capital losses--net (Note 4) .................... (958,148)
---------------
Net Assets--Equivalent to $1.00 per share based on
2,006,622,639 shares of beneficial interest outstanding .............. $ 2,005,662,832
===============
</TABLE>
* Cost for Federal income tax purposes was $1,990,960,039. As of March 31,
1998, net unrealized depreciation for Federal income tax purposes amounted
to $7,061, all of which related to depreciated securities.
See Notes to Financial Statements.
FS-16
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Statement of Operations for the Year Ended March 31, 1998
================================================================================
Investment Income (Note 1c):
Interest and amortization of premium earned ........... $62,786,633
Expenses:
Investment advisory fees (Note 2) ..................... $7,429,249
Distribution fees (Note 2) ............................ 2,160,142
Transfer agent fees (Note 2) .......................... 216,686
Registration fees (Note 1d) ........................... 168,311
Accounting services (Note 2) .......................... 134,365
Custodian fees ........................................ 98,656
Professional fees ..................................... 70,267
Trustees' fees and expenses ........................... 12,389
Pricing fees .......................................... 550
Other ................................................. 13,666
----------
Total expenses ........................................ 10,304,281
-----------
Investment income--net ................................ 52,482,352
Realized Loss on Investments--Net (Note 1c) ........... (44,912)
-----------
Net Increase in Net Assets Resulting from Operations .. $52,437,440
===========
See Notes to Financial Statements.
FS-17
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Statements of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------
Increase (Decrease) in Net Assets: 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net ............................................ $ 52,482,352 $ 42,120,588
Realized gain (loss) on investments--net .......................... (44,912) 26,624
--------------- ---------------
Net increase in net assets resulting from operations .............. 52,437,440 42,147,212
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net ............................................ (52,480,433) (42,120,540)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (52,480,433) (42,120,540)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares .................................. 7,751,865,673 6,159,698,384
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) ............................................... 52,479,878 42,121,016
--------------- ---------------
7,804,345,551 6,201,819,400
Cost of shares redeemed ........................................... (7,364,441,995) (6,057,183,986)
--------------- ---------------
Net increase in net assets derived from beneficial
interest transactions ............................................. 439,903,556 144,635,414
--------------- ---------------
Net Assets:
Total increase in net assets ...................................... 439,860,563 144,662,086
Beginning of year ................................................. 1,565,802,269 1,421,140,183
--------------- ---------------
End of year ....................................................... $ 2,005,662,832 $ 1,565,802,269
=============== ===============
</TABLE>
See Notes to Financial Statements.
FS-18
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Financial Highlights
================================================================================
<TABLE>
<CAPTION>
The following per share data and ratios
have been derived from information provided
in the financial statements. For the Year Ended March 31,
------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year ....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net ................... .03 .03 .03 .03 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations ......... .03 .03 .03 .03 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return .................. 3.06% 2.90% 3.15% 2.66% 1.93%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses ................................. .59% .60% .64% .63% .62%
========== ========== ========== ========== ==========
Investment income--net ................... 3.00% 2.85% 3.11% 2.62% 1.91%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) ... $2,005,663 $1,565,802 $1,421,140 $1,168,234 $1,225,160
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
FS-19
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies:
CMA California Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax
withheld) in additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned other than
original issue discounts. Net realized capital gains, if any, are normally
distributed annually after deducting prior years' loss carryforward. The Fund
may distribute capital gains more frequently than annually in order to maintain
the Fund's net asset value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $1,919 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but
FS-20
<PAGE>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund
Notes to Financial Statements (Concluded)
================================================================================
not exceeding $1 billion, and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of average daily net assets of
the Fund. The distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares of the Fund
and for providing direct personal services to shareholders. The distribution fee
is not compensation for the administrative and operational services rendered to
the Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of approximately
$951,000, of which $433,000 expires in 2002, $476,000 expires in 2003 and
$42,000 expires in 2006. This amount will be available to offset a like amount
of any future taxable gains.
FS-21
<PAGE>
- --------------------------------------------------------------------------------
CMA CONNECTICUT MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA CONNECTICUT MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Connecticut Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 31, 1998, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Connecticut
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 4, 1998
FS-22
<PAGE>
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
Face Value
State Amount Issue (Note la)
<C> <C> <S> <C>
Connecticut-- $ 4,735 Bethel, Connecticut, BAN, UT, 4% due 7/10/1998 $ 4,737
77.7% 21,750 Connecticut State Development Authority, Health Care Revenue Bonds
(Independent Living Project), VRDN, 3.50% due 7/01/2015 (a) 21,750
4,135 Connecticut State Development Authority, IDB (Connecticut Spring and
Stamping Corporation), VRDN, AMT, 3.60% due 9/01/2008 (a) 4,135
4,000 Connecticut State Development Authority, IDR (Handy and Harman Refining),
VRDN, AMT, 3.60% due 12/01/2017 (a) 4,000
Connecticut State Development Authority, PCR, Refunding, VRDN (a):
32,350 (Connecticut Light & Power Co. Project), Series A, 3.65% due 9/01/2028 32,350
1,000 (United Illuminating Co. Project), 3.65% due 6/01/2026 1,000
20,100 (Western Massachusetts Electric Co.), Series A, 3.35% due 9/01/2028 20,100
8,000 Connecticut State Development Authority Revenue Bonds (Solid Waste Project),
VRDN, AMT, 3.40% due 8/01/2023 (a) 8,000
3,575 Connecticut State, GO, Series B, 4.50% due 10/01/1998 3,591
14,500 Connecticut State, GO, VRDN, UT, Series B, 3.65% due 5/15/2014 (a) 14,500
Connecticut State, HFA (Housing Mortgage Finance Program), AMT, CP, Series D:
3,375 3.80% due 4/07/1998 3,375
4,500 3.45% due 6/01/1998 4,500
4,450 3.45% due 6/09/1998 4,450
4,500 3.40% due 6/12/1998 4,500
4,505 3.50% due 8/14/1998 4,505
Connecticut State Health and Educational Facilities Authority Revenue Bonds:
5,000 (Hospital of St. Raphael), VRDN, Series J, 3.45% due 7/01/2022 (a) 5,000
3,300 (Saint Mary's Hospital), Issue B, 7.80% due 7/01/1998 (c) 3,398
1,000 (Sharon Hospital Issue), VRDN, Series A, 3.50% due 7/01/2027 (a) 1,000
2,815 (Yale--New Haven Hospital), Series E, 3.80% due 6/01/1998 (b) 2,815
3,500 (Yale University), CP, Series P, 3.65% due 4/07/1998 3,500
4,000 (Yale University), CP, Series P, 3.70% due 4/07/1998 4,000
2,500 (Yale University), CP, Series P, 3.30% due 6/09/1998 2,500
3,200 (Yale University), CP, Series P, 3.40% due 8/11/1998 3,200
3,500 (Yale University), CP, Series P, 3.40% due 8/14/1998 3,500
17,300 (Yale University), VRDN, Series T, 3.65% due 7/01/2029 (a) 17,300
11,200 (Yale University), VRDN, Series T, 3.70% due 7/01/2029 (a) 11,200
Connecticut State Municipal Electric Energy Cooperative, Power Supply
System Revenue Bonds, CP, Series A:
1,500 3.15% due 5/01/1998 1,500
2,300 3.20% due 5/13/1998 2,300
3,900 3.30% due 6/01/1998 3,900
11,505 Connecticut State Refunding (Economic Recovery Notes), UT, 5% due 6/15/1998 11,534
19,900 Connecticut State Special Assessment Unemployment Compensation, Advanced
Fund Revenue Bonds (Connecticut Unemployment), Series C, 3.90% due 7/01/1998 (b) 19,900
28,050 Connecticut State Special Tax Obligation Revenue Bonds (Transportation
Infrastructure), VRDN, Second Lien, Series 1, 3.65% due 12/01/2010 (a) 28,050
</TABLE>
Portfolio Abbreviations for CMA Connecticut Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
M/F Multi-Family
MSTR Municipal Securities Trust Receipts
PCR Pollution Control Revenue Bonds
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-23
<PAGE>
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONCLUDED) (IN THOUSANDS)
Face Value
State Amount Issue (Note la)
<C> <C> <S> <C>
Connecticut $ 6,050 Danbury, Connecticut, BAN, UT, 4% due 8/07/1998 $ 6,062
(concluded) 8,000 Eagle Tax-Exempt Trust, Connecticut State, VRDN, Series 94, Class 0701,
3.70% due 10/07/1998 (a) 8,000
East Haven, Connecticut, BAN, UT:
6,000 4.25% due 7/15/1998 6,007
1,500 4% due 9/01/1998 1,501
5,600 East Lyme, Connecticut, BAN, UT, 4% due 2/17/1999 5,624
4,600 Hartford, Connecticut, Redevelopment Agency, M/F Mortgage Revenue Refunding
Bonds (Housing-Underwood Tower Project), VRDN, 3.50% due 6/01/2020 (a)(d) 4,600
7,900 New Britain, Connecticut, BAN, VRDN, 3.40% due 4/14/1998 (a) 7,900
6,000 New Canaan, Connecticut, BAN, UT, 3.75% due 3/09/1999 6,016
2,500 Norwalk, Connecticut, BAN, UT, 4% due 7/15/1998 2,502
3,850 Plymouth, Connecticut, BAN, 4.25% due 8/06/1998 3,858
3,600 Prospect, Connecticut, BAN, UT, 3.90% due 4/15/1998 3,600
1,800 Shelton, Connecticut, Housing Authority Revenue Bonds (Crosby Commons
Project), VRDN, 3.60% due 1/01/2031 (a) 1,800
12,500 Stamford, Connecticut, BAN, UT, 4% due 4/01/1998 12,500
8,400 Stamford, Connecticut, Housing Authority Revenue Bonds (Morgan Street
Project), VRDN, AMT, 3.65% due 8/01/2024 (a) 8,400
4,750 Watertown, Connecticut, BAN, UT, 3.50% due 9/22/1998 4,753
4,500 Westport, Connecticut, BAN, UT, Series A, 4% due 6/26/1998 4,503
4,400 Winchester, Connecticut, BAN, 4% due 8/04/1998 4,405
Puerto Rico-- Eagle Tax-Exempt Trust, VRDN (a):
19.2% 9,900 Puerto Rico Housing Finance Corp., 3.70% due 10/01/2011 9,900
7,200 Puerto Rico M/F Mortgage, Series C, 3.70% due 10/01/2011 7,200
Puerto Rico Commonwealth, Government Development Bank Revenue Bonds:
4,300 CP, 3.10% due 4/07/1998 4,300
4,300 CP, 3.10% due 4/08/1998 4,300
4,300 CP, 3.10% due 4/09/1998 4,300
300 Refunding, VRDN, 3.375% due 12/01/2015 (a)(e) 300
3,000 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, VRDN, Series X, 3.375% due 7/01/1999 (a) 3,000
8,000 Puerto Rico Commonwealth, TRAN, Series A, 4.50% due 7/30/1998 8,020
27,450 Puerto Rico Electric Power Authority, Power Revenue Bonds, MSTR, VRDN,
Series SGA-43, 3.60% due 7/01/2022 (a)(e) 27,450
Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities
Financing Authority Revenue Bonds, CP:
3,400 3.25% due 6/09/1998 3,400
1,850 3.80% due 9/01/1998 1,851
3,400 3.25% due 6/01/1998 3,400
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority, Higher Education Revenue Bonds, Series A:
6,800 (Ana G. Mendez University System Project), VRDN, 3.45% due 1/01/2015 (a) 6,800
3,100 CP, 3.70% due 4/07/1998 3,100
Total Investments (Cost--$439,442*)--96.9% 439,442
Other Assets Less Liabilities--3.1% 13,853
--------
Net Assets--100.0% $453,295
========
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March 31, 1998.
See Notes to Financial Statements.
(b) FGIC Insured.
(c) Prefunded.
(d) FSA Insured.
(e) MBIA Insured.
*Cost for Federal income tax purposes.
FS-24
<PAGE>
<TABLE>
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$439,441,751) (Note 1a) $ 439,441,751
Cash 34,787
Receivables:
Securities sold $ 11,006,685
Interest 3,205,454 14,212,139
--------------
Prepaid registration fees and other assets (Note 1d) 18,412
--------------
Total assets 453,707,089
--------------
Liabilities:
Payables:
Investment adviser (Note 2) 200,125
Distributor (Note 2) 122,594 322,719
--------------
Accrued expenses and other liabilities 89,563
--------------
Total liabilities 412,282
--------------
Net Assets $ 453,294,807
==============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of
shares authorized $ 45,347,315
Paid-in capital in excess of par 408,125,832
Accumulated realized capital losses--net (Note 4) (178,340)
--------------
Net Assets--Equivalent to $1.00 per share based on 453,473,147 shares of
beneficial interest outstanding $ 453,294,807
==============
See Notes to Financial Statements.
</TABLE>
FS-25
<PAGE>
<TABLE>
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 13,063,026
Expenses:
Investment advisory fees (Note 2) $ 1,826,850
Distribution fees (Note 2) 454,599
Accounting services (Note 2) 62,364
Registration fees (Note 1d) 56,680
Professional fees 51,399
Transfer agent fees (Note 2) 45,897
Custodian fees 31,463
Pricing fees 4,989
Trustees' fees and expenses 2,643
--------------
Total expenses 2,536,884
--------------
Investment income--net 10,526,142
Realized Loss on Investments--Net (Note 1c) (39,858)
--------------
Net Increase in Net Assets Resulting from Operations $ 10,486,284
==============
See Notes to Financial Statements.
</TABLE>
FS-26
<PAGE>
<TABLE>
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 10,526,142 $ 8,580,599
Realized loss on investments--net (39,858) (7,261)
-------------- --------------
Net increase in net assets resulting from operations 10,486,284 8,573,338
-------------- --------------
Dividends to Shareholders (Note 1e):
Investment income--net (10,523,142) (8,579,669)
-------------- --------------
Net decrease in net assets resulting from dividends
to shareholders (10,523,142) (8,579,669)
-------------- --------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,405,810,520 1,090,795,423
Net asset value of shares issued to shareholders in reinvestment of dividends
(Note 1e) 10,523,097 8,579,691
-------------- --------------
1,416,333,617 1,099,375,114
Cost of shares redeemed (1,302,932,701) (1,072,800,492)
-------------- --------------
Net increase in net assets derived from beneficial interest transactions 113,400,916 26,574,622
-------------- --------------
Net Assets:
Total increase in net assets 113,364,058 26,568,291
Beginning of year 339,930,749 313,362,458
-------------- --------------
End of year $ 453,294,807 $ 339,930,749
============== ==============
See Notes to Financial Statements.
</TABLE>
FS-27
<PAGE>
<TABLE>
CMA CONNECTICUT MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- --------
Net assets value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 2.93% 2.81% 3.01% 2.54% 1.77%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses .69% .71% .72% .71% .70%
======== ======== ======== ======== ========
Investment income--net 2.88% 2.76% 2.97% 2.53% 1.76%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $453,295 $339,931 $313,362 $260,398 $250,038
======== ======== ======== ======== ========
See Notes to Financial Statements.
FS-28
</TABLE>
<PAGE>
CMA CONNECTICUT MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA Connecticut Municipal Money Fund (the "Fund") is part of CMA
Multi-State Municipal Series Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The following
is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $3,000
have been reclassified between accumulated net realized capital
losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company
FS-29
<PAGE>
CMA CONNECTICUT MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Act of 1940, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the annual rate of
0.125% of average daily net assets of the Fund. The distribution fee is to
compensate MLPF&S financial consultants and other directly involved branch
office personnel for selling shares of the Fund and for providing direct
personal services to shareholders. The distribution fee is not compensation for
the administrative and operational services rendered to the Fund by MLPF&S in
processing share orders and administering shareholder accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward :
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $178,000, of which $69,000 expires in 2000, $30,000
expires in 2001, $10,000 expires in 2002, $27,000 expires in 2003,
$2,000 expires in 2005 and $40,000 expires in 2006. This amount will
be available to offset like amounts of any future taxable gains.
FS-30
<PAGE>
- -------------------------------------------------------------------------------
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA Massachusetts Municipal Money Fund of
CMA Multi-State Municipal Series Trust as of March 31, 1998, the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial high-
lights for each of the years in the five-year period then ended. These finan-
cial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these finan-
cial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Massachusetts
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with gen-
erally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 4, 1998
FS-31
<PAGE>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note la)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts- $4,350 Amesbury, Massachusetts, BAN, 4.25% due 10/01/1998................................. $4,363
99.1% 2,950 Boston, Massachusetts, IDR (Boston Seafood Distribution Center Inc. Project),
VRDN, AMT, 3.55% due 1/01/2022 (a)................................................. 2,950
2,725 Boston, Massachusetts, IDR, Industrial Financing Authority, (Acme
Bookbinding Co., Inc.), VRDN, AMT, 3.60% due 9/01/2006 (a)......................... 2,725
5,000 Boston, Massachusetts, Water and Sewer Commission Revenue Bonds, VRDN,
Series SG-75, 3.75% due 11/01/2019 (a)(c).......................................... 5,000
3,400 Central Berkshire, Massachusetts, Regional School District, BAN,
4.25% due 7/15/1998................................................................ 3,402
Eagle Tax-Exempt Trust, Massachusetts, GO, VRDN, Series 93A (a):
1,900 3.77% due 2/01/2006............................................................ 1,900
9,200 3.77% due 2/01/2011............................................................ 9,200
2,750 Fitchburg, Massachusetts, BAN, 4.25% due 6/05/1998................................. 2,751
5,000 Gloucester, Massachusetts, BAN, 4% due 8/07/1998................................... 5,002
2,200 Holliston, Massachusetts, BAN, 4.25% due 10/15/1998................................ 2,205
4,350 Leominster, Massachusetts, BAN, 4.20% due 12/17/1998............................... 4,356
4,200 Littleton, Massachusetts, BAN, 4.15% due 10/16/1998................................ 4,205
2,950 Lowell, Massachusetts, Regional Transportation Authority, RAN,
4.25% due 7/17/1998................................................................ 2,953
5,000 Lynn, Massachusetts, BAN, 4.10% due 4/14/1998...................................... 5,001
5,000 Massachusetts State, GO, VRDN, Series SG-38, 3.75% due 8/01/2014 (a)(c)............ 5,000
5,400 Massachusetts State, HFA, Housing Revenue Bonds, Series 50,
3.90% due 6/01/1998................................................................ 5,400
3,800 Massachusetts State, HFA, M/F Housing Project, Refunding, VRDN, Series A,
3.45% due 1/15/2010 (a)(b)......................................................... 3,800
Massachusetts State Health and Educational Facilities Authority Revenue Bonds:
10,000 (Boston University), CP, Series H, 3.50% due 4/01/1998........................ 10,000
5,500 (Partners Healthcare Systems), VRDN, Series P-2, 3.45% due 7/01/2027 (a)(d)... 5,500
6,500 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue
Bonds (Beverly Enterprises, Inc.), VRDN, 3.65% due 4/01/2009 (a)................... 6,500
Massachusetts State Industrial Finance Agency, IDR, VRDN, AMT (a):
2,900 (Garlock Printing & Converting Corp. Issue), 3.60% due 12/01/2017............ 2,900
3,150 (James F. and Judith Matthews Issue), 3.95% due 9/01/2013.................... 3,150
3,150 (Matco Electric Group Inc. Issue), 3.95% due 7/01/2004....................... 3,150
6,500 (Star Container Corp. Issue), 3.60% due 2/01/2018............................ 6,500
</TABLE>
Portfolio Abbreviations for CMA Massachusetts Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
SAAN Student Aid Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-32
<PAGE>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note 1a)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts Massachusetts State Industrial Finance Agency, Industrial Revenue Bonds,
(continued) VRDN (a):
$ 3,400 (225 Bodwell Corp. Project), AMT, 3.70% due 7/01/2017 ..................... $ 3,400
3,390 (AFC Cable Systems Inc. Issue), AMT, 3.60% due 7/01/2016 .................. 3,390
2,000 (America Technology Corp. & RDLHoldings Ltd. Project),
3.70% due 8/01/2022 ....................................................... 2,000
2,000 (BBB Esq. LLC), AMT, Series B, 3.70% due 12/01/2016 ....................... 2,000
1,700 (Carand Realty Trust Issue), AMT, 3.70% due 5/01/2017 ..................... 1,700
3,700 (Foilmark Manufacturing), AMT, Series A, 3.60% due 6/01/2010 .............. 3,700
3,990 (The Gem Group Inc. Issue), AMT, 3.60% due 7/01/2016 ...................... 3,990
2,150 (Haverdyn Co. LLC Issue), AMT, 3.70% due 9/01/2017 ........................ 2,150
1,900 (ICC Realty Association LPProject), AMT, 3.70% due 2/01/2016 .............. 1,900
3,300 (Mercer Paper Tube Corp.), AMT, 3.95% due 11/01/2011 ...................... 3,300
1,600 (October Co. Inc. Project), AMT, 3.70% due 12/01/2017 ..................... 1,600
6,760 (Performance Corrugated Inc. Project), AMT, 3.90% due 3/01/2009 ........... 6,760
1,375 Refunding (Easy Day Realty Trust Project), Series A, 3.40% due 7/01/2006 .. 1,375
4,400 Refunding (Lightolier Inc. Project), 3.65% due 7/29/2010 .................. 4,400
3,115 Refunding (New England Biolabs), AMT, 3.70% due 3/01/2016 ................. 3,115
4,800 Refunding (Showa Women's Institute Inc.), 3.65% due 3/15/2004 ............. 4,800
2,000 (Sterling Realty Trust LLC Project), 3.70% due 12/01/2017 ................. 2,000
720 (Techprint/Techgraphics), AMT, 3.60% due 6/01/2017 ........................ 720
3,350 (Telcom USA Inc. Issue), AMT, Series A, 3.60% due 8/01/2016 ............... 3,350
3,380 (WBC Extrusion Project), AMT, 3.60% due 4/01/2006 ......................... 3,380
2,925 (William F. Rogers Issue), AMT, Series B, 3.60% due 11/01/2006 ............ 2,925
4,895 (ZBR Limited Partnership), AMT, 3.60% due 4/15/2015 ....................... 4,895
1,500 (ZBR Limited Partnership), AMT, 3.60% due 4/15/2017 ....................... 1,500
Massachusetts State Industrial Finance Agency, PCR:
4,000 (Holyoke Water & Power Company Project), VRDN, AMT,
3.35% due 12/01/2020 (a) .................................................. 4,000
5,500 Refunding (New England Power Company Project), CP, 3.45% due 4/28/1998 .... 5,500
Massachusetts State Industrial Finance Agency Revenue Bonds, VRDN (a):
1,500 (Eastern Nazarene College), 3.55% due 10/01/2027 .......................... 1,500
135 (Edgewood Retirement Community Project), Series C, 3.70% due 11/15/2025 ... 135
3,500 (Gordon College Issue), 3.55% due 12/01/2027 .............................. 3,500
3,000 (Governor Dummer Academy), 3.55% due 12/01/2026 ........................... 3,000
1,825 (Heritage at Dartmouth Project), AMT, 3.50% due 12/01/2028 ................ 1,825
3,000 (Mount Ida College Issue), 3.55% due 7/01/2027 ............................ 3,000
4,500 (Williston Northampton Project), Series B, 3.45% due 4/01/2024 ............ 4,500
2,730 Massachusetts State Industrial Finance Agency, Solid Waste Disposal Revenue
Bonds (E.L. Harvey and Sons), VRDN, AMT, 3.60% due 1/01/2011 (a) .............. 2,730
2,400 Massachusetts State Port Authority, Revenue Refunding Bonds, VRDN,
AMT, Series B, 3.70% due 7/01/2018 (a) ........................................ 2,400
9,595 Massachusetts State Turnpike Authority, Western Turnpike Revenue Bonds,
VRDN, 3.80% due 1/01/2017 (a) ................................................. 9,595
2,700 Massachusetts Technology Park Corp. Promissory Note, 3.90% due 7/31/1998 ...... 2,700
6,300 Natick, Massachusetts, BAN, 4.25% due 8/07/1998 ............................... 6,308
4,200 New Bedford, Massachusetts, RAN, 4.30% due 6/30/1998 .......................... 4,204
North Attleborough, Massachusetts, BAN:
3,295 4.25% due 5/15/1998 ....................................................... 3,296
2,242 UT, 4.25% due 9/25/1998 ................................................... 2,246
</TABLE>
FS-33
<PAGE>
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
Face Value
State Amount Issue (Note la)
- --------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Massachusetts $3,338 Norwell, Massachusetts, BAN, 4.15% due 8/03/1998..................... $ 3,343
(concluded) 3,000 Springfield, Massachusetts, BAN, 4.40% due 6/26/1998................. 3,003
2,190 Taunton, Massachusetts, Industrial Development Financing Authority,
IDR (CD Realty Trust Project--IX), VRDN, AMT, 3.90% due 2/01/2010 (a) 2,190
2,000 Watertown, Massachusetts, BAN, UT, 4.25% due 8/28/1998............... 2,003
Westfield, Massachusetts:
2,979 BAN, 4.25% due 5/08/1998......................................... 2,980
2,100 SAAN, 4.25% due 6/04/1998........................................ 2,101
7,400 Worcester, Massachusetts, Regional Transportation Authority, RAN,
4.25% due 6/19/1998.................................................. 7,405
6,735 Wrentham, Massachusetts, 4.10% due 6/17/1998......................... 6,738
- --------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$266,465*)--99.1%........................... 266,465
Other Assets Less Liabilities--0.9%.................................. 2,464
--------
Net Assets--100.0%................................................... $268,929
========
====================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March 31, 1998.
(b) FNMA Collateralized.
(c) MBIA Insured.
(d) FSA Insured.
* Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-34
<PAGE>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$266,465,153) (Note 1a) ....................... $266,465,153
Cash .................................................................................. 113,156
Interest receivable ................................................................... 2,502,943
Prepaid registration fees and other assets (Note 1d) .................................. 116,005
------------
Total assets .......................................................................... 269,197,257
------------
Liabilities:
Payables:
Investment adviser (Note 2) ......................................................... $ 120,152
Distributor (Note 2) ................................................................ 75,312
Dividends to shareholders (Note 1e) ................................................. 105 195,569
---------
Accrued expenses and other liabilities ................................................ 72,532
------------
Total liabilities ..................................................................... 268,101
------------
Net Assets ............................................................................ $268,929,156
============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized . $ 26,892,999
Paid-in capital in excess of par ...................................................... 242,036,895
Accumulated realized capital losses--net (Note 4) ..................................... (738)
------------
Net Assets--Equivalent to $1.00 per share based on 268,929,993 shares of beneficial
interest outstanding .................................................................. $268,929,156
============
</TABLE>
See Notes to Financial Statements.
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
Investment Income (Note 1c):
Interest and amortization of premium earned .......... $ 8,504,557
Expenses:
Investment advisory fees (Note 2) .................... $ 1,148,245
Distribution fees (Note 2) ........................... 283,055
Transfer agent fees (Note 2) ......................... 52,669
Professional fees .................................... 50,410
Accounting services (Note 2) ......................... 48,947
Registration fees (Note 1d) .......................... 40,605
Custodian fees ....................................... 18,968
Printing and shareholder reports ..................... 9,329
Pricing fees ......................................... 5,133
Trustees' fees and expenses .......................... 1,585
Other ................................................ 4,149
-----------
Total expenses ....................................... 1,663,095
-----------
Investment income--net ............................... 6,841,462
Realized Gain on Investments--Net (Note 1c) .......... 14,640
-----------
Net Increase in Net Assets Resulting from Operations . $ 6,856,102
===========
See Notes to Financial Statements.
FS-35
<PAGE>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------
Increase (Decrease) in Net Assets: 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net ................................................... $ 6,841,462 $ 5,233,385
Realized gain on investments--net ........................................ 14,640 2,973
--------------- ---------------
Net increase in net assets resulting from operations ..................... 6,856,102 5,236,358
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net ................................................... (6,841,462) (5,233,385)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders ...... (6,841,462) (5,233,385)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares ......................................... 1,012,239,315 725,445,153
Net asset value of shares issued to shareholders in reinvestment of dividends
(Note 1e) ................................................................ 6,840,716 5,233,764
--------------- ---------------
1,019,080,031 730,678,917
Cost of shares redeemed .................................................. (950,763,913) (719,565,744)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions . 68,316,118 11,113,173
--------------- ---------------
Net Assets:
Total increase in net assets ............................................. 68,330,758 11,116,146
Beginning of year ........................................................ 200,598,398 189,482,252
--------------- ---------------
End of year .............................................................. $ 268,929,156 $ 200,598,398
=============== ===============
</TABLE>
See Notes to Financial Statements.
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have
been derived from information provided in the
financial statements. For the Year Ended March 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year ....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net ................... .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Total from investment operations ......... .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.03) (.02) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return .................. 3.03% 2.84% 3.04% 2.46% 1.74%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses ................................. .72% .76% .76% .76% .78%
======== ======== ======== ======== ========
Investment income--net ................... 2.98% 2.78% 3.00% 2.43% 1.72%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) ... $268,929 $200,598 $189,482 $161,076 $150,804
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
FS-36
<PAGE>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA Massachusetts Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of average daily net assets of
the Fund. The distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares of the Fund
and for
FS-37
<PAGE>
providing direct personal services to shareholders. The distribution fee is not
compensation for the administrative and operational services rendered to the
Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of approximately
$1,000, all of which expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
FS-38
<PAGE>
- -------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA MICHIGAN MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA Michigan Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 31, 1998, the related state-
ments of operations for the year then ended and changes in net assets for each
of the years in the two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Michigan Mu-
nicipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with gen-
erally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 5, 1998
FS-39
<PAGE>
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<TABLE>
<CAPTION>
Face Value
State Amount Issue (Note la)
<S> <C> <S> <C>
Michigan-- $ 1,320 Battle Creek, Michigan, Housing Corporation, Housing Revenue Bonds
94.4% (Georgetown Estates Project), VRDN, Series 1997-A, 3.65% due 2/01/2027 (a) $ 1,320
890 Bedford Township, Michigan, Economic Development Corporation Revenue
Bonds (Form-Tech Steel Inc. Project), VRDN, 3.89% due 3/01/2010 (a) 890
4,500 Beecher, Michigan, Community School District, SAN, 4.125% due 6/30/1998 4,502
4,500 Berrien County, Michigan, Economic Development Corporation, Economic
Development Revenue Bonds (Arlington Corporation Project), VRDN, AMT,
3.95% due 9/01/2016 (a) 4,500
4,000 Chelsea, Michigan, Economic Development Corporation, Limited Obligation
Revenue Bonds (Silver Maples of Chelsea), VRDN, 3.70% due 5/15/2028 (a) 4,000
Delta County, Michigan, Economic Development Corporation, Environmental
Improvement Revenue Bonds (Mead Escambia Paper) (a):
2,300 DATES, Series F, 3.70% due 12/01/2013 2,300
2,900 Refunding, VRDN, Series D, 3.70% due 12/01/2023 2,900
Detroit, Michigan, Water Supply System Revenue Bonds, MSTR, VRDN (a)(c):
3,500 Series SG-64, 3.80% due 7/01/2025 3,500
2,000 Series SGB-6, 3.80% due 7/01/2025 2,000
1,205 Farmington Hills, Michigan, Economic Development Corporation, Limited
Obligation Revenue Refunding Bonds (Brookfield Building Association), VRDN,
3.75% due 11/01/2010 (a) 1,205
3,000 Fenton, Michigan, Area Public Schools, SAN, 4.25% due 6/30/1998 3,002
2,200 Flint, Michigan, Economic Development Corporation, Economic Development
Revenue Bonds (Plastics Research), VRDN, AMT, 3.80% due 9/01/2004 (a) 2,200
4,500 Garden City, Michigan, School District, SAN, UT, 4.70% due 4/01/1998 4,500
3,400 Genesee County, Michigan, Economic Development Corporation, Limited
obligation, Economic Development Revenue Bonds (MM&E Inc. Project), VRDN,
3.80% due 7/01/2005 (a) 3,400
2,300 Georgetown Charter Township, Michigan, IDR, Limited Obligation (J&F Steel
Corporation), VRDN, AMT, 3.80% due 2/01/2009 (a) 2,300
3,325 Grand Rapids, Michigan, Economic Development Corporation, Economic
Development Revenue Refunding Bonds (Amway Hotel Corporation Project),
VRDN, Series B, 3.65% due 8/01/2017 (a) 3,325
555 Grand Rapids, Michigan, Economic Development Corporation, Limited Obligation
Revenue Refunding Bonds (Calder), VRDN, Series A, 3.65% due 10/01/2011 (a) 555
2,560 Grand Rapids, Michigan, IDR, Refunding (Etheridge Company Project), VRDN,
AMT, 3.75% due 7/01/2009 (a) 2,560
2,600 Grand Rapids, Michigan, Water Supply System, Revenue Refunding Bonds, VRDN,
3.60% due 1/01/2020 (a)(b) 2,600
445 Grosse Point, Michigan, Public Library, TAN, 4.28% due 4/03/1998 445
3,700 Kent Hospital Finance Authority, Michigan, Hospital Facilities Revenue Bonds
(Butterworth Hospital), ACES, Series A, 3.65% due 1/15/2020 (a) 3,700
</TABLE>
Portfolio Abbreviations for CMA Michigan Municipal Money Fund
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
CP Commercial Paper
DATES Daily AdjustableTax-Exempt Securities
FLOATS Floating Rate Securities
HDA Housing Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
MSTR Municipal Securities Trust Receipts
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
SAN State Aid Notes
TAN Tax Anticipation Notes
TEAMS Tax-Exempt Adjustable Municipal Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-40
<PAGE>
<TABLE>
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note la)
<S> <C> <S> <C>
Michigan $ 880 Lenawee County, Michigan, Economic Development Corporation, Limited Obligation
(continued) Revenue Bonds (The Wyatt Project), VRDN, 3.90% due 5/01/2002 (a) $ 880
1,000 Marquette County, Michigan, Economic Development Corporation, Limited
Obligation Revenue Bonds (Pioneer Laboratories), VRDN, Series B, 3.65% due
6/01/2012 (a) 1,000
450 Melvindale, Michigan, Economic Development Corporation, Limited Obligation
Revenue Refunding Bonds (North American Steel Project), VRDN, 3.65% due
6/01/1998 (a) 450
920 Michigan Higher Education Facilities Authority, Limited Obligation Revenue Bonds
(Davenport Collateral Business Project), VRDN, 3.70% due 3/01/2027 (a) 920
Michigan Municipal Bond Authority Revenue Notes:
3,500 RAN, Series C, 4.50% due 9/18/1998 3,509
1,750 Series A, 4.75% due 5/01/1998 1,751
30,375 Series B, 4.508 due 7/02/1998 30,433
2,000 Series D, 5% due 9/18/1998 2,005
Michigan State Building Authority Revenue Bonds:
12,830 CP, 3.40% due 4/09/1998 12,830
3,000 (Facilities Program), Series I, 4.50% due 10/01/1998 3,014
Michigan State, HDA, Limited Obligation Revenue Bonds:
4,000 (Bloomfield), TEAMS, CP, 3.50% due 5/14/1998 4,000
1,200 (Laurel Valley), TEAMS, VRDN, 3.70% due 12/01/2007 (a) 1,200
4,000 (Sand Creek Apartments, Phase 1 Project), VRDN, AMT, 3.80% due 1/01/2029 (a) 4,000
2,000 (woodland Meadows Apartments Project), VRDN, AMT, 3.65% due 3/01/2013 (a) 2,000
7,000 Michigan State, HDA, M/F Housing Revenue Bonds, CP, AMT, Series A,
3.40% due 4/01/1998 7,000
4,500 Michigan State, HDA, Rental Housing Revenue Refunding Bonds, VRDN, Series B,
3.60% due 4/01/2019 (a) 4,500
Michigan State Hospital Finance Authority, Revenue Refunding Bonds:
1,200 (Mid-Michigan Obligation Group), Series A, 3.80% due 6/01/1998 (d) 1,200
1,000 (sisters of Mercy), Series P, 4.10% due 8/15/1998 (c) 1,002
18,600 Michigan State Notes, CP, UT, 4.50% due 9/30/1998 18,677
Michigan State Strategic Fund, Limited Obligation Revenue Bonds, VBDN (a):
3,000 (AACOA Estrusions Inc. Project), AMT, 3.80% due 2/01/2008 3,000
7,500 (AVL North America Inc. Project), 3.80% due 4/01/2011 7,500
900 (Adaptive Manufacturing L.L.C. Project), AMT, 3.90% due 8/01/2016 900
865 (Akemi Inc. Project), AMT, 3.90% due 3/01/2021 865
1,600 (Applied Textiles Inc. Project), AMT, 3.80% due 7/01/2008 1,600
450 (BBPV Project), AMT, Series A-2, 3.85% due 1/01/2014 450
1,430 (BCM&N Project), AMT, 3.75% due 6/01/2020 1,430
2,600 (Baron Drawn Steel), IDR, AMT, 3.90% due 12/01/2006 2,600
2,500 (Cincinnati Milacron Inc. Project), AMT, 3.95% due 4/15/2005 2,500
3,400 (Dott Industries Inc. Project), AMT, 3.80% due 6/01/2001 3,400
1,500 (Gollin Block ; Supply Company), AMT, 3.65% due 7/01/2012 1,500
1,345 (Hercules Drawn Steel Project), AMT, 3.89% due 8/01/2006 1,345
1,500 (Inalfa-Hollandia Inc. Project), AMT, 3.90% due 5/01/2016 1,500
2,000 (Ingersoll CM System Inc. Project), AMT, 3.80% due 12/01/2011 2,000
5,500 (Karona Inc.), AMT, 3.90% due 12/01/2015 5,500
115 (Kay Screen Printing Inc.), AMT, Series A, 3.95% due 1/01/1999 115
3,165 (Monarch Hydraulics Inc. Project), AMT, 3.80% due 7/01/2016 3,165
2,000 (Norbert Industries Inc. Project), AMT, UT, 3.65% due 4/01/2006 2,000
1,000 (Nothern Pure Ice Company Project), 3.35% due 3/01/2015 1,000
960 (Nuvar Properties L.L.C. Project), AMT, 3.808 due 7/01/2026 960
2,300 (Park Realty L.L.C.), AMT, Series A, 3.80% due 9/01/2026 2,300
1,145 (Perfection Steel Inc. Project), AMT, 3.80% due 3/01/2002 1,145
</TABLE>
FS-41
<PAGE>
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONCLUDED) (IN THOUSANDS)
(CAPTION>
Face Value
State Amount Issue (Note la)
<S> <C> <S> <C>
Michigan Michigan State Strategic Fund, Limited Obligation Revenue Bonds,
(concluded) VRDN (a) (concluded):
$ 2,025 (R.H. Wyner Associates Inc. Project), AMT, 3.80% due 10/01/2026 $ 2,025
2,000 Refunding (Consumers Power Company Project), Series A, 3.70% due 6/15/2010 2,000
2,500 Refunding (Detroit Edison Company), Series CC, 3.70% due 9/01/2030 2,500
1,000 Refunding (Grandview Plaza Project), 3.90% due 12/15/2010 1,000
4,850 Refunding (Lake Shore Inc.), AMT, 3.85% due 11/01/2019 4,850
440 Refunding (Park Village Pines Project), 3.65% due 5/01/2006 440
6,285 (Riverwalk Properties L.L.C. Project), AMT, 3.90% due 8/01/2021 6,285
400 Series C-4, 3.85% due 1/01/2009 400
1,250 (TEI Investments L.L.C. Project), AMT, 3.90% due 2/01/2022 1,250
4,275 (Temperance Enterprises Co.), AMT, 3.90% due 8/01/2011 4,275
1,475 (Tom Miller Inc. Project), AMT, 3.75% due 12/01/2009 1,475
2,700 (Universal Tube, Inc. Project), AMT, 3.80% due 8/01/2011 2,700
3,500 (Waltec American Forgings), 3.85% due 10/01/2009 3,500
425 (Whitehall Industries), AMT, Series A-6, 3.85% due 1/01/2014 425
6,000 Michigan State Strategic Fund, PCR, Refunding (Consumers Power Project), VRDN,
Series A, 3.70% due 4/15/2018 (a) 6,000
7,500 Michigan State Trunk Line, FLOATS, Series SG-44, 3.80% due 11/15/2024 (a)(b) 7,500
2,000 Muskegon County, Michigan, Economic Development Corporation, Limited
Obligation Revenue Bonds (Baker College), VRDN, 3.70% due 12/01/2021 (a) 2,000
2,200 Niles, Michigan, Community Schools, SAN, 4.10% due 5/28/1998 2,201
2,000 Oscoda, Michigan, Area Schools District, SAN, 4.25% due 5/11/1998 2,001
1,700 Royal Oak, Michigan, Hospital Finance Authority Revenue Bonds (William Beaumont
Hospital), VRDN, Series L, 3.70% due 1/01/2027 (a) 1,700
175 Sterling Heights, Michigan, Economic Development Corporation, Limited
Obligation Revenue Refunding Bonds (Sterling Shopping Center), VRDN,
3.70% due 12/01/2010 (a) 175
University of Michigan, University Revenue Bonds, VRDN, Series A (a):
4,300 (Hospital), 3.70% due 12/01/2027 4,300
9,890 (Medical Service Plan), 3.70% due 12/01/2027 9,890
8,200 Refunding (Hospital), 3.70% due 12/01/2019 8,200
6,900 Wayne Charter County, Michigan, Airport Revenue Refunding Bonds (Detroit
Metropolitan County), VRDN, AMT, Series A, 3.75% due 12/01/2016 (a) 6,900
1,200 Westwood, Michigan, Community School District, SAN, 4.03% due 6/30/1998 1,201
800 Wyoming, Michigan, Economic Development Corporation, Revenue Refunding
Bonds (Family One Inc. Project), VRDN, AMT, 3.80% due 11/01/2019 (a) 800
Puerto Rico-- 5,500 Puerto Rico Commonwealth Government Development Bonds, CP, 3.10% due
4.6% 4/09/1998 5,500
2,500 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, VRDN, Series X, 3.375% due 7/01/1999 (a) 2,500
6,000 Puerto Rico, Electric Power Authority, Power Revenue Bonds, MSTR, VRDN,
Series SGA-43, 3.60% due 7/01/2022 (a)(c) 6,000
Total Investments (Cost--$302,843*)--99.0% 302,843
Other Assets Less Liabilities--l.O% 3,203
--------
Net Assets--100.0% $306,046
========
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March 31, 1998.
See Notes to Financial Statements.
(b) FGIC Insured.
(c) MBIA Insured.
(d) FSA Insured.
*Cost for Federal income tax purposes.
FS-42
<PAGE>
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$302,843,135) (Note la) $ 302,843,135
Cash 350,040
Interest receivable 3,125,436
Prepaid registration fees and other assets (Note ld) 10,972
--------------
Total assets 306,329,583
--------------
Liabilities:
Payables:
Investment adviser (Note 2) $ 133,613
Distributor (Note 2) 90,103 223,716
-------------
Accrued expenses and other liabilities 59,501
--------------
Total liabilities 283,217
--------------
Net Assets $ 306,046,366
==============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 30,620,174
Paid-in capital in excess of par 275,581,568
Accumulated realized capital losses--net (Note 4) (155,376)
--------------
Net Assets--Equivalent to $1.00 per share based on 306,201,742 shares of
beneficial interest outstanding $ 306,046,366
==============
See Notes to Financial Statements.
</TABLE>
FS-43
<PAGE>
<TABLE>
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 10,574,515
Expenses:
Investment advisory fees (Note 2) $ 1,420,153
Distribution fees (Note 2) 351,653
Transfer agent fees (Note 2) 55,103
Professional fees 52,809
Accounting services (Note 2) 49,333
Registration fees (Note 1d) 43,723
Custodian fees 25,410
Pricing fees 8,560
Trustees' fees and expenses 2,083
--------------
Total expenses 2,008,827
--------------
Investment income--net 8,565,688
Realized Loss on Investments--Net (Note 1c) (5,036)
--------------
Net Increase in Net Assets Resulting from Operations $ 8,560,652
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 8,565,688 $ 7,159,379
Realized loss on investments--net (5,036) (18,304)
-------------- --------------
Net increase in net assets resulting from operations 8,560,652 7,141,075
-------------- --------------
Dividends to Shareholders (Note 1e):
Investment income--net (8,565,688) (7,159,379)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (8,565,688) (7,159,379)
-------------- --------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,337,768,909 1,149,598,981
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) 8,565,686 7,159,224
-------------- --------------
1,346,334,595 1,156,758,205
Cost of shares redeemed (1,313,252,528) (1,131,314,536)
-------------- --------------
Net increase in net assets derived from beneficial interest transactions 33,082,067 25,443,669
-------------- --------------
Net Assets:
Total increase in net assets 33,077,031 25,425,365
Beginning of year 272,969,335 247,543,970
-------------- --------------
End of year $ 306,046,366 $ 272,969,335
============== ==============
See Notes to Financial Statements.
</TABLE>
FS-44
<PAGE>
<TABLE>
CMA MICHIGAN MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.07% 2.90% 3.12% 2.57% 1.81%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses .71% .72% .73% .73% .72%
======== ======== ======== ======== ========
Investment income--net 3.02% 2.84% 3.05% 2.54% 1.79%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $306,046 $272,969 $247,544 $220,171 $236,435
======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
FS-45
<PAGE>
CMA MICHIGAN MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA Michigan Municipal Money Fund (the "Fund") is part of CMA Multi-
State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company Act of 1940,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the Fund. The
distribution fee is to compensate MLPF&S
FS-46
<PAGE>
financial consultants and other directly involved branch office personnel for
selling shares of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the administrative
and operational services rendered to the Fund by MLPF&S in processing share
orders and administering shareholder accounts.
CMA MICHIGAN MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $155,000, of which $62,000 expires in 2001, $4,000
expires in 2002, $50,000 expires in 2003, $32,000 expires in 2005
and $7,000 expires in 2006. This amount will be available to offset
like amounts of any future taxable gains.
FS-47
<PAGE>
- -------------------------------------------------------------------------------
CMA NEW JERSEY MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA NEW JERSEY MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA New Jersey Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 31, 1998, the related state-
ments of operations for the year then ended and changes in net assets for each
of the years in the two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA New Jersey Mu-
nicipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with gen-
erally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 1, 1998
FS-48
<PAGE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New Jersey-- $ 14,900 Atlantic City, New Jersey, BAN, UT, 4.25% due 8/27/1998 $ 14,926
95.7% 3,800 Atlantic County, New Jersey, Improvement Authority Revenue Bonds
(Pooled Governmental Loan Program), ACES, 3.35% due 7/01/2026 (a) 3,800
8,500 Bernards Township, New Jersey, Sewage Authority, Sewer Revenue Refunding
Bonds, 3.85% due 12/15/1998 8,500
Camden County, New Jersey, Improvement Authority Revenue Bonds, VRDN (a):
2,780 (Jewish Community Center Project), 3.50% due 12/01/2010 2,780
13,900 (Parkview Redevelopment Housing Project), AMT, 3.70% due 7/01/2026 13,900
4,620 Clifton, New Jersey, BAN, UT, 4.25% due 6/25/1998 4,624
8,859 Denville Township, New Jersey, BAN, 4.25% due 6/16/1998 8,869
Eagle Tax Exempt Trust, New Jersey State Housing and Mortgage Finance
Agency, VRDN (a):
14,000 Series 97C-3002, Class A, 3.25% due 10/01/2019 14,000
1,000 Series 94C-3001, 3.51% due 10/01/2015 1,000
18,000 Series 94C-3001, 3.77% due 10/01/2015 18,000
Essex County, New Jersey, Improvement Authority Revenue Bonds (Pooled
Governmental Loan Program), ACES (a):
2,000 3.30% due 12/01/1998 2,000
5,050 3.30% due 7/01/2026 5,050
13,260 Floating Rate Trust Certificates, VRDN, Series 1994-E, 3.70% due 7/02/1999 (a) 13,260
8,000 Hudson County, New Jersey, Improvement Authority, Floating Rate Bonds
(Essential Purpose Pooled Government), VRDN, 3.70% due 7/15/2026 (a) 8,000
19,600 Monmouth County, New Jersey, Improvement Authority Revenue Bonds
(Pooled Government Loan Program), ACES, 3.40% due 8/01/2016 (a) 19,600
10,000 New Brunswick, New Jersey, BAN, UT, 4.125% due 7/31/1998 10,014
New Jersey EDA, Dock Facility Revenue Refunding Bonds (Bayonne/IMTT
Project), VRDN, Series A (a):
2,200 3.55% due 12/01/2027 2,200
11,450 3.60% due 12/01/2027 11,450
</TABLE>
Portfolio Abbreviations for CMA New Jersey Municipal Money Fund
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
EDA Economic Development Authority
FLOATS Floating Rate Securities
GO General Obligation Bonds
IDR Industrial Development Revenue Bonds
MSTR Municipal Securities Trust Receipts
PCR Pollution Control Revenue Bonds
TRAN Tax and Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-49
<PAGE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New Jersey New Jersey EDA, Economic Development Revenue Bonds, VRDN (a):
(continued) $ 4,900 (400 International Drive Partners), 3.55% due 9/01/2005 $ 4,900
525 (Astor Chocolate Corporation Project), AMT, 3.70% due 4/01/2002 525
3,300 (Atlanta--Danic Urban Renewal), 3.30% due 11/01/2007 3,300
9,125 (Benedictine Abbey of Newark), 3.70% due 12/01/2019 9,125
1,525 (Brach/Jersey Avenue Project), 3.35% due 5/01/2011 1,525
1,250 (Catholic Community Services), 3.55% due 6/01/2025 1,250
3,600 (Delta Plastics Corporation Project), 3.95% due 10/01/2006 3,600
2,369 (Filtra Corporation Project), 3.70% due 8/01/2015 2,369
1,700 (International Vitamin Corporation Project), AMT, 3.70% due 5/01/2003 1,700
1,700 (Office Court Associates Project), AMT, 3.70% due 4/01/2011 1,700
1,740 (Park Lane Associates Project), AMT, 3.70% due 4/01/2010 1,740
6,100 Refunding (Lawrenceville School Project), Series B, 3.30% due 7/01/2026 6,100
6,500 Refunding (Multi-Modal--Church & Dwight), 3.30% due 12/01/2008 6,500
2,198 Refunding (RJB Associates Project), 3.75% due 8/01/2008 2,198
1,225 (Saint Peter's Preparatory School), 3.80% due 1/01/2010 1,225
3,000 (Wyckoff Family YMCA Project), 3.80% due 10/01/2017 3,000
New Jersey EDA, Exempt Facilities Revenue Bonds, CP, AMT:
3,000 (Chambers Cogeneration), 3.10% due 4/01/1998 3,000
2,000 (Chambers Cogeneration), 3.35% due 4/06/1998 2,000
17,000 (Chambers Cogeneration), 3.50% due 5/01/1998 17,000
2,300 (Chambers Cogeneration), 3.20% due 5/04/1998 2,300
5,200 (Chambers Cogeneration), 3.30% due 6/09/1998 5,200
9,300 (Keystone Project), 3.20% due 5/01/1998 9,300
4,300 (Keystone Project), 3.20% due 5/04/1998 4,300
4,500 (Keystone Project), 3.25% due 5/14/1998 4,500
4,400 (Keystone Project), 3.30% due 6/09/1998 4,400
1,600 New Jersey EDA, IDR (Plastic Suppliers Inc. Project), VRDN, AMT, 3.80% due
6/01/2006 (a) 1,600
600 New Jersey EDA, Industrial and Economic Development Revenue Bonds
(Elizabeth Realty Urban Renewal Associates--1986 Project), VRDN, AMT,
4% due 6/01/2000 (a) 600
24,000 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI Corporation
Project), VRDN, AMT, Series A, 3.60% due 6/01/2026 (a)(b) 24,000
New Jersey EDA, PCR, VRDN (a):
4,835 (General Motors Corp. Project), 3.50% due 10/01/2000 4,835
7,450 (Merck & Company), Series A, 3.90% due 10/01/2004 7,450
1,700 Refunding (Public Service Electric & Gas Company), Series A,
3.30% due 3/01/2012 (e) 1,700
5,000 New Jersey EDA, Port Facility Revenue Bonds (Trailer Marine Crowle), VRDN,
3.65% due 2/01/2002 (a) 5,000
New Jersey EDA, Revenue Bonds, VRDN (a):
4,905 (Accurate Box Company Inc. Project), AMT, 3.75% due 11/01/2009 4,905
2,150 (Adam Spence Corporation Project), AMT, 3.75% due 9/01/2017 2,150
2,200 (Bethany Baptist Church Project), 3.15% due 3/01/2018 2,200
3,700 (Catholic Charities), 3.70% due 11/01/2012 3,700
960 (E.P. Henry Corp. Project), 3.80% due 3/01/2005 960
1,035 (Economic Growth--Greater Mercer County), AMT, Series A-1, 3.40% due
11/01/2016 1,035
4,020 (Economic Growth--Greater Mercer County), AMT, Series E, 3.40% due
11/01/2006 4,020
3,295 (Economic Growth--Greater Mercer County), AMT, Series H, 3.40% due
11/01/2016 3,295
</TABLE>
FS-50
<PAGE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New Jersey New Jersey EDA, Revenue Bonds, VRDN (a)(concluded):
(continued) $ 1,255 (Economic Growth--Greater Mercer County), Series F, 3.30% due
11/01/2016 $ 1,255
1,500 (Economic Growth--Greater Mercer County), Series G, 3.30% due
11/01/2016 1,500
2,800 (Economic Growth--Paterson), AMT, Series A, 3.35% due 1/01/2016 2,800
2,000 (Economic Growth--Paterson), AMT, Series B, 3.35% due 1/01/2005 2,000
4,600 (Hoffman-La Roche, Inc. Project), AMT, 3.45% due 11/01/2011 4,600
3,000 (Joe & James Moreng), AMT, 3.45% due 3/01/2013 3,000
1,000 (The Peddie School Project), 3.65% due 2/01/2026 1,000
2,000 (The Peddie School Project), Series B, 3.65% due 2/01/2019 2,000
1,000 (Saint James Prep and Social Services Project), 3.30% due 12/01/2027 1,000
6,800 New Jersey EDA, Water Facilities Revenue Bonds (Elizabethtown Water
Company Project), VRDN, AMT, Series A, 3.60% due 6/01/2027 (a)(b) 6,800
21,930 New Jersey Sports and Exposition Authority Revenue Bonds (State Contract),
VRDN, Series C, 3.45% due 9/01/2024 (a)(e) 21,930
New Jersey State Educational Facilities Authority Revenue Bonds:
7,585 FLOATS, Series SG-48, 3.65% due 7/01/2026 (a)(e) 7,585
2,000 (Higher Educational Facilities Trust Fund), Series A, 5.125% due
9/01/1998 (b) 2,011
3,400 New Jersey State Higher Educational Assistance Authority, Student Loan
Revenue Bonds (New Jersey Class Loan Program), AMT, Series B, 3.90% due
6/01/1998 (e) 3,400
10,000 New Jersey State Highway Authority, General Revenue Bonds (Garden State
Parkway), 7.25% due 1/01/1999 (c) 10,466
1,535 New Jersey State Housing and Mortgage Finance Agency Revenue Bonds,
VRDN, Series C-76, 3.80% due 10/01/2015 (a) 1,535
1,000 New Jersey State, Refunding, GO, UT, Series E, 5% due 7/15/1998 1,003
New Jersey State TRAN, CP, Series 97:
5,700 3.15% due 4/03/1998 5,700
5,800 3.15% due 4/06/1998 5,800
10,400 3.45% due 4/06/1998 10,400
9,400 3.75% due 4/06/1998 9,400
5,000 3.80% due 4/06/1998 5,000
4,300 3.75% due 4/07/1998 4,300
5,000 3.35% due 4/09/1998 5,000
4,000 3.40% due 5/12/1998 4,000
5,000 3.40% due 6/05/1998 5,000
5,000 3.40% due 6/09/1998 5,000
5,500 3.45% due 6/15/1998 5,500
10,900 New Jersey State Transportation Trust Fund Authority Refunding Bonds
(Transportation System), Series A, 5.50% due 6/15/1998 10,942
22,000 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds,
VRDN, Series D, 3.15% due 1/01/2018 (a)(d) 22,000
8,000 Ocean County, New Jersey, BAN, UT, 4.25% due 6/19/1998 8,009
18,028 Passaic County, New Jersey, BAN, UT, 4.25% due 6/16/1998 18,039
Port Authority of New York and New Jersey (Line of Credit), CP, AMT:
3,220 3.15% due 4/01/1998 3,220
2,800 3.25% due 5/01/1998 2,800
1,260 3.45% due 5/22/1998 1,260
</TABLE>
FS-51
<PAGE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New Jersey Port Authority of New York and New Jersey, Special Obligation Revenue
(concluded) Bonds, VRDN, AMT (a):
$ 14,500 Floating Rate Receipts, Series SG-94, 3.80% due 12/01/2017 (e) $ 14,500
23,600 MSTR, Series SGA-69, 3.70% due 12/01/2022 23,600
Port Authority of New York and New Jersey, Special Obligation Revenue Bonds
(Versatile Structure Obligation), VRDN (a):
46,600 AMT, Refunding, Series 1R, 3.75% due 8/01/2028 46,600
38,400 AMT, Series 6, 3.70% due 12/01/2027 38,400
44,900 Series 4, 3.70% due 4/01/2024 44,900
7,300 Salem County, New Jersey, Industrial Pollution Control Financing Authority
Revenue Bonds (du Pont (E.I.) de Nemours), VRDN, Series A, 3.40% due
3/01/2012 (a) 7,300
Salem County, New Jersey, Pollution Control Financing Authority, PCR,
Refunding, VRDN (a)(e):
1,000 (Atlantic City Electric), AMT, Series B, 3.55% due 7/15/2017 1,000
5,500 (Atlantic City Electric), Series A, 3.45% due 4/15/2014 5,500
4,000 (Public Service Electric & Gas), AMT, 3.40% due 4/01/2031 4,000
11,660 Sussex County, New Jersey, BAN, UT, 4% due 2/09/1999 11,692
Union County, New Jersey, Industrial Pollution Control Financing Authority,
PCR, Refunding, VRDN (a):
2,200 (Allied Signal Project), 3.80% due 12/01/2020 2,200
1,100 (Exxon Project), 3.55% due 7/01/2033 1,100
1,500 West Orange, New Jersey, BAN, 4.25% due 11/17/1998 1,504
8,000 West Windsor/Plainsboro, New Jersey, Regional School District Temporary
Notes, UT, 4% due 1/27/1999 8,027
17,800 Woodbridge Township, New Jersey, BAN, UT, 4.25% due 7/01/1998 17,819
Puerto Rico-- 7,000 Puerto Rico Commonwealth, Government Development Bank, Refunding,
3.6% VRDN, 3.375% due 12/01/2015 (a)(e) 7,000
22,000 Puerto Rico Commonwealth, TRAN, Series A, 4.50% due 7/30/1998 22,056
Total Investments (Cost--$794,633*)--99.3% 794,633
Other Assets Less Liabilities--0.7% 5,364
--------
Net Assets--100.0% $799,997
========
<FN>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in effect at
March 31, 1998.
(b)AMBAC Insured.
(c)Prerefunded.
(d)FGIC Insured.
(e)MBIA Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
</TABLE>
FS-52
<PAGE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$794,632,609) (Note 1a) $ 794,632,609
Cash 52,964
Interest receivable 5,770,940
Prepaid registration fees and other assets (Note 1d) 225,342
--------------
Total assets 800,681,855
--------------
Liabilities:
Payables:
Investment adviser (Note 2) $ 337,709
Distributor (Note 2) 232,058 569,767
--------------
Accrued expenses and other liabilities 114,793
--------------
Total liabilities 684,560
--------------
Net Assets $ 799,997,295
==============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 80,013,757
Paid-in capital in excess of par 720,123,489
Accumulated realized capital losses--net (Note 4) (139,951)
--------------
Net Assets--Equivalent to $1.00 per share based on 800,137,573 shares of
beneficial interest outstanding $ 799,997,295
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 25,399,676
Expenses:
Investment advisory fees (Note 2) $ 3,390,860
Distribution fees (Note 2) 879,810
Transfer agent fees (Note 2) 127,236
Accounting services (Note 2) 79,096
Registration fees (Note 1d) 75,730
Professional fees 70,307
Custodian fees 46,738
Pricing fees 12,005
Trustees' fees and expenses 5,383
Other 6,152
--------------
Total expenses 4,693,317
--------------
Investment income--net 20,706,359
Realized Loss on Investments--Net (Note 1c) (31,035)
--------------
Net Increase in Net Assets Resulting from Operations $ 20,675,324
==============
See Notes to Financial Statements.
</TABLE>
FS-53
<PAGE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 20,706,359 $ 17,125,404
Realized loss on investments--net (31,035) (47,138)
-------------- --------------
Net increase in net assets resulting from operations 20,675,324 17,078,266
-------------- --------------
Dividends to Shareholders (Note 1e):
Investment income--net (20,706,317) (17,117,196)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (20,706,317) (17,117,196)
-------------- --------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 2,799,906,641 2,177,998,397
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) 20,706,788 17,116,053
-------------- --------------
2,820,613,429 2,195,114,450
Cost of shares redeemed (2,703,946,349) (2,121,998,967)
-------------- --------------
Net increase in net assets derived from beneficial interest transactions 116,667,080 73,115,483
-------------- --------------
Net Assets:
Total increase in net assets 116,636,087 73,076,553
Beginning of year 683,361,208 610,284,655
-------------- --------------
End of year $ 799,997,295 $ 683,361,208
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.03) (.02) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return 2.97% 2.83% 3.07% 2.52% 1.82%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses .66% .68% .68% .71% .70%
========== ========== ========== ========== ==========
Investment income--net 2.92% 2.78% 3.02% 2.51% 1.80%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) $ 799,997 $ 683,361 $ 610,285 $ 525,747 $ 441,846
========== ========== ========== ========== ==========
See Notes to Financial Statements.
</TABLE>
FS-54
<PAGE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA New Jersey Municipal Money Fund (the "Fund") is part of CMA
Multi-State Municipal Series Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The following
is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $43
have been reclassified between accumulated net realized capital
losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
FS-55
<PAGE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company Act of 1940,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the Fund. The
distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares
of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the
administrative and operational services rendered to the Fund by
MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $140,000, of which $72,000 expires in 2003, $4,000
expires in 2004, $33,000 expires in 2005 and $31,000 expires in
2006. This amount will be available to offset like amounts of any
future taxable gains.
FS-56
<PAGE>
- -------------------------------------------------------------------------------
CMA NEW YORK MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA NEW YORK MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA New York Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 31, 1998, the related state-
ments of operations for the year then ended and changes in net assets for each
of the years in the two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian and brokers. An audit also in-
cludes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presenta-
tion. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA New York Mu-
nicipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with gen-
erally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 8, 1998
FS-57
<PAGE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New York-- $ 890 Albany, New York, BAN, UT, Series A, 4.25% due 12/18/1998 $ 892
101.6% 1,049 Albany, New York, Housing Authority, Private Act Revenue Bonds (Historic
Bleeker Terrace), VRDN, AMT, 3.80% due 3/01/2015 (a) 1,049
2,500 Albany, New York, IDA, IDR, Refunding (Albany Ventures Inc. Project),
VRDN, 3.64% due 12/29/2010 (a) 2,500
1,565 Brockport, New York, Central School District, BAN, UT, 4.25% due 12/17/1998 1,570
13,000 Buffalo, New York, RAN, 4.40% due 8/05/1998 13,026
6,250 Connetquot Central School District, Islip, New York, UT, 4.25% due 6/25/1998 6,256
10,000 Copake Taconic Hills, New York, Central School District, BAN, 4.25%
due 4/08/1999 10,053
Eagle Tax-Exempt Trust, VRDN (a):
7,200 New York City, Series 1994-C4, 3.70% due 8/01/2003 7,200
20,000 New York Medical Care, New York Hospital, Series 1995-3201, 3.77%
due 8/15/2024 20,000
27,000 New York State Electric Gas Corp., Series 1994-3201, 3.82% due 4/01/2034 27,000
13,000 New York State Local Government Assistance, Series A, 3.40%
due 4/01/2017 13,000
7,000 Farmingdale, New York (Unified Free School District), 4.25% due 6/29/1998 7,006
Harrison, New York (Central School District):
14,745 BAN, 4% due 3/18/1999 14,804
6,450 BAN, UT, 4.25% due 7/17/1998 6,456
2,200 TAN, UT, 4.25% due 6/26/1998 2,202
13,000 Hempstead, New York (Unified Free School District), TAN, UT, 4.25% due
6/30/1998 13,011
10,000 Hempstead Town, New York, BAN, UT, Series D, 4% due 10/15/1998 10,009
3,400 Lancaster, New York, IDA, IDR (Jiffy Tite Co. Inc.), VRDN, 3.74% due
4/01/2018 (a) 3,400
2,955 Monroe County, New York, IDA (Coopervision Project), VRDN, 3.89%
due 1/01/2012 (a) 2,955
Municipal Assistance Corporation, City of New York, New York:
21,000 CP, Series 2, 3.15% due 4/08/1998 21,000
7,525 Refunding, Series E, 4.10% due 7/01/1998 7,530
4,340 Refunding, Series L, 4.50% due 7/01/1998 4,347
14,000 Series F, 3.20% due 4/03/1998 (d) 14,000
12,900 VRDN, Sub-Series K-2, 3.90% due 7/01/2008 (a) 12,900
20,000 Nassau County, New York, RAN, Series B, 4.25% due 4/10/1998 20,002
New York City, New York, CP:
24,600 3.15% due 4/06/1998 24,600
20,000 3.25% due 4/06/1998 20,000
2,000 3.75% due 4/06/1998 2,000
12,000 3.75% due 4/08/1998 12,000
25,500 3.50% due 4/09/1998 25,500
5,000 3.65% due 4/09/1998 5,000
</TABLE>
Portfolio Abbreviations for CMA New York Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
MSTR Municipal Securities Trust Receipts
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
TAN Tax Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-58
<PAGE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New York New York City, New York, CP (concluded):
(continued) $ 19,000 3.60% due 4/19/1998 $ 19,000
2,000 3.80% due 5/08/1998 2,000
6,100 3.65% due 7/15/1998 6,100
4,400 3.55% due 8/07/1998 4,400
21,200 3.50% due 8/10/1998 21,200
52,100 3.50% due 8/11/1998 52,100
2,000 New York City, New York, City Housing Development Corporation,
Residential Mortgage Revenue Bonds (East 17th Street), VRDN, Series A,
3.70% due 1/01/2023 (a) 2,000
New York City, New York, GO, VRDN (a):
1,400 3.85% due 8/01/2020 1,400
5,000 MSTR, SGB-36, UT, 3.70% due 6/01/2022 (d) 5,000
600 Series C, 3.80% due 10/01/2023 600
14,850 UT, BTP-264, 3.80% due 8/01/2009 14,850
6,350 UT, Series B, Sub-Series B-2, 3.70% due 8/15/2003 (c) 6,350
3,300 UT, Series B, Sub-Series B-3, 3.70% due 8/15/2004 (c) 3,300
2,700 UT, Series B, Sub-Series B-4, 3.70% due 8/15/2023 (c) 2,700
4,500 UT, Series B, Sub-Series B-7, 3.70% due 8/15/2018 (d) 4,500
1,600 UT, Sub-Series A-4, 3.65% due 8/01/2022 1,600
21,600 UT, Sub-Series A-4, 3.65% due 8/01/2023 21,600
400 UT, Sub-Series A-5, 3.70% due 8/01/2016 400
2,300 UT, Sub-Series A-7, 3.70% due 8/01/2021 2,300
400 UT, Sub-Series A-10, 3.70% due 8/01/2016 400
400 UT, Sub-Series B-2, 3.80% due 8/15/2020 400
500 UT, Sub-Series B-4, 3.80% due 8/15/2023 500
New York City, New York, Housing Development Corporation, M/F Housing
Revenue Bonds, VRDN, Series A (a):
54,600 (Monterey), 3.50% due 11/15/2019 (f) 54,600
32,400 (West 89th Street), AMT, 3.60% due 12/01/2029 32,400
20,000 New York City, New York, Housing Development Corporation, M/F Rental
Housing Revenue Bonds (Carnegie Park), VRDN, Series A, 3.50%
due 11/15/2019 (a) 20,000
1,600 New York City, New York, IDA, IDR (Bowe Industry Inc. Project), VRDN, AMT,
Series K, 3.50% due 11/01/2010 (a) 1,600
New York City, New York, Municipal Water Finance Authority, Water and
Sewer System Revenue Bonds:
18,500 CP, 3.40% due 4/09/1998 18,500
18,700 CP, 3.45% due 5/08/1998 18,700
30,400 CP, 3.60% due 6/25/1998 30,400
21,700 VRDN, MSTR, SGB-25, 3.80% due 6/15/2023 (a)(c) 21,700
30,000 VRDN, MSTR, SGB-26, 3.80% due 6/15/2029 (a)(c) 30,000
31,530 VRDN, MSTR, SGB-27, 3.80% due 6/15/2024 (a)(b)(e) 31,530
9,500 VRDN, Series 93-C, 3.70% due 6/15/2022 (a)(b) 9,500
8,200 VRDN, Series A, 3.70% due 6/15/2025 (a)(b) 8,200
1,100 VRDN, Series C, 3.70% due 6/15/2023 (a)(b) 1,100
3,800 VRDN, Series G, 3.65% due 6/15/2024 (a)(b) 3,800
15,590 New York City, New York, Refunding, Series G, 4.25% due 8/01/1998 15,623
New York City, New York, UT:
31,800 RAN, Series A, 4.50% due 6/30/1998 31,862
5,400 VRDN, Series B, Sub-Series B-6, 3.65% due 8/15/2005 (a)(c) 5,400
New York State, CP:
10,000 3.60% due 6/18/1998 10,000
20,000 3.55% due 7/12/1998 20,000
</TABLE>
FS-59
<PAGE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New York New York State Dormitory Authority Revenue Bonds:
(continued) $ 13,000 CP, 3.50% due 4/07/1998 $ 13,000
5,045 (Foundling Charitable), VRDN, 3.60% due 7/01/2012 (a) 5,045
7,500 (Memorial Sloan Kettering), CP, Series A, 3% due 4/08/1998 7,500
1,600 (Memorial Sloan Kettering), CP, Series A, 3.55% due 7/10/1998 1,600
2,600 (Memorial Sloan Kettering), CP, Series B, 3% due 4/08/1998 2,600
2,000 (Memorial Sloan Kettering), CP, Series B, 3.55% due 7/10/1998 2,000
13,600 (Memorial Sloan Kettering), CP, Series C, 3.30% due 4/08/1998 13,600
1,300 (Memorial Sloan Kettering), CP, Series C, 3.55% due 7/10/1998 1,300
7,000 (Memorial Sloan Kettering), CP, Series C, 3.50% due 7/14/1998 7,000
4,395 (Memorial Sloan Kettering), CP, Series D, 3% due 4/08/1998 4,395
3,870 Refunding (Secured Hospital-Brookdale Hospital), Series J, 3.90%
due 2/15/1999 3,870
New York State Energy Research and Development Authority, Electric Facilities
Revenue Bonds (Long Island Lighting Co. Project), VRDN, AMT (a):
15,000 Series A, 3.70% due 8/01/2025 15,000
6,880 Series A, 3.55% due 12/01/2027 6,880
18,300 Series B, 3.70% due 11/01/2023 18,300
New York State Energy Research and Development Authority, PCR, VRDN (a):
26,300 (Niagara Mohawk Power Corporation Project), AMT, Series A, 3.70% due
12/01/2023 26,300
31,400 (Niagara Mohawk Power Corporation Project), AMT, Series B, 3.70% due
7/01/2027 31,400
9,000 Refunding (New York State Electric and Gas), Series D, 3.65% due
10/01/2029 9,000
26,900 New York State Environmental Facilities Corporation, Resource Recovery
Revenue Bonds (OFS Equity Huntington Project), VRDN, AMT, 3.75% due
11/01/2014 (a) 26,900
1,700 New York State Environmental Facilities Corporation, Solid Waste Disposal
Revenue Bonds, CP, 3.20% due 4/03/1998 1,700
29,450 New York State Environmental Facilities Corporation, Water Facilities
Revenue Bonds, CP, 3.20% due 4/03/1998 29,450
New York State, HFA, Revenue Bonds, VRDN (a):
29,300 (East 84th Street), AMT, Series A, 3.60% due 11/01/2028 29,300
8,600 (Normandie Court-I Project), 3.50% due 5/15/2015 8,600
18,000 (Tribeca Landing Housing), AMT, Series A, 3.50% due 11/01/2030 18,000
New York State Local Government Assistance Corporation, VRDN (a):
14,300 Series B, 3.40% due 4/01/2023 14,300
2,700 Series C, 3.45% due 4/01/2025 2,700
11,900 Series F, 3.40% due 4/01/2025 11,900
500 New York State Medical Care Facilities Finance Agency, Special Obligation,
Mental Services Facilities Improvement Bonds, Series A, 7.70% due 11/01/1998 511
New York State Power Authority, CP:
5,500 3% due 4/06/1998 5,500
10,000 3.40% due 5/01/1998 10,000
New York State Power Authority, Revenue and General Purpose Bonds, CP:
18,000 3.20% due 4/06/1998 18,000
25,000 3.60% due 4/06/1998 25,000
7,600 3.20% due 4/09/1998 7,600
11,000 3.60% due 5/01/1998 11,000
11,500 3.60% due 5/11/1998 11,500
20,000 3.60% due 6/10/1998 20,000
21,000 3.45% due 6/11/1998 21,000
</TABLE>
FS-60
<PAGE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
New York $ 43,890 New York State Power Authority, Revenue and General Purpose Bonds
(concluded) (Junior Lien), 3.60% due 9/01/1998 $ 43,890
New York State Thruway Authority, General Revenue Bonds, VRDN (a):
14,800 3.70% due 1/01/2024 (b) 14,800
7,000 MSTR, Series SG-31, 3.75% due 1/01/2025 7,000
2,000 Oceanside, New York (Unified Free School District), TAN, UT, 4.25% due
6/26/1998 2,002
1,000 Oneida County, New York, Refunding, 4% due 3/15/1999 (b) 1,002
5,000 Oswego County, New York, BAN, AMT, UT, 4.50% due 5/08/1998 5,002
12,500 Patchogue-Medford, New York (Unified Free School District), TAN, UT, 4.25%
due 6/25/1998 12,510
Port Authority of New York and New Jersey, AMT:
2,840 CP, 3% due 4/08/1998 2,840
2,515 CP, 3.55% due 7/10/1998 2,515
9,765 VRDN, Series SG-52, 3.80% due 3/01/2016 (a)(c) 9,765
16,830 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds,
VRDN, AMT, SG-93, 3.80% due 12/01/2015 (a)(c) 16,830
Port Authority of New York and New Jersey, Special Obligation Revenue Bonds
(Versatile Structure Obligation), VRDN (a):
15,400 AMT, Refunding, Series 1-R, 3.75% due 8/01/2028 15,400
1,800 Series 5, 3.70% due 8/01/2024 1,800
15,400 Series 6, 3.70% due 12/01/2017 15,400
14,590 Rochester, New York, BAN, UT, Series IV, 4.25% due 10/29/1998 14,621
3,600 Schenectady County, New York, IDA, IDR (Super Steel Inc. Project), VRDN,
AMT, Series A, 3.65% due 5/01/2006 (a) 3,600
9,015 Schenectady, New York, BAN, Series A, 4% due 4/08/1999 9,041
27,000 Suffolk County, New York, IDA, IDR (Nissequogue Cogeneration Partners), VRDN,
3.65% due 12/15/2023 (a) 27,000
7,500 Suffolk County, New York, TAN, UT, Series II, 4.50% due 9/10/1998 7,522
11,535 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Community
Development Properties-Larned Project), VRDN, 3.75% due 4/01/2018 (a) 11,535
8,935 Three Village Central School District, New York (Brookhaven and Smithtown),
TAN, UT, 4.25% due 6/30/1998 8,943
100 Triborough Bridge and Tunnel Authority, New York, Special Obligation
Revenue Bonds, VRDN, 3.45% due 1/01/2024 (a)(b) 100
9,750 Waterloo, New York, Central School District, BAN, UT, 4% due 3/17/1999 9,777
20,000 Westchester County, New York, TAN, UT, 3.59% due 12/29/1998 20,002
6,440 William Floyd, New York (Unified Free School District), TAN, UT, 4.25%
due 6/30/1998 6,445
Puerto Rico-- 5,000 Puerto Rico Commonwealth, TRAN, Series A, 4.50% due 7/30/1998 5,016
0.3%
Total Investments (Cost--$1,584,992*)--101.9% 1,584,992
Liabilities in Excess of Other Assets--(1.9%) (28,971)
----------
Net Assets--100.0% $1,556,021
==========
<FN>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in effect at
March 31, 1998.
(b)FGIC Insured.
See Notes to Financial Statements.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)FSA Insured.
(f)FNMA Collateralized.
*Cost for Federal income tax purposes.
</TABLE>
FS-61
<PAGE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$1,584,992,214) (Note 1a) $ 1,584,992,214
Cash 1,451,444
Interest receivable 9,463,190
Prepaid registration fees and other assets (Note 1d) 41,982
----------------
Total assets 1,595,948,830
----------------
Liabilities:
Payables:
Securities purchased $ 38,702,430
Investment adviser (Note 2) 595,018
Distributor (Note 2) 437,475
Dividends to shareholders (Note 1e) 131
Beneficial interest redeemed 105 39,735,159
----------------
Accrued expenses and other liabilities 193,090
----------------
Total liabilities 39,928,249
----------------
Net Assets $ 1,556,020,581
================
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 155,691,478
Paid-in capital in excess of par 1,401,142,780
Accumulated realized capital losses--net (Note 4) (813,677)
----------------
Net Assets--Equivalent to $1.00 per share based on 1,556,914,778 shares of
beneficial interest outstanding $ 1,556,020,581
================
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 48,409,973
Expenses:
Investment advisory fees (Note 2) $ 5,848,065
Distribution fees (Note 2) 1,646,549
Transfer agent fees (Note 2) 225,365
Registration fees (Note 1d) 115,542
Accounting services (Note 2) 112,683
Custodian fees 70,823
Professional fees 66,863
Pricing fees 13,211
Trustees' fees and expenses 9,756
Other 7,252
----------------
Total expenses 8,116,109
----------------
Investment income--net 40,293,864
Realized Loss on Investments--Net (Note 1c) (14,703)
----------------
Net Increase in Net Assets Resulting from Operations $ 40,279,161
================
See Notes to Financial Statements.
</TABLE>
FS-62
<PAGE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 40,293,864 $ 32,928,337
Realized loss on investments--net (14,703) (802)
--------------- ---------------
Net increase in net assets resulting from operations 40,279,161 32,927,535
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net (40,290,474) (32,920,755)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (40,290,474) (32,920,755)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 5,366,386,741 4,110,518,531
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) 40,289,876 32,921,515
--------------- ---------------
5,406,676,617 4,143,440,046
Cost of shares redeemed (5,086,967,045) (4,039,388,472)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions 319,709,572 104,051,574
--------------- ---------------
Net Assets:
Total increase in net assets 319,698,259 104,058,354
Beginning of year 1,236,322,322 1,132,263,968
--------------- ---------------
End of year $ 1,556,020,581 $ 1,236,322,322
=============== ===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA NEW YORK MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net .03 .03 .03 .03 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .03 .03 .03 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return 3.09% 2.94% 3.17% 2.59% 1.79%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses .61% .63% .64% .67% .67%
========== ========== ========== ========== ==========
Investment income--net 3.04% 2.88% 3.12% 2.59% 1.78%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) $1,556,021 $1,236,322 $1,132,264 $ 919,852 $ 772,760
========== ========== ========== ========== ==========
See Notes to Financial Statements.
</TABLE>
FS-63
<PAGE>
CMA NEW YORK MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA New York Municipal Money Fund (the "Fund") is part of CMA Multi-
State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $3,390
have been reclassified between accumulated net realized capital
losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
FS-64
<PAGE>
CMA NEW YORK MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company Act of 1940,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the Fund. The
distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares
of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the
administrative and operational services rendered to the Fund by
MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $814,000, of which $203,000 expires in 2001, $293,000
expires in 2002, $304,000 expires in 2003, $2,000 expires in 2004
and $12,000 expires in 2006. This amount will be available to offset
like amounts of any future taxable gains. Expired capital loss carry-
forward in the amount of $80,520 has been reclassified to paid-in
capital in excess of par.
FS-65
<PAGE>
- -------------------------------------------------------------------------------
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA North Carolina Municipal Money Fund of
CMA Multi-State Municipal Series Trust as of March 31, 1998, the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial high-
lights for each of the years in the five-year period then ended. These finan-
cial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these finan-
cial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA North Carolina
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with gen-
erally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 5, 1998
FS-66
<PAGE>
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
North Carolina-- $ 1,000 Beaufort County, North Carolina, Industrial Facilities and Pollution Control
87.4% Financing Authority Revenue Bonds (Texasgulf, Inc. Project), VRDN, 3.75%
due 12/01/2000 (a) $ 1,000
5,400 Beaufort County, North Carolina, Water District IV, BAN, 3.795% due 8/26/1998 5,400
2,600 Brunswick County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Woods Industries Inc. Project), VRDN,
AMT, 3.90% due 7/01/2017 (a) 2,600
Buncombe County, North Carolina, VRDN (a):
410 3.65% due 6/01/2000 410
455 3.65% due 6/01/2002 455
500 3.65% due 6/01/2004 500
525 3.65% due 6/01/2005 525
580 3.65% due 6/01/2007 580
435 3.65% due 6/01/2008 435
640 3.65% due 6/01/2009 640
740 3.65% due 6/01/2012 740
815 3.65% due 6/01/2014 815
900 3.65% due 6/01/2016 900
6,600 Cabarrus County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Industrial Revenue Bonds (S&D Coffee Inc. Project),
VRDN, AMT, 3.70% due 9/01/2011 (a) 6,600
3,000 Carteret County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, PCR (Texasgulf, Inc. Project), VRDN, 3.775% due
10/01/2005 (a) 3,000
800 Catawba County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Lukens Steel Co. Project), VRDN, AMT,
3.85% due 12/01/2009 (a) 800
5,000 Charlotte-Mecklenberg Hospital Authority, North Carolina, Health Care System
Revenue Bonds, VRDN, Series D, 3.65% due 1/15/2026 (a) 5,000
18,895 Charlotte, North Carolina, Airport Revenue Refunding Bonds, VRDN, Series A,
AMT, 3.75% due 7/01/2017 (a)(b) 18,895
2,180 Craven County, North Carolina, BAN, UT, 3.85% due 5/20/1998 2,180
Craven County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Resource Bonds (Cravenwood Energy Project), VRDN,
AMT (a):
6,250 Series B, 3.75% due 5/01/2011 6,250
3,600 Series C, 3.75% due 5/01/2011 3,600
</TABLE>
Portfolio Abbreviations for CMA North Carolina Municipal Money Fund
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
CP Commercial Paper
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
MSTR Municipal Securities Trust Receipts
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-67
<PAGE>
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
North Carolina Cumberland County, North Carolina, Industrial Facilities and Pollution
(continued) Control Financing Authority, Revenue Refunding Bonds (Monsanto Co.
Project), VRDN (a):
$ 1,715 3.65% due 6/01/2012 $ 1,715
600 3.65% due 10/01/2014 600
2,650 Edgecombe Water and Sewer District No. 1, North Carolina, BAN, UT,
3.54% due 7/29/1998 2,650
Gaston County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN (a):
1,960 (Gold Medal Homes), 3.85% due 12/01/2009 1,960
2,200 (Mount Holly Enterprises/Queens G.P. Inc.), AMT, 3.80% due 5/01/2004 2,200
Granville County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN, AMT (a):
4,000 (Mayville Metal Production Project), 3.55% due 5/23/2020 4,000
1,525 (Tuscarora Plastics, Inc. Project), 3.80% due 12/01/2001 1,525
500 Greene County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, IDA, Revenue Bonds (Federal Paper Board Company,
Inc. Project), VRDN, AMT, 3.70% due 11/01/2009 (a) 500
Guilford County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN, AMT (a):
900 (Pharmagraphics Inc. Project), 3.85% due 9/01/2010 900
7,500 (US Woven Label Project), 3.70% due 1/01/2013 7,500
21,215 Halifax County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Exempt Facilities-Westmoreland Project),
VRDN, AMT, 3.75% due 12/01/2019 (a) 21,215
3,417 Holly Springs, North Carolina, BAN, UT, 3.79% due 6/24/1998 3,417
1,380 Johnston County, North Carolina, COP (Judicial Annex and Healthcare Project),
4.15% due 9/01/1998 (b) 1,382
385 Johnston County, North Carolina, UT, Series 1996, 5% due 2/01/1999 (d) 389
3,700 Lenoir County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (West Co. Nebraska, Inc. Project), VRDN,
3.80% due 10/01/2005 (a) 3,700
8,200 Lincoln County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Hof Textiles Inc. Project), VRDN, AMT,
3.70% due 10/01/2011 (a) 8,200
8,500 Mecklenberg County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, IDR (Rexroth Corporation Project), VRDN, AMT, 3.70%
due 9/01/2016 (a) 8,500
Mecklenberg County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN (a):
2,000 (Edgecomb Metals Company Project), 3.65% due 12/01/2009 2,000
900 (Flawa Corporation Project), AMT, 3.55% due 12/01/2008 900
1,500 (Griffith Micro Science Project), AMT, 3.75% due 11/01/2007 1,500
7,500 Mecklenburg County, North Carolina, VRDN, Series C, 3.65% due 2/01/2017 (a) 7,500
805 New Hanover County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Interroll Corp. Project), VRDN, 3.80%
due 11/01/2003 (a) 805
North Carolina Eastern Municipal Power Agency, Power System Revenue Bonds:
4,900 CP, Series B, 3.45% due 5/20/1998 4,900
1,250 Refunding, Series A, 7.25% due 1/01/1999 (c) 1,307
</TABLE>
FS-68
<PAGE>
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
North Carolina North Carolina Educational Facilities Finance Agency Revenue Bonds
(continued) (Duke University Project), VRDN (a):
$ 1,500 Series A, 3.60% due 6/01/2027 $ 1,500
5,000 Series B, 3.60% due 12/01/2021 5,000
2,000 North Carolina Medical Care Commission, Health Care Facilities Revenue Bonds
(Cabarrus Memorial Hospital Project), VRDN, 3.60% due 3/01/2012 (a) 2,000
North Carolina Medical Care Commission, Hospital Revenue Bonds, VRDN (a):
3,300 (Duke University Hospital), Series B, 3.60% due 6/01/2015 3,300
3,500 (Duke University Hospital), Series C, 3.60% due 6/01/2015 3,500
2,130 (Duke University Hospital), Series D, 3.60% due 6/01/2015 2,130
3,500 (Pooled Financing Project), ACES, 3.70% due 4/01/2012 3,500
1,800 (Pooled Financing Project), ACES, Series A, 3.70% due 10/01/2020 1,800
200 Refunding (Moses H. Cone Memorial Hospital Project), 3.70% due
10/01/2023 200
North Carolina Municipal Power Agency, Electric Revenue Bonds (No. 1
Catawba):
25,000 CP, 3.65% due 5/15/1998 25,000
20,117 CP, 3.60% due 5/21/1998 20,117
14,500 CP, 3.40% due 7/17/1998 14,500
2,885 Refunding, 5.10% due 1/01/1999 (e) 2,917
1,800 North Carolina State Port Authority, Docks and Wharves Facility Revenue Bonds
(Morehead City Terminals), VRDN, AMT, 3.80% due 1/01/2016 (a) 1,800
1,305 Piedmont Triad Airport Authority, North Carolina, Special Facility Revenue
Bonds (Purpose-Cessna Aircraft Company Project), VRDN, AMT, 3.80% due
10/01/2012 (a) 1,305
Raleigh-Durham, North Carolina, Airport Authority, Special Facility Revenue
Refunding Bonds (American Airlines), VRDN (a):
2,300 Series A, 3.70% due 11/01/2005 2,300
300 Series A, 3.80% due 11/01/2015 300
4,000 Series B, 3.70% due 11/01/2015 4,000
400 Raleigh-Durham, North Carolina, Refunding, UT, 4.25% due 4/01/1998 400
6,000 Richland Township, North Carolina, Water and Sewer District, BAN, UT,
3.75% due 11/18/1998 6,006
700 Rowan County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Reynolds Metals Company Project),
3.75% due 6/01/1998 700
2,900 Rutherford County, North Carolina, Industrial Facilities and Pollution Control
Financial Authority Revenue Bonds (All American Homes of North Carolina
Inc.), VRDN, AMT, 3.85% due 11/01/2011 (a) 2,900
3,330 Sampson County, North Carolina, Water and Sewer District, BAN, UT,
3.545% due 9/09/1998 3,331
400 Union County, North Carolina, UT, Series B, 5.25% due 5/01/1998 (b) 401
4,900 University of North Carolina, Chapel Hill School of Medicine and Ambulatory
Care, Clinic Revenue Bonds, VRDN, 3.75% due 7/01/2012 (a) 4,900
1,629 Warren County, North Carolina, Water and Sewer District, BAN, 3.785% due
5/06/1998 1,629
2,000 Wayne County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Revenue Refunding Bonds (General Signal), VRDN,
3.85% due 12/01/2000 (a) 2,000
</TABLE>
FS-69
<PAGE>
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
North Carolina $ 400 Wilson County, North Carolina, Industrial Facilities and Pollution Control
(concluded) Financing Authority, IDR (North Carolina Chip Co. Project), VRDN, 3.80%
due 1/01/2000 (a) $ 400
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank:
12.2% 23,000 CP, 3.10% due 4/08/1998 23,000
500 Revenue Refunding Bonds, VRDN, 3.375% due 12/01/2015 (a)(b) 500
2,800 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, VRDN, Series X, 3.375% due 7/01/1999 (a) 2,800
Puerto Rico Electric Power Authority Revenue Bonds:
6,000 MSTR, VRDN, Series SGA-43, 3.60% due 7/01/2022 (a)(b) 6,000
5,000 Series M, 6.90% due 7/01/1998 5,041
Total Investments (Cost--$305,767*)--99.6% 305,767
Other Assets Less Liabilities--0.4% 1,302
--------
Net Assets--100.0% $307,069
========
<FN>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in effect at
March 31, 1998.
(b)MBIA Insured.
(c)Prerefunded.
(d)AMBAC Insured.
(e)FGIC Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
</TABLE>
FS-70
<PAGE>
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$305,766,586) (Note 1a) $ 305,766,586
Cash 66,196
Interest receivable 1,502,071
Prepaid registration fees and other assets (Note 1d) 14,802
--------------
Total assets 307,349,655
--------------
Liabilities:
Payables:
Investment adviser (Note 2) $ 132,622
Distributor (Note 2) 88,673 221,295
--------------
Accrued expenses and other liabilities 58,906
--------------
Total liabilities 280,201
--------------
Net Assets $ 307,069,454
==============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 30,710,871
Paid-in capital in excess of par 276,397,838
Accumulated realized capital losses--net (Note 4) (39,255)
--------------
Net Assets--Equivalent to $1.00 per share based on 307,108,709 shares of
beneficial interest outstanding $ 307,069,454
==============
See Notes to Financial Statements.
</TABLE>
FS-71
<PAGE>
<TABLE>
CMA North Carolina Municipal Money Fund
Statement of Operations for the Year Ended March 31, 1998
<CAPTION>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 10,154,212
Expenses:
Investment advisory fees (Note 2) $ 1,381,698
Distribution fees (Note 2) 340,553
Professional fees 53,122
Accounting services (Note 2) 52,391
Transfer agent fees (Note 2) 50,229
Registration fees (Note 1d) 34,308
Custodian fees 24,644
Pricing fees 7,679
Trustees' fees and expenses 2,114
Printing and shareholder reports 638
Other 2,923
--------------
Total expenses 1,950,299
--------------
Investment income--net 8,203,913
Realized Gain on Investments--Net (Note 1c) 556
--------------
Net Increase in Net Assets Resulting from Operations $ 8,204,469
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 8,203,913 $ 7,440,667
Realized gain (loss) on investments--net 556 (3,442)
-------------- --------------
Net increase in net assets resulting from operations 8,204,469 7,437,225
-------------- --------------
Dividends to Shareholders (Note 1e):
Investment income--net (8,203,913) (7,440,667)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (8,203,913) (7,440,667)
-------------- --------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 908,145,767 757,440,492
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) 8,204,020 7,440,785
-------------- --------------
916,349,787 764,881,277
Cost of shares redeemed (883,460,955) (764,608,188)
-------------- --------------
Net increase in net assets derived from beneficial interest transactions 32,888,832 273,089
-------------- --------------
Net Assets:
Total increase in net assets 32,889,388 269,647
Beginning of year 274,180,066 273,910,419
-------------- --------------
End of year $ 307,069,454 $ 274,180,066
============== ==============
See Notes to Financial Statements.
</TABLE>
FS-72
<PAGE>
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.02% 2.84% 3.12% 2.61% 1.85%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .71% .72% .69% .62% .61%
======== ======== ======== ======== ========
Expenses .71% .72% .74% .72% .71%
======== ======== ======== ======== ========
Investment income--net 2.97% 2.79% 3.08% 2.58% 1.84%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $307,069 $274,180 $273,910 $278,704 $293,452
======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
FS-73
<PAGE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA North Carolina Municipal Money Fund (the "Fund") is part of CMA
Multi-State Municipal Series Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The following
is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company Act of 1940,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the Fund. The
distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares
of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the
administrative and operational services rendered to the Fund by
MLPF&S in processing share orders and administering shareholder
accounts.
FS-74
<PAGE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $39,000, of which $5,000 expires in 2001, $10,000
expires in 2002, $13,000 expires in 2003 and $11,000 expires in
2005. This amount will be available to offset like amounts of any
future taxable gains.
FS-75
<PAGE>
- -------------------------------------------------------------------------------
CMA OHIO MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA OHIO MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, includ-
ing the schedule of investments, of CMA Ohio Municipal Money Fund of CMA Mul-
ti-State Municipal Series Trust as of March 31, 1998, the related statements
of operations for the year then ended and changes in net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended. These financial state-
ments and the financial highlights are the responsibility of the Fund's man-
agement. Our responsibility is to express an opinion on these financial state-
ments and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Ohio Municipal
Money Fund of CMA Multi-State Municipal Series Trust as of March 31, 1998, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally ac-
cepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 7, 1998
FS-76
<PAGE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Ohio--99.3% $ 890 Allen County, Ohio, IDR (Nickles Bakery Project), VRDN, 4.25% due 1/02/2003 (a) $ 890
2,175 Anna, Ohio, Local School District, BAN, 4.39% due 4/06/1998 2,175
3,600 Ashtabula County, Ohio, Hospital Facilities Revenue Bonds (Ashtabula County
Medical Center Project), VRDN, 3.75% due 12/01/2007 (a) 3,600
2,160 Ashtabula County, Ohio, IDR (Neff-Perkins Co. Project), VRDN, AMT, 3.85%
due 6/01/2005 (a) 2,160
Barberton, Ohio, City School District, BAN:
2,000 4.34% due 6/01/1998 2,001
5,000 UT, Series B, 4.48% due 6/01/1998 5,006
315 Brooklyn Heights, Ohio, IDR (ATC Nymold Inc.), VRDN, AMT, 3.85% due 2/01/2002 (a) 315
Butler County, Ohio, BAN:
3,700 4.29% due 8/06/1998 3,705
2,000 4.25% due 10/22/1998 2,004
2,800 Cadiz, Ohio, BAN, 4.40% due 6/18/1998 2,803
Canal Winchester, Ohio, BAN:
2,800 4.375% due 8/11/1998 2,803
1,000 4.30% due 1/12/1999 1,002
Canal Winchester, Ohio, Local School District, BAN, UT:
3,500 4.25% due 6/17/1998 3,504
2,350 4.30% due 6/17/1998 2,352
1,055 Canton, Ohio, IDR (Accu Plate Project), VRDN, AMT, 3.89% due 3/01/2017 (a) 1,055
3,575 Cincinnati and Hamilton County, Ohio, Port Authority, Economic Development
Revenue Bonds (Berthesda One Ltd.), 4% due 8/01/1998 3,575
7,000 Cincinnati, Ohio, City School District, BAN, 4.32% due 9/17/1998 7,012
1,770 Clark County, Ohio, BAN, 4.40% due 6/30/1998 1,772
1,700 Clermont County, Ohio, IDR (Southern Ohio Fabricator), VRDN, AMT, Series A,
3.95% due 9/01/2005 (a) 1,700
9,000 Cleveland, Ohio, Airport System Revenue Refunding Bonds, VRDN, AMT, Series D,
3.80% due 1/01/2027 (a) 9,000
2,750 Columbiana County, Ohio, IDR (The Hall China Project), VRDN, AMT, 3.90%
due 1/01/2007 (a) 2,750
Cuyahoga County, Ohio, Health Care Facilities Revenue Bonds, VRDN (a):
700 (Benjamin Rose Institute Project), Series B, 3.70% due 12/01/2000 700
4,900 (Catholic Charities Facilities), 3.80% due 7/01/2012 4,900
Cuyahoga County, Ohio, IDR, VRDN (a):
940 (Athens Pastries Inc. Project), AMT, 3.89% due 6/03/2009 940
5,155 (Cleveland E Excel Ltd.), AMT, 3.85% due 3/01/2019 5,155
595 (Erieview Metal Treating Project), AMT, 3.89% due 5/01/2010 595
2,290 Refunding (Curtiss Wright Project), 3.80% due 12/01/2008 2,290
3,150 Refunding (Parma Care Center, Inc.), 3.89% due 12/01/2011 3,150
945 Refunding (Pleasant Lake Association Project), 3.74% due 5/01/2011 945
3,400 (Suburban Pavilion Inc. Project), AMT, 4.25% due 10/02/2006 3,400
</TABLE>
Portfolio Abbreviations for CMA Ohio Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-77
<PAGE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Ohio $ 5,000 Dayton, Ohio, BAN, 3.95% due 9/15/1998 $ 5,003
(continued) 4,000 Dublin, Ohio, City School District, GO, UT, 4.33% due 5/13/1998 4,002
4,000 Eagle Tax-Exempt Trust, Cleveland, Ohio, Class A, 3.60% due 10/01/1998 4,000
Eagle Tax-Exempt Trust, Custodial Receipts (Ohio Edison), VRDN (a):
5,000 Series 95, Class 3501, 3.77% due 7/01/2015 5,000
5,000 Series 95, Class 3502, 3.77% due 7/01/2015 5,000
1,000 East Palestine, Ohio, BAN, 3.93% due 8/28/1998 1,000
Erie County, Ohio, IDR, VRDN (a):
500 (Brighton Manor Company Project), AMT, 3.85% due 11/01/2016 500
1,590 Refunding (Huron Health Care Center Project), 3.75% due 8/01/2007 1,590
3,300 Franklin County, Ohio, Health Systems Revenue Bonds (Franciscan Sisters-
Saint Anthony Medical Facility), VRDN, Series B, 3.70% due 7/01/2015 (a) 3,300
Franklin County, Ohio, Hospital Revenue Bonds, VRDN (a):
5,900 (Children's Hospital Project), Series B, 3.85% due 12/01/2014 5,900
1,000 (Lutheran Senior City Inc. Project), 3.65% due 5/01/2015 1,000
Franklin County, Ohio, Hospital Revenue Refunding and Improvement Bonds
(US Health Corp. Project):
500 Series C, 4.10% due 6/01/1998 500
2,900 VRDN, Series A, 3.70% due 12/01/2021 (a) 2,900
Franklin County, Ohio, IDR:
1,325 (GSW Building Association Ltd.), 3.80% due 5/01/1998 1,325
2,500 Refunding (Heekin Can Inc. Project), VRDN, AMT, 3.95% due 5/01/2007 (a) 2,500
3,000 Franklin County, Ohio, M/F Housing Revenue Bonds (Colonial Courts Project),
VRDN, AMT, 3.85% due 12/01/2024 (a) 3,000
2,900 Fulton County, Ohio, IDR (Gilders Business Holdings Project), VRDN, AMT,
3.90% due 4/01/2007 (a) 2,900
1,255 Geauga County, Ohio, IDR (Neff-Perkins Co. Project), VRDN, AMT, 3.85%
due 6/01/2005 (a) 1,255
2,000 Graham, Ohio, Local School District, UT, Series A, 4.29% due 5/28/1998 2,001
1,000 Greene County, Ohio, IDR (FC Ltd./AFC Stamping), VRDN, AMT, 3.89% due
9/01/2016 (a) 1,000
546 Hamilton County, Ohio, Economic Development Revenue Bonds (Cincinnati
Performing Arts), VRDN, 3.85% due 6/15/2005 (a) 546
5,500 Hamilton County, Ohio, Hospital Facilities Revenue Bonds (Alliance Health),
VRDN, Series F, 2.95% due 1/01/2018 (a)(b) 5,500
1,160 Huber Heights, Ohio, IDR (Lasermike Inc. Project), VRDN, AMT, 3.34% due
12/01/2014 (a) 1,160
1,000 Lancaster, Ohio, BAN, 4.25% due 11/18/1998 1,002
3,400 Lorain County, Ohio, BAN, 4.22% due 9/17/1998 3,404
3,155 Lorain County, Ohio, IDR (DGR Investment Ltd./Trimline Die Corp.), VRDN, AMT,
3.34% due 12/01/2012 (a) 3,155
5,000 Lorain County, Ohio, Independent Living Facilities Revenue Bonds (Elyria
United Methodist Project), VRDN, Series A, 3.80% due 6/01/2022 (a) 5,000
2,910 Lucas County, Ohio, Economic Development Revenue Bonds (Hammill
Manufacturing Co. Project), VRDN, AMT, 3.95% due 5/01/2010 (a) 2,910
200 Lucas County, Ohio, Hospital Revenue Bonds (Sunshine Children's Home Project),
VRDN, 3.80% due 12/01/2007 (a) 200
4,690 Lucas County, Ohio, IDR (Reichert Stamping Co. Project), VRDN, 3.90% due
7/15/2006 (a) 4,690
6,000 Lucas County, Ohio, M/F Housing Revenue Bonds (Virigina Lake Apartments Project),
AMT, 3.80% due 11/27/1998 6,000
</TABLE>
FS-78
<PAGE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Ohio $ 5,000 Marion County, Ohio, BAN, 4.10% due 11/23/1998 $ 5,007
(continued) 260 Marion County, Ohio, Hospital Improvement Revenue Bonds (Pooled Lease
Program), VRDN, 3.75% due 5/01/2019 (a) 260
1,860 Marion County, Ohio, IDR (Mid-Ohio Packaging Company Project), VRDN, AMT,
3.90% due 11/01/2015 (a) 1,860
9,300 Mason, Ohio, Economic Development Revenue Bonds (Cedar Village Project),
VRDN, 3.67% due 12/01/2017 (a) 9,300
2,780 Mentor, Ohio, IDR (Metcor Partnership/Tridelt), VRDN, AMT, 3.85% due
12/01/2008 (a) 2,780
3,500 Mercer County, Ohio, BAN, 4.25% due 9/25/1998 3,504
6,600 Montgomery County, Ohio, Hospital Revenue Bonds (Miami Valley Hospital), CP,
Series C, 3.60% due 5/07/1998 6,600
2,370 Montgomery County, Ohio, IDR (Citywide Development Corp. Project), VRDN,
AMT, 3.85% due 12/01/2013 (a) 2,370
590 Montgomery County, Ohio, IDR (Town Centers Ltd. Partnership Project), AMT,
3.95% due 5/15/1998 590
1,615 Moraine, Ohio, IDR, Refunding (Gray America Corporation Project), VRDN, AMT,
3.85% due 12/01/2001 (a) 1,615
450 Mount Gilead, Ohio, BAN, 4% due 11/05/1998 450
1,000 New Knoxville, Ohio, Local School District, BAN, UT, 4.53% due 6/16/1998 1,001
6,200 Northwest, Ohio, Local School District (Hamilton County), BAN, UT, 4.84% due
6/17/1998 6,213
1,790 Obetz, Ohio, IDR (HFI Inc. Project), VRDN, AMT, 3.85% due 10/01/2003 (a) 1,790
8,045 Ohio State Air Quality Development Authority, Environmental Improvement
Revenue Refunding Bonds (USX Project), 3.55% due 6/15/1998 8,045
7,500 Ohio State Air Quality Development Authority, PCR (Duquesne Light Co. Project),
CP, Series B, 3.70% due 5/11/1998 7,500
2,700 Ohio State Air Quality Development Authority, Revenue Refunding Bonds
(Cincinnati Gas and Electric), VRDN, Series A, 3.65% due 9/01/2030 (a) 2,700
Ohio State Higher Educational Facilities, Commission Revenue Bonds, VRDN (a):
4,555 (Facilities Pooled Financing), 3.55% due 12/01/2016 4,555
2,760 (Mount Vernon), 3.80% due 9/01/2009 2,760
2,825 Ohio State, IDR, Refunding (General Motors Corp. Project), VRDN, 3.85% due
9/01/2001 (a) 2,825
5,000 Ohio State Solid Waste Disposal Revenue Bonds (USG Corp. Project), VRDN, AMT,
3.75% due 8/01/2032 (a) 5,000
13,500 Ohio State Solid Waste Revenue Bonds (BP Exploration & Oil Project), VRDN, AMT,
3.75% due 2/01/2033 (a) 13,500
3,700 Ohio State Turnpike Commission Revenue Bonds (Municipal Securities Trust
Receipts), VRDN, Series SGA-60, 3.80% due 2/15/2026 (a)(b) 3,700
2,120 Ohio State University, General Receipts, VRDN, 3.70% due 12/01/2027 (a) 2,120
9,000 Ohio State Water Development Authority, Environmental Improvement Revenue
Bonds (Mead Corp. Project), VRDN, AMT, 3.75% due 3/01/2023 (a) 9,000
3,000 Ohio State Water Development Authority, PCR(Duquesne Light Co. Project), CP,
AMT, 3.70% due 5/07/1998 3,000
8,500 Ohio State Water Development Authority, Pollution Control Facilities Revenue
Bonds (Ohio Edison Company), AMT, Series A, 4.10% due 5/01/1998 8,500
6,745 Ohio State Water Development Authority Revenue Bonds, Series A, 3.75% due
9/01/1998 6,745
3,000 Ohio State Water Development Authority, Solid Waste Disposal Revenue Bonds
(American Steel & Wire Corp.), VRDN, 3.85% due 9/01/2025 (a) 3,000
3,600 Ontario, Ohio, BAN, 4.20% due 12/23/1998 3,606
</TABLE>
FS-79
<PAGE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Ohio $ 5,000 Ottawa County, Ohio, BAN, 4.125% due 8/06/1998 $ 5,004
(continued) 200 Paulding County, Ohio, IDR, Refunding (Countrymark Cooperative Inc. Project),
VRDN, 3.70% due 3/01/1999 (a) 200
5,400 Paulding County, Ohio, Solid Waste Disposal Revenue Bonds (Lafarge Corp.
Project), VRDN, AMT, 3.50% due 8/01/2026 (a) 5,400
Pickerington, Ohio, Local School District, BAN, UT:
1,500 4.07% due 8/03/1998 1,502
1,500 4.24% due 8/03/1998 1,502
Portage County, Ohio, IDR, VRDN, AMT (a):
6,750 (Commercial Turf Products Ltd. Project), 3.85% due 5/01/2022 6,750
1,370 (John E. Susong Project), Series B, 3.89% due 5/02/2016 1,370
1,685 (NCSP L.P. Project), 3.85% due 7/01/2014 1,685
2,585 (PM Property One, Ltd.), 3.85% due 11/01/2012 2,585
2,075 Refunding (John E. Susong Project), Series A, 3.89% due 5/02/2011 2,075
1,000 Rickenbacker, Ohio, Port Authority, IDR, Refunding (Rickenbacker Holdings, Inc.),
VRDN, 3.75% due 12/01/2010 (a) 1,000
1,250 Ross County, Ohio, Hospital Revenue Bonds (Medical Center Hospital Project),
VRDN, 3.65% due 12/01/2020 (a) 1,250
1,700 Saint Mary's, Ohio, BAN, 4.40% due 6/17/1998 1,701
1,100 Salem, Ohio, BAN, 4.45% due 5/28/1998 1,101
Sandusky County, Ohio, IDR, VRDN (a):
1,300 (Brighton Manor Co. Project), AMT, 3.85% due 12/01/2016 1,300
1,910 (Crown Battery Manufacturing Co.), AMT, 3.89% due 8/06/2003 1,910
3,000 (Louis G. Freeman Co. Project), AMT, 3.89% due 7/01/2017 3,000
4,160 (Magnesium Refining Technologies Inc. Project), Series A, 3.89%
due 9/01/2007 4,160
2,000 Seneca County, Ohio, Health Care Facilities Revenue Bonds (Good Shepherd Home
Project), VRDN, 3.80% due 10/01/2017 (a) 2,000
235 Solon, Ohio, IDR (Tameran Project), VRDN, AMT, 3.89% due 11/01/2004 (a) 235
Stark County, Ohio, IDR, VRDN, AMT (a):
2,345 (Superior Dairy Inc. Project), 3.85% due 5/01/2003 2,345
1,340 (Wilkof-Morris Project), 3.89% due 1/01/2010 1,340
1,580 Streetsboro, Ohio, BAN, 4.15% due 10/09/1998 1,581
2,060 Strongsville, Ohio, IDR (E&E Properties/Dupli System Project), VRDN, 3.90%
due 2/01/2010 (a) 2,060
400 Summit County, Ohio, Hospital Facilities Revenue Bonds (Cuyahoga Falls
General Hospital), VRDN, Series B, 3.70% due 7/01/1999 (a) 400
Summit County, Ohio, IDR:
820 (Ohio Camshaft Project), 3.95% due 4/01/1998 820
950 (Texler Inc. Project), AMT, 3.85% due 5/01/1998 950
Summit County, Ohio, IDR, VRDN (a):
1,250 (Ace Precision Industries Inc. Project), AMT, 3.90% due 7/01/2014 1,250
1,595 (Austin Printing Co. Inc. Project), AMT, 3.90% due 8/01/2006 1,595
2,260 (Delco Corp. Project), AMT, 3.90% due 6/01/2016 2,260
340 (Forest Manufacturing Project), 3.85% due 11/01/2001 340
720 (Hardcoating Project), 3.90% due 7/01/2002 720
140 (Lucerne Production Project), AMT, 3.85% due 6/01/2002 140
1,150 (Sigma Properties Project), 3.89% due 6/01/2008 1,150
1,000 (Steffen Bookbinders Project), 3.90% due 11/01/2004 1,000
450 (Struktol Project), AMT, Series A, 3.85% due 6/01/2002 450
</TABLE>
FS-80
<PAGE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Ohio $ 1,590 Troy, Ohio, Economic Development Revenue Bonds (L&CP Corp. Project), AMT,
(concluded) 3.90% due 6/01/1998 $ 1,590
1,920 Trumbull County, Ohio, IDR (ATD Corp. Project), VRDN, AMT, 3.89% due
8/01/2010 (a) 1,920
2,500 Union County, Ohio, IDR (Union Aggregates Co. Project), VRDN, AMT, 3.95% due
11/01/2006 (a) 2,500
1,215 Valley View, Ohio, IDR (Porter Development Project), VRDN, AMT, 3.90% due
5/01/2016 (a) 1,215
1,515 Valley View, Ohio, IDR, Refunding and Improvement (Sweet Valley Dillion Project),
VRDN, AMT, 3.90% due 4/01/2011 (a) 1,515
2,255 Vinton County, Ohio, Local School District, 4.37% due 7/21/1998 2,260
Wadsworth, Ohio, City School District, BAN, UT:
1,400 4.23% due 8/04/1998 1,402
1,300 4.375% due 8/04/1998 1,302
1,980 Warren County, Ohio, IDR (Kardol Quality Products Project), VRDN, AMT,
3.95% due 12/01/2014 (a) 1,980
2,330 Willoughby, Ohio, IDR (Malish Brush & Specialty), VRDN, AMT, 3.85% due
6/01/2009 (a) 2,330
2,860 Wood County, Ohio, Economic Development Revenue Bonds (Great Lakes
Window Project), AMT, 4.60% due 6/01/1998 2,860
Wood County, Ohio, IDR, VRDN, AMT (a):
1,145 (B&B Box Co. Project), 3.90% due 3/01/2011 1,145
1,000 (Centaur Tool & Die Inc. Project), 3.90% due 8/01/2010 1,000
1,410 Woodster, Ohio, IDR (Litco International Inc. Project), VRDN, AMT, 3.90% due
5/01/2010 (a) 1,410
3,055 Zanesville-Muskingum County, Ohio, Port Authority, IDR (B.E. Products Inc.
Project), VRDN, AMT, 3.85% due 9/01/2004 (a) 3,055
Total Investments (Cost--$392,013*)--99.3% 392,013
Other Assets Less Liabilities--0.7% 2,702
--------
Net Assets--100.0% $394,715
========
<FN>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in effect at
March 31, 1998.
(b)MBIA Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
</TABLE>
FS-81
<PAGE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$392,013,283) (Note 1a) $ 392,013,283
Cash 80,896
Interest receivable 2,961,282
Prepaid registration fees and other assets (Note 1d) 10,283
---------------
Total assets 395,065,744
---------------
Liabilities:
Payables:
Investment adviser (Note 2) $ 171,178
Distributor (Note 2) 114,188 285,366
---------------
Accrued expenses and other liabilities 65,834
---------------
Total liabilities 351,200
---------------
Net Assets $ 394,714,544
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 39,474,610
Paid-in capital in excess of par 355,271,488
Accumulated realized capital losses--net (Note 4) (31,554)
---------------
Net Assets--Equivalent to $1.00 per share based on 394,746,098 shares of
beneficial interest outstanding $ 394,714,544
===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium earned $ 13,532,283
Expenses:
Investment advisory fees (Note 2) $ 1,784,810
Distribution fees (Note 2) 440,461
Transfer agent fees (Note 2) 60,851
Registration fees (Note 1d) 58,377
Accounting services (Note 2) 55,454
Professional fees 51,477
Custodian fees 31,359
Pricing fees 14,917
Trustees' fees and expenses 2,634
Printing and shareholder reports 325
Other 3,378
---------------
Total expenses 2,504,043
---------------
Investment income--net 11,028,240
---------------
Net Increase in Net Assets Resulting from Operations $ 11,028,240
===============
See Notes to Financial Statements.
</TABLE>
FS-82
<PAGE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 11,028,240 $ 8,896,526
--------------- ---------------
Net increase in net assets resulting from operations 11,028,240 8,896,526
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net (11,028,240) (8,896,526)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (11,028,240) (8,896,526)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,402,701,781 1,162,499,097
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) 11,028,169 8,896,416
--------------- ---------------
1,413,729,950 1,171,395,513
Cost of shares redeemed (1,346,188,447) (1,126,409,501)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions 67,541,503 44,986,012
--------------- ---------------
Net Assets:
Total increase in net assets 67,541,503 44,986,012
Beginning of year 327,173,041 282,187,029
--------------- ---------------
End of year $ 394,714,544 $ 327,173,041
=============== ===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .03 .03 .02
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.15% 3.00% 3.26% 2.65% 1.88%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses .70% .71% .73% .74% .72%
======== ======== ======== ======== ========
Investment income--net 3.09% 2.94% 3.21% 2.64% 1.86%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $394,715 $327,173 $282,187 $237,655 $213,655
======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
FS-83
<PAGE>
CMA OHIO MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA Michigan Municipal Money Fund (the "Fund") is part of CMA Multi-
State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company Act of 1940,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the Fund. The
distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares
of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the
administrative and operational services rendered to the Fund by
MLPF&S in processing share orders and administering shareholder
accounts.
FS-84
<PAGE>
CMA OHIO MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $32,000, of which $23,000 expires in 2000, $5,000
expires in 2001 and $4,000 expires in 2002. This amount will be
available to offset like amounts of any future taxable gains.
FS-85
<PAGE>
- --------------------------------------------------------------------------------
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Pennsylvania Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 31, 1998, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian and broker. An audit also in-
cludes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presenta-
tion. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Pennsylvania
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1998, the results of its operations, the changes in its net assets, and the fi-
nancial highlights for the respective stated periods in conformity with gener-
ally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 1, 1998
FS-86
<PAGE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Pennsylvania-- Allegheny County, Pennsylvania, Hospital Development Authority Revenue
99.0% Bonds, VRDN (a):
$ 1,000 (Allegheny General Hospital), Series B, 3.65% due 9/01/2010 $ 1,000
600 (Presbyterian Health Center), Series A, 3.70% due 3/01/2020 (b) 600
500 (Presbyterian Health Center), Series B, 3.70% due 3/01/2020 (b) 500
5,000 (Saint Francis Medical Center--Accounts Receivable Program),
Series A, 3.80% due 2/15/2012 5,000
Allegheny County, Pennsylvania, IDA, Revenue Bonds (Unitel Mobile Video
Project), VRDN (a):
1,000 3.30% due 7/01/2009 1,000
3,500 Series B, 4.20% due 7/01/2009 3,500
8,800 Allegheny County, Pennsylvania, IDA, Revenue Refunding Bonds (Commercial
Development Parkway Center Mall Project), VRDN, Series A, 3.75% due
5/01/2009 (a) 8,800
8,800 Beaver County, Pennsylvania, IDA, Environmental Improvement Revenue Bonds
(BASF Corporation Project), VRDN, 3.75% due 9/01/2032 (a) 8,800
Beaver County, Pennsylvania, IDA, PCR:
2,000 (Duquesne Light Project), CP, 3.65% due 4/07/1998 2,000
4,200 (Duquesne Light Project), CP, 3.60% due 7/16/1998 4,200
4,000 Refunding (Atlantic Richfield Project), VRDN, 3.65% due 12/01/2020 (a) 4,000
10,000 Refunding (Toledo Edison), CP, Series E, 3.80% due 12/01/1998 10,000
Berks County, Pennsylvania, IDA, IDR:
4,100 (Citizens Utilities Co. Projects), CP, 3.60% due 7/17/1998 4,100
2,235 (Valley Forge Company, Inc. Project), VRDN, AMT, Series A, 3.90% due
9/01/2006 (a) 2,235
4,830 Bucks County, Pennsylvania, IDA, Environmental Improvement Revenue
Refunding Bonds (USX Corporate Project), 3.55% due 6/15/1998 4,830
2,600 Bucks County, Pennsylvania, IDA, Revenue Bonds (Dunmore Corp. Project),
VRDN, AMT, 3.90% due 9/01/2012 (a) 2,600
Carbon County, Pennsylvania, IDA, Resource Recovery Revenue Bonds
(Panther Creek Partners), Series A, CP, AMT:
2,000 3.55% due 4/03/1998 2,000
4,050 3.50% due 5/14/1998 4,050
2,550 3.60% due 5/14/1998 2,550
14,540 3.55% due 5/15/1998 14,540
6,200 3.70% due 5/15/1998 6,200
1,750 Crawford County, Pennsylvania, IDA, Revenue Bonds (Heatrix Inc. Project),
VRDN, AMT, Series A, 3.90% due 11/01/2017 (a) 1,750
4,690 Cumberland County, Pennsylvania, Municipal Authority College Revenue Bonds
(Dickinson College), Series B, 3.75% due 11/02/1998 4,690
5,300 Dauphin County, Pennsylvania, General Authority Revenue Bonds (School
District Pooled Financing Program II), VRDN, 4.10% due 9/01/2032 (a)(f) 5,300
</TABLE>
Portfolio Abbreviations for CMA Pennsylvania Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
CP Commercial Paper
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
MSTR Municipal Securities Trust Receipts
PCR Pollution Control Revenue Bonds
S/F Single-Family
TAN Tax Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UPDATES Unit Price Daily Adjustable Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-87
<PAGE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Pennsylvania $ 4,600 Delaware County, Pennsylvania, IDA, PCR (BP Oil Inc. Project), UPDATES, VRDN,
(continued) 3.70% due 12/01/2009 (a) $ 4,600
2,000 Delaware County, Pennsylvania, Revenue Bonds (Widener University Inc.),
VRDN, 3.80% due 7/01/2014 (a) 2,000
Eagle Tax-Exempt Trust, Pennsylvania, VRDN (a):
4,300 GO, Series 94, Class 3803, 3.63% due 5/01/2008 4,300
5,700 GO, Series 96-C, 3.63% due 5/01/2014 5,700
9,800 Housing Resident Development, Series 92, Class 3801, 3.75% due 7/01/1998 9,800
5,800 Housing Security, Series A, Class 3801, 3.48% due 7/01/2025 5,800
3,570 East Hempfield Township, Pennsylvania, IDA, Revenue Bonds (Steckel
Printing Inc.), VRDN, AMT, 3.90% due 2/01/2013 (a) 3,570
5,000 Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN, 3.75%
due 12/01/2028 (a)(d) 5,000
Erie County, Pennsylvania, IDA, Revenue Bonds, VRDN, AMT (a):
1,900 (McInnes Steel Co.), 3.75% due 11/01/2001 1,900
3,250 (Reed Manufacturing), 3.90% due 6/01/2006 3,250
6,000 Erie County, Pennsylvania, TRAN, 4.375% due 12/31/1998 6,025
3,700 Geisinger, Pennsylvania, Health System Revenue Bonds, VRDN, Series B,
3.70% due 7/01/2022 (a) 3,700
2,950 Jeannette, Pennsylvania, Health Service Authority, Hospital Revenue Bonds
(Jeannette District Memorial Hospital), VRDN, Series B, 3.80% due 11/01/2018 (a) 2,950
6,390 Lackawanna County, Pennsylvania, MSTR, VRDN, UT,Series SGB-38, 3.80%
due 9/15/2020 (a)(f) 6,390
Lancaster, Pennsylvania, IDA, Revenue Bonds (Kalas Manufacturing Inc.
Project), VRDN, AMT (a):
2,225 Series A, 3.90% due 10/01/2004 2,225
1,800 Series B, 3.90% due 10/01/2004 1,800
3,400 Lehigh County, Pennsylvania, General Purpose Authority Revenue Bonds
(Lehigh Valley Hospital), VRDN, Series A, 3.70% due 7/01/2028 (a)(f) 3,400
1,100 Montgomery County, Pennsylvania, GO, VRDN, UT, 3.45% due 11/15/2001 (a) 1,100
17,800 Montgomery County, Pennsylvania, Higher Education and Health Authority
Revenue Bonds (Pennsylvania Higher Education & Health Loan), VRDN,
Series A, 3.80% due 8/01/2021 (a) 17,800
1,700 Montgomery County, Pennsylvania, IDA, Revenue Bonds (Merck & Co. Project),
VRDN, Series A, 4.15% due 10/01/2017 (a) 1,700
4,810 Montgomery County, Pennsylvania, IDA, Revenue Refunding Bonds (Commercial
Development--Valley Forge Plaza), VRDN, 3.70% due 12/01/2013 (a) 4,810
3,850 Montour County, Pennsylvania, IDA, PCR (Merck & Co. Project), VRDN,
Series A, 3.70% due 10/01/2003 (a) 3,850
3,500 Moon, Pennsylvania, IDA, Commerical Development Revenue Bonds
(One Thorn Run Center Project), VRDN, Series A, 3.60% due 11/01/2015 (a) 3,500
Northampton County, Pennsylvania, IDA, Revenue Bonds, VRDN, AMT (a):
4,250 (MCS Industries Inc.), 3.90% due 6/01/2012 4,250
4,750 Refunding (Reale Association Project), 3.90% due 4/01/2012 4,750
1,000 Oil City, Pennsylvania, School District, UT, 3.95% due 8/27/1998 1,000
Pennsylvania Economic Development Financing Authority, Economic
Development Revenue Bonds, VRDN (a):
5,000 AMT, Series D-7, 3.95% due 8/01/2022 5,000
1,800 AMT, Series F-5, 3.95% due 12/01/2006 1,800
800 (Erie Forge & Steel Project), AMT, Series B-4, 3.95% due 12/01/1999 800
1,400 (Erie Plating Company Project), AMT, Series B-5, 3.95% due 12/01/2004 1,400
4,500 (Gutchess Hardwoods Project), Series B, 3.85% due 4/01/2005 4,500
1,090 (Wendt Dunnington Co. Project), AMT, 3.80% due 9/01/2010 1,090
</TABLE>
FS-88
<PAGE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Pennsylvania $ 7,500 Pennsylvania Economic Development Financing Authority, Exempt Facilities
(continued) Revenue Bonds (National Gypsum Company Project), VRDN, AMT, Series A,
3.80% due 11/01/2027 (a) $ 7,500
Pennsylvania Energy Development Authority, Energy Development Revenue
Bonds, VRDN, AMT (a):
5,450 (B&W Ebensburg Project), 3.75% due 12/01/2011 5,450
14,000 (Piney Creek Project), Series A, 3.70% due 12/01/2011 14,000
900 (Piney Creek Project), Series C, 3.70% due 12/01/2011 900
9,900 Pennsylvania Intergovernmental Cooperative Authority, Special Tax Revenue
Bonds, VRDN, UT, 3.60% due 6/15/2007 (a) 9,900
Pennsylvania State Higher Education Assistance Agency, Student Loan
Revenue Bonds, VRDN (a):
3,100 AMT, Series A, 3.80% due 1/01/2018 3,100
15,000 AMT, Series A, 4.10% due 3/01/2027 15,000
1,800 Series C, 3.80% due 7/01/2018 1,800
3,400 Pennsylvania State Higher Educational Facilities Authority, College and
University Revenue Refunding Bonds (Pennsylvania College of Optometry),
VRDN, 3.70% due 3/01/2026 (a) 3,400
Pennsylvania State Higher Educational Facilities Authority Revenue Bonds:
5,000 CICU Financing Program (Rosemont College), Series B-6, 4.50% due
11/01/1998 5,018
2,500 Council Independent Colleges (Bucknell University), Series A-1, 3.58% due
4/01/1998 2,500
1,600 Council Independent Colleges (Duquesne University), Series A-4, 3.58% due
4/01/1998 1,600
Pennsylvania State Higher Educational Facilities Authority, Revenue Refunding
Bonds (Carnegie Mellon University), VRDN (a):
1,000 Series A, 3.70% due 11/01/2025 1,000
4,850 Series B, 3.70% due 11/01/2027 4,850
900 Series C, 3.70% due 11/01/2029 900
300 Series D, 3.70% due 11/01/2030 300
7,500 Pennsylvania State, TAN, 4.50% due 6/30/1998 7,515
2,000 Pennsylvania State Turnpike Commission, Turnpike Revenue Bonds, Series C,
7.55% due 12/01/1998 (c)(g) 2,086
3,000 Pennsylvania State University, Series A, 4.50% due 3/30/1999 3,027
2,560 Philadelphia, Pennsylvania, Authority for IDR (David Michael & Co. Inc.), VRDN,
AMT, 3.90% due 10/01/2006 (a) 2,560
Philadelphia, Pennsylvania, Hospital and Higher Education Facilities
Authority, Hospital Revenue Bonds (Children's Hospital Project), VRDN (a):
4,800 3.70% due 3/01/2027 4,800
4,300 Series A, 3.70% due 3/01/2027 4,300
2,185 Philadelphia, Pennsylvania, Hospital and Higher Education Facilities Authority,
Hospital Revenue Refunding Bonds (Pennsylvania Hospital), VRDN, Series B,
3.70% due 7/01/2023 (a)(c) 2,185
4,425 Philadelphia, Pennsylvania, Redevelopment Authority, M/F Housing Revenue
Refunding Bonds (Courts Project), VRDN, Series A, 3.70% due 6/01/2025 (a) 4,425
5,000 Philadelphia, Pennsylvania, School District, TRAN, 4.50% due 6/30/1998 5,008
15,000 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1998 15,018
8,000 Philadelphia, Pennsylvania, Water and Wastewater Revenue Bonds, VRDN,
Series B, 3.82% due 8/05/1998 (a)(f) 8,000
2,100 Pittsburgh, Pennsylvania, Urban Redevelopment Authority, S/F Mortgage
Revenue Bonds, AMT, Series C, 3.60% due 6/01/1998 (e) 2,100
</TABLE>
FS-89
<PAGE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Pennsylvania Schuylkill County, Pennsylvania, IDA, Resource Recovery Revenue Refunding
(concluded) Bonds (Northeastern Power Co.), VRDN (a):
$ 24,300 AMT, Series B, 3.70% due 12/01/2022 $ 24,300
2,600 Series A, 3.60% due 12/01/2022 2,600
3,300 Scranton-Lackawanna, Pennsylvania, Health and Welfare Authority, Hospital
Facilities Revenue Refunding Bonds (Mercy Health Systems), VRDN, Series A,
3.65% due 12/01/2021 (a) 3,300
11,000 Temple University of the Commonwealth System of Higher Education,
Pennsylvania, University Funding Obligations, 4.75% due 5/18/1998 11,012
Venango, Pennsylvania, IDA, Resource Recovery Revenue Bonds (Scrubgrass
Progress), CP, AMT:
1,000 3.65% due 4/07/1998 1,000
2,000 3.70% due 4/07/1998 2,000
2,000 3.60% due 7/10/1998 2,000
6,000 Refunding, Series A, 3.85% due 4/08/1998 6,000
4,200 Refunding, Series A, 3.65% due 7/09/1998 4,200
7,300 Refunding, Series A, 3.45% due 7/17/1998 7,300
2,500 York, Pennsylvania, General Pooled Financing Authority Revenue Bonds, VRDN,
3.80% due 9/01/2026 (a) 2,500
Puerto Rico-- 5,000 Puerto Rico Commonwealth, Government Development Bank, Revenue
1.1% Refunding Bonds, VRDN, 3.375% due 12/01/2015 (a)(b) 5,000
Total Investments (Cost--$443,459*)--100.1% 443,459
Liabilities in Excess of Other Assets--(0.1%) (447)
---------
Net Assets--100.0% $ 443,012
=========
<FN>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in effect at
March 31, 1998.
(b)MBIA Insured.
(c)FGIC Insured.
(d)FSA Insured.
(e)GNMA Collateralized.
(f)AMBAC Insured.
(g)Prerefunded.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
</TABLE>
FS-90
<PAGE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
<S> <C> <C>
Assets:
Investments, at value (identified cost--$443,458,955) (Note 1a) $ 443,458,955
Cash 106,588
Interest receivable 3,113,234
Prepaid registration fees and other assets (Note 1d) 837,345
---------------
Total assets 447,516,122
---------------
Liabilities:
Payables:
Securities purchased $ 4,100,000
Investment adviser (Note 2) 194,255
Distributor (Note 2) 132,478 4,426,733
---------------
Accrued expenses and other liabilities 77,226
---------------
Total liabilities 4,503,959
---------------
Net Assets $ 443,012,163
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 44,305,889
Paid-in capital in excess of par 398,752,672
Accumulated realized capital losses--net (Note 4) (46,398)
---------------
Net Assets--Equivalent to $1.00 per share based on 443,058,886 shares of
beneficial interest outstanding $ 443,012,163
===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 15,440,314
Expenses:
Investment advisory fees (Note 2) $ 2,072,950
Distribution fees (Note 2) 513,883
Transfer agent fees (Note 2) 92,719
Accounting services (Note 2) 66,136
Professional fees 58,610
Registration fees (Note 1d) 37,186
Custodian fees 33,785
Pricing fees 8,368
Printing and shareholder reports 7,329
Trustees' fees and expenses 3,216
Other 4,243
---------------
Total expenses 2,898,425
---------------
Investment income--net 12,541,889
Realized Loss on Investments--Net (Note 1c) (22,010)
---------------
Net Increase in Net Assets Resulting from Operations $ 12,519,879
===============
See Notes to Financial Statements.
</TABLE>
FS-91
<PAGE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C>
Operations:
Investment income--net $ 12,541,889 $ 11,528,806
Realized loss on investments--net (22,010) (1,453)
-------------- --------------
Net increase in net assets resulting from operations 12,519,879 11,527,353
-------------- --------------
Dividends to Shareholders (Note 1e):
Investment income--net (12,541,889) (11,525,719)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (12,541,889) (11,525,719)
-------------- --------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,609,592,001 1,355,806,175
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) 12,541,999 11,525,515
-------------- --------------
1,622,134,000 1,367,331,690
Cost of shares redeemed (1,607,995,896) (1,355,166,461)
-------------- --------------
Net increase in net assets derived from beneficial interest
transactions 14,138,104 12,165,229
-------------- --------------
Net Assets:
Total increase in net assets 14,116,094 12,166,863
Beginning of year 428,896,069 416,729,206
-------------- --------------
End of year $ 443,012,163 $ 428,896,069
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net .03 .03 .03 .03 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .03 .03 .03 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.03) (.03) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return 3.08% 2.92% 3.19% 2.65% 1.87%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses .70% .71% .72% .71% .72%
========== ========== ========== ========== ==========
Investment income--net 3.03% 2.86% 3.13% 2.64% 1.85%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) $ 443,012 $ 428,896 $ 416,729 $ 353,635 $ 336,853
========== ========== ========== ========== ==========
See Notes to Financial Statements.
</TABLE>
FS-92
<PAGE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
CMA Pennsylvania Municipal Money Fund (the "Fund") is part of CMA
Multi-State Municipal Series Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The following
is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--Investments are valued at amortized
cost, which approximates market value. For the purpose of valuation,
the maturity of a variable rate demand instrument is deemed to be
the next coupon date on which the interest rate is to be adjusted.
In the case of a floating rate instrument, the remaining maturity is
the demand notice payment period.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests daily such dividends (net of non-
resident alien tax and back-up withholding tax withheld) in
additional fund shares at net asset value. Dividends are declared
from the total of net investment income, excluding discounts earned
other than original issue discounts. Net realized capital gains, if
any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more
frequently than annually in order to maintain the Fund's net asset
value at $1.00 per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.50%
of the first $500 million of average daily net assets; 0.425% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in
compliance with Rule 12b-1 under the Investment Company Act of 1940,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the Fund. The
distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares
of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the
administrative and operational services rendered to the Fund by
MLPF&S in processing share orders and administering shareholder
accounts.
FS-93
<PAGE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.
4. Capital Loss Carryforward:
At March 31, 1998, the Fund had a net capital loss carryforward of
approximately $46,000, of which $13,000 expires in 2002; $11,000
expires in 2003; and $22,000 expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
FS-94
<PAGE>
[This page intentionally left blank]
<PAGE>
TABLE OF CONTENTS
PAGE
----
Investment Objectives and Policies......................................... 2
Management of the Trust.................................................... 5
Trustees and Officers..................................................... 5
Compensation of Trustees.................................................. 7
Management and Advisory
Arrangements............................................................. 9
Purchase and Redemption of Shares.......................................... 10
Portfolio Transactions..................................................... 11
Determination of Net Asset Value........................................... 13
Yield Information.......................................................... 13
Taxes...................................................................... 14
Federal................................................................... 14
State..................................................................... 16
General Information........................................................ 20
Description of Series and Shares.......................................... 20
Custodian and Transfer Agent.............................................. 20
Independent Auditors...................................................... 20
Legal Counsel............................................................. 21
Reports to Shareholders................................................... 21
Additional Information.................................................... 21
Appendices................................................................. A-1
Financial Statements....................................................... FS-1
Code #16818-0798
CMA MULTI-STATE MUNICIPAL SERIES TRUST
. ARIZONA
. CALIFORNIA
. CONNECTICUT
. MASSACHUSETTS
. MICHIGAN
. NEW JERSEY
. NEW YORK
. NORTH CAROLINA
. OHIO
. PENNSYLVANIA
- --------------------------------------------------------------------------------
STATEMENT OFADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
[LOGO] CMA
July 28, 1998
- --------------------------------------------------------------------------------
LOGO
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)FINANCIAL STATEMENTS:
Financial Statements contained in Part A:
Financial Highlights for the period July 5, 1988 (commencement of
operations) to March 31, 1989 and for each of the years in the nine-
year period ended March 31, 1998.
Financial Statements contained in Part B:
Schedule of Investments as of March 31, 1998.
Statement of Assets and Liabilities as of March 31, 1998.
Statement of Operations for the year ended March 31, 1998.
Statements of Changes in Net Assets for each of the years in the
two-year period ended March 31, 1998.
Financial Highlights for each of the years in the five-year period
ended March 31, 1998.
(b)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.(a) --Declaration of Trust of the Registrant dated February 6,
1987.(a)
(b) --Amendment to the Declaration of Trust.(a)
(c) --Instrument establishing CMA California Tax-Exempt Fund as a
series of the Registrant.(a)
(d) --Change of series designation to CMA California Municipal Money
Fund (the "Fund"), filed May 9, 1993.(a)
2. --By-Laws of the Registrant.(a)
3. --None.
4. --Portion of the Declaration of Trust, Establishment and
Designation and By-Laws of the Registrant defining the rights of
holders of shares of the Fund as a series of the Registrant.(b)
5.(a) --Form of Management Agreement between the Registrant and Fund
Asset Management, L.P.(a)
(b) --Supplement to the Management Agreement with Fund Asset
Management, L.P.(c)
6. --Form of Distribution Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.(a)
7. --None.
8. --Form of Custody Agreement between the Registrant and State
Street Bank and Trust Company.(a)
9.(a) --Amended Transfer Agency, Shareholder Servicing Agency and Proxy
Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(a)
(b) --Form of Cash Management Account Agreement.(a)
10. --None.
11. --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12. --None.
13. --Certificate of Fund Asset Management, L.P.(a)
14. --None.
15. --Form of Distribution and Shareholder Servicing Plan between the
Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.(a)
16.(a) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22.(a)
(b) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22.(d)
17. --Financial Data Schedule for the fiscal year ended March 31,
1998.
</TABLE>
C-1
<PAGE>
- --------
(a) Previously filed pursuant to the Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") phase-in requirements as an exhibit to Post-Effective
Amendment No. 8 to Registrant's Registration Statement (the "Registration
Statement") on Form N-1A filed on July 31, 1995.
(b) Reference is made to Article II, Section 2.3 and Articles III, V, VI,
VIII, IX, X and XI of the Registrant's Declaration of Trust, filed as
Exhibit 1(a) to Post-Effective Amendment No. 8 to the Registration
Statement; to the Certificate of Establishment and Designation
establishing the Fund as a series of the Registrant, filed as Exhibit 1(c)
to Post-Effective Amendment No. 8 to the Registration Statement; and to
Articles I, V and VI of the Registrant's By-Laws, filed as Exhibit 2 to
Post-Effective Amendment No. 8 to the Registration Statement.
(c) Filed on July 29, 1994 as an exhibit to Post-Effective Amendment No. 7 to
the Registration Statement.
(d) Filed on July 31, 1995 as an exhibit to Post-Effective Amendment No. 8 to
the Registration Statement.
Reference is made to the Registration Statements under the Securities Act of
1933 on Form N-1A in connection with exhibits relating to CMA Arizona
Municipal Money Fund (File No. 33-54492), CMA Connecticut Municipal Money Fund
(File No. 33-38833), CMA Massachusetts Municipal Money Fund (File No. 33-
34610), CMA Michigan Municipal Money Fund (File No. 33-38834), CMA New Jersey
Municipal Money Fund (File No. 33-34609), CMA New York Municipal Money Fund
(File No. 33-20463), CMA North Carolina Municipal Money Fund (File No. 33-
38780), CMA Ohio Municipal Money Fund (File No. 33-38835) and CMA Pennsylvania
Municipal Money Fund (File No. 33-34608).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS
TITLE OF CLASS AT JUNE 30, 1998
-------------- ----------------
<S> <C>
Shares of beneficial interest, par value $0.10 per
share.................................................. 19,931
</TABLE>
--------
Note: The number of holders shown above includes holders of record
plus beneficial owners, whose shares are held of record by
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch").
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either
C-2
<PAGE>
for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter
of good faith and reasonable belief as to the best interests of the Trust,
had been adjudicated, it would have been adjudicated in favor of such
person. The rights accruing to any person under these provisions shall not
exclude any other right to which he may be lawfully entitled; provided that
no person may satisfy any right of indemnity or reimbursement granted
herein or in Section 5.1 or to which he may be otherwise entitled except
out of the property of the Trust, and no Shareholder shall be personally
liable to any person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
The Registrant's By-Laws provide that insofar as the conditional advancing
of indemnification moneys pursuant to Section 5.3 of the Declaration of Trust
for actions based upon the Investment Company Act of 1940 may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.
In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money
C-3
<PAGE>
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., Financial
Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch
California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Puerto Rico Tax Exempt Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and for the following closed-end registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt
Strategies Fund Inc., Debt Strategies Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured
Fund II, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund II, MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
Insured Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida
Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York
Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of FAM, acts as
the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Real Estate
Fund, Inc. Merrill Lynch Ready Assets Trusts, Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Fund, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis
and Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisors Trust.
C-4
<PAGE>
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665. The address of the Manager, MLAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") is P.O. Box 9081, Princeton,
New Jersey 08543-9081. The address of Merrill Lynch and Merrill Lynch & Co.,
Inc. ("ML & Co.") is North Tower, World Financial Center, 250 Vesey Street,
New York, New York 10281-1201. The address of Merrill Lynch Financial Data
Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
April 1, 1995 for his, her or its own account or in the capacity of director,
officer, employee, partner or trustee. In addition, Mr. Zeikel is President,
director and trustee, Mr. Glenn is Executive Vice President and Mr. Richard is
Treasurer of all or substantially all of the investment companies listed in
the first two paragraphs of this Item 28. Messrs. Zeikel, Glenn and Richard
also hold the same position with all or substantially all of the investment
companies advised by MLAM as they do with those advised by the Manager and
Messrs. Giordano, Harvey, Kirstein and Monagle are officers or
directors/trustees of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... Chairman (since 1997); Chairman of MLAM; President of the
President (1977-1997) Manager and MLAM from 1977 to 1997;
Chairman and Director of Princeton
Services; President of Princeton
Services from 1993 to 1997; Executive
Vice President of ML & Co.
Jeffrey M. Peek......... President (since 1997) President of MLAM since 1997; President
and Director of Princeton Services
since 1997; Executive Vice President of
ML & Co.; Managing Director and Co-Head
of the Investment Banking Division of
Merrill Lynch in 1997; Senior Vice
President and Director of the Global
Securities and Economic Division of
Merrill Lynch from 1995 to 1997.
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of MLAM; Senior
and Controller Vice President of Princeton Services
</TABLE>
<TABLE>
<S> <C> <C>
Debra W. Landsman-Yaros. Senior Vice President Senior Vice President of MLAM; Vice
President of MLFD; Senior Vice
President of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995
Richard L. Reller....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Director of MLFD
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Gregory D. Upah......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Merrill Lynch acts as the principal underwriter for the Registrant.
Merrill Lynch also acts as the principal underwriter for each of the following
open-end investment companies referred to in the first paragraph of Item
C-6
<PAGE>
28: CBA Money Fund, nine other series of CMA Multi-State Municipal Series
Trust, CMA Money Fund, CMA Tax-Exempt Fund, CMA Treasury Fund, CMA Government
Securities Fund, The Corporate Fund Accumulation Program, Inc. and The
Municipal Fund Accumulation Program, Inc. and also acts as the principal
underwriter for each of the closed-end investment companies referred to in the
first paragraph of Item 28, and as the depositor of the following unit
investment trusts: The Corporate Income Fund, Municipal Investment Trust Fund,
The ML Trust for Government Guaranteed Securities and The Government
Securities Income Fund.
(b) Set forth below is information concerning each director and executive
officer of Merrill Lynch. The principal business address of each such person
is North Tower, World Financial Center, 250 Vesey Street, New York, New York
10281-1201.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MERRILL LYNCH WITH REGISTRANT
---- ------------------------------------- -------------------------
<S> <C> <C>
David H. Komansky....... Chairman and Chief Executive Officer None
Stephen L. Hammerman.... Vice Chairman and General Counsel None
Herbert M. Allison,
Jr. ................... President and Chief Operating Officer None
John L. Steffens........ Executive Vice President and Director None
Barry S. Friedberg...... Executive Vice President None
Edward L. Goldberg...... Executive Vice President None
Jerome P. Kenney........ Executive Vice President None
Thomas H. Patrick....... Executive Vice President None
Winthrop H. Smith, Jr. . Executive Vice President None
Roger M. Vasey.......... Executive Vice President None
George A. Schierren..... General Counsel None
Theresa Lang............ Treasurer None
Andrea L. Dulberg....... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey
08536 and its transfer agent, MLFDS, 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, and in response
to Item 31 in Part C of the Registration Statements of CMA Arizona Municipal
Money Fund, CMA Connecticut Municipal Money Fund, CMA Massachusetts Municipal
Money Fund, CMA Michigan Municipal Money Fund, CMA New Jersey Municipal Money
Fund, CMA New York Municipal Money Fund, CMA North Carolina Municipal Money
Fund, CMA Ohio Municipal Money Fund, and CMA Pennsylvania Municipal Money
Fund, the Registrant is not a party to any management-related services
contract.
C-7
<PAGE>
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF
1933 AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO AND STATE OF NEW JERSEY, ON THE 27TH
DAY OF JULY, 1998.
CMA Multi-State Municipal Series
Trust (Registrant)
/s/ Terry K. Glenn
By-----------------------------------
(Terry K. Glenn, Executive Vice
President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSON IN
THE CAPACITY AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
Arthur Zeikel* President (Principal
- ------------------------------------- Executive Officer)
(Arthur Zeikel) and Trustee
Gerald M. Richard* Treasurer (Principal
- ------------------------------------- Financial and
(Gerald M. Richard) Accounting Officer)
Ronald W. Forbes* Trustee
- -------------------------------------
(Ronald W. Forbes)
Cynthia A. Montgomery* Trustee
- -------------------------------------
(Cynthia A. Montgomery)
Charles C. Reilly* Trustee
- -------------------------------------
(Charles C. Reilly)
Kevin A. Ryan* Trustee
- -------------------------------------
(Kevin A. Ryan)
Richard R. West* Trustee
- -------------------------------------
(Richard R. West)
*By /s/ Terry K. Glenn
--------------------------------- July 27, 1998
(Terry K. Glenn, Attorney-in-Fact)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11. --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17. --Financial Data Schedule for the fiscal year ended March 31, 1998.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Line Art on Back Cover Back cover of Prospectus and
back cover of Statement of
Additional Information
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> CMA CALIFORNIA MUNICIPAL MONEY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 1990952978
<INVESTMENTS-AT-VALUE> 1990952978
<RECEIVABLES> 14441094
<ASSETS-OTHER> 1829572
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2007223644
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1560812
<TOTAL-LIABILITIES> 1560812
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2006620980
<SHARES-COMMON-STOCK> 2006622639
<SHARES-COMMON-PRIOR> 1566719083
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (958148)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2005662832
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 62786633
<OTHER-INCOME> 0
<EXPENSES-NET> (10304281)
<NET-INVESTMENT-INCOME> 52482352
<REALIZED-GAINS-CURRENT> (44912)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 52437440
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (52480433)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7751865673
<NUMBER-OF-SHARES-REDEEMED> (7364441995)
<SHARES-REINVESTED> 52479878
<NET-CHANGE-IN-ASSETS> 439860563
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (915154)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7429249
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10304281
<AVERAGE-NET-ASSETS> 1747799856
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
CMA California Municipal Money Fund of
CMA Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 11 to Registration
Statement No. 33-20580 of our report dated May 8, 1998 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Princeton, New Jersey
July 24, 1998
