As filed with the Securities and Exchange Commission on June 28,
2000
Securities Act
File No. 33-54492
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. |
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¨ |
| Post-Effective
Amendment No. 9 |
|
x |
| and/or |
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| REGISTRATION
STATEMENT UNDER THE |
|
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| INVESTMENT
COMPANY ACT OF 1940 |
|
x |
| Amendment No.
110 |
|
x |
(Check appropriate
box or boxes)
CMA®
ARIZONA 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)
TERRY K.
GLENN
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
Fund:
BROWN & WOOD
LLP
One World Trade
Center
New York, New
York 10048-0557
Attention:
Thomas R. Smith, Jr., Esq.
|
|
Michael J.
Hennewinkel, Esq.
FUND ASSET
MANAGEMENT, L.P.
P.O. Box
9011
Princeton, New
Jersey
08543-9011
|
|
Jeffrey S.
Alexander, Esq.
MERRILL LYNCH,
PIERCE, FENNER & SMITH INCORPORATED
222
Broadway
(14th
Floor)
New York, New York
10038
It is proposed that
this filing will become effective (check appropriate box)
|
x
|
immediately upon
filing pursuant to paragraph (b)
|
|
¨
|
on (date) pursuant
to paragraph (b)
|
|
¨
|
60 days after
filing pursuant to paragraph (a) (1)
|
|
¨
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on (date) pursuant
to paragraph (a) (1)
|
|
¨
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75 days after
filing pursuant to paragraph (a) (2)
|
|
¨
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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
Prospectus
[LOGO OF MERRILL
LYNCH]
|
CMA®
Multi-State Municipal Series Trust
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|
CMA® Arizona Municipal
Money Fund
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CMA® California
Municipal Money Fund
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CMA® Connecticut
Municipal Money Fund
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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
|
|
CMA® Pennsylvania
Municipal Money Fund
|
June 28,
2000
|
This prospectus
contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for
future reference.
|
|
The Securities
and Exchange Commission has not approved or disapproved these securities
or passed upon the adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
|
Table of Contents
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| |
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| [GRAPHIC] |
|
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| DETAILS ABOUT EACH
FUND |
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CMA MULTI-STATE
MUNICIPAL SERIES TRUST
Key Facts
[GRAPHIC]
In an effort to
help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in
this prospectus in the sidebar.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
A Cash Management Account (“CMA Account”) is a
conventional Merrill Lynch cash securities or margin account
that is linked to the CMA Funds, to money market deposit
accounts maintained with certain banks and to a Visa®
card/check account (“Visa® Account”). Subscribers
to the CMA service are charged an annual program participation
fee, presently $100, and may automatically invest free cash
balances held in their CMA Accounts in shares of the CMA
Tax-Exempt Fund or one of the various series of CMA Multi-State
Municipal Series Trust (commonly known as a “sweep”).
After June 5, 2000, shares of CMA Money Fund, CMA Government
Securities Fund and CMA Treasury Fund are no longer available
for the CMA sweep.
The CMA
service is a program offered by Merrill Lynch (not the Funds).
This prospectus provides information concerning certain CMA
Funds, but is not intended to provide detailed information
concerning the CMA service. If you want more information about
the CMA service, please review the CMA program description
brochure.
The ten
series of the CMA Multi-State Municipal Series Trust, together
with CMA Money Fund, CMA Government Securities Fund, CMA
Tax-Exempt Fund and CMA Treasury Fund make up the CMA Funds. The
CMA Funds are money market funds whose shares are offered to
subscribers of the CMA service. Each CMA Fund is a no-load money
market fund that seeks current income, preservation of capital
and liquidity from investing in short term
securities.
Each CMA
Fund has its own goals, investment strategies and risks. We
cannot guarantee that any of the CMA Funds will achieve its
objectives.
This
prospectus provides information concerning only the Funds that
make up the CMA Multi-State Municipal Series Trust.
CMA MULTI-STATE MUNICIPAL SERIES TRUST AT A GLANCE
What are each
Fund’s investment objectives?
The
investment objectives of each Fund are to seek current income
(or value, in the case of states that impose intangible personal
property taxes) exempt from tax, including 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.
What are each
Fund’s main investment strategies?
Each Fund
intends to achieve its investment objectives by investing in a
portfolio of short term municipal securities of
its designated state. These securities consist principally of
municipal notes and commercial paper, short term municipal
bonds, variable rate demand obligations, and short term
municipal derivative securities.
Each Fund
will generally invest at least 80% of its net assets in
municipal securities including at least 65% of its total assets
in municipal securities of its designated state. The New Jersey
Fund will generally invest at least 80% of its total assets in
New Jersey municipal securities. Each Fund may invest up to 20%
of its assets in short term money market securities that are not
exempt from Federal or state taxes.
Each Fund
only invests in short term municipal securities that have one of
the two highest short term ratings from a nationally recognized
rating agency or in unrated securities that Fund management
believes are of comparable quality. Certain short term municipal
securities are entitled to the benefit of insurance, guarantees,
letters of credit or similar arrangements provided by a
financial institution. Each Fund may invest more than 25% of its
assets in short term municipal securities of this kind. When
this is the case, Fund management may consider the obligation of
the financial institution and its creditworthiness in
determining whether the security is an appropriate investment
for the Fund. Certain short term municipal securities have
maturities longer than 397 days, but give the Fund the right to
demand payment from a financial institution within that period.
The Funds treat those securities as having a maturity of 397
days or less. The dollar-weighted average maturity of each
Fund’s portfolio will be 90 days or less.
Fund
management decides which securities to buy and sell based on its
assessment of the relative values of different securities and
future interest rates. Fund management seeks to improve each
Fund’s yield by taking advantage of differences in
yield that regularly occur between securities of a similar
kind.
We cannot
guarantee that each Fund will achieve its
objectives.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
4
What are the
main risks of investing in a Fund?
An
investment in a Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
The Fund could lose money if the issuer of an instrument held by
the Fund defaults or if short term interest rates rise sharply
in a manner not anticipated by Fund management. Although each
Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in a
Fund.
In
addition, since each Fund invests at least 65% of its assets in
the municipal securities of its designated state, it is more
exposed to negative political or economic factors in that state
than a fund that invests more widely.
Who should
invest?
Shares of
each Fund are offered to participants in the Cash Management
Account® financial service program and to investors
maintaining accounts directly with the Transfer
Agent.
A Fund
may be an appropriate investment for you if you:
|
Ÿ
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Are
investing with short term goals in mind
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|
Ÿ
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Are
looking for preservation of capital
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Ÿ
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Are
looking for current income and liquidity
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
5
[GRAPHIC] Key
Facts
The bar charts
and tables shown below provide an indication of the risks of
investing in each Fund. The bar charts show changes in each
Fund’s performance for each of the past ten calendar years
or since inception. The tables show the average annual total
returns of each Fund for the periods shown. How each Fund
performed in the past is not necessarily an indication of how
that Fund will perform in the future.
[GRAPH]
CMA Arizona Municipal Money Fund
1994 2.43%
1995 3.48%
1996 2.90%
1997 3.04%
1998 2.85%
1999 2.63%
During the period
shown in the bar chart, the highest return for a quarter was
0.94% (quarter ended June 30, 1995) and the lowest return for a
quarter was 0.45% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.73%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA Arizona Municipal Money
Fund |
|
2.63% |
|
2.98% |
|
2.76%† |
|
†
|
Inception date is February 8, 1993.
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
6
[GRAPH]
CMA California Municipal Money Fund
1990 5.24%
1991 3.85%
1992 2.43%
1993 1.94%
1994 2.34%
1995 3.22%
1996 2.92%
1997 3.05%
1998 2.81%
1999 2.51%
During the ten
year period shown in the bar chart, the highest return for a
quarter was 1.31% (quarter ended June 30, 1990 and the lowest
return for a quarter was 0.45% (quarter ended March 31, 1994).
The Fund’s year-to-date return as of March 31, 2000 was
0.64%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Past
Ten Years |
|
| CMA California Municipal Money
Fund |
|
2.51% |
|
2.90% |
|
3.03% |
|
[GRAPH]
CMA Connecticut Municipal Money Fund
1992 2.45%
1993 1.80%
1994 2.22%
1995 3.07%
1996 2.83%
1997 2.94%
1998 2.74%
1999 2.52%
During the period
shown in the bar chart, the highest return for a quarter was
0.81% (quarter ended June 30, 1995) and the lowest return for a
quarter was 0.43% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.68%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA Connecticut Municipal Money
Fund |
|
2.52% |
|
2.82% |
|
2.67%† |
|
†
|
Inception date is April 29, 1991.
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
7
[GRAPHIC] Key
Facts
[GRAPH]
CMA Massachusetts Municipal Money Fund
1991 4.12%
1992 2.42%
1993 1.77%
1994 2.14%
1995 3.08%
1996 2.85%
1997 3.02%
1998 2.88%
1999 2.65%
During the period
shown in the bar chart, the highest return for a quarter was
1.07% (quarter ended March 31, 1991) and the lowest return for a
quarter was 0.41% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.73%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA Massachusetts Municipal Money
Fund |
|
2.65% |
|
2.89% |
|
2.89%† |
|
†
|
Inception date is July 30, 1990.
|
[GRAPH]
CMA Michigan Municipal Money Fund
1992 2.44%
1993 1.85%
1994 2.24%
1995 3.17%
1996 2.91%
1997 3.07%
1998 2.89%
1999 2.69%
During the period
shown in the bar chart, the highest return for a quarter was
0.84% (quarter ended June 30, 1995) and the lowest return for a
quarter was 0.43% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.75%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA Michigan Municipal Money
Fund |
|
2.69 |
% |
|
2.95 |
% |
|
2.76%† |
|
†
|
Inception date is April 29, 1991.
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
8
[GRAPH]
CMA New Jersey Municipal Money Fund
1991 3.91%
1992 2.40%
1993 1.84%
1994 2.20%
1995 3.12%
1996 2.84%
1997 2.97%
1998 2.82%
1999 2.58%
During the period
shown in the bar chart, the highest return for a quarter was
1.01% (quarter ended March 31, 1991) and the lowest return for a
quarter was 0.42% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.73%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA New Jersey Municipal Money
Fund |
|
2.58% |
|
2.87% |
|
2.86%† |
|
†
|
Inception date is July 30, 1990.
|
[GRAPH]
CMA New York Municipal Money Fund
1990 5.10%
1991 3.77%
1992 2.38%
1993 1.79%
1994 2.24%
1995 3.23%
1996 2.93%
1997 3.10%
1998 2.91%
1999 2.69%
During the ten
year period shown in the bar chart, the highest return for a
quarter was 1.28% (quarter ended December 31, 1990) and the
lowest return for a quarter was 0.43% (quarter ended June 30,
1993). The Fund’s year-to-date return as of March 31, 2000
was 0.75%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Past
Ten Years |
|
| CMA New York Municipal Money
Fund |
|
2.69% |
|
2.97% |
|
3.01% |
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
9
[GRAPHIC] Key
Facts
[GRAPH]
CMA North Carolina Municipal Money Fund
1992 2.44%
1993 1.86%
1994 2.27%
1995 3.22%
1996 2.85%
1997 3.01%
1998 2.85%
1999 2.60%
During the period
shown in the bar chart, the highest return for a quarter was
0.86% (quarter ended June 30, 1995) and the lowest return for a
quarter was 0.44% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.72%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA North Carolina Municipal
Money Fund |
|
2.60% |
|
2.91% |
|
2.72%† |
|
†
|
Inception date is May 28, 1991.
|
[GRAPH]
CMA Ohio Municipal Money Fund
1992 2.49%
1993 1.87%
1994 2.29%
1995 3.35%
1996 3.02%
1997 3.14%
1998 2.97%
1999 2.73%
During the period
shown in the bar chart, the highest return for a quarter was
0.88% (quarter ended June 30, 1995) and the lowest return for a
quarter was 0.45% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.76%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA Ohio Municipal Money
Fund |
|
2.73% |
|
3.04% |
|
2.83%† |
|
†
|
Inception date is April 29, 1991.
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
10
[GRAPH]
CMA Pennsylvania Municipal Money Fund
1991 4.00%
1992 2.50%
1993 1.86%
1994 2.30%
1995 3.26%
1996 2.93%
1997 3.06%
1998 2.89%
1999 2.65%
During the period
shown in the bar chart, the highest return for a quarter was
1.02% (quarter ended September 30, 1991) and the lowest return
for a quarter was 0.43% (quarter ended March 31, 1994). The
Fund’s year-to-date return as of March 31, 2000 was
0.74%.
Average
Annual Total Returns
(as of the calendar year ended)
December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
| CMA Pennsylvania Municipal Money
Fund |
|
2.65% |
|
2.96% |
|
2.93%† |
|
†
|
Inception date is August 27, 1990.
|
Yield
Information
The yield
on Fund shares normally will go up and down on a daily basis.
Therefore, yields for any given past periods are not an
indication or representation of future yields. Each Fund’s
yield is affected by changes in interest rates, average
portfolio maturity and operating expenses. Current yield
information may not provide the basis for a comparison with bank
deposits or other investments, which pay a fixed yield over a
stated period of time. To obtain each Fund’s current 7-day
yield, call 1-800-MER-FUND.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
11
[GRAPHIC] Key
Facts
UNDERSTANDING
EXPENSES
Fund investors
pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all
mutual funds may charge:
Expenses paid
indirectly by the shareholder:
Annual Fund
Operating Expenses — expenses that cover the
costs of operating a Fund.
Management
Fee — a fee paid to the Manager
for managing a Fund.
Distribution
Fees — fees used to support a
Fund’s marketing and distribution efforts, such as
compensating financial consultants, advertising and
promotion.
FEES AND
EXPENSES
The
following tables show the different fees and expenses that you
may pay if you buy and hold shares of a Fund. Future expenses
may be greater or less than those indicated below.
Shareholder Fees (fees paid
directly by the shareholder) |
|
Arizona
Fund |
|
California
Fund |
|
Connecticut
Fund |
|
Massachusetts
Fund |
|
Michigan
Fund |
|
| Maximum Account
Fee(a) |
|
$100 |
|
|
$100 |
|
|
$100 |
|
|
$100 |
|
|
$100 |
|
|
Annual Fund Operating
Expenses (expenses that
are deducted from fund
assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Management
Fee(b) |
|
0.50 |
% |
|
0.42 |
% |
|
0.50 |
% |
|
0.50 |
% |
|
0.50 |
% |
|
Distribution
and/or
Service (12b-1)
Fees(c) |
|
0.13 |
% |
|
0.13 |
% |
|
0.13 |
% |
|
0.13 |
% |
|
0.13 |
% |
|
Other Expenses
(including transfer
agency fees)(d) |
|
0.08 |
% |
|
0.03 |
% |
|
0.04 |
% |
|
0.07 |
% |
|
0.07 |
% |
|
Total Annual Fund
Operating Expenses |
|
0.71 |
% |
|
0.58 |
% |
|
0.67 |
% |
|
0.70 |
% |
|
0.70 |
% |
|
Shareholder Fees (fees paid
directly by the shareholder) |
|
New Jersey
Fund |
|
New York
Fund |
|
North
Carolina
Fund |
|
Ohio
Fund |
|
Pennsylvania
Fund |
|
| Maximum Account
Fee(a) |
|
$100 |
|
|
$100 |
|
|
$100 |
|
|
$100 |
|
|
$100 |
|
|
Annual Fund Operating
Expenses (expenses that
are deducted from fund
assets) |
|
| Management
Fee(b) |
|
0.47 |
% |
|
0.42 |
% |
|
0.50 |
% |
|
0.50 |
% |
|
0.50 |
% |
|
| Distribution
(12b-1) Fees(c) |
|
0.13 |
% |
|
0.13 |
% |
|
0.13 |
% |
|
0.13 |
% |
|
0.13 |
% |
|
Other Expenses
(including transfer
agency fees)(d) |
|
0.04 |
% |
|
0.03 |
% |
|
0.08 |
% |
|
0.06 |
% |
|
0.06 |
% |
|
Total Annual Fund
Operating Expenses |
|
0.64 |
% |
|
0.58 |
% |
|
0.71 |
% |
|
0.69 |
% |
|
0.69 |
% |
|
(a)
|
Merrill
Lynch charges this annual program fee to CMA program
subscribers.
|
(b)
|
See
“Management of the Funds — Management and
Advisory Arrangements — Management
Fee” — Page 13 of the Statement of
Additional Information.
|
(c)
|
Each
Fund is authorized to pay Merrill Lynch distribution fees of
0.125% each year under the distribution plan each Fund has
adopted under Rule 12b-1. See “Purchase of
Shares —Distribution
Plan” — Page 19 of the Statement of
Additional Information.
|
(d)
|
Each
Fund pays the Transfer Agent $10.00 for each shareholder
account and reimburses the Transfer Agent’s out-of-pocket
expenses. See “Management and Advisory
Arrangements —Transfer Agency
Services” — Page 15 of the Statement of
Additional Information. The Manager provides accounting
services to each Fund at its cost.
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
12
Examples:
The
following examples are intended to help you compare the cost of
investing in each Fund with the cost of investing in other money
market funds.
These
examples assume that you invest $10,000 in a Fund for the time
periods indicated, that your investment has a 5% return each
year and that the Fund’s operating expenses remain the
same. This assumption is not meant to indicate that you will
receive a 5% annual rate of return. Your annual return may be
more or less than the 5% used in this example. Although your
actual costs may be higher or lower, based on these assumptions
your costs would be:
| |
|
1
Year |
|
3
Years |
|
5
Years |
|
10
Years |
|
| Arizona Fund |
|
$73 |
|
$227 |
|
$395 |
|
$883 |
|
| California Fund |
|
59 |
|
186 |
|
324 |
|
726 |
|
| Connecticut Fund |
|
68 |
|
214 |
|
373 |
|
835 |
|
| Massachusetts
Fund |
|
72 |
|
224 |
|
390 |
|
871 |
|
| Michigan Fund |
|
72 |
|
224 |
|
390 |
|
871 |
|
| New Jersey Fund |
|
65 |
|
205 |
|
357 |
|
798 |
|
| New York Fund |
|
59 |
|
186 |
|
324 |
|
726 |
|
| North
Carolina Fund |
|
73 |
|
227 |
|
395 |
|
883 |
|
| Ohio Fund |
|
70 |
|
221 |
|
384 |
|
859 |
|
| Pennsylvania
Fund |
|
70 |
|
221 |
|
384 |
|
859 |
|
These
examples do not take into account the annual program
participation fee charged by Merrill Lynch to CMA subscribers.
See the CMA program description brochure for details.
Shareholders of a Fund whose accounts are maintained directly
with the Transfer Agent and who are not subscribers to the CMA
program will not be charged a program fee but will not receive
any of the additional services available to
subscribers.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
13
Details About the
Fund [GRAPHIC]
Liquidity — the
ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, as a consequence,
greater volatility.
Each
Fund seeks current income exempt from Federal income taxes and
any applicable state taxes, preservation of capital and
liquidity. Each Fund tries to achieve its goals by investing in
a portfolio of short term municipal securities of its designated
state. We cannot guarantee that each Fund will achieve its
goals.
Short
term municipal securities mature or reset to a new interest rate
within 13 months. Certain short term municipal securities have
maturities longer than 13 months, but give the Fund the right to
demand payment from a financial institution within that period.
The Funds treat these securities as having a maturity of 13
months or less. Each Fund’s dollar-weighted average
maturity will not exceed 90 days. Each Fund only invests in
short term municipal securities having one of the two highest
ratings from a nationally recognized rating agency or unrated
securities which, in the opinion of Fund management, are of
similar credit quality. Certain short term municipal securities
are entitled to the benefit of insurance, guarantees, letters of
credit or similar arrangements provided by a financial
institution. Each Fund may invest more than 25% of its assets in
short term municipal securities of this kind. When this is the
case, Fund management may consider the obligation of the
financial institution and its creditworthiness in determining
whether the security is an appropriate investment for the
Fund.
Fund
management intends to keep each Fund’s assets fully
invested to maximize the yield on that Fund’s portfolio.
There may be times when a Fund has uninvested cash, however,
which will reduce its yield. Fund management will vary the kinds
of short term municipal securities in each portfolio as well as
its average maturity. Fund management decides which securities
to buy and sell based on its assessment of the relative values
of different securities and future interest rates. Fund
management seeks to improve each Fund’s yield by taking
advantage of differences in yield that regularly occur between
securities of a similar kind.
Each Fund
will generally invest at least 80% of its net assets in short
term municipal securities, including at least 65% of its total
assets in municipal securities of its designated state. The New
Jersey Fund will generally invest at least 80% of its total
assets in New Jersey municipal securities. Each Fund normally
may invest up to 20% of its assets in short term money market
securities that are not exempt from Federal or state taxes. For
temporary defensive purposes, each Fund may invest more than 35%
(or more than 20% for the New Jersey Fund) of its total assets
in short term municipal securities other than those of
designated state and more than 20% of its total assets in these
taxable money market securities.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
14
Illiquid — securities that cannot be resold within
seven days under normal circumstances at prices approximating
carrying value or that have legal or contractual restrictions on
resale.
ABOUT THE
PORTFOLIO MANAGERS
Edward J. Andrews
is the portfolio manager of the CMA New York Fund. Mr. Andrews
has been a Vice President of Merrill Lynch Asset Management
since 1991.
Steven Lewis is
the portfolio manager of the CMA Connecticut and New Jersey
Funds. Mr. Lewis has been a Vice President of Merrill Lynch
Asset Management since 1998 and was an Assistant Vice President
of Merrill Lynch Asset Management from 1995 to 1998.
Darren
Sanfillippo is the portfolio manager of the CMA Arizona,
Michigan, North Carolina and Pennsylvania Funds. Mr. Sanfillippo
has been a Vice President of Merrill Lynch Asset Management
since 1998, and was an Assistant Vice President of Merrill Lynch
Asset Management from 1994 to 1998.
Kevin A. Schiatta
is the portfolio manager of the CMA Massachusetts and Ohio
Funds. Mr. Schiatta has been a Vice President of Merrill Lynch
Asset Management since 1985.
Helen Marie
Sheehan is the portfolio manager of the CMA California Fund. Ms.
Sheehan has been a Vice President of Merrill Lynch Asset
Management since 1991.
No more
than 10% of each Fund’s net assets will be invested in
illiquid securities.
The Funds
may invest in certain short term municipal securities classified
as “private activity bonds” that may subject certain
investors to a Federal alternative minimum tax.
Among the
securities the Funds may buy are:
Municipal
Bonds — long term debt obligations that pay
interest exempt from Federal income tax. A Fund will only invest
in municipal bonds with no more than 397 days (13 months)
remaining to maturity at the date of purchase or that the Fund
has a contractual right to sell (put) periodically or on demand
within that time.
Variable
Rate Demand Obligations — floating rate securities that combine
an interest in a long term municipal bond with a right to demand
payment periodically or on notice. Each Fund may also buy a
participation interest in a variable rate demand obligation
owned by a commercial bank or other financial institution. When
the Fund purchases a participation interest, it receives the
right to demand payment on notice to the owner of the
obligation. Each Fund will not invest more than 20% of its total
assets in participation interests in variable rate demand
obligations.
Short Term
Municipal Derivatives — a variety of securities that generally
represent a Fund’s ownership interest in one or more
municipal bonds held by a trust or partnership coupled with a
conditional right to sell (put) that interest on demand or
periodically to a financial institution for a price equal to
face value. Income on the underlying municipal bonds is
“passed through” the trust or partnership to a Fund
and other institutions having an ownership interest. Depending
on the particular security, a Fund may receive pass-through
income at a fixed interest rate or a floating municipal money
market interest rate.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
15
[GRAPHIC] Details
About Each Fund
ABOUT THE
MANAGER
Each Fund is
managed by Fund Asset Management.
Municipal Lease Obligations — participation certificates issued by
government authorities to finance the acquisition, development
or construction of equipment, land or facilities. The
certificates represent participations in a lease or similar
agreement backed by the municipal issuer’s promise to
budget for and appropriate funds to make payments due under the
lease.
Money
Market Securities — Short term debt instruments such as
U.S. Treasury Bills.
Repurchase
Agreements; Purchase and Sale Contracts — Each Fund may enter into certain types
of repurchase agreements or purchase and sale contracts. Under a
repurchase agreement, the seller agrees to repurchase a security
(typically a security issued or guaranteed by the U.S.
Government) at a mutually agreed upon time and price. This
insulates a Fund from changes in the market value of the
security during the period, except for currency fluctuations. A
purchase and sale contract is similar to a repurchase agreement,
but purchase and sale contracts provide that the purchaser
receives any interest on the security paid during the period. If
the seller fails to repurchase the security in either situation
and the market value declines, a Fund may lose money. Each Fund
may invest in repurchase agreements involving the money market
securities described above or U.S. Government and agency
securities with longer maturities.
When
Issued, Delayed Delivery and Forward
Commitments — A Fund may buy or sell money market
securities on a when issued, delayed delivery and forward
commitment basis. In these transactions, the Fund buys or sells
the securities at an established price with payment and delivery
taking place in the future. The value of the security on the
delivery date may be more or less than its purchase or sale
price.
Each
Fund’s portfolio represents a significant percentage of the
market in short term municipal securities in its designated
state. A shortage of available high quality short term municipal
securities will affect the yield on a Fund’s portfolio.
Each Fund may suspend or limit sales of shares if, due to such a
shortage, the sale of additional shares will not be in the best
interest of the Fund’s shareholders.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
16
This
section contains a summary discussion of the general risks of
investing in the Funds. As with any mutual fund, there can be no
guarantee that a Fund will meet its goals or that a Fund’s
performance will be positive for any period of time.
Credit
Risk — Credit risk is the risk that the issuer
of a security owned by a Fund will be unable to pay the interest
or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the
obligation. While each Fund invests only in money market
securities of highly rated issuers, those issuers may still
default on their obligations.
Selection
Risk — Selection risk is the risk that the
securities that Fund management selects will underperform other
funds with similar investment objectives and investment
strategies.
Interest
Rate Risk — Interest rate risk is the risk that
prices of securities owned by the Fund generally increase when
interest rates go down and decrease when interest rates go up.
Prices of longer term securities generally change more in
response to interest rate changes than prices of shorter term
securities.
Share
Reduction Risk — In order to maintain a constant net
asset value of $1.00 per share, each Fund may reduce the number
of shares held by its shareholders.
Borrowing
Risk — Each Fund may borrow only to meet
redemptions. Borrowing may exaggerate changes in the net asset
value of a Fund’s shares and in the yield on a Fund’s
portfolio. Borrowing will cost a Fund interest expenses and
other fees. The cost of borrowing money may reduce a Fund’s
return.
Repurchase
Agreement Risk — If the other party to a repurchase
agreement defaults on its obligation under the agreement, the
Fund may suffer delays and incur costs or even lose money in
exercising its rights under the agreement.
When Issued
Securities, Delayed Delivery Securities And Forward
Commitments — When issued and delayed delivery securities
and forward commitments involve the risk that the security that
a Fund buys will lose value prior to its delivery. There also is
the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs, a Fund loses
both the investment opportunity for the assets it has set aside
to
pay for
the security and any gain in the security’s price. When
issued and delayed delivery securities also involve the risk
that the yields available in the market when delivery takes
place may be higher than those fixed in the transaction at the
time of the commitment. If this happens, the value of the when
issued or delayed delivery security will generally
decline.
VRDO and
Municipal Derivatives Credit Risk — When a Fund invests in variable rate
demand obligations or short term municipal derivatives, it
assumes credit risk with respect to the financial institution
providing the Fund with the right to demand payment or put
(sell) the security. While the Funds invest only in short term
municipal securities of high quality issuers, or which are
backed by high quality financial institutions, those issuers or
financial institutions may still default on their
obligations.
Short Term
Municipal Derivatives — Short term municipal derivatives
present certain unresolved tax, legal, regulatory and accounting
issues not presented by investments in other short term
municipal securities. These issues might be resolved in a manner
adverse to the Fund. For example, the Internal Revenue Service
has never ruled on the subject of whether pass-through income
paid to a Fund is tax-exempt. Each Fund receives an opinion of
counsel that pass-through income is tax-exempt, but that does
not mean that the IRS will never rule that pass-through income
is taxable.
Municipal
Lease Obligations — In a municipal lease obligation, the
issuer often agrees to budget for and appropriate municipal
funds to make payments due on the lease obligation. However,
this does not ensure that funds will actually be appropriated in
future years. The issuer does not pledge its unlimited taxing
power for the payment of the lease obligation but the leased
property secures the obligation. In addition, the proceeds of
sale might not cover the Fund’s loss.
Illiquid
Securities — If a Fund buys illiquid securities, it
may be unable to quickly resell them or may be able to sell them
only at a price below current value.
Concentration Risk — Each Fund may invest more than 25% of
its assets in municipal securities secured by bank letters of
credit. Banks are subject to extensive government regulation,
depend on the availability and cost of funds to support their
lending operations, and are more exposed than other businesses
to adverse economic conditions. These factors may affect a
bank’s ability to meet its obligations under a letter of
credit.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
18
State Specific Risk — Each Fund will invest primarily in
municipal securities issued by or on behalf of its designated
state. As a result each Fund is more exposed to risks affecting
issuers of its designated state’s municipal securities than
is a municipal securities fund that invests more widely. Set
forth below are certain risk factors specific to each state.
Management does not believe that the current economic conditions
of any state will adversely affect that state’s ability to
invest in high quality state municipal securities.
Arizona — Economic conditions in Arizona are influenced
by numerous factors including the condition of the national
economy, the evolution of new industries, including high
technology, the levels of in-migration, real estate development
and tourism. The Manager believes that the current economic
conditions in Arizona will enable the Fund to continue to invest
in high quality Arizona municipal bonds. The State of Arizona is
not authorized to issue general obligation bonds.
California — During the late 1990’s,
California’s economy has been recovering from the severe
recession it suffered at the beginning of the decade and has
been growing steadily. The current expansion has been marked by
growth in high technology manufacturing and services, electronic
manufacturing, motion picture and television production,
business services, nonresidential and residential construction
and local education. However, weakness in Asian and Latin
American economies, which are California’s largest trading
partners, may slow growth. Moody’s, Standard &
Poor’s and Fitch currently rate the State of
California’s general obligation bonds Aa3, AA-, and AA,
respectively, which are in Moody’s and Standard &
Poor’s second highest rating category and at the lower end
of Fitch’s second highest rating category.
Connecticut — Connecticut’s economy relies, in
part, on activities that may be adversely affected by cyclical
change. However, in recent years, the unemployment level has
dropped, and personal wealth has remained among the highest in
the nation despite severe poverty in several of
Connecticut’s largest cities. Connecticut has run General
Fund surpluses since the 1990-1991 fiscal year. Moody’s,
Standard & Poor’s and Fitch currently rate the State of
Connecticut’s general obligation bonds Aa3, AA, and AA,
respectively, which are at the lower end of each agency’s
second highest rating category.
Massachusetts — Massachusetts is currently enjoying a
strong and continuing economic recovery. The state has run
positive budget operating fund balances for the last half of the
1990’s and is projected to continue that trend. Currently,
both Standard & Poor’s and Fitch rate the Commonwealth
of
Massachusetts general obligation bonds AA-, which is at
the lower end of each agency’s second highest rating
category. Moody’s currently rates the Commonwealth of
Massachusetts general obligation bonds Aa2, which is at the
mid-range of the agency’s second highest rating
category.
Michigan — Michigan’s economy remains closely
tied to the cycles of the automobile industry, although it has
worked to diversify its economy in recent years. This greater
diversification coupled with the current increase in automobile
production have led to an unemployment rate below the national
average for the last several years. Moody’s, Standard &
Poor’s and Fitch currently rate the State of
Michigan’s general obligation bonds Aa1, AA+, and AA+,
respectively, which are at the top of each agency’s second
highest rating category.
New
Jersey — The economic outlook for the years 2000
and 2001 is for continued growth, but at somewhat more moderate
rates. Although the forecasts for the years 2000 and 2001
contain more risks than in the recent past, the basic
fundamentals of New Jersey’s economic health remain
favorable. The New Jersey outlook is based on expected national
economic performance and on recent New Jersey strategic policy
actions aimed at infrastructure improvements, effective
education and training of New Jersey’s workforce, and
maintaining a competitive business environment. Investments in
each of these policy areas are critical to maintaining the
long-term health of New Jersey’s economy. Moody’s,
Standard & Poor’s and Fitch currently rate the State of
New Jersey’s general obligation bonds Aa1, AA+, and AA+,
respectively, which are at the top of each agency’s second
highest rating category.
New
York — In recent years, New York State, New
York City, and other New York public entities have had financial
problems that could adversely affect the performance of the
State’s municipal bonds. In the recent years, however, New
York’s economy has improved, although growth has generally
remained below the national average. Moody’s, Standard
& Poor’s and Fitch currently rate New York City’s
general obligation bonds A3, A-, and A, respectively, which are
in each agency’s third highest rating category.
Moody’s and Standard & Poor’s currently rate the
State of New York’s general obligation bonds A2 and A+,
respectively, which are each agency’s third highest rating
category.
North
Carolina — North Carolina derives most of its
revenue from taxes, including taxes on personal and corporate
income, alcohol, and tobacco. In
recent
years, the state has run General Fund surpluses, a trend that is
expected to continue for the near future. Moody’s, Standard
& Poor’s and Fitch currently rate the State of North
Carolina’s general obligation bonds Aaa, AAA, and AAA,
respectively, which are in each agency’s highest rating
category.
Ohio — Economic activity in Ohio, as in many
other industrial states, tends to be more cyclical than in other
states and in the nation as a whole. At the end of its most
recent fiscal year, the state’s General Revenue Fund had a
positive cash balance. Moody’s, Standard & Poor’s
and Fitch currently rate the State of Ohio’s general
obligation bonds Aa1, AA+, and AA+, respectively, which are at
the top of each agency’s second highest rating
category.
Pennsylvania — From time to time, Pennsylvania and its
political subdivisions have had financial difficulties that have
adversely affected their credit standings. In recent years,
however, the state’s general fund has run positive cash
balances. Moody’s, Standard & Poor’s and Fitch
currently rate the State of Pennsylvania’s general
obligation bonds Aa3, AA, and AA, respectively, which are at the
lower end of each agency’s second highest rating
category.
STATEMENT OF ADDITIONAL INFORMATION
If you
would like further information about any Fund, including how it
invests, please see the Statement of Additional
Information.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
21
Your Account
[GRAPHIC]
HOW TO BUY, SELL AND TRANSFER SHARES
The chart on the following pages summarizes how to buy, sell and
transfer shares through Merrill Lynch. You may also buy and sell
shares through the Transfer Agent. To learn more about buying,
selling and transferring shares through the Transfer Agent, call
1-800-MER-FUND. Because the selection of a mutual fund involves
many considerations, your Merrill Lynch Financial Consultant may
help you with this decision.
Because
of the high costs of maintaining smaller shareholder accounts,
the Fund may redeem the shares in your account (without charging
any deferred sales charge) if the net asset value of your
account falls below $500 due to redemptions you have made. You
will be notified that the value of your account is less than
$500 before the Fund makes an involuntary redemption. You will
then have 60 days to make an additional investment to bring the
value of your account to at least $500 before the Fund takes any
action. This involuntary redemption does not apply to retirement
plans or Uniform Gifts or Transfers to Minors Acts
accounts.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
22
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
| Buy
Shares |
|
Determine the
amount of
your investment |
|
If you are a
CMA program subscriber, there is no minimum initial
investment for Fund shares, but the minimum for the program is
$20,000 in cash and/or securities. |
| |
| |
|
|
|
If you are not
a CMA program subscriber, the minimum initial
investment for a Fund is $5,000. |
|
|
|
Have cash
balances from
your account automatically
invested in shares of the
Fund designated as your
primary money account |
|
If you are a
CMA program subscriber and you choose to have
your cash balances automatically invested in a Fund, they will be
invested as follows: |
| |
|
|
|
Ÿ Except as
described below, cash balances of less than
$1,000 in a CMA invested in shares account are
automatically invested in shares of a Fund at the next
determined net asset value not later than the first business
day of each week on which both the New York Stock
Exchange and New York banks are open, which will usually
be a Monday. |
| |
|
|
|
Ÿ Cash
balances from (i) a sale of securities that does not
settle on the day the sale is made, (ii) a sale of securities
that settles on a same day basis, (iii) a repayment of
principal on debt securities held in the CMA account, or (iv)
a sale of shares of Merrill Lynch Ready Assets Trust or
Merrill Lynch U.S.A. Government Reserves will be invested
in shares of a Fund at the next determined net asset value
on the business day following the day on which proceeds
of the transaction are received by the CMA account,
subject to certain timing considerations described
below. |
| |
|
|
|
Ÿ A cash
deposit of $1,000 or more to the CMA account,
other than a manual investment placed through your
Merrill Lynch Financial Consultant, or a cash balance of
$1,000 or more from a payment of dividends or interest on
securities held in your CMA account will be invested in
shares of a Fund at the next determined net asset value on
the next business day if the deposit is made or the
payment is received prior to the cashiering deadline in the
brokerage office in which the deposit is made in order to
be invested in shares. Check with your Merrill Lynch
Financial Consultant regarding the cashiering deadline in
his or her branch. If the deposit is made or payment
received after the applicable cashiering deadline, the cash
balance will be invested in shares of the Fund at the net
asset value next determined on the second business day
following the date of the deposit or payment. |
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
23
[GRAPHIC] Your
Account
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
Buy Shares
(continued) |
|
Have your
Merrill Lynch
Financial Consultant submit
your purchase order |
|
If you are a
CMA subscriber, you may make manual investments
of $1,000 or more at any time in shares of a CMA Fund not
selected as your primary money account. However, you may not
hold shares of more than one Series of the CMA Multi-State
Municipal Series Trust at the same time. |
| |
|
| |
|
|
|
Generally,
manual purchases placed through Merrill Lynch will be
effective on the day following the day the order is placed.
Manual purchases of $500,000 or more can be made effective on
the same day the order is placed provided certain requirements
are met. |
| |
| |
|
|
|
Each Fund may
reject any order to buy shares and may suspend
the sale of shares at any time. |
| |
| |
|
|
|
Merrill Lynch
reserves the right to terminate a subscriber’s
participation in the CMA program at any time. |
| |
| |
|
|
|
When purchasing
shares as a CMA program subscriber, you will be
subject to the applicable annual program participation fee. To
receive all the services available as a CMA program subscriber,
you
must complete the account opening process, including completing
or supplying requested documentation. |
|
| |
|
Or contact the
Transfer
Agent |
|
If you maintain
an account directly with the Transfer Agent and
are not a CMA program subscriber, you may call the Transfer
Agent at 1-800-MER-FUND and request a purchase application.
Mail the completed purchase application to the Transfer Agent at
the address on the inside back cover of this
prospectus. |
|
Add to Your
Investment |
|
Purchase
additional shares |
|
The minimum
investment for additional purchases (other than
automatic purchases) is $1,000 for all accounts. |
|
| |
|
Acquire
additional shares
through the automatic
dividend reinvestment plan |
|
All dividends
are automatically reinvested daily in the form of
additional shares at net asset value. |
|
Transfer Shares
to
Another Securities
Dealer |
|
Transfer to a
participating
securities dealer |
|
You may
transfer your Fund shares only to another securities
dealer that has entered into an agreement with Merrill Lynch.
Certain shareholder services may not be available for the
transferred shares. You may only purchase additional shares of
funds previously owned before the transfer. All future trading of
these assets must be coordinated by the receiving
firm. |
|
| |
|
Transfer to a
non-
participating securities
dealer |
|
If you no
longer maintain a CMA account, you must either
transfer your shares to an account with the Transfer Agent or
they will be automatically redeemed. Shareholders maintaining
accounts with the Transfer Agent are not entitled to the services
available to CMA subscribers. |
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
24
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
| Sell Your
Shares |
|
Automatic
Redemption |
|
Each Fund has
instituted an automatic redemption procedure for
CMA program subscribers who have elected to have cash balances
in their accounts automatically invested in shares of a
designated
Fund. For these subscribers, unless directed otherwise, Merrill
Lynch will redeem a sufficient number of shares of the designated
Fund to satisfy debit balances in the account (i) created by
activity
therein or (ii) created by Visa® card purchases, cash
advances or
checks written against the Visa® account. Each CMA account
of a
subscriber will be automatically scanned for debits each business
day prior to 12 noon, Eastern time. After application of any cash
balances in the account to these debits, shares of the Fund
designated on the primary money account and to the extent
necessary, other CMA Funds or money accounts, will be redeemed
at net asset value at the 12 noon, Eastern time, pricing to
satisfy
remaining debits. |
|
| |
|
Have your
Merrill Lynch
Financial Consultant submit
your sales order |
|
If you are a
CMA program subscriber, you may redeem your shares
directly by submitting a written notice of redemption to Merrill
Lynch, which will submit the request to the Transfer Agent. Cash
proceeds from the redemption generally will be mailed to you at
your address of record, or upon request, mailed or wired (if
$10,000 or more) to your bank account. Redemption requests
should not be sent to the Fund or the Transfer Agent. If
inadvertently sent to the Fund or the Transfer Agent, redemption
requests will be forwarded to Merrill Lynch. All shareholders on
the account must sign the letter and signatures must be
guaranteed (e.g., by a bank or a broker). |
| |
| |
|
|
|
Redemptions of
Fund shares will be confirmed to CMA program
subscribers (rounded to the nearest share) in their monthly
transaction statements. |
|
| |
|
Sell through
the Transfer
Agent |
|
You may sell
shares held at the Transfer Agent by writing to the
Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the
letter. A
signature guarantee will generally be required but may be waived
in certain limited circumstances. You can obtain a signature
guarantee from a bank, securities dealer, securities broker,
credit
union, savings association, national securities exchange and
registered securities association. A notary public seal will not
be
acceptable. Redemption requests should not be sent to the Fund
or Merrill Lynch. The Transfer Agent will mail redemption
proceeds
to you at your address of record. If you make a redemption
request before a Fund has collected payment for the purchase of
shares, the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten
days. |
| |
| |
|
|
|
Check with the
Transfer Agent or your Merrill Lynch Financial
Consultant for details. |
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
25
[GRAPHIC] Your
Account
Net
Asset Value — the market value of a Fund’s
total assets after deducting liabilities, divided by the number
of shares outstanding.
Dividends — Ordinary income and capital gains
paid to shareholders. Dividends may be reinvested in additional
Fund shares as they are paid.
HOW SHARES ARE
PRICED
When you
buy shares, you pay the net asset value (normally $1.00 per
share) without a sales charge. The “amortized cost”
method is used in calculating net asset value, meaning that the
calculation is based on a valuation of the assets held by each
Fund at cost, with an adjustment for any discount or premium on
a security at the time of purchase. The net asset value is the
offering price. Shares are also redeemed at their net asset
value. Each Fund calculates its net asset value at 12 noon
Eastern time on each business day the New York Stock Exchange or
New York banks are open immediately after the daily declaration
of dividends. The net asset value used in determining your price
is the one calculated after your purchase or redemption order
becomes effective. Share purchase orders are effective on the
date Federal funds become available to the Fund.
DIVIDENDS AND
TAXES
Dividends
are declared and reinvested daily in the form of additional
shares at net asset value. You will begin accruing dividends on
the day following the date your purchase becomes effective.
Shareholders will receive statements monthly as to such
reinvestments. In most cases shareholders redeeming their
holdings will receive all dividends declared and reinvested
through the date of redemption.
Each Fund
intends to make distributions, most of which will be exempt from
Federal income tax, the designated state’s personal income
tax and, in certain instances local personal income tax. Where
applicable, each Fund intends that the value of its shares will
be exempt from state intangible personal property tax or local
personal property tax in the designated state, although it
cannot guarantee that this will always be the case. If you are
subject to income tax in a state other than the relevant
designated state, the dividends derived from state municipal
securities of the designated state will not be exempt from that
state’s personal income tax although they may be exempt
from Federal income tax.
Distributions derived from capital gains on portfolio
securities will be subject to Federal income taxes and will
generally be subject to state and local income taxes. Capital
gain dividends are generally taxed at different rates from
ordinary income dividends for Federal income tax purposes.
However, in general, capital gain dividends are taxed at the
same rates as ordinary
income for state personal income tax purposes. Certain investors
may be subject to a Federal alternative minimum tax on dividends
received from a Fund attributable to the Fund’s investments
in private activity bonds. Interest income on some of each
Fund’s investments may produce taxable
distributions.
Generally, within 60 days after the end of a Fund’s
taxable year, the Trust will tell you the amount of exempt
interest dividends and capital gain dividends you received that
year. Capital gain dividends are taxable, for Federal income tax
purposes, as long term capital gains to you regardless of how
long you have held your shares. The tax treatment of
distributions from a Fund is the same whether you choose to
receive distributions in cash or to have them reinvested in
shares of the Fund.
If the
value of assets held by a Fund declines, the 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 your
eliminated shares would be added to the basis of your remaining
Fund shares, and you could recognize a capital loss if you
disposed of your shares at that time.
By law,
each Fund must withhold 31% of your dividends and redemption
proceeds if you have not provided a taxpayer identification
number to the Trust or the number is incorrect.
This
section summarizes some of the consequences under current
Federal and, very generally, state tax law of an investment in
each Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax
consequences of an investment in each Fund under all applicable
tax laws.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
27
Management of the
Fund [GRAPHIC]
Fund
Asset Management, the Funds’ Manager, manages each
Fund’s investments and its business operations under the
overall supervision of the Trust’s Board of Trustees. The
Manager has the responsibility for making all investment
decisions for each Fund. Each Fund pays the Manager a fee at the
annual rate of 0.500% of each Fund’s average daily net
assets not exceeding $500 million; 0.425% of the average daily
net assets exceeding $500 million but not exceeding $1 billion;
and 0.375% of the average daily net assets exceeding $1
billion.
Fund
Asset Management was organized as an investment adviser in 1977
and offers investment advisory services to more than 40
registered investment companies. Fund Asset Management is part
of Asset Management Group of ML and Co., which had approximately
$555 billion in investment company and other portfolio assets
under management as of May 2000. This amount includes assets
managed for Merrill Lynch affiliates.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
28
The
following Financial Highlights tables are intended to help you
understand each Fund’s financial performance for the
periods shown. Certain information reflects financial results
for a single Fund share. The total returns in the tables
represent the rate an investor would have earned or lost on an
investment in the respective Fund (assuming reinvestment of all
dividends). This information has been audited by Deloitte &
Touche LLP
, whose report, along with each Fund’s financial statements,
is included in each Fund’s annual report to shareholders,
which is available upon request.
| |
|
Arizona
Fund
|
|
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
(loss) on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
| Total
Investment Return |
|
2.80 |
% |
|
2.73 |
% |
|
3.05 |
% |
|
2.86 |
% |
|
3.35 |
% |
|
| Ratios to
Average Net Assets: |
|
| Expenses, net
of reimbursement |
|
.71 |
% |
|
.73 |
% |
|
.74 |
% |
|
.76 |
% |
|
.58 |
% |
|
| Expenses |
|
.71 |
% |
|
.73 |
% |
|
.74 |
% |
|
.76 |
% |
|
.77 |
% |
|
| Investment
income — net |
|
2.76 |
% |
|
2.69 |
% |
|
2.99 |
% |
|
2.80 |
% |
|
3.27 |
% |
|
| Supplemental
Data: |
|
| Net assets, end
of year (in thousands) |
|
$227,210 |
|
|
$214,018 |
|
|
$213,277 |
|
|
$169,551 |
|
|
$137,520 |
|
|
†
|
Amount
is less than $.01 per share.
|
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
29
FINANCIAL
HIGHLIGHTS
| |
|
California
Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
| Total
Investment Return |
|
2.59 |
% |
|
2.68 |
% |
|
3.06 |
% |
|
2.90 |
% |
|
3.15 |
% |
|
| Ratios to
Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses |
|
.58 |
% |
|
.58 |
% |
|
.59 |
% |
|
.60 |
% |
|
.64 |
% |
|
| Investment
income — net |
|
2.56 |
% |
|
2.63 |
% |
|
3.00 |
% |
|
2.85 |
% |
|
3.11 |
% |
|
| Supplemental
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net assets, end
of year (in thousands) |
|
$2,312,154 |
|
|
$2,270,864 |
|
|
$2,005,663 |
|
|
$1,565,802 |
|
|
$1,421,140 |
|
|
|
| † Amount is less than $.01 per
share. |
|
| |
|
Connecticut
Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
(loss) on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
| Total
Investment Return |
|
2.66 |
% |
|
2.62 |
% |
|
2.93 |
% |
|
2.81 |
% |
|
3.01 |
% |
|
| Ratios to
Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses |
|
.67 |
% |
|
.70 |
% |
|
.69 |
% |
|
.71 |
% |
|
.72 |
% |
|
| Investment
income — net |
|
2.63 |
% |
|
2.58 |
% |
|
2.88 |
% |
|
2.76 |
% |
|
2.97 |
% |
|
| Supplemental
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net assets, end
of year (in thousands) |
|
$ 623,491 |
|
|
$ 481,633 |
|
|
$ 453,295 |
|
|
$ 339,931 |
|
|
$ 313,362 |
|
|
|
| † Amount is less than $.01 per
share. |
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
30
FINANCIAL
HIGHLIGHTS
| |
|
Massachusetts Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
on investments — net |
|
— |
† |
|
— |
|
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
and distributions: |
| Investment
income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
| Realized gain on
investments — net |
|
— |
† |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
| Total dividends
and distributions |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
| Total
Investment Return |
|
2.80 |
% |
|
2.77 |
% |
|
3.03 |
% |
|
2.84 |
% |
|
3.04 |
% |
|
| Ratios to
Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses |
|
.70 |
% |
|
.72 |
% |
|
.72 |
% |
|
.76 |
% |
|
.76 |
% |
|
| Investment
income — net |
|
2.76 |
% |
|
2.72 |
% |
|
2.98 |
% |
|
2.78 |
% |
|
3.00 |
% |
|
| Supplemental
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net assets, end
of year (in thousands) |
|
$409,700 |
|
|
$331,437 |
|
|
$268,929 |
|
|
$200,598 |
|
|
$189,482 |
|
|
|
| † Amount is less than $.01 per
share. |
|
| |
|
Michigan
Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
(loss) on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
| Total
Investment Return |
|
2.86 |
% |
|
2.78 |
% |
|
3.07 |
% |
|
2.90 |
% |
|
3.12 |
% |
|
| Ratios to
Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses |
|
.70 |
% |
|
.71 |
% |
|
.71 |
% |
|
.72 |
% |
|
.73 |
% |
|
| Investment
income — net |
|
2.81 |
% |
|
2.72 |
% |
|
3.02 |
% |
|
2.84 |
% |
|
3.05 |
% |
|
| Supplemental
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net assets, end
of year (in thousands) |
|
$360,334 |
|
|
$393,612 |
|
|
$306,046 |
|
|
$272,969 |
|
|
$247,544 |
|
|
|
| † Amount is less than $.01 per
share. |
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
31
FINANCIAL
HIGHLIGHTS
| |
|
New Jersey
Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
| Total
Investment Return |
|
2.74 |
% |
|
2.71 |
% |
|
2.97 |
% |
|
2.83 |
% |
|
3.07 |
% |
|
| Ratios to
Average Net Assets: |
|
| Expenses |
|
.64 |
% |
|
.66 |
% |
|
.66 |
% |
|
.68 |
% |
|
.68 |
% |
|
| Investment
income — net |
|
2.71 |
% |
|
2.65 |
% |
|
2.92 |
% |
|
2.78 |
% |
|
3.02 |
% |
|
| Supplemental
Data: |
|
| Net assets, end
of year (in thousands) |
|
$1,085,988 |
|
|
$1,017,235 |
|
|
$ 799,997 |
|
|
$ 683,361 |
|
|
$ 610,285 |
|
|
|
| † Amount is less than $.01 per
share. |
|
| |
|
New York
Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
| Total
Investment Return |
|
2.86 |
% |
|
2.79 |
% |
|
3.09 |
% |
|
2.94 |
% |
|
3.17 |
% |
|
| Ratios to
Average Net Assets: |
|
| Expenses |
|
.58 |
% |
|
.61 |
% |
|
.61 |
% |
|
.63 |
% |
|
.64 |
% |
|
| Investment
income — net |
|
2.83 |
% |
|
2.74 |
% |
|
3.04 |
% |
|
2.88 |
% |
|
3.12 |
% |
|
| Supplemental
Data: |
|
| Net assets, end
of year (in thousands) |
|
$2,177,183 |
|
|
$1,826,720 |
|
|
$1,556,021 |
|
|
$1,236,322 |
|
|
$1,132,264 |
|
|
|
| † Amount is less than $.01 per
share. |
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
32
FINANCIAL
HIGHLIGHTS
| |
|
North
Carolina Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
(loss) on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
| Total
Investment Return |
|
2.76 |
% |
|
2.73 |
% |
|
3.02 |
% |
|
2.84 |
% |
|
3.12 |
% |
|
| Ratios to
Average Net Assets: |
|
| Expenses, net
of reimbursement |
|
.71 |
% |
|
.71 |
% |
|
.71 |
% |
|
.72 |
% |
|
.69 |
% |
|
| Expenses |
|
.71 |
% |
|
.71 |
% |
|
.71 |
% |
|
.72 |
% |
|
.74 |
% |
|
| Investment
income — net |
|
2.72 |
% |
|
2.69 |
% |
|
2.97 |
% |
|
2.79 |
% |
|
3.08 |
% |
|
| Supplemental
Data: |
|
| Net assets, end
of year (in thousands) |
|
$291,536 |
|
|
$304,066 |
|
|
$307,069 |
|
|
$274,180 |
|
|
$273,910 |
|
|
|
| † Amount is less than $.01 per
share. |
|
| |
|
Ohio
Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized gain
on investments — net |
|
— |
† |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
$
1.00 |
|
|
| Total
Investment Return |
|
2.89 |
% |
|
2.85 |
% |
|
3.15 |
% |
|
3.00 |
% |
|
3.26 |
% |
|
| Ratios to
Average Net Assets: |
|
| Expenses |
|
.69 |
% |
|
.71 |
% |
|
.70 |
% |
|
.71 |
% |
|
.73 |
% |
|
| Investment
income — net |
|
2.85 |
% |
|
2.80 |
% |
|
3.09 |
% |
|
2.94 |
% |
|
3.21 |
% |
|
| Supplemental
Data: |
|
| Net assets, end
of year (in thousands) |
|
$432,473 |
|
|
$402,370 |
|
|
$394,715 |
|
|
$327,173 |
|
|
$282,187 |
|
|
|
| † Amount is less than $.01 per
share. |
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
33
FINANCIAL
HIGHLIGHTS
| |
|
Pennsylvania
Fund
|
| |
|
For the Year
Ended March 31,
|
| Increase
(Decrease) in Net Asset Value: |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| 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 |
|
|
.03 |
|
|
| Realized loss
on investments — net |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
— |
† |
|
| Total from
investment operations |
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
.03 |
|
|
| Less dividends
from investment income — net |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
(.03 |
) |
|
| Net asset
value, end of year |
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
$ 1.00 |
|
|
| Total
Investment Return |
|
2.81 |
% |
|
2.77 |
% |
|
3.08 |
% |
|
2.92 |
% |
|
3.19 |
% |
|
| Ratios to
Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses |
|
.69 |
% |
|
.70 |
% |
|
.70 |
% |
|
.71 |
% |
|
.72 |
% |
|
| Investment
income — net |
|
2.78 |
% |
|
2.71 |
% |
|
3.03 |
% |
|
2.86 |
% |
|
3.13 |
% |
|
| Supplemental
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net assets, end
of year (in thousands) |
|
$539,177 |
|
|
$528,840 |
|
|
$443,012 |
|
|
$428,896 |
|
|
$416,729 |
|
|
|
| † Amount is less than $.01 per
share. |
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
34
[FLOW CHART]
POTENTIAL
INVESTORS
Open an account (two options).
1
CMA PROGRAM SUBSCRIBER'S
MERRILL LYNCH
FINANCIAL CONSULTANT
Advises shareholders on their fund investments.
2
TRANSFER AGENT
Financial Data Services, Inc.
ADMINISTRATIVE OFFICES
4800 Deer Lake Drive East
Jacksonville, Florida 32246-5289
MAILING ADDRESS
P.O. BOX 45289
Jacksonville, Florida 32232-5289
1-800-221-7210
Performs recordkeeping and reporting services.
DISTRIBUTOR
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
4 World Financial Center
New York, New York 10080
Arranges for the sale of Fund shares.
THE FUNDS
The Board of Trustees
oversees each Fund.
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Provides legal advice to the Fund.
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02101
Holds the Fund's assets for safekeeping.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Princeton Forrestal Village
116-300 Village Boulevard
Princeton, New Jersey 08540-6400
Audits the financial statements of the
Fund on behalf of the shareholders.
MANAGER
Fund Asset Management L.P.
ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Plainsboro, New Jersey 08536
MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
For More
Information [GRAPHIC]
|
Additional
information about each Fund’s investments is available in
the Fund’s annual and semi-annual reports to
shareholders. You may obtain these reports at no cost by
calling 1-800-MER-FUND.
|
|
Each Fund will
send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have.
To receive separate shareholder reports for each account, call
your Merrill Lynch Financial Consultant or write to the
Transfer Agent at its mailing address. Include your name,
address, tax identification number and Merrill Lynch brokerage
or mutual fund account number. If you have any questions,
please call your Merrill Lynch Financial Consultant or the
Transfer Agent at 1-800-MER-FUND.
|
|
Statement of Additional Information
|
|
The Funds’
Statement of Additional Information contains further
information about each Fund and is incorporated by reference
(legally considered to be part of this Prospectus). You may
request a free copy by writing the Trust at Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289 or by calling 1-800-MER-FUND.
|
Contact your
Merrill Lynch Financial Consultant or the Trust at the telephone
number or address indicated above if you have any
questions.
Information about
each Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC’s Public Reference
Room in Washington, D.C. Call 1-202-942-8090 for information on
the operation of the public reference room. This information is
also available on the SEC’s Internet site at
http://www.sec.gov and copies may be obtained upon payment of a
duplicating fee by electronic request at the following e-mail
address: [email protected], or by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-0102.
You should
rely only on the information contained in this Prospectus. No
one is authorized to provide you with information that is
different from the information contained in this
Prospectus.
Investment
Company Act file #811—5011
Code
#16817-0600
©
Fund Asset Management, L.P.
Prospectus
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 Ÿ 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. There can be no
assurance that a Fund’s investment objective will be
achieved. The Funds may invest in certain tax-exempt securities
classified as “private activity bonds” that may
subject certain investors in the Funds to a Federal 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®
(“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 cash balances held in CMA accounts. A CMA
account is a conventional Merrill Lynch cash securities or
margin securities account (“Securities Account”) that
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® card/check account (“Visa Account”).
Merrill Lynch markets its margin account under the name Investor
CreditLine
SM
service.
The CMA Funds, CMA Tax-Exempt Fund, accounts at Merrill Lynch
Bank USA and/or Merrill Lynch Bank & Trust Co. (the
“Merrill Lynch Banks”), Merrill Lynch’s
affiliated, FDIC-insured depository institutions, and the
Insured Savings Account are collectively referred to as
“Money Accounts.”
A
customer of Merrill Lynch may subscribe to the CMA program with
a minimum of $20,000 in securities or cash. Free cash balances
in the Securities Account of CMA participants may be invested,
automatically or periodically, in shares of CMA Tax-Exempt Fund,
the Funds, or deposited in accounts at Merrill Lynch Banks or
deposited with a depository institution through the Insured
Savings
SM
Account
(the “Insured Savings Account”). Free cash balances
held in CMA accounts will be invested automatically or deposited
through the Money Account selected by the CMA subscriber as the
Primary Money 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® 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.
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).
Unless
otherwise indicated, the information set forth in this Statement
of Additional Information 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.
This
Statement of Additional Information of the Funds is not a
prospectus and should be read in conjunction with the Prospectus
of the Funds, dated June 28, 2000 (the “Prospectus”),
which has been filed with the Securities and Exchange Commission
(the “Commission”) and can be obtained, without
charge, by calling (800) MER-FUND or by writing the Trust at the
above address. The Prospectus is incorporated by reference into
this Statement of Additional Information, and this Statement of
Additional Information is incorporated by reference into the
Prospectus. Each Fund’s audited financial statements are
incorporated in this Statement of Additional Information by
reference to its 2000 annual report to shareholders. You may
request a copy of the annual report at no charge by calling
(800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
Fund
Asset Management — Manager
The date
of this Statement of Additional Information is June 28,
2000.
TABLE
OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES
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.
There can be no assurance that each Fund’s investment
objectives will be achieved. 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 that 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.” There can be no assurance that each
Fund’s investment objectives will be achieved. The
investment objectives are fundamental policies of each Fund that
may not be changed without the approval of the holders of the
Fund’s outstanding securities (as defined below). Reference
is made to “How the Fund Invests” and “Investment
Risks” in the Prospectus. The Fund is classified as a
non-diversified fund under the Investment Company
Act.
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 that 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 and the value of which
may be subject to state property taxes. Such obligations, either
separately or together with State Municipal Securities, are
herein referred to as “Municipal
Securities.”
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.
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. Interest received on certain
State Municipal Securities and Municipal Securities that are
classified as “private activity bonds” (in general,
bonds that benefit non-governmental entities) may be subject to
a Federal 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 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. This could
cause distributions to be subject to New Jersey Income
Tax.
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
“Investment Objectives and Policies—Other
Factors.”
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,
in certain instances, 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.
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.
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.
VRDOs
and Participating VRDOs. VRDOs are
tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and right of demand on the part
of the holder thereof to receive payment of the unpaid balance
plus accrued interest upon a short notice period not to exceed
seven days. There is, however, the possibility that because of
default or insolvency the demand feature of VRDOs and
Participating VRDOs may not be honored. The interest rates on
are adjustable at intervals (ranging from daily to one year) to
some prevailing market rate of the VRDOs at approximately the
par value of the VRDOs on the adjustment date. The adjustment
may be based upon the Public Securities Index or some other
appropriate interest rate adjustment index. Each Fund may invest
in all types of tax-exempt instruments currently outstanding or
to be issued in the future that satisfy the short term maturity
and quality standards of a Fund.
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 financial
institution upon a specified number of days notice, not to
exceed seven
days. In addition, the Participating VRDO is backed by an
irrevocable letter of credit or guaranty of the financial
institution. A Fund would have an undivided interest in an
underlying obligation and thus participate on the same basis as
the financial institution in such obligation except that the
financial 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 Funds
should be entitled to treat the income received on Participating
VRDOs as interest from tax-exempt obligations. It is
contemplated that no Fund will invest more than a limited amount
of its total assets in Participating VRDOs.
VRDOs
that contain a 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 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
Manager the daily function of determining and monitoring
liquidity of such VRDO. The Trustees, however, will retain
sufficient oversight and be ultimately responsible for such
determinations.
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
Temporary Investments, VRDOs and Participating VRDOs in which
the Tax-Exempt Fund may invest will be in the following rating
categories at the time of purchase: MIG-1/VMIG-1 through
MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for
commercial paper as determined by Moody’s Investors
Service, Inc. (“Moody’s”), SP-1 through SP-2 for
notes and A-1 through A-3 for VRDOs and commercial paper as
determined by Standard & Poor’s (“S&P”),
or F-1 through F-3 for notes, VRDOs and commercial paper as
determined by Fitch IBCA, Duff & Phelps (“Fitch”).
Temporary Investments, if not rated, must be of comparable
quality in the opinion of the Manager. In addition, the
Tax-Exempt Fund reserves the right to invest temporarily a
greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgement of the Manager,
market conditions warrant.
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 a Fund receives opinions of legal
counsel to the effect that the income from a Derivative Product
in which the fund invests 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 Notes. Municipal
notes are shorter term municipal debt obligations. They may
provide interim financing in anticipation of tax collection,
bond sales or revenue receipts. If there is a shortfall in the
anticipated proceeds, the note may not be fully repayed and the
Fund may lose money.
Municipal Commercial
Paper. Municipal commercial paper is
generally unsecured and issued to met short-term financing
needs. The lack of security presents some risk of loss to the
Fund.
Municipal Lease
Obligations. Also included within the
general category of the State Municipal Securities are
certificates of participation (“COPs”) issued by
governmental authorities as entities to finance the acquisition
or construction of equipment, land and/or facilities. The COPs
represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter
collectively called “lease obligations”) relating to
such equipment, land or facilities. Although lease obligations
do not constitute general obligations of the issuer for which
the issuer’s unlimited taxing power is pledged, a lease
obligation is frequently backed by the issuer’s covenant to
budget for, appropriate and make the payments due under the
lease obligation. However, certain lease obligations contain
“non-appropriation” clauses which provide that the
issuer 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
“non-appropriation” lease obligations are secured by
the leased property, disposition of the property in the event of
foreclosure might prove difficult. The securities represent a
type of financing that has not yet developed the depth of
marketability associated with more conventional securities.
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
that 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. The Manager will deem lease
obligations to be liquid if they are publicly offered and have
received an investment grade rating of Baa or better by
Moody’s, or BBB or better by “S&P” or Fitch.
Unrated lease obligations, or those rated below investment
grade, 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 latter, the Manager must, among other things, also review
the creditworthiness of the entity obligated to make payment
under the lease obligation and 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.
Purchase of Securities with Fixed Price
“Puts.” The Tax-Exempt Fund
has authority to purchase fixed rate Tax-Exempt Securities and,
for a price, simultaneously acquire the right to sell such
securities back to the seller at an agreed upon price at any
time during a stated period or on a certain date. Such a right
is generally denoted as a fixed price put. Puts with respect to
fixed rate instruments are to be distinguished from the demand
or repurchase features of VRDOs and Participating VRDOs which
enable the Tax-Exempt Fund to dispose of the security at a time
when the market value of the security approximates its par
value.
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,
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.
For a description of Municipal Securities and ratings, see
Appendix K—“Information Concerning Municipal
Securities.”
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, Moody’s, Standard &
Poor’s 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.
Preservation of capital is a prime investment objective of
the Funds, and while the types of money market securities in
which the Funds invest generally are considered to have low
principal risk, such securities are not completely risk free.
There is a risk of the failure of issuers or credit enhancers to
meet their principal and interest obligations. With respect to
repurchase agreement and purchase and sale contracts, there is
also the risk of the failure of the parties involved to
repurchase at the agreed-upon price, in which event each Fund
may suffer time delays and incur costs or possible losses in
connection with such transactions.
Single
State Risk
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. See Appendices A through J hereto for
special considerations and risk factors specific to each
Fund.
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 that are related in such a way that an
economic, business or political development or change affecting
one such security also 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 that 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 leading 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
involve the purchase or sale of securities by a Fund at an
established price with payment and delivery taking place in the
future. The Fund enters into these transactions to obtain what
is considered an advantageous price to the Fund at the time of
entering into the transaction. The Fund has not established any
limit on the percentage of its assets that may be committed in
connection with these transactions. When the Fund purchases
securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase
commitments.
There can
be no assurance that a security purchased on a when issued basis
will be issued or that a security purchased or sold through a
forward commitment will be delivered. The value of securities in
these transactions on the delivery date may be more or less than
the Fund’s purchase price. The Fund may bear the risk of a
decline in the value of the security in these transactions and
may not benefit from an appreciation in the value of the
security during the commitment period.
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.
Taxable Money Market Securities
The Funds
may invest in a variety of taxable money market securities
(“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.
Repurchase Agreements
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 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:
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(1) purchase any securities other than
securities referred to under “How the Funds Invest”
in the Prospectus and under “Investment Objectives and
Policies” herein;
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(2) invest more than 5% of its total assets
(taken at market value at the time of each investment) in
private activity bonds or 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;
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(3) make investments for the purpose of
exercising control or management;
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(4) purchase securities of other investment
companies, except in connection with a merger, consolidation,
acquisition or reorganization;
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(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;
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(6) purchase any securities on margin, except
for use of short term credit necessary for clearance of
purchases and sales of portfolio securities;
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(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”;
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(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);
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(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.);
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(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;
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(11) invest 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;
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(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;
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(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; and
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(14) issue senior securities to the extent
such issuance would violate applicable law.
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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.
Non-Diversified Status
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. Each Fund’s investments
are limited, however, in order to allow each Fund to qualify as
a “regulated investment company” (“RIC”)
under the Code. See “Taxes.” To qualify, 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. 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. 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.
The Board
of Trustees of the Trust consists of seven individuals, five of
whom are not “interested persons” of the Trust as
defined in the Investment Company Act (the “non-interested
Trustees”). The Trustees are responsible for the overall
supervision of the operations of each Fund and perform the
various duties imposed on the directors of investment companies
by the Investment Company Act.
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, executive officer
and the portfolio manager is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
TERRY
K. GLENN
(59) — President and Trustee
(1)(2) — Executive Vice President of the Manager
and Merrill Lynch Asset Management, L.P. (“MLAM”)
(which terms as used herein include their corporate
predecessors) since 1983; Executive Vice President and Director
of Princeton Services, Inc. (“Princeton Services”)
since 1993; President of Princeton Funds Distributor, Inc.
(“PFD”) since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since
1988.
RONALD
W. FORBES
(59) — Trustee (2)(3) — 1400
Washington Avenue, Albany, New York 12222. Professor of Finance,
School of Business, State University of New York at Albany since
1989; International Consultant, Urban Institute, Washington,
D.C. from 1995 to 1999.
CYNTHIA
A. MONTGOMERY
(47) — Trustee
(2)(3) — 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
(68) — Trustee (2)(3) — 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 Arnold 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.
KEVIN
A. RYAN
(67) — Trustee (2)(3) — 127
Commonwealth Avenue, Chestnut Hill, Massachusetts 02167. Founder
and Emeritus Director of The Boston University Center for the
Advancement of Ethics and Character and director thereof until
1989; Professor from 1982 until 1999 and currently Professor
Emeritus of Education at Boston University; formerly taught on
the faculties of The University of Chicago, Stanford University
and Ohio State University.
RICHARD
R. WEST
(62) — Trustee (2)(3) — 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
Realty Trust, Inc., Vornado Operating Company (real estate
holding company) and Alexander’s Inc. (real estate
company).
ARTHUR
ZEIKEL
(67) — Trustee (1)(2) — 300
Woodland Avenue, Westfield, New Jersey 07090. Chairman of the
Manager and MLAM from 1997 to 1999 and President thereof from
1977 to 1997; Chairman of Princeton Services from 1997 to 1999,
Director thereof from 1993 to 1999 and President thereof from
1993 to 1997; Executive Vice President of Merrill Lynch &
Co., Inc. (“ML & Co.”) from 1990 to
1999.
VINCENT
R. GIORDANO
(55) — 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
(40) — 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.
PETER
J. HAYES
(41) — 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
(49) — 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
(45) — Vice President and Portfolio Manager
(1)(2) — Vice President of MLAM since
1985.
HELEN
MARIE
SHEEHAN
(40) — 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
(37) — Vice President and Portfolio Manager
(1)(2) — Vice President of MLAM since 1998;
Assistant Vice President of MLAM from 1995 to 1998.
DARRIN
SANFILLIPPO
(35) — Vice President and Portfolio Manager
(1)(2) — Vice President of MLAM since 1998;
Assistant Vice President of MLAM from 1994 to 1998.
DONALD
C. BURKE
(40) — Vice President and Treasurer
(1)(2) — Senior Vice President and Treasurer of
the Manager and MLAM since 1999; First Vice President of MLAM
from 1997 to 1999; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990; Vice President of PFD
since 1999; Senior Vice President and Treasurer of Princeton
Services since 1999.
PHILLIP
S. GILLESPIE
(36) — Secretary
(1)(2) — Director of MLAM Legal Advisory since
2000; Vice President of MLAM Legal Advisory from 1999 to 2000
and Attorney associated with the Manager and MLAM since 1998;
Assistant General Counsel of Chancellor LGT Asset Management,
Inc. from 1997 to 1998; Senior Counsel and Attorney in the
Division of Investment Management and the Office of General
Counsel at the U.S. Securities and Exchange Commission from 1993
to 1997.
(1)
|
Interested person, as defined in the Investment Company
Act, of the Trust.
|
(2)
|
Such
Trustee or officer is a director, trustee or officer of
certain other investment companies for which MLAM or FAM acts
as the investment adviser or manager.
|
(3)
|
Member
of the Fund’s Audit and Nominating Committee, which is
responsible for the selection of the independent auditors and
the selection and nomination of non-interested
Trustees.
|
As of
June 1, 2000, the Trustees and officers of the Trust as a group
(17 persons) owned an aggregate of less than 1% of the
outstanding shares of each Fund. At such date, Mr. Zeikel, a
Trustee of the Trust, Mr. Glenn, a Trustee and officer of the
Trust, and the other officers of each Fund owned an aggregate of
less than 1% of the outstanding shares of common stock of ML
& Co.
Pursuant
to the terms of separate management agreements between the Trust
on behalf of each Fund and the Manager (the “Management
Agreements”), the Manager pays all compensation of officers
and employees of the Trust as well as the fees of Trustees who
are affiliated persons of ML & Co. or its subsidiaries. The
Trust pays each non-interested Trustee a fee of $5,000 per year
plus $500 per meeting attended. The Trust also compensates
members of its Audit and Nominating Committee (the
“Committee”), which consists of all the non-interested
Trustees, a fee of $2,000 per year. The Trust pays all
Trustees’ 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.
The
following table sets forth for the fiscal year ended March 31,
2000 compensation paid by the Funds to the non-affiliated
Trustees and for the calendar year ended December 31, 1999 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.
Name
of Trustee
|
|
Compensation
from Fund
|
|
Pension or Retirement
Benefits Accrued as Part
of Fund Expense
|
|
Aggregate
Compensation from
Fund and MLAM/
FAM Advised Funds
Paid to Trustees(1)
|
| Arizona Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$ 255.42 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$ 255.42 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$ 283.42 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$ 255.42 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$ 255.42 |
|
None |
|
$388,775 |
| California Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$2,617.50 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$2,617.50 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$2,911.48 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$2,617.50 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$2,617.50 |
|
None |
|
$388,775 |
| Connecticut Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$ 550.15 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$ 550.15 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$ 610.62 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$ 550.15 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$ 550.15 |
|
None |
|
$388,775 |
| Massachusetts Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$ 393.49 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$ 393.49 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$ 436.12 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$ 393.49 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$ 393.49 |
|
None |
|
$388,775 |
| Michigan Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$ 467.75 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$ 467.75 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$ 519.05 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$ 467.75 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$ 467.75 |
|
None |
|
$388,775 |
| New
Jersey Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$1,151.83 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$1,151.83 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$1,281.36 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$1,151.83 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$1,151.83 |
|
None |
|
$388,775 |
| New
York Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$2,133.21 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$2,133.21 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$2,370.54 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$2,133.21 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$2,133.21 |
|
None |
|
$388,775 |
Name
of Trustee
|
|
Compensation
from Fund
|
|
Pension or Retirement
Benefits Accrued as Part
of Fund Expense
|
|
Aggregate
Compensation from
Fund and MLAM/
FAM Advised Funds
Paid to Trustees(1)
|
| North Carolina Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$ 343.14 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$ 343.14 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$ 380.41 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$ 343.14 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$ 343.14 |
|
None |
|
$388,775 |
| Ohio
Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$ 477.18 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$ 477.18 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$ 529.64 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$ 477.18 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$ 477.18 |
|
None |
|
$388,775 |
| Pennsylvania Fund |
|
|
|
|
|
|
| Ronald W.
Forbes(1) |
|
$ 610.33 |
|
None |
|
$213,900 |
| Cynthia A.
Montgomery(1) |
|
$ 610.33 |
|
None |
|
$213,900 |
| Charles C.
Reilly(1) |
|
$ 677.36 |
|
None |
|
$400,025 |
| Kevin A.
Ryan(1) |
|
$ 610.33 |
|
None |
|
$213,900 |
| Richard R.
West(1) |
|
$ 610.33 |
|
None |
|
$388,775 |
(1)
|
The
Trustees serve on the boards of FAM/MLAM-advised funds as
follows: Mr. Forbes (36 registered investment companies
consisting of 49 portfolios); Ms. Montgomery (36 registered
investment companies consisting of 49 portfolios); Mr. Reilly
(57 registered investment companies consisting of 68
portfolios); Mr. Ryan (36 registered investment companies
consisting of 49 portfolios); and Mr. West (67 registered
investment companies consisting of 72 portfolios).
|
Trustees
of the Trust, members of the Boards of other FAM-advised
investment companies, ML & Co. and its subsidiaries (the
term “subsidiaries,” when used herein with respect to
ML & Co., includes FAM, MLAM and certain other entities
directly or indirectly wholly owned and controlled by ML &
Co.) and their trustees/directors and employees and any trust,
pension, profit-sharing or other benefit plan for such persons,
may purchase shares of a Fund at net asset value. Each Fund
realizes economies of scale and reduction of sales-related
expenses by virtue of the familiarity of these persons with the
Fund. Employees and directors or trustees wishing to purchase
shares of each Fund must satisfy the Fund’s suitability
standards.
Management and Advisory Arrangements
Management Services. Subject to
the supervision of the Board of Trustees, the Manager performs,
or arranges for affiliates to perform, the management and
administrative services necessary for the operation of each
Fund. The Manager and its affiliates will provide a variety of
administrative and operational services to shareholders of the
Funds, including processing services related to the purchase and
redemption of shares and the general handling of shareholder
relations. 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 review by the Trustees. The Manager
provides the Funds with office space, equipment and facilities
and such other services as the Manager, subject to supervision
and review by the Trustees, shall from time to time determine to
be necessary to perform its obligations under the Management
Agreements.
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 objectives or other factors, a particular security may
be bought for one or more clients when one or more clients are
selling the same 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 funds and 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.
Management
Fee. Pursuant to the Management
Agreements, the Manager receives for its services to each Fund
monthly compensation approximately at the following annual
rates:
Portion of average daily net assets:
| |
|
Rate
|
| Not
exceeding $500 million |
|
0.500% |
| In
excess of $500 million but not exceeding $1 billion |
|
0.425% |
| In
excess of $1 billion |
|
0.375% |
Set forth
below are the total management fees paid by each Fund to the
Manager for the fiscal years ended March 31, 2000, 1999 and
1998:
| |
|
For
the Year Ended March 31,
|
| |
|
2000
|
|
1999
|
|
1998
|
| Arizona
Fund |
|
$1,060,932 |
|
$1,025,182 |
|
$ 888,435 |
| California Fund |
|
$8,704,241 |
|
$8,687,408 |
|
$7,429,249 |
| Connecticut Fund |
|
$2,524,856 |
|
$2,234,172 |
|
$1,826,850 |
| Massachusetts Fund |
|
$1,838,401 |
|
$1,483,533 |
|
$1,148,245 |
| Michigan Fund |
|
$1,926,333 |
|
$1,806,214 |
|
$1,420,153 |
| New
Jersey Fund |
|
$4,289,924 |
|
$3,896,780 |
|
$3,390,860 |
| New
York Fund |
|
$7,690,298 |
|
$6,833,444 |
|
$5,848,065 |
| North
Carolina Fund |
|
$1,471,749 |
|
$1,425,986 |
|
$1,381,698 |
| Ohio
Fund |
|
$2,086,560 |
|
$1,960,327 |
|
$1,784,810 |
| Pennsylvania Fund |
|
$2,599,328 |
|
$2,420,993 |
|
$2,072,950 |
Payment of Fund Expenses. Each
Management Agreement obligates the Manager to provide management
services and to pay all compensation of and furnish office space
for officers and employees of the Trust connected with
investment and economic research, trading and investment
management 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 affiliates. 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 asset size of
the respective Fund. Such expenses include, among other things:
taxes, expenses for legal and auditing services, costs of
printing proxies, stock certificates, shareholder reports,
prospectuses and statements of additional information, except to
the extent paid by Merrill Lynch; charges of the custodian and
the transfer agent; expenses of redemption of shares; Commission
fees; expenses of registering the shares under Federal and state
securities laws; fees and expenses of non-interested Trustees;
accounting and pricing costs (including the daily calculations
of net asset value); insurance; interest; brokerage costs; and
other expenses properly payable by each Fund. 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. Accounting services are provided for each Fund by
the Manager and each Fund reimburses the Manager for its costs
in connection with such services. Set forth below are the
reimbursements paid by each Fund to the Manager for the fiscal
years ended March 31, 2000, 1999 and 1998.
| |
|
For
the Year Ended March 31,
|
| |
|
2000
|
|
1999
|
|
1998
|
| Arizona
Fund |
|
$ 27,241 |
|
$ 45,973 |
|
$ 39,972 |
| California Fund |
|
$148,224 |
|
$182,407 |
|
$134,365 |
| Connecticut Fund |
|
$ 32,583 |
|
$ 79,100 |
|
$ 62,364 |
| Massachusetts Fund |
|
$ 45,100 |
|
$ 61,612 |
|
$ 48,947 |
| Michigan Fund |
|
$ 69,007 |
|
$ 58,678 |
|
$ 49,333 |
| New
Jersey Fund |
|
$116,841 |
|
$ 94,658 |
|
$ 79,096 |
| New
York Fund |
|
$ 49,383 |
|
$134,062 |
|
$112,683 |
| North
Carolina Fund |
|
$ 56,798 |
|
$ 51,784 |
|
$ 52,391 |
| Ohio
Fund |
|
$ 60,013 |
|
$ 83,806 |
|
$ 55,454 |
| Pennsylvania Fund |
|
$ 82,671 |
|
$ 68,305 |
|
$ 66,136 |
For information
as to the distribution fee paid by the Fund to Merrill Lynch
pursuant to the Distribution Agreement, see “Purchase and
Redemption of Shares” below.
Organization of the
Manager. The Manager is a limited
partnership, the partners of which are ML & Co., a financial
services holding company and the parent of Merrill Lynch, and
Princeton Services. ML & Co. and Princeton Services are
“controlling persons” of the Manager as defined under
the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling
influence over its management or policies.
Duration and
Termination. Unless earlier
terminated as described herein, the Management Agreements will
continue in effect from year to year if approved annually (a) by
the Board of Trustees of the Trust or by a majority of the
outstanding 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 agreement terminates upon assignment and
may be terminated without penalty on 60 days’ written
notice at the option of either party thereto or by vote of the
shareholders of the respective Fund.
Transfer Agency Services
Financial
Data Services, Inc. (the “Transfer Agent”), a
subsidiary of ML & Co., acts as each Fund’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 of $10.00 per account and is
entitled to reimbursement from the 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 in the relevant share class on a
recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co.
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, 2000.
| |
|
For
the Year Ended
March 31, 2000
|
| Arizona
Fund |
|
$ 22,963 |
| California Fund |
|
$211,907 |
| Connecticut Fund |
|
$ 50,028 |
| Massachusetts Fund |
|
$ 55,540 |
| Michigan Fund |
|
$ 53,785 |
| New
Jersey Fund |
|
$126,637 |
| New
York Fund |
|
$235,075 |
| North
Carolina Fund |
|
$ 48,735 |
| Ohio
Fund |
|
$ 60,423 |
| Pennsylvania Fund |
|
$ 89,865 |
The Board
of Trustees of the Trust has approved a Code of Ethics under
Rule 17j-1 of the Investment Company Act that covers the Trust
and the Trust’s Manager and Merrill Lynch (the “Code
of Ethics”). The Code of Ethics significantly restricts the
personal investing activities of all employees of the Manager
and Merrill Lynch and, as described below, imposes additional,
more onerous restrictions on fund investment
personnel.
The Code
of Ethics requires that all employees of the Manager and Merrill
Lynch pre-clear any personal securities investments (with
limited exceptions, such as mutual funds, high-quality
short-term securities and direct
obligations of the U.S. government). The pre-clearance requirement
and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all
employees of the Manager and Merrill Lynch include a ban on
acquiring any securities in a “hot” initial public
offering and a prohibition from profiting on short term trading
in securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the
case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Code of Ethics provides for trading
“blackout periods” which prohibit trading by
investment personnel of the Trust within seven calendar days
before or after trading by the Trust in the same or equivalent
security.
Reference
is made to “How to Buy, Sell and Transfer Shares” in
the Prospectus.
Purchase of Shares by Cash Management Account
Subscribers
CMA
Program. The shares of the Funds are
offered to participants in the CMA program and to individual
investors maintaining accounts directly with the Funds’
Transfer Agent to provide a medium for the investment of free
cash balances held in CMA accounts (commonly referred to as a
“sweep”). Persons subscribing to the CMA program will
have these balances invested in shares of a CMA State Fund or
CMA Tax-Exempt Fund 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 or an
account at a Merrill Lynch Bank as their Primary Money Account.
As described in the CMA Program Description, a subscriber to the
CMA service may elect to have free cash 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 or in an
account at a Merrill Lynch Bank. The CMA Funds, the Insured
Savings Account and accounts of a Merrill Lynch Bank are
collectively referred to as the “Money Accounts.”
However, this Statement of Additional Information does not
purport to describe the other CMA Funds, the accounts at the
Merrill Lynch Banks or the Insured Savings Account and
prospective participants in such CMA Funds or Insured Savings
Account are referred to the Statement of Additional Information
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, the
accounts at the Merrill Lynch Banks 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®
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.
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 CMA Tax-Exempt Fund or one
of the other CMA State Funds, an account at a Merrill Lynch Bank
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
without sales charge at a public offering price equal to the net
asset value (normally $1.00 per share) next determined after
receipt by a Fund of an automatic or manual purchase order.
Shares purchased will receive the next dividend declared after
the shares are issued, which will be immediately prior to the 12
noon, Eastern time, pricing on the following business day. A
purchase order will not become effective until cash in the form
of Federal funds becomes available to the Fund (see below for
information as to when the Funds receive such funds). There are
no minimum investment requirements for CMA subscribers other
than for manual purchases.
Automatic Purchases. Free cash
balances arising in a CMA account are automatically invested in
shares of a 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 or New York banks are open, which
normally will be Monday. Free cash balances arising from the
following transactions will be invested automatically prior to
the automatic weekly sweeps. Free cash 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 the Funds 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 cash 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 the Funds 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 cash 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 cash balances of less than $1,000 are invested in shares in
the automatic weekly sweep.
Manual
Purchases. Subscribers to the CMA
service may make manual investments of $1,000 or more at any
time in shares of a Fund not selected as their 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. 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”), 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.
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 any not be available in
such programs. For more information on the services available
under such programs, participants should contact their Merrill
Lynch Financial Consultants.
Purchase of Shares by Non-Cash Management Account
Subscribers
Shares of
the Funds may be purchased by investors maintaining accounts
directly with the Funds’ Transfer Agent who are not
subscribers to the Cash Management Account program. Shareholders
of the Funds not subscribing to such program will not be charged
the applicable program fee, but will not receive any of the
services available to program subscribers, such as the Visa
card/check account or the automatic investment of free cash
balances. The minimum initial purchase for non-program
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 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 Financial Data Services, Inc.,
P.O. Box 45290, Jacksonville, Florida 32232-5290. Purchase
orders that are sent by hand should be delivered to 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
Financial Data Services, Inc. Existing shareholders should
enclose the detachable stub from a monthly account statement
that 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.
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, on behalf of each Fund, has entered into a separate
Distribution Agreement with Merrill Lynch pursuant to which
Merrill Lynch acts as the distributor for each Fund. The
Distribution Agreements obligate Merrill Lynch to pay certain
expenses in connection with the offering of the shares of the
Funds. 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 will also 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.
The
Trust, on behalf of each Fund, has also adopted a separate
Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act (the
“Distribution Plans”) pursuant to which 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, to
investors maintaining securities accounts at Merrill Lynch who
are not subscribers to the CMA programs and to investors
maintaining accounts directly with the Transfer Agent, except
that the value of Fund shares in accounts maintained directly
with the Transfer Agent that 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 fee is paid. The distribution fees
principally compensate Merrill Lynch Financial Consultants and
other Merrill Lynch personnel for selling shares of the Fund and
for providing direct 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 that are covered by the Management
Agreements (see “Management of the Funds—Management
and Advisory Arrangements”) between the Trust 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.
Set forth
below are the distribution fees paid by each Fund to Merrill
Lynch pursuant to their respective Distribution Plans for the
fiscal years ended March 31, 2000, 1999 and 1998. All of the
amounts expended were allocated to Merrill Lynch personnel and
to related administrative costs.
| |
|
For
the Year Ended March 31,
|
| |
|
2000
|
|
1999
|
|
1998
|
| Arizona
Fund |
|
$ 263,542 |
|
$ 252,963 |
|
$ 218,259 |
| California Fund |
|
$2,586,619 |
|
$2,589,655 |
|
$2,160,142 |
| Connecticut Fund |
|
$ 632,217 |
|
$ 556,486 |
|
$ 454,599 |
| Massachusetts Fund |
|
$ 453,159 |
|
$ 369,059 |
|
$ 283,055 |
| Michigan Fund |
|
$ 477,787 |
|
$ 450,367 |
|
$ 351,653 |
| New
Jersey Fund |
|
$1,144,594 |
|
$1,033,214 |
|
$ 879,810 |
| New
York Fund |
|
$2,260,684 |
|
$1,981,066 |
|
$1,646,549 |
| North
Carolina Fund |
|
$ 365,734 |
|
$ 355,105 |
|
$ 340,553 |
| Ohio
Fund |
|
$ 517,420 |
|
$ 484,767 |
|
$ 440,461 |
| Pennsylvania Fund |
|
$ 649,944 |
|
$ 604,797 |
|
$ 513,883 |
The
payment of the distribution fees under the Distribution
Agreements is subject to the provisions of each Fund’s
Distribution Plan and Rule 12b-1. Among other things, each
Distribution Plan provides that Merrill Lynch
shall provide and the Trustees of the Trust shall review quarterly
reports regarding the payment of the respective distribution
fees during such period. In their consideration of each
Distribution Plan, the Trustees must consider all factors they
deem relevant, including information as to the benefits of the
Distribution Plan to the respective Fund and its shareholders.
Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and
nomination of non-interested Trustees shall be committed to the
discretion of the non-interested Trustees then in office. A
Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the non-interested
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 respective Fund thereunder without
shareholder approval, and all material amendments are required
to be approved by vote of the Trustees, including a majority of
the non-interested Trustees, cast in person at a meeting called
for that purpose.
Reference
is made to “How to Buy, Sell and Transfer Shares” in
the Prospectus.
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, Eastern time, on
any day that the New York Stock Exchange (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
cash 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 or with a Merrill Lynch Bank 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 CreditLine
SM
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 CreditLine
SM
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 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, Financial Data Services, Inc., P.O. Box
45290, Jacksonville, Florida 32232-5290. Redemption requests
which are sent by hand should be delivered to 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.
DETERMINATION OF NET ASSET VALUE
The net
asset value of each Fund is determined by the Manager at 12
noon, Eastern time, on each business day the NYSE or New York
banks are open for business. As a result of this procedure, the
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 is determined by adding the value of all
securities and other assets in the portfolio, deducting the
portfolio’s liabilities, dividing by the number of shares
outstanding and rounding the result to the nearest whole cent.
It is anticipated that the net asset value per share of each
Fund will remain constant at $1.00, but no assistance can be
given in this regard.
Each fund
values its portfolio securities based upon 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 the fund would receive if it sold the
instrument.
In
accordance with the Commission rule applicable to the valuation
of its portfolio securities, each Fund will maintain a
dollar-weighted average portfolio maturity of 90 days or less
and will purchase instruments having remaining maturities of not
more than 397 days (13 months). Each Fund will 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, the Trust’s price per share as computed for the
purpose of sales and redemptions at $1.00. Deviations of more
than an insignificant amount between the net asset value
calculated using market quotations and that calculated on an
“amortized cost” basis will be reported to the
Trustees by the Manager. In the event the Trustees determine
that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, each
Fund will take such corrective action as it regards as necessary
and appropriate, including the reduction of the number of
outstanding shares of each Fund by having each shareholder
proportionately contribute shares to each 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 solely 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 each Fund’s capital.
Each shareholder will be deemed to have agreed to such
contribution by his or her investment in each 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 each 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 each Fund, representing the
reinvestment of dividend income, is reflected by an increase in
the number of shares of each Fund in his or her account and any
decrease in the value of a shareholder’s investment may be
reflected by a decrease in the number of shares in his or her
account. See “Dividends and Taxes.”
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 yield on
Fund shares does not 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 standardized
manner that 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 divided by seven, and subtracting one from the result. This
compound yield calculation also does not reflect realized gains
or losses on portfolio securities.
The yield on
each Fund’s shares normally will fluctuate on a daily
basis. Therefore, the yield for any given past period is not an
indication or representation by each Fund of future yields or
rates of return on its shares. The yield is affected by such
factors as changes in interest rates on each Fund’s
portfolio securities, average portfolio maturity, the types and
quality of portfolio securities held and operating
expenses.
Fund
|
|
Seven-Day
Period Ended
March 31, 2000
(Excluding gains
and losses)
|
| Arizona
Fund |
|
3.08% |
| California Fund |
|
2.75% |
| Connecticut Fund |
|
2.84% |
| Massachusetts Fund |
|
3.08% |
| Michigan Fund |
|
3.16% |
| New
Jersey Fund |
|
3.20% |
| New
York Fund |
|
3.17% |
| North
Carolina Fund |
|
3.10% |
| Ohio
Fund |
|
3.22% |
| Pennsylvania Fund |
|
3.13% |
On
occasion, each Fund may compare its yield to (i) industry
averages compiled by MoneyNet Inc.’s Money Fund
Report, a widely recognized independent publication that
monitors the performance of money market mutual funds, (ii) the
average yield reported by the Bank Rate Monitor National
Index™ for money market deposit accounts offered by the
100 leading banks and thrift institutions in the ten largest
standard metropolitan statistical areas, (iii) yield data
published by Lipper Analytical Services, Inc., (iv) the yield on
an investment in 90-day Treasury bills on a rolling basis,
assuming quarterly compounding or (v) 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 (vi) historical yield data relating
to other central asset accounts similar to the CMA program. As
with yield quotations, yield comparisons should not be
considered indicative of each 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.
Each Fund
has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject
to policy established by the Board of Trustees and the officers
of each Fund, the Manager is primarily responsible for each
Fund’s portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of each Fund
to obtain the best net results taking into account such factors
as price (including the applicable dealer spread), the size,
type and difficulty of the transaction involved, the firm’s
general execution and operational facilities, 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 money
market securities in which the Funds invest are traded primarily
in the “OTC” market. Bonds and debentures usually are
traded OTC, but may be traded on an exchange. Where possible,
each Fund 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 money market securities in which each Fund invests
are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of
executing portfolio securities transaction of each Fund
primarily will consist of dealer spreads. Under the Investment
Company Act, persons affiliated with the Trust are prohibited
from dealing with the Trust as principals 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 a Fund’s dealer in connection with such
transactions except pursuant to the exemptive order described
below. An affiliated person of the Trust may serve as its broker
in OTC transactions conducted on an agency basis. A Fund may not
purchase securities from any underwriting syndicate of which
Merrill Lynch is a member, except in accordance with applicable
rules under the Investment Company Act.
Prior to
the receipt of the exemptive order described below, the Funds
could be purchase securities in principal transactions from
Merrill Lynch, although they could purchase tax-exempt
securities from underwriting syndicates of which Merrill Lynch
was a member under certain conditions in accordance with a rule
adopted under the Investment Company Act. The Commission has
issued an exemptive order permitting the Funds to conduct
principal transactions with Merrill Lynch in Municipal
Securities with remaining maturities of one year or less. This
order contained a number of conditions, including conditions
designed to ensure that the price to a Fund from Merrill Lynch
is equal to or better than that available from other sources.
Merrill Lynch has informed the Trust that it will in no way, at
any time, attempt to influence or control the activities of any
Fund or the Manager in placing such principal transactions. The
exemptive order allows Merrill Lynch to receive a dealer spread
on any transaction with a Fund no greater than its customary
dealer spread for transactions of the type involved.
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 fiscal years ended March 31, 2000, 1999
and 1998.
| |
|
For
the Year Ended March 31,
|
| |
|
2000
|
|
1999
|
|
1998
|
| |
|
Number of
Transactions
|
|
Aggregate
Amount*
|
|
Number of
Transactions
|
|
Aggregate
Amount*
|
|
Number of
Transactions
|
|
Aggregate
Amount*
|
| Arizona
Fund |
|
12 |
|
$ 23.9 |
|
10 |
|
$ 23.0 |
|
2 |
|
$ 2.2 |
| California Fund |
|
16 |
|
$176.2 |
|
43 |
|
$754.3 |
|
43 |
|
$614.7 |
| Connecticut Fund |
|
28 |
|
$117.3 |
|
17 |
|
$ 87.8 |
|
78 |
|
$230.3 |
| Massachusetts Fund |
|
7 |
|
$ 42.0 |
|
1 |
|
$ 5.6 |
|
21 |
|
$ 63.1 |
| Michigan Fund |
|
12 |
|
$ 95.6 |
|
12 |
|
$ 61.2 |
|
11 |
|
$ 52.5 |
| New
Jersey Fund |
|
20 |
|
$146.3 |
|
10 |
|
$ 38.6 |
|
75 |
|
$258.7 |
| New
York Fund |
|
0 |
|
$ — |
|
0 |
|
$ — |
|
6 |
|
$ 46.4 |
| North
Carolina Fund |
|
40 |
|
$133.9 |
|
4 |
|
$ 10.3 |
|
11 |
|
$ 41.8 |
| Ohio
Fund |
|
0 |
|
$ — |
|
2 |
|
$ 3.3 |
|
13 |
|
$ 76.4 |
| Pennsylvania Fund |
|
9 |
|
$ 29.8 |
|
7 |
|
$ 29.2 |
|
6 |
|
$ 30.4 |
The
Trustees of the Trust have considered the possibilities of
recapturing for the benefit of the Funds expenses of possible
portfolio transactions, such as dealer spreads and underwriting
commissions, by conducting such portfolio transactions through
affiliated entities, including Merrill Lynch. For example,
dealer spreads received by Merrill Lynch on transactions
conducted pursuant to the permissive order described above could
be offset against the management fee payable by a Fund to the
Manager. 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 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 price and execution, dealers who provide
supplemental investment research (such as information concerning
money market securities, economic data and market forecasts) to
the Manager may receive orders for transactions of 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.
Dividends
Dividends
are declared and reinvested daily by each Fund in the form of
additional shares at net asset value. Each Fund’s net
income for dividend purposes is determined at 12 noon, Eastern
time, on each day the NYSE or New York banks are open for
business, immediately prior to the determination of such
Fund’s net asset value on that day (see “Determination
of Net Asset Value”). Such reinvestments will be reflected
in shareholders’ monthly CMA transaction statements.
Shareholders liquidating their holdings will receive on
redemption all dividends declared and reinvested through the
date of redemption, except that 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. Since the net
income (including realized gains and losses on the portfolio
assets) is declared as a dividend in shares each time the net
income of the Fund is determined, the net asset value per share
of the Fund normally remains constant at $1.00 per
share.
Net
income of each Fund (from the time of the immediately preceding
determination thereof) consists of (i) interest accrued and/or
discount earned (including both original issue and market
discount), (ii) less amortization of premiums and the estimated
expenses of the Fund (including the fees payable to the
Investment Adviser) for the period, (iii) plus or minus all
realized gains and losses on portfolio securities. The amount of
discount or premium on portfolio securities is fixed at the time
of their purchase and consists of the difference between the
purchase price for such securities and the principal amount of
such securities. Unrealized gains and losses are reflected each
Fund’s net assets and are not included in the calculation
of net income.
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 each Fund 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 and herein. 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.
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. Certain categories of capital gains are
taxable at different rates. 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 and
capital gain dividends, as well as any 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 a Federal alternative minimum tax. The Federal
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 a
Federal alternative minimum tax. The Funds will purchase such
“private activity bonds”, and the Trust will report to
shareholders within 60 days after calendar year-end the portion
of each respective 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 a Federal 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.
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. So long as, at the
close of each quarter of the California Fund’s taxable
year, at least 50% of the value of the Fund’s total assets
consists of California State Municipal Securities,
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, whether received in cash
or additional shares, are subject to this tax, except that, in
the case of shares of the Fund held by shareholders as a capital
asset, 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
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 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 may
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 gain dividends of the Massachusetts Fund (except to the
extent derived from capital gains on certain Massachusetts State
Municipal Securities which are specifically exempt by statute),
and 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 Massachusetts
personal income tax rates for long-term capital gains vary from
0% to 5% based on the holding period of the asset generating the
gain. Under proposed regulations, capital gain dividends of the
Massachusetts Fund will be taxed at the 5% rate unless the Fund
provides certain information to the Massachusetts Commissioner
of Revenue and to Massachusetts Fund Shareholders regarding the
various rate categories from which its net capital gains were
derived. The Massachusetts Fund does not at this time intend to
provide the information required by the proposed regulations.
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, all 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.
The income tax rate will begin a gradual reduction beginning in
year 2000, from the present 4.2 percent, down to a 3.9 percent
rate for year 2004 and beyond. The single business tax is being
phased-out over a twenty-three year period at a rate of
one-tenth of one percent per year beginning in 1999.
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
may be taxable to shareholders for New Jersey personal income
tax purposes. However, regardless of whether the New Jersey Fund
meets the 80% Test, all distributions attributable to interest
earned on Federal obligations will be exempt from New Jersey
personal income tax. 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. Accordingly, investors in
the New Jersey Fund, including, in particular, corporate
investors which might be subject to the New Jersey corporation
business (franchise) tax and, if applicable, the New Jersey
corporation income tax, should consult their tax advisors with
respect to the application of such taxes to an investment in the
New Jersey Fund, to the receipt of New Jersey Fund dividends and
as to their New Jersey tax situation in general.
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, including exempt-interest dividends, and capital gains
of the New York Fund 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.
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.
Description of Series and Shares
The Trust
is an unincorporated business trust organized on February 6,
1987 under the laws of Massachusetts. 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.
Deloitte
& Touche LLP
, Princeton Forrestal Village, 116-330 Village Boulevard,
Princeton, New Jersey 08540-6400, has been selected as the
independent auditors of the Trust. The selection of independent
auditors is subject to approval by the non-interested Trustees
of the Trust. The independent auditors are responsible for
auditing the annual financial statements of each
Fund.
State
Street Bank and Trust Company (the “Custodian”), P.O.
Box 1713, Boston, Massachusetts 02101 acts as custodian of each
Fund’s 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 and dividends on each Fund’s
investments.
Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as each Fund’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. See “How to Buy, Sell and Transfer
Shares—Through the Transfer Agent” in the
Prospectus.
Brown
& Wood LLP
, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
The
fiscal year of each Fund ends on March 31. Each Fund sends to
its shareholders, at least semi-annually, reports showing each
Fund’s portfolio and other information. An annual report,
containing financial statements audited by independent auditors,
is sent to shareholders each year.
Shareholder inquiries may be addressed to each Fund at the
address or telephone number set forth on the cover page of this
Statement of Additional Information.
The
Prospectus and this Statement of Additional Information with
respect to the shares of each Fund do not contain all the
information set forth in the Registration Statement and the
exhibits relating thereto, which each Fund has filed with the
Securities and Exchange Commission, Washington, D.C., under the
Securities Act and the Investment Company Act, to which
reference is hereby made.
The Cash
Management Account financial service program is also marketed by
Merrill Lynch under the registered service mark
“CMA.”
The
Declaration of Trust establishing the Trust, as amended (the
“Declaration”), is on file in the office of the
Secretary of the Commonwealth of Massachusetts. The Declaration
provides that the name “CMA Multi-State Municipal Series
Trust” refers to the Trustees under the Declaration
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 for his or her 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 or otherwise in connection with the affairs of the
Trust but the Trust Property only shall be liable.
To the
knowledge of the Funds, no person owned beneficially 5% or more
of any Fund’s shares as of June 1, 2000, except that the
following person owned beneficially 5% or more of the North
Carolina Fund:
| |
Name |
|
Address |
|
Percent
of Class |
| Mr. W.
Dunlop White, Jr. |
|
920
Wellington Road |
|
5.1% |
| |
|
|
Salem,
NC 27106 |
|
|
32
Each
Fund’s audited financial statements are incorporated in
this Statement of Additional Information by reference to its
annual report to shareholders for the year ended March 31, 2000.
You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
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 publicly available
offering statements relating to debt offerings of state and
local issuers and other demographic information; however, it has
not been updated nor will it be updated during the year. The
Trust has not independently verified the
information.
Over the
past several decades, the State’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 1980’s and early
1990’s, the State’s efforts to diversify its economy
have enabled it to achieve, and then sustain, steady growth
rates in 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 1980’s
and early 1990’s. Although the construction sector has
experienced a moderate slowing since the end of 1999, it is
predicted to continue expanding. Overall, economists agree that
the State’s economy will continue to grow, though at a more
sustainable rate, throughout 2000.
Arizona’s strong economy, warm climate and reasonable
cost of living, coupled with the economic problems and adverse
climatic conditions experienced from time to time in other parts
of the country, have encouraged many people to move to the
State. In the last decade, the State’s population increased
22% to 4.87 million. The State’s population is predicted to
increase another 2.7% in 2000 to 4.97 million. Between 1990 and
1998, the State’s population increased 21%, to a total of
4.66 million; during the same period, Maricopa County, the
State’s most populous county, had the single largest
population inflow (in absolute terms) of any county in the
country. With a current population of more than 2.8 million,
Maricopa County is home to more people than 17 states. Through
the year 2002, the State predicts an annual average population
growth of approximately 2.7%, or 127,000 people, per
year.
Part of
the State’s recent popularity can be attributed to the
favorable job climate. For the period from 1993 to 1999, Arizona
had the nation’s second highest job growth rate, up 33% to
more than two million jobs. Though the rate showed a moderate
slowing in 1999, Arizona’s job growth was still fast enough
to rank second in the nation. Job growth is predicted to
continue to increase 3.9% in 2000 and 3.6% in 2001, two to three
times the national pace. A relatively sound United States
economy, a stronger economy in California (which historically
has been a prime market for Arizona goods and services), a
recovery in Asian markets, and continued growth in retail trade,
manufacturing and services should enable the State to realize
these positive, though more modest, gains. Unemployment has
declined in the last four years from an average of 5.5% in 1996
to 4.4% in 1999.
The
State’s recent economic growth 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
per capita personal income growth of nearly 4.5% by 1999.
Similar growth is projected in 2002. The gains in per capita
personal income during this period have also led to steady
growth in retail sales. Average retail sales grew 4.3% in 1999
and are predicted to increase between 3.7 and 5.0% in
2000.
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 from 1993 through 1998.
However, during fiscal year 1999, a significant portion of the
accumulated surpluses were committed to construction and
renovation of public school facilities, reducing the projected
surplus at June 30, 1998 to approximately $70 million. On April
16, 1999, the Governor signed the State’s $12 billion
budget for the 2000 and 2001 fiscal years. Although an amendment
to the State’s Constitution requiring a 2
/3 majority
vote in both
houses of the Legislature to pass a tax or fee increase constrains
the State’s ability to raise additional revenue if needed,
the State has placed in excess of $400 million of its surplus
revenues in a rainy-day fund to protect against such an
eventuality.
In 1994,
the Arizona Supreme Court declared the then-current system for
funding construction and maintenance of the State’s public
schools to be unconstitutional on the ground that it resulted in
substantial disparities in the nature and condition of capital
facilities in the State’s public schools. The Supreme Court
directed the State Legislature to make appropriate changes in
the system to rectify this disparity. After several efforts, the
State Legislature, in 1998, adopted legislation which
establishes a State Facilities Board to set uniform minimum
capital facilities standards for Arizona’s public schools,
with funding for any new facilities or renovations to be
provided on a pay-as-you-go basis from a new School Facilities
Fund which will be funded by annual State appropriations. Under
limited circumstances, the voters in a local school district
could authorize the issuance and sale of bonds to pay for the
acquisition or construction of new capital facilities in the
district which exceed the State’s established minimum
standards. This legislation should have no effect on the
obligation or ability of the districts to pay debt service on
currently outstanding bonds.
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 sixth 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 has achieved
an average annual employment growth rate of 4.5% or more each
year since 1995. 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. A variety of professional sports teams are based in
Maricopa County, including the Phoenix Suns (NBA basketball),
the Arizona Cardinals (NFL football), the Phoenix Coyotes (NHL
hockey), and the Arizona Diamondbacks (MLB
baseball).
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
Aircraft, which transferred its Hughes Missile Systems division
to Tucson from Canoga Park, California, several years ago, 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 traditionally experienced more
modest annual job growth, averaging 2.0-2.5%; this rate is
expected to continue for the forseeable future.
APPENDIX B
ECONOMIC AND FINANCIAL 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
Trust has not independently verified the
information.
General Economic Conditions
The
economy of the State of California (sometimes referred to herein
as the “State”) is one of the largest in the world.
Since 1994, California’s economy has been performing
strongly after suffering a deep recession between
1990-1994.
California’s July 1, 1999 population of over 34
million represented over 12% of the total United States
population.
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, 1998, the
five-county Los Angeles area accounted for 49% of the
State’s population, with over 16.0 million residents and
the 10-county San Francisco Bay Area represented 21%, with a
population of over 7.0 million.
The
Governor issues a proposed budget in January and a revision to
that January Budget in May. In the 2000 May Revision released by
the Governor on May 15, 2000 (the “2000 May
Revision”), the Department of Finance projected that the
California economy will continue to show strong growth in 2000,
followed by more moderate gains in 2001. The projection assumes
a relatively flat stock market, and a 25% reduction in stock
option income in 2000-01. The economic expansion has been marked
by strong growth in high technology manufacturing and business
services (including software, computer programming and the
Internet), nonresidential construction, entertainment and
tourism-related industries. Growth in 1999 was greater than
earlier years in the economic expansion, with 23.7%
year-over-year increase in nonfarm payroll employment.
Unemployment, now less than 5%, is at the lowest rate in over 30
years. Taxable sales in the first quarter of 2000 are 10% above
year-earlier levels. Significant economic improvement in Asia
(Japan excluded), ongoing strength in NAFTA partners Mexico and
Canada, and stronger growth in Europe are expected to further
increase California-made exports in 2000 and 2001.
Nonresidential construction has been strong for the past four
years. New residential construction has increased since lows of
the early 1990’s recession, but remains lower than during
the previous economic expansion in the 1980’s.
1995-96 Through 1998-99 Fiscal Years
Following
a severe recession beginning in 1990, the State’s financial
condition improved markedly during the fiscal years starting in
1995-96, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued
spending restraint based on actions taken in earlier years. The
State’s cash position also improved, and no external
deficit borrowing occurred over the end of the last four fiscal
years.
The
California economy grew strongly during the fiscal years
beginning in 1995-96 years, and as a result, the General Fund
(the principal operating fund that holds major revenue sources
for the State) took in substantially greater tax revenues
(around $2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4
billion in 1997-98 and $1.7 billion in 1998-99) than were
initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as
mandated by Proposition 98 to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97 and
particularly in 1998-99 to fund new program incentives. The
accumulated budget deficit from the recession years was finally
eliminated.
In the
1999 Budget Act, signed by the Governor on June 29, 1999, the
Department of Finance reflected the State’s budget reserve
(the Special Fund for Economic Uncertainties or SFEU) as having
a balance of about $1,932 billion at June 30, 1999. The June 30,
2000, budget reserve projection reflects the latest revenue
projections and expenditure amounts as updated in the 2000 May
Revision to the 2000-01 Governor’s Budget. As in any year,
the
Budget Act and related trailer bills are not the only pieces of
legislation that appropriate funds. Other factors including
re-estimates of revenues and expenditures, existing statutory
requirements, and additional legislation introduced and passed
by the Legislature may impact the reserve amount.
At the
time of the release of the 2000 May Revision, on May 15, 2000,
the Department of Finance projected the budget reserve would
have a balance of about $6.920 billion at June 30, 2000,
compared to the amount of $880 million projected at the time the
1999 Budget Act was signed on June 29, 1999, and the amount of
$2.420 billion projected in the 2000-01 Governor’s Budget
released January 10, 2000.
The
following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the
legislative session:
|
1.
The most significant feature of the 1998-99 budget
was agreement on a total of $1.4 billion of tax cuts. The
central element was a bill that provided for a phased-in
reduction of the Vehicle License Fee (“VLF”). Since
the VLF is transferred to cities and counties under existing
law, the bill provided for the General Fund to replace the
lost revenues. Starting on January 1, 1999, the VLF has been
reduced by 25 percent, at a cost to the General Fund of
approximately $500 million in the 1998-99 fiscal year and
about $1 billion annually thereafter.
|
|
In
addition to the cut in VLF, the 1998-99 budget included both
temporary and permanent increases in the personal income tax
dependent credit ($612 million General Fund cost in 1998-99,
but less in future years), a nonrefundable renters’ tax
credit ($133 million), and various targeted business tax
credits ($106 million).
|
|
2.
On November 8, 1998, voters of the State approved
Proposition 98, a combined initiative constitutional amendment
and statute called the “Classroom Instructional
Improvement and Accountability Act.” Proposition 98
changed State funding of public education below the university
level, primarily by guaranteeing local school and community
college (“K-14”) schools a minimum share of General
Fund revenues. Proposition 98 funding for K-14 schools was
increased by $1.7 billion in General Fund moneys over revised
1997-98 levels, over $300 million higher than the minimum
Proposition 98 guarantee. Of the 1998-99 funds, major new
programs included money for instructional and library
materials, deferred maintenance, support for increasing the
school year to 180 days and reduction of class sizes in Grade
9. The Budget also included $250 million as repayment of prior
years loans to schools, as part of the settlement of the
California Teachers’ Association v. Gould lawsuit.
That lawsuit, filed in 1992, requires that the State and K-14
schools share in repayment of prior years’ emergency
loans to schools.
|
|
3.
Funding for higher education increased
substantially above the actual 1997-98 level. General Fund
support was increased by $340 million (15.6%) for the
University of California and $267 million (14.1%) for the
California State University system. In addition, Community
Colleges funding increased by $300 million (6.6%).
|
|
4.
The Budget included increased funding for health,
welfare and social services programs. A 4.9% grant increase
was included in the basic welfare grants, the first increase
in those grants in 9 years.
|
|
5.
Funding for the judiciary and criminal justice
programs increased by about 11% over 1997-98, primarily to
reflect increased State support for local trial courts and a
rising prison population.
|
|
6.
Major legislation enacted after the 1998 Budget
Act included new funding for resources projects, a share of
the purchase of the Headwaters Forest, funding for the
Infrastructure and Economic Development Bank ($50 million) and
funding for the construction of local jails. The State
realized savings of $433 million from a reduction in the
State’s contribution to the State Teacher’s
Retirement System in 1998-99.
|
Final
tabulation of revenues and expenditures contained in the 2000-01
January Governor’s Budget (the “2000 January
Governor’s Budget”), released on January 10, 2000,
reveals that stronger than expected economic conditions in the
State produced total 1998-99 General Fund revenues of about
$58.6 billion, almost $1.6 billion above the 1998 Budget Act
estimates. Actual General Fund expenditures were $57.8 billion,
the amount estimated at the 1998 Budget Act. Some of this
additional revenue will be directed to K-14 schools pursuant to
Proposition 98. The 2000 January Governor’s Budget reports
a balance in the State’s budget reserve at June 30, 1999,
of approximately $3.1 billion on a budgetary basis.
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) a
change 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 (this provision has been amended by
subsequent federal law) 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. The block grant
formula under the Law is operative through federal fiscal year
2002.
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. As
required by the federal Law, CalWORKs contains new time limits
on receipt of welfare aid, both lifetime as well as for any
current time on aid. The centerpiece of CalWORKs is the linkage
of eligibility to work participation requirements.
Administration of the Welfare-to-Work programs will be largely
at the county level, and counties are given financial incentives
for success in this program.
Counties
have been successful in earning performance incentive payments
and have earned amounts in excess of the available appropriation
for 1998-99 and, it is estimated, for 1999-00 as well. The
Administration proposes to modify the current incentive
structure in 2000-01 to permit adequate funding for other
CalWORKs program demands in the future and proposes to put a
limit on county incentives earned after 1999-00 equal to the
annual Budget Act appropriation for incentives. No appropriation
is proposed for new county incentive earnings in
2000-01.
In
addition, the Administration proposes to establish a $294.3
million TANF reserve for contingencies. These funds will be
available for unanticipated needs in any Department of Social
Services program for which TANF funds are appropriated,
including CalWORKs benefit, employment services, and county
administration costs. The funds also may be used to pay any
prior year CalWORKs county performance incentives earned by
counties that have spent the incentive funds allocated to them
from the funds appropriated for incentives through
1999-00.
To date,
the implementation of the CalWORKs program has continued the
trend of declining welfare caseloads. The CalWORKs caseload is
projected to be 580,000 in 1999-00 and 549,000 in 2000-01, down
from a high of 921,000 cases in 1994-95. The longer-term impact
of the new federal law and CalWORKs is being evaluated by the
RAND Corporation, with a series of reports to be furnished and
the final report due October 2001.
The
2000-01 CalWORKs budget reflects California’s success in
meeting the federally mandated work participation requirements
for federal fiscal year 1998. With that goal being met, the
federally imposed maintenance-of-effort (MOE) level for
California is reduced from 80 percent of the federal fiscal year
1994 baseline expenditures for the former AFDC program ($2.9
billion) to 75 percent ($2.7 billion). It is still uncertain if
the State will meet the work participation requirements for
federal fiscal year 1999; however, due to program changes, it is
expected that California will meet the work participation goal
in federal fiscal year 2000 and beyond.
In
addition, California has received a TANF High Performance Bonus
award of $45.5 million. This one-time bonus is awarded to states
for their successes in moving welfare recipients to work and
sustaining their participation in the workforce. Using this
award, the Administration proposes the establishment of an
additional TANF reserve that will be available for any
Department of Social Services program for which TANF funds have
been appropriated in the Budget Act.
The 2000
May Revision to the 2000 January Governor’s Budget proposes
expenditures that will continue to meet, but not exceed, the
federally required $2.7 billion combined State and county MOE
requirement. Total CalWORKs-related expenditures are estimated
to be $7.2 billion for 1999-00 and $7.0 billion for 2000-01,
including child care transfer amounts for the Department of
Education.
1999-00 Fiscal Year Budget. On
January 8, 1999, Governor Davis released his proposed budget for
fiscal year 1999-00 (the “1999 January Governor’s
Budget”). The 1999 January Governor’s Budget generally
reported that General Fund revenues for fiscal year 1998-99 and
fiscal year 1999-00 would be lower than earlier projections
(primarily due to weaker overseas economic conditions perceived
in late 1998), while some welfare caseloads would be higher than
earlier projections. The 1999 January Governor’s Budget
proposed $60.5 billion of General Fund expenditures in fiscal
year 1999-00, with a $415 million SFEU reserve or budget reserve
at June 30, 2000.
The 1999
May Revision released by the Governor in May 1999 and revising
his 1999 January Governor’s Budget (the “1999 May
Revision”) showed an additional $4.3 billion of revenues
for combined fiscal years 1998-99 and 1999-00. The completion of
the 1999 Budget Act occurred in a timely fashion. The final
Budget Bill was adopted by the Legislature on June 16, 1999, and
was signed by the Governor on June 29, 1999 (the “1999
Budget Act”), meeting the Constitutional deadline for
budget enactment for only the second time in the
1990s.
The final
1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion
after the Governor used his line-item veto to reduce the
legislative Budget Bill expenditures by $581 million (both
General Fund and special fund). The 1999 Budget Act also
contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that
the budget reserve would have a balance at June 30, 2000, of
about $880 million. Not included in this amount was an
additional $300 million that (after the Governor’s vetoes)
was “set aside” to provide funds for employee salary
increases (to be negotiated in bargaining with employee unions),
and for litigation reserves. The 1999 Budget Act anticipates
normal cash flow borrowing during the fiscal year.
The
principal features of the 1999 Budget Act include the
following:
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1.
Proposition 98 funding for K-12 schools was
increased by $1.6 billion in General Fund moneys over revised
1998-99 levels, $108.6 million higher than the minimum
Proposition 98 guarantee. Of the 1999-00 funds, major new
programs included money for reading improvement, new
textbooks, school safety, improving teacher quality, funding
teacher bonuses, providing greater accountability for school
performance, increasing preschool and after school care
programs and funding deferred maintenance of school
facilities. The 1999 Budget also included $310 million as
repayment of prior years’ loans to schools, as part of
the settlement of the California Teachers’ Association
v. Gould lawsuit. (See “Constitutional and Statutory
Limitations.”)
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2.
Funding for higher education increased
substantially above the actual 1998-99 level. General Fund
support was increased by $184 million (7.3%) for the
University of California (“UC”) and $126 million
(5.9%) for the California State University (“CSU”)
system. In addition, Community Colleges funding increased by
$324.3 million (6.6%). As a result, undergraduate fees at UC
and CSU will be reduced for the second consecutive year, and
the per-unit charge at Community Colleges will be reduced by
$1.
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3.
The 1999 Budget included increased funding of
nearly $600 million for health and human services.
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4.
About $800 million from the General Fund was to be
directed toward infrastructure costs, including $425 million
in additional funding for the Infrastructure Bank, initial
planning costs for a new prison in the Central Valley,
additional equipment for train and ferry service, and payment
of deferred maintenance for state parks.
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5.
The Legislature enacted a one-year additional
reduction of 10% of the Vehicle License Fee for calendar year
2000, at a General Fund cost of about $250 million in each of
fiscal year 1999-00 and 2000-01 to make up lost funding to
local governments. Conversion of this one-time reduction to a
permanent cut will remain subject to the revenue tests in the
legislation adopted last year. Several other targeted tax
cuts, primarily for businesses, were also approved, at a cost
of $54 million in 1999-00.
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6.
A one-time appropriation of $150 million, to be
split between cities and counties, was made to offset property
tax shifts during the early 1990s. Additionally, an ongoing
$50 million was appropriated as a subvention to cities for
jail booking or processing fees charged by counties when an
individual arrested by city personnel is taken to a county
detention facility.
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The revised
1999-00 budget included in the 2000 May Revision of the 2000-01
Governor’s Budget, released on May 15, 2000, reflects the
latest estimated costs or savings as provided in various pieces
of legislation passed and signed after the 1999 Budget Act. As a
result of the very strong economy in the State and associated
extraordinary revenue receipts, revised 1999-00 General Fund
revenues are $70.9 billion, an increase of $7.9 billion above
the projections made when the 1999 Budget Act was enacted, and
$5.7 billion above the previous estimate made in the 2000-01
Governor’s Budget in January 2000. Revised 1999-00
expenditures are $67.3 billion or $3.6 billion higher than
projections at the 1999 Budget Act. These additional
expenditures include a supplemental appropriation of $665
million for Smog Impact Fee refunds (see discussion of Jordan
v. D.M.V. case in “Pending Litigation” below). The
Department of Finance projects that the balance in the budget
reserve will be about $6.9 billion at June 30, 2000, much of
which will be appropriated for Fiscal Year 2000-01.
CURRENT STATE BUDGET
Proposed 2000-01 Fiscal Year
Budget. On January 10, 2000, Governor
Davis released his 2000 January Governor’s Budget, which
generally reflected an estimate that General Fund revenues for
Fiscal Year 1999-00 would be higher than projections made at the
time of the 1999 Budget Act. Even these positive estimates
proved to be greatly understated as continuing economic growth
and stock market gains (at least through the first quarter of
2000) resulted in a surge of revenues. The Administration
estimated in the 2000 May Revision that General Fund revenues
would total $70.9 billion in 1999-00, and $73.8 billion in
2000-01, a two-year increase of $12.3 billion above the 2000
January Governor’s Budget revenue estimates. The 2000-01
revenue estimate assumes a $545 million reduction in personal
income tax revenue from the Governor’s proposal to provide
an income tax exemption for all teachers in the
State.
The 2000
May Revision proposes General Fund expenditures of $78.2
billion, as compared to an original spending proposal of $68.8
billion in the 2000 January Governor’s Budget. Included in
the revised Budget are set-asides of $500 million for legal
contingencies and $200 million for various one-time legislative
initiatives. Based on the proposed revenues and expenditures,
the 2000 May Revision projects the June 30, 2001 balance in the
budget reserve fund to be $1.769 billion, up from $1.238 billion
proposed in the 2000 January Governor’s Budget.
The 2000
May Revision contains a number of proposals for spending the
additional revenues, mostly in 2000-01. According to a report by
the Legislative Analyst’s Office, about $7.2 billion is
proposed for one-time expenditures, including a general tax
rebate and senior citizen’s tax relief ($1.9 billion), aid
to public schools ($1.5 billion), transportation ($1.5 billion),
housing ($500 million), set-asides and increased reserves ($600
million) and other uses ($1.2 billion). About $5.1 billion is
proposed for program enhancements that would be permanent,
including increased Proposition 98 funds for schools ($2.4
billion), tax relief ($600 million, including the exemption for
teachers mentioned above), transportation ($440 million per year
for five years), health and social services ($1.1 billion) and
other ($600 million). All of these proposals are subject to
review and action by the Legislature.
The
Legislature has adopted a budget and has sent it to the Governor
for his consideration.
Tobacco Litigation. In late
1998, the State signed a settlement agreement with the four
major cigarette manufacturers. The State agreed to drop its
lawsuit and not to sue in the future. Tobacco manufacturers
agreed to billions of dollars in payments and restrictions in
marketing activities. Under the settlement, the companies will
pay California governments a total of approximately $25 billion
over a period of 25 years. Beyond 2025, payments of
approximately $1 billion per year will continue in perpetuity.
Under the State’s settlement, half of these moneys will be
paid to the State, and half to local governments (cities of San
Diego, Los Angeles, San Francisco and San Jose and all
counties). The 2000 May Revision to the 2000 January
Governor’s Budget includes the receipt of $515 million of
settlement money to the General Fund in fiscal year 1999-00. In
2000-01, General Fund tobacco settlement receipts are forecast
to be $388 million.
The
specific amount to be received by the State and local
governments is, however, subject to adjustment for a number of
reasons. Various details in the settlement allow reduction of
the companies’ payments because of events such as certain
types of federal legislation or reductions in cigarette sales.
The “first annual” payment, received in April 2000,
was 12% lower than the base settlement amount due to reduced
sales. Future payment
estimates have been reduced by a similar percentage. In the event
that any of the companies go into bankruptcy, the State could
seek to terminate the agreement with respect to those companies
filing bankruptcy actions thereby reinstating all claims against
those companies. The State may then pursue those claims in the
bankruptcy litigation, or as otherwise provided by law. Also,
several parties have brought a lawsuit challenging the
settlement and seeking damages: see “Pending
Litigation” below.
Local
Governments
The
primary units of local government in California are the
counties, ranging in population from 1,200 (Alpine) to over
9,900,000 (Los Angeles). Counties are responsible for providing
many basic services, including indigent healthcare, welfare,
courts, jails and public safety in unincorporated areas. There
are also about 475 incorporated cities and thousands of 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.
In the
aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property and tax
moneys, including taking over the principal responsibility for
funding local K-12 schools and community colleges. During the
recession, the Legislature eliminated remnants of this
post-Proposition 13 aid to local government entities other than
K-14 education districts, by requiring cities and counties to
transfer some of their property tax revenues to school
districts. However, the Legislature also has provided additional
funding sources (such as sales taxes) and reduced certain
mandates for local services.
Since
then the State has also provided additional funding to counties
and cities through such programs as health and welfare
realignment, welfare reform, trial court restructuring, an
annual program supporting local public safety departments, and
various other measures.
The 1999
Budget Act included a $150 million one-time grant of money from
the General Fund to local agencies for relief from the 1992 and
1993 property tax shifts. Legislation has been passed, subject
to voter approval at the election in November 2000, to provide a
more permanent payment to local governments to offset the
property tax shift. In addition, legislation was enacted in 1999
to provide approximately $35.8 million annual relief to cities
based on 1997-98 costs of jail booking and processing fees paid
to counties.
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 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, Statutes of 1997, restructured the State’s
trial court funding system. Funding for the courts, with the
exception of costs for facilities, local judicial benefits, and
revenue collection, was consolidated at the State level. 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 assumed responsibility for future growth
in trial court funding. The consolidation of funding is intended
to streamline the operation of the courts, provide a dedicated
revenue source, and relieve fiscal pressure on the counties.
Beginning in 1998-99, the county general fund contribution for
court operations was reduced by $290 million, and cities
retained $62 million in fine and penalty revenue previously
remitted to the State. The General Fund reimbursed the $362
million revenue loss to the Trial Court Trust Fund. The 1999
Budget Act included funds to further reduce the county general
fund contribution by an additional $96 million by reducing by
100 percent the contributions of
the next 18 smallest counties and by 10 percent the general fund
contribution of the remaining 21 counties. The 2000 May Revision
proposes to continue this permanent assistance to local
governments.
On
November 5, 1996, voters approved Proposition 218, called the
“Right to Vote on Taxes Act,” which adds new Articles
XIIIC and XIIID into the California Constitution. These
provisions enact limits 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 or charges through local initiatives. There are a
number of ambiguities concerning the Proposition and its impact
on local governments and their bonded debt that will require
interpretation by the courts or the State Legislature. The State
Legislative 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. Proposition
218 does not affect the State or its ability to levy or collect
taxes.
On
December 23, 1997, lead claimant Sonoma County and a consortium
of California counties filed a test claim with the Commission on
State Mandates (the “Commission”) asking the
Commission to determine whether the property tax shift from
counties to the Educational Revenue Augmentation Fund beginning
in 1993-94, which is a funding source for schools, is a
reimbursable state mandated cost. On August 11, 1998, the State
Department of Justice, on behalf of the State Department of
Finance, filed a rebuttal in opposition to the counties’
claim. The test claim was heard on October 29, 1998, and the
Commission on State Mandates found in favor of the State. In
March 1999, Sonoma County filed suit in the Superior Court to
overturn the Commission’s decision. In October 1999, a
Sonoma County Superior Court Judge ruled in favor of the county.
The claimants sought review in the Sonoma County Superior Court.
On November 10, 1999, the superior court granted the
counties’ petition for writ of mandate and reversed the
Commission’s decision. The State then appealed to the court
of appeal and briefing in that court will be completed by the
end of June 2000. Meanwhile, on April 19, 2000, the California
Supreme Court denied the counties’ petition to transfer the
State’s appeal directly to the Supreme Court. Should the
final decision on this matter be in favor of the counties, the
impact to the State General Fund could be more than $10.0
billion. In addition, there would be an annual Proposition 98
General Fund cost of at least $3.75 billion. This cost would
grow in accordance with the annual assessed value growth
rate.
Constitutional and Statutory Limitations; Future
Initiatives; Pending Litigation
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 45, 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 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 8, 1988 general election, California voters approved an
initiative known as Proposition 98. Proposition 98 changed State
funding of public eduction below the university level and the
operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund
revenues. Under
Proposition 98 (as modified by Proposition 111, which was enacted
on June 5, 1990), K-14 schools are guaranteed the greater of (a)
in general, a fixed percent of General Fund revenues (“Test
1”), (b) the amount appropriated to K-14 schools in the
prior year, adjusted for changes in the cost of living (measured
as in Article XIIIB by reference to State per capita personal
income) and enrollment (“Test 2”), or (c) a third
test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year
plus one half of one percent is less than the percentage growth
in State per capita personal income (“Test 3”). Under
Test 3, schools would receive the amount appropriated in the
prior year adjusted for changes in enrollment and per capita
General Fund revenues, plus an additional small adjustment
factor. If Test 3 is used in any year, the difference between
Test 3 and Test 2 would become a “credit” to schools
that would be the basis of payments in future years when per
capita General Fund revenue growth exceeds per capita personal
income growth. Legislation adopted prior to the end of the
1998-99 fiscal year, implementing Proposition 98, determined the
K-14 schools’ funding guarantee under Test 1 to be 40.3
percent of General Fund tax revenues, based on 1986-87
appropriations. However, that percent has been adjusted to
approximately 35 percent to account for a subsequent redirection
of local property taxes, since such redirection directly affects
the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote
of both houses, with the Governor’s concurrence, to suspend
the K-14 schools’ minimum funding formula for a one-year
period. Proposition 98 also contains provisions transferring
certain State tax revenues in excess of the Article XIIIB limit
to K-14 schools.
During
the recession in the early 1990s, General Fund revenues for
several years were less than originally projected, so that the
original Proposition 98 appropriations turned out to be higher
than the minimum percentage provided in the law. The Legislature
responded to these developments by designating the
“extra” Proposition 98 payments in one year as a
“loan” from future years’ 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 $4,200 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
is repaying $935 million by forgiveness of the amount owed,
while schools will repay $825 million. The State share of the
repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools’ share
of the repayment will count 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 reduce any
adverse fiscal impact.
Substantially increased General Fund revenues, above
initial budget projections, in the 1994-95 to 1999-00 fiscal
years have resulted in retroactive increases in Proposition 98
appropriations from subsequent fiscal years’ budgets.
Because of the State’s increasing revenues, per-pupil
funding at the K-12 level has increased by more than 50% from
the level in place from 1991-92, and its estimated at about
$6,672 per the average daily attendance rate of students in
2000-01. A significant amount of the “extra”
Proposition 98 monies in the last few years has been allocated
to special programs, including an initiative to increase the
number of computers in schools throughout the State.
Furthermore, since General Fund revenue growth is expected to
continue in 2000-01, the Governor has also proposed new
initiatives to improve student achievement, provide better
teacher recruitment and training, and provide schools with
advanced technology and the opportunity to form academic
partnerships to help them meet increased expectations.
Additional initiatives include teacher performance bonuses, tax
relief for teachers and an expansion of English Language
Learners Programs.
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.
Opponents
of Proposition 187 filed at least eight lawsuits (which were
subsequently consolidated) challenging the constitutionally and
validity of the measure. On March 18, 1998, a United States
District Court judge entered a final judgment in the case,
holding key portions of the measure unconstitutional and
permanently enjoining the State from implementing those sections
that would have required law enforcement, teachers and social
services and health care workers to verify a person’s
immigration status and subsequently report illegal immigrants to
authorities and deny them social services, health care and
education benefits. An appeal by the State Attorney General was
filed with the Ninth Circuit Court of Appeals on March 25, 1998.
Governor Gray Davis subsequently asked the United States Ninth
Circuit Court of Appeal to serve as mediator on the issue. On
April 26, 1999, the Ninth Circuit Court of Appeal granted
Governor Davis’ request for mediation of the controversy.
In response, David B. Lombardi, Chief Mediator for the Ninth
Circuit Mediation Office ordered a stay until June 18, 1999 of
all appellate proceedings in connection with the six cases then
pending before the Court of Appeal involving Proposition 187
challenges. On June 1, 1999, the Howard Jarvis Taxpayers’
Association sued Governor Davis in the California Supreme Court
challenging Governor Davis’ right to submit Proposition 187
to mediation, which the plaintiff claims undermine the
public’s right of initiative. On June 30, 1999, the
California Supreme Court declined to hear the case. Since that
time, Governor Davis had the State’s appeal withdrawn,
letting stand the District Court rulings.
At the
November 1998 elections voters approved Proposition 2. This
proposition requires the General Fund to repay loans made from
certain transportation special accounts (such as the State
Highway Account) at least once per fiscal year, or up to 30 days
after adoption of the annual budget act. Since the General Fund
may reborrow from the transportation accounts soon after the
annual repayment is made, the proposition is not expected to
have any adverse impact on the State’s cash
flow.
Future
Initiatives. Articles XIIIA, XIIIB,
XIIIC and XIIID were each adopted as measures that qualified for
the ballot pursuant to the State’s initiative process. From
time to time, other initiative measures could be adopted that
could affect revenues of the State or public agencies within the
State.
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 and services 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 expanded the
claim to include supplemental claims filed by several other
educational institutions are determined that part, but not all,
of the claims should have been paid by the State. 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 Commission on State Mandates issued
a decision in December 1998 determining that a small number of
components of the State’s special education program are
state mandated local costs. The administrative proceeding is in
the “parameters and guidelines” stage where the
Commission is considering whether and to what extent the costs
associated with the state mandated components of the special
education program are offset by funds that the State already
allocates to that program. The State’s position is that all
costs are offset by existing funding. The State has the option
to seek judicial review of the mandate finding. Potential
liability of the State, if all potentially eligible school
districts pursue timely claims, has been estimated by the
Department of Finance to be in excess of $1.5 billion, if the
State is not credited for its existing funding of the program.
The Commission was unable to resolve two other identified
aspects of the State’s program due to tie votes. As such,
the Commission referred these matters to an administrative law
judge for preparation of recommended decisions. One of these
matters encompasses all special education services for students
between the ages of 3 to 5 and 18 to 21, and thus represents
significant additional potential liability if the claim is
ultimately upheld and the State is denied credit for its
existing funding.
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 past costs of cleanup of the
site, a declaration that the defendants are each fully liable
for future costs, and an order that the cleanup be completed.
However, the defendants have filed a counterclaim against the
State for alleged negligent acts, resulting in significant
findings of liability against the State as owner, operator and
generator of the wastes taken to that site. The State has
appealed. Present estimates of the cleanup range from $400
million to $600 million. Potential State liability falls within
this same range. However, all or a portion of any judgment
against the State could be satisfied by recoveries from the
State’s insurance carriers. The State has filed a suit
against certain of these carriers and trial is expected to begin
in 2001.
The State
is a defendant in a coordinated action involving 3,000
plaintiffs seeking recovery for damages caused by the Yube 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 a sample of plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed,
ranges from $800 million to $1.5 billion. In 1992, the State and
plaintiffs filed appeals. In August 1999, the court of appeal
issued a decision reversing the trial court’s judgment
against the State and remanding the case for retrial on the
inverse condemnation cause of action. The California Supreme
Court denied plaintiffs’ petition for review. No trial date
has been set although trial management issues, including whether
plaintiffs have the right to a jury trial on their inverse
condemnation claim and whether trial should be held in Yuba
County, are presently being considered by the trial
court.
On June
24, 1998, plaintiffs in Howard Jarvis Taxpayers Association
et. al. v. Kathleen Connell filed a complaint for certain
declaratory and injunctive relief challenging the authority of
the State Controller to make payments from the State Treasury in
the absence of a State budget. On July 21, 1998, the trial court
issued a preliminary injunction prohibiting the State Controller
from paying moneys from the State Treasury for fiscal year
1998-99, with certain limited exceptions, in the absence of a
State budget. The preliminary injunction, among other things,
prohibited the State Controller from making any payments
pursuant to any continuing appropriation. On July 22 and 27,
1998, various employee unions that had intervened in the case
appealed the trial court’s preliminary injunction and asked
the Court of Appeal to stay the preliminary injunction. On July
28, 1998, the Court of Appeal granted the unions’ requests
and stayed the preliminary injunction pending the Court of
Appeal’s decision on the merits of the appeal. On August 5,
1998, the Court of Appeal denied the plaintiffs’ request to
reconsider the stay. Also on July 22, 1998, the State Controller
asked the California Supreme Court to immediately stay the trial
court’s preliminary injunction and to overrule the order
granting the preliminary injunction on the merits. On July 29,
1998, the Supreme Court transferred the State Controller’s
request to the Court of Appeal. The matters are now pending
before the Court of Appeal. Briefs have been submitted; no date
has been set for oral argument.
A
judgment was entered for the plaintiff in August 1998 in the
case of Ceridian Corporation v. Franchise Tax Board, a
suit that challenged the validity of two sections of the
California Tax laws. The first related to deduction from
corporate taxes for dividends received from insurance companies
to the extent the insurance companies have California
activities. The second related to corporate deduction of
dividends to the extent the earnings of the dividend-paying
corporation have already been included in the measure of their
California tax. On August 13, 1998, the court issued a judgment
against the Franchise Tax Board on both issues. The Franchise
Tax Board has appealed the judgment. Briefing has been
completed. The State has taken the position that, if the
challenged section of the Revenue & Taxation Code is struck
down, all deductions relating to dividends would be eliminated
and the result would be additional income to the State.
Plaintiff, however, contends that if it prevails, the deduction
should be extended to all dividends that would result in a
one-time liability for open years of approximately $60 million,
including interest, and an annual revenue loss of approximately
$10 million. No date has yet been set for oral
argument.
The State
is also a defendant in First Credit Bank etc. v.
Franchise Tax Board, which challenges a Revenue &
Taxation Code section similar to the one challenged in the
Ceridian case, but applicable to a different group of
corporate taxpayers. The State’s motion for summary judgment
is currently pending and a trial date has been set in September
2000. A decision in the Ceridian case could impact the
outcome of this case. The State has taken the position that, if
the challenged section of the Revenue & Taxation Code is
struck down, all deductions relating to dividends would be
eliminated and the result would be additional income to the
State. Plaintiffs, however, contend that if they prevail, the
deduction should be extended to all dividends, which would
result in a one-time liability for open years of approximately
$385 million, including interest, and an annual revenue loss of
approximately $60 million.
In
January of 1997, California experienced major flooding in six
different areas with preliminary estimates of property damage of
approximately 1.6 to 2.0 billion. In McMahon v. State, a
substantial number of plaintiffs have joined an existing suit
against the State, local agencies, and private companies and
contractors seeking compensation for the damages they suffered
as a result of the 1997 flooding. After various pre-trial
proceedings, the State filed its answer to the plaintiffs’
complaint in January of 2000. No trial date has been set. The
State is defending the action.
Plaintiffs in County of San Bernardino v. Barlow
Respiratory Hospital and related actions seek mandamus
relief requiring the State to retroactively increase out-patient
Medi-Cal reimbursement rates. Plaintiffs have estimated the
damages to be several hundred million dollars. The State is
defending these cases, as well as related federal cases
addressing the calculation of Medi-Cal reimbursement rates in
the future. Trial is scheduled for September 2000.
The State
is involved in two refunds actions, Cigarettes Cheaper!, et
al. v. Board of Equalization, et al. and California Assn.
of Retail Tobacconists (CART), et al v. Board of Equalization,
et al. that challenge the constitutionality of Proposition
10, approved by the voters in 1998. Plaintiffs allege that
Proposition 10, which increases the excise tax on tobacco
products, violates 11 sections of the California Constitution
and related provisions of law. Plaintiffs Cigarettes
Cheaper! seek declaratory and injunctive relief and a refund
of over $4 million. The CART case filed by retail
tobacconists in San Diego seeks a refund of $5 million.
Plaintiffs McLane/Suneast seek a refund between $500,000
and $1 million. The State is contesting these cases. The
State’s motion for judgment on the pleadings was granted
but the court gave the three sets of plaintiffs permission to
amend their complaints. As a result, the defendants’ motion
for summary judgment was taken off the calendar. A hearing on
the State’s demurrer to the third amended complaint by
CART, the second amended complaint by Cigarettes Cheaper! and
the first amended complaint by McLane/Suneast is pending. The
State has obtained several protective orders and extensive
discovery continues. If the statute is declared
unconstitutional, exposure may include the entire $750 million
collected annually with interest.
The State
is involved in two cases challenging the constitutionality of
the interest offset provisions of the Revenue and Taxation Code:
Hunt-Wesson, Inc., v. Franchise Tax Board and F.W.
Woolworth Co. and Kinney Shoe Corporation v. Franchise Tax
Board. In both cases, the Franchise Tax Board prevailed in
the California Court of Appeal and the California Supreme Court
denied taxpayers’ petitions for review. In both cases, the
United States Supreme Court granted certiorari. On
February 22, 2000, the United States Supreme Court reversed and
remanded the Hunt-Wesson case to the California Court of
Appeal for further proceedings. Although the Court did not take
similar action in the Woolworth Co. case, it is
anticipated that it will do so. The Franchise Tax Board recently
estimated that the adverse decisions in these cases will result
in a reduction in State revenues of approximately $15 million
annually, with past year collection and interest exposure of
approximately $95 million.
Guy F.
Atkinson Company of California v. Franchise Tax Board is a
corporation tax refund action involving the solar energy system
tax credit provided for under the Revenue & Taxation Code.
The case went to trial in May 1998 and the trial court entered
judgment in favor of the Franchise Tax Board. The taxpayer has
filed an appeal to the California Court of Appeal and the court
has affirmed the trial court judgement. The taxpayer may attempt
to appeal. The Franchise Tax Board estimates that the cost would
be $150 million annually if the plaintiff prevails. Allowing
refunds for all open years would entail a refund of at least
$500 million.
Jordan
et al. v. Department of Motor Vehicles, et al.
challenges the validity of the Vehicle Smog Impact
Fee, a $300 fee that is collected by the Department of Motor
Vehicles from vehicle registrants when a vehicle without a
California new-vehicle certification is first registered in
California. The plaintiffs contend that the fee violates
the interstate commerce and equal protection clauses of the United
States Constitution as well as Article XIX of the State
Constitution. In October 1999, the Court of Appeal upheld a
trial court judgment for the plaintiffs and the State has
declined to appeal further. Although refunds through the court
actions could be limited by a three-year statute of limitations,
with a potential liability of about $750 million, the Governor
has proposed refunding fees collected back to the initiation of
these fees in 1990. Legislation has been enacted, which the
Governor is prepared to sign, providing a $665 million
supplemental appropriation in 1999-00 to pay these
claims.
PTI,
Inc., et al. v. Philip Morris, et al. was filed by five
distributors in the cigarette import-/re-entry business, seeking
to overturn the tobacco Master Settlement Agreement
(“MSA”) entered between 46 states and the tobacco
industry in November, 1998. See “Tobacco Litigation”
above. The primary focus of the complaint is the provision of
the MSA encouraging participating states to adopt a statute
requiring nonparticipating manufacturers to either become
participating manufacturers and share the financial obligations
under the MSA or pay money into an escrow account. Plaintiffs
seek compensatory and punitive damages against the State and
State officials and an order placing tobacco settlement funds
into a trust to be administered by the court for the treatment
of medical expenses of persons injured by tobacco products.
Plaintiffs have filed an amended complaint and the State has
filed a motion to dismiss the amended complaint. A hearing on
the State’s motion to dismiss was heard on May 8, 2000. The
potential fiscal impact of an adverse ruling is largely unknown,
but could exceed the full amount of the settlement (estimated to
be $1 billion annually, of which 50% will go directly to the
State’s General Fund and the other 50% directly to the
State’s 58 counties and 4 largest cities).
Arnett
v. California Public Employees Retirement System, et. al.
was filed by seven former employees of the State of California
and local agencies, seeking back wages, damages and injunctive
relief. Plaintiffs are former public safety members who began
employment after the age of 40 and are recipients of Industrial
Disability Retirement (“IDR”) benefits. Plaintiffs
contend that the formula that determines the amount of IDR
benefits violates the federal Age Discrimination in Employment
Act of 1967 (“ADEA”). Plaintiffs contend that, but for
their ages at hire, they would receive increased monthly IDR
benefits similar to their younger counterparts who began
employment before the age of 40. CalPERS has estimated the
liability to the State as approximately $315.5 million were the
plaintiffs to prevail. The District Court dismissed the
complaint for failure to state a claim. On August 17, 1999, the
Ninth Circuit Court of Appeals reversed the District
Court’s dismissal of the complaint for failure to state a
claim. The State sought further review in the United States
Supreme Court. On January 11, 2000, the United States Supreme
Court in Kimel v. Florida Board of Regents, held that
Congress did not abrogate the sovereign immunity of the states
when it enacted the ADEA. Thereafter, on January 18, 2000, the
Supreme Court granted the petition for writ of certiorari
in Arnett, vacated the judgment of the Ninth Circuit, and
remanded the case to the Ninth Circuit for further proceedings
consistent with Kimel. In turn, the Ninth Circuit has
remanded the case to the District Court and the State has filed
a motion to dismiss the complaint based upon a lack of subject
matter jurisdiction.
In
FORCES Action Project, et al. v. State of California, et
al., various smokers rights groups challenge the tobacco
settlement as it pertains to California, Utah and the City and
County of San Francisco. Plaintiffs assert a variety of
constitutional challenges, including that the settlement
represents an unlawful tax on smokers. Motions to dismiss by all
defendants, including the tobacco companies, were eventually
converted to summary judgment motions by the court and heard on
September 17, 1999. On January 5, 2000, the court dismissed the
complaint for lack of subject matter jurisdiction because the
plaintiffs lacked standing to sue. The court also concluded that
the plaintiffs’ claims against the State and its officials
are barred by the 11th Amendment. Plaintiffs have appealed.
Briefing is expected to be complete by July 2000.
Louis
Bolduc, et al. v. State of California, et al. is a class
action filed on July 13, 1999 by six Medi-Cal beneficiaries who
have received medical treatment for smoking-related diseases.
Plaintiffs allege the State owes them an unspecified portion of
the tobacco settlement monies under a federal regulation that
requires a state to turn over to an injured Medicaid beneficiary
any monies the state recovers from a third party tortfeasor in
excess of the costs of the care provided. The State moved to
dismiss the complaint on September 8, 1999. On February 29,
2000, the court denied the State’s motion to dismiss, but
struck the plaintiffs’ class action allegations. The State
is seeking appellate review of that portion of the court’s
order denying its motion to dismiss, and plaintiffs have
appealed the court’s striking of their class action
allegations. All written briefs should be filed by August
2000.
On March 30, 2000,
a group of students, parents, and community based organizations
representing school children in the Los Angeles Unified School
District brought a lawsuit against the State Allocation Board
(“SAB”), the State Office of Public School
Construction (“OPSC”) and a number of State officials
(Godinez, et al. v. Davis, et al.) in the Superior Court
in the County of Los Angeles. The lawsuit principally alleges
SAB and OPSC have unconstitutionally and improperly allocated
funds to local school districts for new public school
construction as authorized by the Class Size Reduction
Kindergarten-University Public Education Facilities Bond Act
(hereafter referred to as “Proposition 1A”).
Plaintiffs allege that funds are not being allocated reasonably
and fairly according to need on the basis of a uniform, state
wide assessment of highest priority needs. Plaintiffs seek a
declaration of the illegality of the current allocation system,
and a preliminary and permanent injunction and/or a writ of
mandate against further allocation of Proposition 1A funds
unless the allocation system is modified. On May 12, 2000, Judge
David P. Yaffe of the Superior Court denied plaintiffs’
request for a temporary restraining order, and a hearing on
plaintiffs’ request for a preliminary injunction has been
scheduled. Also, a hearing on the United Teachers of Los
Angeles’ motion for intervention is scheduled for late July
2000. The State will defend this lawsuit. The plaintiffs have
not questioned the legality of, or sought any relief concerning,
any commercial paper notes or bonds issued by the State under
Proposition 1A, all of which funded projects based on
allocations made prior to the filing of the lawsuit. The
Attorney General is of the opinion that the lawsuit does not
affect the validity of any State bonds.
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
affect issuers. The summary is based primarily upon one or more
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 Trust has not
independently verified the information.
Manufacturing has historically been of prime economic
importance to Connecticut (sometimes referred to as the
“State”). The State’s manufacturing industry is
diversified, with the construction of transportation equipment
(primarily aircraft engines, helicopters and submarines) being
the dominant industry, followed by fabricated metals,
non-electrical machinery and electrical equipment. As a result
of a rise in employment in service-related industries and a
decline in manufacturing employment, however, manufacturing
accounted for only 16.92% of total non-agricultural employment
in Connecticut in 1998. 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 considerably reduced this sector’s
significance in Connecticut’s economy.
The
average annual unemployment rate in Connecticut increased from a
low of 3.6% in 1989 to a high of 7.6% in 1992 and, after a
number of important changes in the method of calculation, was
reported to be 3.0% in 1999. Per capita personal income of
Connecticut residents increased in every year from 1990 to 1999,
rising from $25,935 to $38,747. 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
seven fiscal years ended June 30, 1998, 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, $262,600,000,
$312,900,000, and $71,800,000, respectively. General Fund
budgets adopted for the biennium ending June 30, 2001,
authorized expenditures of $10,581,600,000 for the 1999-2000
fiscal year and $11,085,200,000 for the 2000-2001 fiscal year
and projected surpluses of $64,400,000 and $4,800,000,
respectively, for those years.
As of
April 30, 2000, the Comptroller estimated an operating surplus
of $402,200,000 for the 1999-2000 fiscal year. Thereafter,
following a declaration by the Governor needed to permit the
appropriation of funds beyond the limits of the State’s
expenditure cap, midterm budget adjustments were enacted. For
the 1999-2000 fiscal year, expenditures not previously budgeted
totaling $196,400,000 were authorized and, after a required
deposit into the Budget Reserve Fund from unappropriated surplus
of 5% of General Fund expenditures, provision was made for the
disposition of substantially the entire remaining surplus, most
of which would be used to avoid having to issue debt for school
construction. For the 2000-2001 fiscal year, the midterm budget
adjustments anticipate General Fund expenditures of
$11,280,800,000, revenue of $11,281,300,000, and a resulting
surplus of only $500,000. A special legislative session will be
needed to implement various provisions of the midterm budget
adjustments, which could result in changes to them.
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 January
1, 2000, the State had authorized direct general obligation bond
indebtedness totaling $13,310,385,000, of which $11,338,459,000
had been approved for issuance by the State Bond Commission and
$9,872,122,000 had been issued. As of January 1, 2000, net State
direct general obligation bond indebtedness outstanding was
$6,795,705,000.
In 1995,
the State established the University of Connecticut as a
separate corporate entity to issue bonds and construct certain
infrastructure improvements. The University was authorized to
issue bonds totaling $962,000,000 by June 30, 2005, that are
secured by a State debt service commitment to finance
improvements, $359,475,000 of which were outstanding on October
15, 1999. Additional costs for the improvements anticipated to
be $288,000,000 are expected to be funded from other
sources.
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 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 January 1,
2000, the amount of bonds outstanding on which the State has
limited or contingent liability totaled
$4,315,600,000.
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, 2004, is currently estimated to be $14.0 billion, to be
met from federal, state, and local funds. The State expects to
finance most of its $5.5 billion share of such cost by issuing
$5.0 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.
The
State’s general obligation bonds are rated Aa3 by
Moody’s and AA by Fitch. On October 8, 1998, Standard &
Poor’s upgraded 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)
an action on behalf of all persons with traumatic brain injury
who have been placed in certain State hospitals and other
persons with acquired brain injury who are in the custody of the
Department of Mental Health and Addiction Services, 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; (ii) litigation
involving claims by Indian tribes to portions of the
State’s land area; (iii) 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; and (iv) an action for money damages for the death of a
young physician killed in an automobile accident allegedly as a
result of negligence of the State; (v) actions by several
hospitals claiming partial refunds of taxes imposed on hospital
gross earnings to the extent such taxes related to tangible
personal property transferred in the provision of services to
patients; and (vi) an action against the State and the Attorney
General by importers and distributors of cigarettes previously
sold by their manufacturers seeking damages and injunctive
relief relating to business losses alleged to result from the
1998 Master Settlement Agreement entered into by most states in
litigation against the major domestic tobacco companies and
challenging certain related so-called Non Participating
Manufacturer statutes.
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
Superior Court ordered the State to show cause as to whether
there has been compliance with the Supreme Court’s ruling
and concluded that the State had complied but that the
plaintiffs had not allowed the State sufficient time to take
additional remedial steps. Accordingly, the plaintiffs might be
able to pursue their claim at a later date. The fiscal impact of
this matter might be significant but is not determinable at this
time.
The
State’s Department of Information Technology coordinated a
review of the State’s Year 2000 exposure and completed its
plans on a timely basis. As of December 31, 1999, 99.5% of the
testing cycles required to validate compliance in mission
critical systems had been completed. Nevertheless, there is
still a risk that all failure scenarios did not reveal all
software or hardware problems or that systems of others on whom
the State’s systems or service commitments rely were not
tested and remediated in a timely fashion. If the necessary
remediations were not adequately tested, the Year 2000 problem
may have a material impact on the operations of the
State.
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 had
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. Such bonds may be repaid only from
the 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.
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 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 Trust
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
May 2000, the Commonwealth’s unadjusted unemployment rate
was 2.3% as compared to a national average of 3.9%. Per capita
personal income in the Commonwealth is currently higher than the
national average.
In fiscal
1998, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 9.0% over the prior
fiscal year to $19.800 billion. Expenditures increased by 5.9%
over the prior fiscal year to $19.002 billion. As a result, the
Commonwealth ended fiscal year 1998 with a positive closing fund
balance of $2.192 billion.
In fiscal
1999, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 1.8% over the prior
fiscal year to $20.165 billion. Expenditures increased by 6.5%
over the prior fiscal year to $20.245 billion. As a result, the
Commonwealth ended fiscal year 1999 with a positive closing fund
balance of $2.112 billion.
Budgeted
revenues and other sources in fiscal 2000, which will end on
June 30, 2000, were estimated as of June 16, 2000, by the
Executive Office for Administration and Finance to be
approximately $21.641 billion, including tax revenues of $15.46
billion. It is estimated that fiscal 2000 budgeted expenditures
and other uses will be $21.259 billion and that fiscal 2000 will
end with fund balances of $2,319 billion.
On April
14, 2000 the House of Representatives approved its version of
the fiscal 2001 budget. The House budget provides for total
appropriations of approximately $21.8 billion and is based on a
tax revenue estimate of $15.283 billion, excluding $645 million
of sales tax receipts dedicated to the Massachusetts Bay
Transportation Authority as a result of forward funding
legislation. On May 25, 2000 the Senate approved its version of
the fiscal 2001 budget, which provides for total spending of
approximately $21.549 billion and is based on a tax revenue
estimate of approximately $15.204 billion, which is essentially
equivalent to the House estimate after adjusting for proposed
tax cuts in the Senate budget. Based on tax revenue through
April, the Secretary of Administration and Finance did not agree
with the Legislature’s proposed tax revenue estimate and
consensus was not reached by May 15, 2000 as required by state
finance law. On June 12, 2000 the Secretary of Administration
and Finance informed the chairmen of the House and Senate
Committees on Ways and Means that the administration accepted
the legislative consensus tax revenue estimate for fiscal 2001
($15.283 billion before any tax cuts), based on
higher-than-expected tax collections in May, 2000. The
differences between the House and Senate versions will be
reconciled by a legislative conference committee.
On
February 9, 2000, the Governor announced a debt reduction
proposal to be funded with approximately $150 million in
accumulated surplus revenues from fiscal 1997, 1998, and 1999
(now on deposit in the Capital Projects Fund) and surplus
revenues expected on account of fiscal 2000, estimated as of
March 3, 2000, at $200 million. Under the Governor’s
proposal, such moneys would be applied to the retirement of
outstanding Commonwealth debt bearing the highest interest
rates.
Both
Standard & Poor’s and Fitch IBCA, Duff & Phelps
have rated the Commonwealth’s general obligation bonds as
AA-. Moody’s Investors Service, Inc. has rated the
Commonwealth’s bonds as Aa2. From time to time, agencies
may change their ratings.
Limits on
Commonwealth tax revenues were established by initiative
petition in November 1986, and added to the Commonwealth’s
General Laws as Chapter 62F. Chapter 62F contains no exclusion
for debt service on Municipal Obligations of the Commonwealth.
Tax revenues in fiscal 1995 through fiscal 1999 were lower than
the limit set by Chapter 62F, and the Executive Office for
Administration and Finance currently estimates that state tax
revenues in fiscal 2000 will not reach such limit. 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.
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.
The
largest single component of the Commonwealth’s capital
program is the Central Artery/Ted Williams Tunnel Project, a
major construction project that is part of the completion of the
federal interstate highway system. On April 11, 2000 the U.S.
Secretary of Transportation released a report dated March 31,
2000 that had been prepared by a task force of federal
officials. The task force report stated that senior management
of the Central Artery/Ted Williams Tunnel project had
deliberately withheld information about cost overruns from the
Federal Highway Administration and recommended a change in
project leadership, as well as an evaluation of whether the
Massachusetts Turnpike Authority should continue to be
responsible for the management of the project. The reports
stated that there were risks that could lead to cost exposures
in addition to those identified in the March 15, 2000 finance
plan update submitted by the Massachusetts Turnpike Authority in
the range of $300 million to $480 million. The task force
estimated that a realistic total cost estimate for the project
was $13.4 billion to $13.6 billion. The report stated that the
Commonwealth appeared to have adequate resources to finance the
additional costs but had not yet identified precisely how it
would do so, noting that several of the elements in the
Governor’s proposed funding plan did not appear to have
state legislative support. Upon receiving the report, the
Governor requested and received the resignation of the chairman
of the Massachusetts Turnpike Authority and appointed a new
chairman.
The
Executive Office for Administration and Finance has engaged the
services of an independent consulting and accounting firm to
review costs associated with the Central Artery/Ted Williams
Tunnel project and expects to receive the results of the
firm’s review by the end of July, 2000. On May 17, 2000 the
Governor approved legislation to provide financing for the
additional costs of the Central Artery/Ted Williams Tunnel
project and for the statewide road and bridge program. The
legislation authorizes approximately $1.520 billion of
Commonwealth bonds, which may be issued as general obligations
or as special obligations payable from the gasoline tax and, in
the case of $1.35 billion, from Highway Fund revenues generally.
The legislation reinstates certain fees collected by the
Registry of Motor Vehicles. On June 16, 2000 the Massachusetts
Turnpike Authority filed with the Federal Highway Administration
a finance plan update identifying total project costs, expressed
as cash needs through completion in 2004, of $13.513
billion.
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 $3.950 billion in fiscal
1998. Fiscal 1999 expenditures for direct local aid were $4.310
billion, which is an increase of approximately 9.2% above the
1998 level. It is estimated that fiscal 2000 expenditures for
direct local aid will be $4.645 billion, which is an increase of
approximately 7.8% above the fiscal 1999 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. As of
January 1, 1998, the Public Employee Retirement Administration
Commission (PERAC) estimated these liabilities to be $5.803
billion 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. Further,
on April 8, 1999, independent actuarial consultants to the
Pension Reserves Investment Management (PRIM) Board released
significantly higher figures based on the same data used by
PERAC, but using a more advanced software system. PERAC
currently is conducting an experience study of the pension
system which it expects to complete by the end of the summer of
2000. 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 of
Administration and Finance and approved by the legislature. On
March 1, 2000 the Secretary of Administration and Finance filed
a revised pension funding schedule (which has been deemed
approved by the Legislature) which provides that the amounts
required for funding of current pension liabilities in fiscal
years 2001, 2002, 2003 and 2004 are estimated to be $1.029
billion, $1.050 billion, $1.073 billion and $1.096 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.
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 (the “State”) 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 publicly available offering
statements relating to debt offerings of state issuers, however,
it has not been updated nor will it be updated for the year. The
Trust has not independently verified the
information.
Economic
activity in the State of Michigan 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 16.1% in
1998. While durable goods manufacturing still represents a
sizable portion of the State’s economy, the service sector
now represents 27.51% 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. Although
historically, the average monthly unemployment rate in the State
has been higher than the average figures for the United States,
for the last four years, the unemployment rate in the State has
been below the national average. During 1999, the average
monthly unemployment rate in the State was 3.7% compared to a
national average of 4.7%.
The
State’s economy could continue to be affected by changes in
the auto industry 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 located
could be more severe.
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
calculations necessary to determine the State’s compliance
with this requirement for 1998-99 are not final. However, the
State estimates that State revenues subject to the limit will
exceed that limit by $21.7 milion. The State Constitution does
not prohibit the increasing of taxes so long as expected
revenues do not exceed 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 to 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 55% 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. 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 net succeeding year’s budget for that fund.
The State
of Michigan reports its financial results in accordance with
generally accepted accounting principles. The State ended the
five fiscal years 1992-96 with its General Fund in balance after
substantial transfers from the General Fund to the Budget
Stabilization Fund. For the 1997 fiscal year, the State closed
its books with its general fund in balance. During the 1997-98
fiscal year, an error was identified pertaining to the Medicaid
program administered by the Department of Community Health
(“DCH”). Over a ten-year period DCH did not properly
record all Medicaid expenditures and revenues on a modified
accrual basis as required by GAAP. For the fiscal year ended
September 30, 1997, the General Fund did not reflect Medicaid
expenditures of $178.7 million, and federal revenue of $24.6
million. As a result, the ending General Fund balance for the
fiscal year ended September 30, 1997, was reduced by $154.1
million to account for the correction of the prior period error.
The General Fund was in balance as of September 30, 1998 and
September 30, 1999. The balance in the Budget Stabilization Fund
as of September 30, 1999 was 1,222.5 million. In all but two of
the last seven 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. No
cash flow borrowing was required in the 1999 fiscal year or is
planned for the 2000 fiscal year.
In
November, 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 is required to pay to other school districts an estimated
amount of $632 million over time. These payments, which
commenced in fiscal year 1998-99, are being paid out of the
Budget Stabilization Fund and the General Fund, half in annual
payments over ten years and half in annual payments over fifteen
years.
Amendments to the Michigan Constitution which placed
limitations on increases in State taxes and local ad
valorem taxes (including taxes used to meet the 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 services taxes might be
affected.
State law
provided 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 six 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% (since
further reduced to 4.2% with gradual reductions until the rate
is 3.9% in 2004), reduced some property taxes 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 contained 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.
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 government 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. The State received upgrades in January 1998 from
Standard & Poor’s, in March 1998 from Moody’s and
in April 1998 from Fitch.
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
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 Trust 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 2001” refers to the
State’s fiscal year beginning July 1, 2000 and ending June
30, 2001.
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 revenues, and certain miscellaneous revenue items are
recorded in the General Fund.
The
State’s undesignated General Fund balance was $281 million
for Fiscal Year 1997, $228 million for Fiscal Year 1998 and $276
million for Fiscal Year 1999. For the Fiscal Year 2000 and the
Fiscal Year 2001, the balance in the undesignated General Fund
is estimated to be $206 million and $131 million,
respectively.
The State
finances certain 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 payments, interest payments, and redemption premium
payments, if any, required to fully pay the bonds. 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.
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.
During
1999, a continuation of the national business expansion, a
strong business climate in New Jersey and positive developments
in neighboring metropolitan areas contributed to the
State’s economic expansion - - the second strongest year
for economic growth since 1988.
Employment within the State increased by 1.7% in 1999,
resulting in an increase of over 65,000 jobs. Job gains were
primarily spread across the service producing industries with
particularly strong growth in wholesale and retail trade
(20,400) and business services (20,200). Computer software and
personnel supply related companies accounted for the bulk of the
job growth in the business services sub-sector, adding 15,000
jobs.
During
the past decade, New Jersey’s job growth has been
concentrated in five major “growth clusters”: high
technology, health, financial, entertainment and logistics.
Combined, these five growth clusters added over 200,000 jobs
during the ten years from 1988 to 1998, a 19% growth rate
compared to a 4% growth rate for all other industries in the
State. These growth clusters grew by 2.6% in 1999, over twice
the rate of 1.2% for all other industries in New
Jersey.
With
strong labor market conditions, New Jersey’s personal
income increased at a pace of 5.8% in 1999, making it the first
year since 1992 that the New Jersey growth rate was above the
national rate. The strong State economy also led to a 6.5%
growth in retail sales. Low inflation, approximately 2%,
continues to benefit New Jersey consumers and businesses, and
low interest rates have increased spending on housing and other
consumer durables. In 1999, home building was at its highest
level since 1988.
New Jersey’s
unemployment rate remained low in 1999—close to the
national average. Joblessness, in terms of both absolute level
and its rate, has been falling steadily since its peak in 1992.
The early trends in year 2000 indicate that the number of
unemployed persons in New Jersey has dropped to its lowest level
since mid-1989.
The
economic outlook for the years 2000 and 2001 is for continued
growth, but at somewhat more moderate rates. Employment is
expected to increase by approximately 50,000 jobs, reflecting a
slowing national economy and shortages in skilled technical
specialties that will constrain job growth. The outlook also
indicates a steady slowing in State personal income growth from
5.7% in 2000 to 4.8% in 2001.
A slower
growing national economy and the national election year campaign
make it increasingly unlikely that any changes in national
economic or fiscal policy will be implemented that will impact
the State’s economy significantly in the forecast period.
However, uncertainties in the international economy are likely
to remain due to oil price and currency issues.
Other
areas of concern include the volatility in the stock market,
possible significant shifts in consumer and investor confidence,
unstable and potentially deflationary international economic
conditions, and the prospect of leaner U.S. corporate profits.
In addition, the restructuring of major industries will continue
due to cost containment, globalization of competition, and the
deregulation concerns. Although the forecasts for the years 2000
and 2001 contain more risks than in the recent past, the basic
fundamentals of the State’s economic health remain
favorable.
The
outlook for New Jersey is based on expected national economic
performance and on recent State strategic policy actions aimed
at infrastructure improvements, effective education and training
of New Jersey’s workforce, and those maintaining a
competitive business environment. Investments in each of these
policy areas are critical to maintaining the long-term health of
the State’s economy.
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 claims 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 $94,196,000 for tort and medical
malpractice claims pending as of December 31, 1999. 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.
Buena
Regional Commercial Township et al. v. New Jersey Department of
Education et al. This lawsuit was
filed in Superior Court, Chancery Division, Cumberland County.
This lawsuit was filed 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 entered into a consent order to transfer the matter to
the Commissioner of Education for resolution. The chancery court
did not retain jurisdiction. Once the matter was transferred to
the Commissioner, plaintiffs moved to amend their pleadings and
have done so three times. With each new pleading, the State has
answered with a motion to dismiss. Decisions on the first two
motions to dismiss were rendered moot by plaintiffs’ filing
of a subsequent amended pleading. On February 24, 2000, the
Commissioner decided the State’s final motion to dismiss
and ordered that the matter be transmitted to the Office of
Administrative Law for a hearing limited to whether each
petitioning district has fully effectuated the provisions of the
Comprehensive Educational Improvement and Financing Act,
including the provisions for early childhood program aid and
demonstrably effective program aid. The State is unable at this
time to estimate its exposure for this claim and intends to
defend this suit 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 April 20, 1998. On
June 23, 1998, plaintiffs filed an amended complaint removing
one and adding eighteen school district plaintiffs. The State
defendants filed a motion to dismiss the amended complaint on
September 18, 1998. The motion was argued on January 29, 1999
and the court reserved its decision. The State will vigorously
defend this matter. The State is unable, at this time, to
estimate its exposure for these claims.
United
Hospitals et al. v. State of New Jersey and William
Waldman. These cases represent
challenges by 19 State hospitals to Medicaid hospital
reimbursement since 1995. The matters were filed in the
Appellate Division of the Superior Court of New Jersey. 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., including
the regulations’ interpretation of marginal loss are
arbitrary, capricious and unreasonable, (iii) whether the
Department of Human Services (“DHS”) incorrectly
calculated the rates; (iv) whether DHS denied hospitals 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 since 1995.
The State intends to vigorously defend these
actions.
Abbott
V Appeals. Abbott districts, in
furtherance of the Court’s decision in Abbott v.
Burke (“Abbott V”) and DOE regulations,
have developed operational plans for the provision of early
childhood programs. In February of 1999, the Department of
Education informed each of the districts of the
Department’s concerns regarding each district’s plan,
and asked that amended plans be submitted to the Department. The
Abbott districts have filed individual petitions of appeal with
the Commissioner. Issues on appeal include the quality of
community care providers, the requirement that districts
collaborate with DHS-licensed facilities, the use of
certificated teachers, requests for full day preschool,
accreditation of early childhood programs, and as-applied
constitutional challenges to N.J.A.C. 6:19A-1 et seq. In
response to the filed petitions, the State has filed answers or
motions in lieu of answers. The matters were transmitted to the
Office of Administrative Law (the “OAL”) for further
proceedings. To date, eleven of the original thirteen districts
that filed petitions remain active. Additionally, the Education
Law Center filed petitions on behalf of students in each of the
three State-operated school districts of Newark, Jersey City and
Paterson and on behalf of the students of West New York. On
October 13, 1999, the New Jersey Supreme Court heard oral
argument on a motion in aid of litigants’ rights filed by
the Education Law Center on behalf of the students in the Abbott
districts. Therein, plaintiffs challenged the Department of
Education’s implementation plan for early childhood
education. Many of the issues raised in the motion were the same
as those raised by the districts in the OAL proceedings. On
March 7, 2000, the Supreme Court issued its decision clarifying
the requirements of Abbott V as to early childhood
education and requiring DHS-licensed childcare providers used by
the Abbott districts to enhance requirements to prepare children
for success in elementary school (“Abbott VI”).
The full impact of Abbott VI on the pending OAL
proceedings has not yet been determined. A petition of appeal
for emergent relief was filed with the Commissioner of Education
on August 23, 1999 by the Passaic school district seeking
supplemental funding for special education, facilities and other
programs for the commencement of the 1999-2000 school year. The
State is unable to estimate its exposure for these claims and
intends to defend the suits vigorously.
Currently, the State’s general obligation bonds are
rated AA+ by Standard & Poor’s, Aa1 by Moody’s and
AA+ by Fitch. From time to time agencies may change their
ratings.
APPENDIX G
ECONOMIC AND FINANCIAL 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”). 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 Trust 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 the City has a significant
effect on the fiscal health of the State. The City’s
current financial plan assumes that, after strong growth in
2000, moderate economic growth will exist through calendar year
2003, with moderating job growth and wage increases.
For each
of the 1981 through 1999 fiscal years, the City had an operating
surplus, before discretionary and other transfers, and achieved
balanced operating results as reported in accordance with
generally accepted accounting principles (“GAAP”),
after discretionary and other 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 tax or other revenue increases or reductions in City
services or entitlement programs, which could adversely affect
the City’s economic base.
The Mayor
is responsible for preparing the City’s financial plan,
including the City’s current financial plan for the 2000
through 2004 fiscal years (the “2000-2004 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.
As
required by law, the City prepares a four-year annual financial
plan, which is reviewed and revised on a quarterly basis and
which includes the City’s capital, revenue and expense
projections and outlines proposed gap-closing programs for years
with projected budget gaps. The City’s Financial Plan
projects a surplus in the 2000 and 2001 fiscal years, before
discretionary transfers, and budget gaps for each of the 2002,
2003 and 2004 fiscal years. This pattern of current year surplus
operating results and projected subsequent year budget gaps has
been consistent through the entire period since 1982, during
which the City has achieved surplus operating results, before
discretionary transfers, for each fiscal year.
City’s Financing
Program. Implementation of the City
Financial Plan is dependent upon the City’s ability to
market its securities successfully. The City’s program for
financing capital projects for fiscal years 2000 through 2004
contemplates the issuance of $7.21 billion of general obligation
bonds and $7.33 billion of bonds to be issued by the New York
City Transitional Finance Authority (the “Transitional
Finance Authority”). The City’s financing program
assumes that the Governor will sign into law legislation passed
by the State Legislature increasing the financing capacity of
the Transitional Finance Authority by $4 billion, which would
provide sufficient capacity to continue the City’s capital
program through the end of the City’s Financial Plan in
fiscal year 2004. In addition, the Financial Plan anticipates
access to approximately $2.4 billion in financing capacity of
TSASC, Inc. (“TSASC”), which issues debt secured by
revenues derived from the settlement of litigation with tobacco
companies selling cigarettes in the United States. The
Transitional Finance Authority and TSASC were created to assist
the City in financing its capital program while keeping City
indebtedness within the forecast level of the constitutional
restrictions on the amount of debt the City is authorized to
incur.
In
addition, the City issues revenue notes and tax anticipation
notes to finance its seasonal working capital requirements (see
“Seasonal Financing Requirements” within). The
success of projected public sales of City, New York City
Municipal Water Finance Authority (the “Water
Authority”), Transitional Finance Authority, TSASC and
other bonds and notes will be subject to prevailing market
conditions. The City’s planned capital and operating
expenditures are dependent upon the sale of its general
obligation debt, as well as debt of the Water Authority,
Transitional Finance Authority and TSASC.
2000-2004 Financial Plan. On
June 15, 2000, the City released the Financial Plan for the 2000
through 2004 fiscal years, which relates to the City and certain
entities which receive funds from the City and which reflects
changes as a result of the City’s expense and capital
budgets for fiscal year 2001 (which begins July 1, 2000), which
were adopted on June 6, 2000. The Financial Plan projects
revenues and expenditures for the 2000 and 2001 fiscal years
balanced in accordance with GAAP, and project gaps of $2.6
billion, $2.7 billion and $2.7 billion for fiscal years 2002
through 2004, respectively, after implementation of a gap
closing program.
The
Financial Plan reflects a proposed discretionary transfer from
fiscal year 2000 to fiscal year 2001 primarily to pay debt
service due in fiscal year 2001 totaling $3.2 billion, a
proposed discretionary transfer from fiscal year 2001 to fiscal
year 2002 primarily to pay debt service due in fiscal year 2002
totaling $904 million and a proposed discretionary transfer from
fiscal year 2002 to fiscal year 2003 to pay debt service due in
fiscal year 2003 totaling $345 million.
In
addition, the Financial Plan sets forth gap-closing actions to
eliminate a previously projected gap for the 2000 and 2001
fiscal years and to reduce projected gaps for fiscal years 2002
through 2004. The gap-closing actions for the 2000 through 2004
fiscal years include: (i) additional City agency actions
totaling $337 million, $400 million, $210 million, $210 million
and $210 million for fiscal years 2000 through 2004,
respectively; (ii) assumed additional Federal and State actions
of $75 million in each of fiscal years 2001 through 2004, which
are subject to Federal and State approval; and (iii) proposed
productivity savings and reducing fringe benefits costs totaling
$250 million, $265 million, $280 million and $300 million in
fiscal years 2001 through 2004, respectively, to partly offset
the costs of the proposed merit pay program which is subject to
collective bargaining negotiations. The Financial Plan also
reflects a proposed tax reduction program totaling $418 million,
$735 million, $877 million and $1.1 billion in fiscal years 2001
through 2004, respectively, including elimination of the
commercial rent tax over three years commencing June 1, 2000 at
a cost of $97 million in fiscal year 2002, increasing to $430
million in fiscal year 2004; a 50% reduction in the 14% personal
income tax surcharge on July 1, 2000 at a cost of $329 million
in fiscal year 2001, increasing to $403 million in fiscal year
2004; the extension of current tax reductions for owners of
cooperative and condominium apartments at an annual cost of
approximately $200 million starting in fiscal year 2002; and
repeal of the $2 flat fee hotel occupancy tax effective December
1, 2000.
Assumptions. The 2000-2004
Financial Plan is based on numerous assumptions, including the
condition of the City’s and the region’s economies and
modest employment growth and the concomitant receipt of
economically sensitive tax revenues in the amounts projected.
The 2000-2004 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 2000
through 2004 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 (the “HHC”), the Board of Education (the
“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; adoption of the
City’s budgets by the City Council in substantially the
forms submitted by the Mayor; the ability of the City to
implement cost reduction initiatives, and 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 (see “Certain
Reports” within). 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 projects that the authorized number of City-funded
employees whose salaries are paid directly from City funds, as
opposed to Federal or State funds or water or sewer funds, will
increase from an estimated level of 215,878 on June 30, 2000 to
an estimated level of 216,687 by June 30, 2004, before
implementation of the gap-closing programs included in the
Financial Plan.
The
Reserve for Collective Bargaining contains funding for the cost
of a wage increase through a merit pay plan for City employees
which provides for salary increases based on merit as measured
by performance evaluations for two years after their collective
bargaining contracts expire in fiscal years 2000 and 2001,
contingent upon proposed productivity savings. The reserve does
not contain provisions for wage increases thereafter. The
reserve reflects a partial offset to these costs from such
productivity savings or fringe benefits cost containment that
are to be part of any future collective bargaining agreement.
Contracts covering the City’s workforce have expired or are
expected to expire in fiscal year 2001.
Intergovernmental Aid. The City
depends on aid from the State 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 projected; that, in future years, 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. The 2000-2004
Financial Plan assumes that all existing Federal and State
categorical grant programs will continue, unless specific
legislation provides for their termination or adjustment, and
assumes increases in aid where increased costs are projected for
existing grant programs.
The
City’s receipt of categorical aid is contingent upon the
satisfaction of certain statutory conditions and is subject to
subsequent audits, possible disallowances and possible prior
claims by the State or Federal governments. Substantial
disallowances of aid claims may be asserted during the course of
the 2000-2004 Financial Plan. The amount of such disallowances
attributable to prior years declined from $124 million in the
1977 fiscal year to $15 million in the 1999 fiscal year. As of
June 30, 1999, the City had an accumulated reserve of $205
million for future disallowances of categorical aid.
Certain Reports. The
City’s financial plans have been the subject of extensive
public comment and criticism. From time to time, the staff of
the New York State Financial Control Board (the “Control
Board”), 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 May
26, 2000, the City Comptroller issued a report on the financial
plan submitted to the Control Board on May 1, 2000 (the
“May Financial Plan”). With respect to fiscal years
2001 through 2004, the report identified baseline risks of
between $214 million and $1.0 billion, $678 million and $1.3
billion, $867 million and $1.6 billion and $1.3 billion and $2.2
billion, respectively, depending upon whether (i) the City
achieves the productivity savings in collective bargaining
negotiations of between $250 million and $300 million annually
assumed in the May Financial Plan; (ii) the City incurs labor
costs exceeding those assumed in the May Financial Plan by
between $34 million and $116 million, $22 million and $216
million, $382 million and $740 million and $816 million and $1.3
billion in fiscal years 2001 through 2004, respectively,
depending upon whether labor contracts are settled at the rate
of local inflation or consistent with new labor contracts
negotiated between the State and the Civil Service Employees
Contract; (iii) the City receives an additional $100 million
annually of assumed State and Federal aid; and (iv) the sale of
the New York Coliseum is completed in fiscal year
2001.
Additional risks identified in the report for fiscal years
2001 through 2004 include assumed payments from the Port
Authority relating to the City’s claim for back rental,
which are the subject of arbitration, possible increased
overtime expenditures and the writedown of outstanding education
aid receivables of between $75 million and $123 million in each
of fiscal years 2002 through 2004. In addition, the report
identified risks and uncertainties including proposals to
enhance employee and retiree pension benefits and the
possibility of an economic slowdown, and noted that when the
Federal Reserve increased interest rates in 1994 the City had to
revise its tax revenue forecast by $500 million during fiscal
year 1995, reflecting lower securities industry
profits.
On August
25, 1998, the City Comptroller issued a report reviewing the
current condition of the City’s major physical assets and
the capital expenditures required to bring them to a state of
good repair. The report’s findings relate only to current
infrastructure and do not address future capacity or technology
needs. The report estimated that the expenditure of
approximately $91.83 billion would be required over the next
decade to bring the City’s infrastructure to a systematic
state of good repair and address new capital needs already
identified. The report stated that the City’s current
Ten-Year Capital Strategy, together with funding received from
other sources, is projected to provide approximately $52.08
billion. The report noted that the City’s ability to meet
all capital obligations is limited by law, as well as funding
capacity, and that the issue for the City is how best to set
priorities and manage limited resources.
On June
1, 2000, the staff of the OSDC issued a report that noted that
current State law, which permits property owners of income
producing property to use sales prices of real property as
evidence of unequal assessments, could significantly increase
the City’s liability in tax certiorari cases. The report
also noted that the Metropolitan Transportation Authority
(“MTA”) has proposed a $18.1 billion capital program
and released its five-year operating budget, which showed a
cumulative funding shortfall of $4.4 billion and noted that the
MTA refinancing and borrowing programs will rely, to an
unprecedented degree, on debt and that the MTA has yet, (as of
June 21, 2000) to explain how it will close the $4.4 billion
projected budget gap. With respect to possible wage increases,
the report further noted that recent agreements with the Civil
Service Employees Association and the Transport Workers Union
increased compensation by about twice the projected rate of
inflation.
On May
23, 2000, the staff of the Control Board issued a report
reviewing fiscal year 2000. The report noted that the City will
end fiscal year 2000 with its budget in balance. However, the
report noted that large gaps continue to exist in the 2002
through 2004 fiscal years.
On May
15, 2000, the IBO released a report providing its analysis of
the May Financial Plan. The report estimated a potential surplus
of $553 million in fiscal year 2001 and potential gaps of $1.5
billion, $2.0 billion and $2.2 billion for fiscal years 2002
through 2004, respectively. Uncertainties identified in the
report include collection of projected rent payments for the
City’s airports and higher estimates of City-funded
spending for Medicaid, public assistance, education and
overtime.
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 City has issued $750 million of
short-term obligations in the 2000 fiscal year to finance the
City’s cash flow needs for the 2000 fiscal year. The City
issued $500 million of short-term obligations in the 1999 fiscal
year to finance the City’s cash flow needs for the 1999
fiscal year. 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 June 21, 2000,
Moody’s rated the City’s outstanding general
obligation bonds A3, Standard & Poor’s rated such bonds
A- and Fitch rated such bonds A. On July 10, 1995, Standard
& Poor’s revised its ratings on City bonds downward to
BBB+. On July 16, 1998, Standard & Poor’s revised its
rating of City bonds upward to A-. Moody’s rating of City
bonds was revised in February 1998 to A3 from Baa1. On March 8,
1999, Fitch revised its rating of City bonds upward to A. Such
ratings reflect only the views of Moody’s, Standard &
Poor’s and Fitch. There is no assurance that such ratings
will continue for any given period of time or that they
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. Other factors will
affect issuers. The summary is based primarily upon one or more
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 Trust 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. North Carolina derives most of its revenue
from taxes, including individual income tax, corporation income
tax, sales and use taxes, corporation franchise tax, alcoholic
beverage tax, and insurance tax, tobacco products tax. State
sales taxes on food, as well as the inheritance and soft drink
taxes, are 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 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.
Fiscal
year 1998 ended with a positive General Fund balance of
approximately $1,662 million. Along with additional reserves,
$21.6 million was reserved in the Savings Reserve, and $55
million was reserved to fund public school employee performance
bonuses, longevity payments, school bus purchases and purchases
of additional school technology. $145 million was placed in the
Reserve for Repairs and Renovations of State Facilities
(bringing the total reserve to $174.2 million), and $47.4
million was placed in the reserve for the Clean Water Management
Trust Fund. After additional reserves, the unreserved General
Fund balance at the end of fiscal year 1998 was approximately
$101 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, 1997 and 1998 was $1,703.9 million and
$1,669.7 million, respectively.
On
October 28, 1998, the North Carolina General Assembly adopted
the biennium budget for 1998 to 2000. The $12.6 billion budget
for fiscal year 1999 included over $100 million in new spending
for the state’s universities and community colleges, over
$90 million in new spending for health and human services,
including $42.5 million for expansion of North Carolina’s
Smart Start program for preschool children, and almost $30
million in new spending on law enforcement. The legislature also
approved teacher pay raises averaging 6.5%.
On June
30, 1999, the General Assembly adopted a $13.5 billion budget
for fiscal year 1999-2000, an increase of 4.6% percent from the
previous year, with no new taxes or tax relief. Primarily
focusing on education, the General Assembly authorized 7.5%
raises for teachers in the public schools and salary and tuition
increases at community colleges and universities. Additionally,
the General Assembly allocated $30 million to the Clean Water
Management Trust Fund to provide grants and loans to local
governments to clean up and protect rivers and streams and to
preserve open spaces.
The
General Assembly also took action to reduce some taxes,
including elimination of the sales tax on food (estimated cost
$185.5 million in fiscal years 1999-2000) and the inheritance
tax (estimated cost $52.5 million in fiscal years
1999-2000).
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 the 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 has
announced that the State’s seasonally adjusted unemployment
rate in September 1999 was 3.1% of the labor force, as compared
with an unemployment rate of 4.2% 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.
Patton
v. State of North Carolina and Bailey v. State of North
Carolina—State Tax Refunds—Federal and 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 the
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.
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. 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.
In June
1998, the plaintiff classes in the Bailey and
Patton cases reached a tentative settlement with the
State of North Carolina. Under the terms of the settlement, the
General Assembly will appropriate $400 million in the 1998-1999
fiscal year, and $399 million by July 15, 1999 in the 1999-2000
fiscal year, to a settlement fund. Amounts in the fund will be
paid to the state, local and federal retirees in the cases. The
terms of the settlement provide that such payments will
completely extinguish all of the State’s liability to the
retirees arising from the taxation of state, local and federal
retirement income and benefits from 1989 through
1997.
The
tentative court settlement was made subject to the appropriation
of funds by the General Assembly and to court approval following
notice to the class members. The $400 million appropriation was
made by action of the General Assembly in September 1998, and on
October 7, 1998, the court entered an order approving the
settlement. The final $399 million appropriation was made by
action of the General Assembly in June 1999.
Smith
et. al. v. State of North Carolina—State Tax
Refunds—Intangibles Tax. On February
21, 1996, the U.S. Supreme Court declared North Carolina’s
intangibles tax unconstitutional. Subsequently, the State
refunded intangibles taxes paid by all persons who had paid such
taxes under protest in compliance with the state’s tax
refund statute. In the Smith case, refunds were sought by
a class of taxpayers who had not complied with the tax refund
statute. On December 4, 1998, the Supreme Court ruled that North
Carolina will have to pay these refunds. Refunds to
non-protesters will total approximately $233 million plus
interest of approximately $100 million. In July 1999, the
General Assembly authorized the appropriation of $440 million
over the next two years to pay such refunds, and a tentative
court settlement made subject to such appropriations was
approved. An initial $200 million was made by action of the
General Assembly on July 21, 1999. In order to achieve final
consummation of the settlement, the General Assembly must
appropriate an additional $240 million amount for such refunds
no later than July 10, 2000.
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). In March
1999, the State again issued an additional $450 million of the
authorized school bonds (Public School Building Bonds). The
offering of the remaining $1.15 billion of these authorized
bonds is anticipated to occur over the next two to four
years.
On
November 3, 1998, North Carolina voters approved the issuance of
$800 million in clean water bonds and $200 million in natural
gas facilities bonds. The clean water bonds will provide grants
and loans for needed water and sewer improvement projects for
the State’s municipalities, and fund programs to reduce
pollution in the State’s waterways. The natural gas bond
issue will provide grants, loans and other financing for local
distribution companies or state or local government agencies to
build natural gas facilities, in part to help attract industry
to the State’s rural regions. In September 1999, the State
issued a total of $197.4 million of authorized clean water bonds
and natural gas facilities bonds, $177.4 million of which were a
combination of clean water bonds and natural gas facilities
bonds and $20 million of which were solely natural gas
facilities bonds. In October 1999, the State issued an
additional $2.6 million of authorized clean water
bonds.
Hurricane
Floyd struck North Carolina on September 16, 1999, causing
significant flood and wind damage and some loss of life. The
effects of the storm and its aftermath have been, and continue
to be, felt in the eastern part of the State. Federal and State
disaster recovery and relief efforts are ongoing to assist
victims of the storm.
The final estimate of property damage caused by the storm and its
aftermath has not yet been determined but is expected to exceed
the $6 billion of damages caused by Hurricane Fran in
1996.
In the
opinion of the Offices of the Governor and the State Treasurer,
notwithstanding the devastation caused by Hurricane Floyd, the
storm and its consequences should not have a material adverse
impact upon the ability of the State to meet its financial
obligations, including timely payment of principal and interest
on the Bonds.
Currently, Moody’s, Standard & Poor’s and
Fitch rate North Carolina general obligation bonds Aaa, AAA, and
AAA, respectively.
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
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 Trust has not
independently verified the information.
The State
of Ohio (sometimes referred to herein as 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 (“BSF”) for purposes of cash
management.
The GRF
ending fund and cash balances for the State’s 1984-85
through 1998-99 bienniums were as follows:
Biennium
|
|
Beginning
July 1
|
|
Ending
June 30
|
|
Ending Fund
Balance
(In Thousands)
|
|
Ending Cash
Balance
(In Thousands)
|
| 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 |
| 1998-99 |
|
1997 |
|
1999 |
|
976,778 |
|
1,512,528 |
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, 1992: 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 administration
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 totaling 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.
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, provided
approximately for total GRF expenditures of $36.1 billion, an
increase of 7.8% over the previous appropriations act. The Act
increased spending for primary and secondary education, higher
education, and rehabilitation and corrections, and provided for
a 4.5% personal income tax reduction in 1998. The biennium
ending GRF balances were $1,512,528,000 (cash) and $976,778,000
(fund). Of the fund balance, legislation directed $325,700,000
to school building assistance, $293,185,000 to the State income
tax reduction fund $85,400,000 to SchoolNet (a program to supply
computers for classrooms), $46,374,000 to the BSF and $4,600,000
to interactive video distance learning. Following the transfer,
the BSF balance increased to $953,291,000.
The GRF
appropriations acts for the current 2000-2001 biennium (one for
all education purposes and one for general GRF purposes) were
passed on June 24 and June 28, 1999, respectively, and promptly
signed (after selective vetoes) by the Governor. Those acts
provided for total GRF biennial expenditures of over $39.8
billion with major program expenditure increases in primary and
secondary eduction (16.9%), higher education (12.6%) mental
health and mental retardation (4.3%) and adult and juvenile
corrections (18%).
OMB is
projecting a positive June 30, 2000 fund balance of $412.7
million.
Litigation pending 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. ODHS appealed an
order of the Federal court directing it to provide notice to
persons potentially affected by the former rules from 1990
through 1995, and the Court of Appeals has ruled in favor of
ODHS. Plaintiffs’ petition for certiorari was not granted
by the U.S. Supreme Court. As to the Court of Claims case, it is
not possible to state 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
would be approximately $240 million. On April 15, 1999, the
Court of Claims decertified the action there as a class action
but on appeal, in April 2000, an Ohio Court of Appeals reversed
the Court of Claims grant of the motion to
decertify.
Because
GRF cash receipts and disbursements do not precisely coincide,
temporary GRF cash flow deficiencies may occur in some months,
particularly the middle months, of a Fiscal Year. Statutory
provisions provide for effective management by permitting the
adjustment of payment schedules (as was done during some prior
Fiscal Years) and the use of a “Total Operating Fund”
(“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). 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.
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 $743.14 million being the highest) to
four months in Fiscal Year 1995 and 1997 (the highest being
$565.741 million). OBM reports the GRF had cash flow
deficiencies in five months of Fiscal Year 1998 (the highest
being $742.059 million), and in six months of Fiscal Year 1999
(the highest being $497.677 million).
GRF cash flow
deficiencies have been and are projected by OBM to be within the
TOF limitations discussed above.
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 611 public school
districts and 49 joint vocational school districts receive a
major portion (less than 50% in Fiscal Year 1999) 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. School
districts also rely heavily upon receipts from locally voted
taxes. In part because of provisions of some State laws, such as
that partially limiting the increase (without further vote of
the local electorate) in voted property tax collections that
would otherwise result from increased assessed valuations, 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 in Ohio courts since 1991 questioning the
constitutionality of Ohio’s system of school funding and
compliance with the constitutional requirement that the State
provide a “thorough and efficient system of common
schools.” In May 2000, the Ohio Supreme Court in a 4-3
decision concluded, as it had in 1997, that the State, even
after crediting significant gubernatorial and legislative
steps in recent years, failed to comply with that requirement.
It set as general base threshold requirements that every school
district have enough funds to operate, an ample number of
teachers, sound and safe buildings, and equipment sufficient for
all students to be afforded an educational opportunity. The
court maintained continuing jurisdiction and has scheduled for
June 2001 further review of the State’s responses to its
ruling. With respect to funding sources, the Supreme Court
repeated its conclusion that property taxes no longer may be the
primary means of school funding in Ohio, noting that recent
efforts to reduce that historic reliance have been laudable but
in the Court’s view insufficient. The three dissenting
justices concluded generally, as they had in 1997, that
compliance with the constitutional requirement was a matter for
the legislative branch, not the State judiciary.
In its
1997 opinion, the Court had held that major aspects of the
system (including the Foundation Program and certain borrowing
programs) were not in compliance with the constitutional
requirement. On remand to hear evidence and opine on the
sufficiency of then intervening legislation and executive
actions, early in 1999 the trial court judge again concluded
that the State was not in compliance with the constitutional
requirements. The recent Supreme Court action was on an appeal
from that decision.
It is not
possible at this time to state what further actions may be taken
by the State to effect compliance, or what effect those actions
may have on the State’s overall financial
condition.
In
response to the ongoing litigation, the General Assembly has
significantly increased State funding for public schools, as
discussed below. In addition, at the November 1999 election
electors approved a constitutional amendment authorizing the
issuance of general obligation debt for school buildings and for
higher education facilities.
State
appropriations for primary and secondary education for the
current 2000-01 biennium are $13.3 billion or 15% over the
previous biennium and represent an increase of 7.6% in Fiscal
Year 2000 over 1999 and 7.6% in Fiscal Year 2001 over 2000.
Appropriations for school funding in recent bienniums were $11.6
billion in the 1998-99 biennium (18.3% increase), and $10.1
billion in the 1996-97 biennium (13.6% increase).
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 1994-95
biennium, $144,759,340 in the 1996-97 biennium, $100,800,000 in
the 1998-99 biennium and $23,700,000 in the 2000-01 biennium. A
recent settlement of one desegregation case significantly
reduces annual State payments.
The
State’s Constitution expressly provides that the State
General Assembly has no power to pass laws impairing the
obligations of contracts.
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.
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. In 1997, Ohio
ranked seventh in the nation with an estimated $320.5 billion in
gross state product (estimated to be $341 billion in 1998) and
was third in manufacturing with a value of $83.9 billion. As a
percent of Ohio’s 1997 gross state product, manufacturing
was responsible for 26%, with 18% attributable to the services
sector and 16% to the finance, insurance and real estate
sectors. Ohio is the eighth largest exporting state, with 1998
merchandise exports totaling an estimated $27.1 billion. The
State’s two leading export industries are transportation
equipment and industrial machinery, which together account for
53% of the value of Ohio’s merchandise exports. 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) based on 1999 revenues
as reported in 2000 by Fortune magazine, 28 had headquarters in
Ohio, placing Ohio tied for fifth as a corporate
“headquarters” state. 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 has reached a new high in 1998.
Growth in recent years has been concentrated among
nonmanufacturing industries, with manufacturing employment
tapering off since its 1969 peak. Nonmanufacturing industries
now employ approximately 80% of all nonagricultural payroll
workers in Ohio. Historically, the average monthly unemployment
rate in Ohio has been higher than the average figures for the
United States, although in recent years, the average
unemployment rate in Ohio has been lower than the national rate.
Ohio was 4.2%, below the national rate of 4.3% (seasonally
unadjusted) for March 2000.
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 1997 population was estimated
at 11,186,000, still seventh among the United
States.
As of the
date of this Statement of Additional Information, the
State’s general obligation bonds are rated Aa1, AA+ and AA+
by Moody’s, Standard & Poor’s and Fitch,
respectively.
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 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
Trust 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.
The
five-year period ending with fiscal 1999 was a time of economic
growth with modest rates of growth at the beginning of the
period and larger increases during the most recent years.
Throughout the period, inflation remained relatively low,
helping to restrain expenditure growth. Favorable economic
conditions helped total revenues and other sources rise at an
average annual rate of 5.8% (6% on a “GAAP” basis)
during the five-year period. Taxes increased at an average
annual rate of 4.3% (4.2% on a “GAAP” basis) during
the period. Expenditures and other uses during the fiscal 1995
through fiscal 1999 period rose at a 4.8% (5% on a
“GAAP” basis) average annual rate.
The fund
balance at June 30, 1999 totaled $2,863.4 million, an increase
of $905 million over the $1,958.9 million balance at June 30,
1998. The fiscal 1999 year-end unreserved-undesignated balance
of $1,235.7 million is the largest balance recorded since GAAP
reporting was instituted in 1984 for the
Commonwealth.
Operations during the 1998 fiscal year increased the
unappropriated balance of Commonwealth revenues during that
period by $86.4 million to $488.7 million at June 30, 1998
(prior to reserves for transfer to the Tax Stabilization Reserve
Fund). Higher than estimated revenues, offset in part by
increased reserves for tax refunds, and by slightly lower
expenditures than budgeted were responsible for the increase.
Transfers to the Tax Stabilization Reserve Fund for fiscal 1998
operations total $223.3 million consisting of $73.3 million
representing the required transfer of 15% of the ending
unappropriated surplus balance, plus an additional $150 million
authorized by the General Assembly when it enacted the fiscal
1999 budget. With these transfers, the balance in the Tax
Stabilization Reserve Fund exceeds $668 million and represent
3.7% of fiscal 1998 revenues.
Commonwealth revenues (prior to tax refunds) during the
fiscal year totaled $18,123.2 million, $676.1 million (3.9%)
above the estimate made at the time the budget was enacted. Tax
revenue received in fiscal 1998 grew 4.8% over tax revenues
received during fiscal 1997. This rate of increase includes the
effect of legislated tax reductions that affected receipts
during both fiscal years and therefore understates the actual
underlying rate of growth of tax revenue during fiscal
1998.
Expenditures from all fiscal 1998 appropriations of
Commonwealth revenues (excluding pooled financing expenditures
and net of current year lapses) totaled $17,229.8 million. This
represents an increase of 4.5% over fiscal 1997 appropriation
expenditures. Lapses of appropriation authority during the
fiscal year totaled $161.8 million including $58.8 million from
fiscal 1998 appropriations. These appropriation lapses were used
to fund $120.5 million of supplemental fiscal 1998
appropriations.
For GAAP
purposes, assets increased $705.1 million and liabilities rose
by $111.1 million during the fiscal year. These changes
contributed to a $310.3 million dollar rise in the
undesignated-unreserved balance for June 30, 1998 to $497.6
million.
The 1999
fiscal year ended with an unappropriated surplus (prior to
transfers) of $702.9 million, an increase of $214.2 million from
June 30, 1998. Transfers to the Tax Stabilization Reserve Fund
totaled 255.4 million for fiscal 1999 consisting of $105.4
million representing the statutory 15% of fiscal year-end
unappropriated surplus and an additional $150 million from the
unappropriated surplus authorized by the General Assembly. The
$447.5 million balance of the unappropriated surplus was carried
over to fiscal year 2000. The higher unappropriated surplus was
generated by tax revenues that were $712 million (3.9%) above
estimate and $61 million of non-tax revenue (18.4%) above
estimate. Higher than anticipated appropriation lapses also
contributed to the higher surplus. A portion of the higher
revenues and appropriation lapses were used for supplemental
fiscal 1999 appropriations totaling $357.8 million. These
supplemental appropriations represent expected one-time
obligations. Including the supplemental appropriations and net
of appropriation lapses, expenditures for fiscal 1999 totaled
$18,144.9 million, a 5.9% increase over expenditures during
fiscal 1998.
For GAAP
purposes, assets increased $1,024 million in fiscal 1999 and
liabilities rose $119.5 million. The increase in assets over
liabilities for fiscal 1999 caused the fund balance as of June
30, 1999 to increase by $904.5 million over the fund balance as
of June 30, 1998. The total fund balance as of June 30, 1999 was
$2,863.4, the largest fund balance since audited GAAP reporting
was instituted in 1984.
The
General Fund budget for the 2000 fiscal year was approved by the
General Assembly in May 1999. The adopted budget includes
estimated spending of $19,061.5 million and estimated revenues
(net of estimated tax refunds and enacted tax changes) of
$18,699.9 million. Funds to cover the $361.6 million difference
between estimated revenues and projected spending will be
obtained from a draw down of the projected fiscal 1999 year-end
balance.
The
estimate of Commonwealth revenues for fiscal year 2000 is based
on an economic forecast for real gross domestic product of grow
at a 1.4% rate from the second quarter of 1999 to the second
quarter of 2000. Growth of real gross domestic product is
expected to be restrained by a slowing of the rate of consumer
spending to a level consistent with personal income gains and by
smaller gains in business investment in response to falling
capacity utilization and profits. Slowing economic growth is
expected to cause the unemployment rate to rise through the
fiscal year but inflation is expected to remain moderate. Trends
for the Pennsylvania economy are expected to maintain their
close association with national economic trends. Personal income
growth is anticipated to remain slightly below that of the U.S.
while the Pennsylvania unemployment rate is anticipated to be
very close to the national rate.
Commonwealth revenues (excluding the estimated cost of the
enacted tax reductions) are projected to increase by 2.8% over
fiscal 1999 receipts. Appropriates from Commonwealth funds are
budgeted to increase by 3.8% over revised fiscal 1999
appropriations.
Subsequent to the enactment of the fiscal 2000 budget,
$153.6 million of additional appropriations were authorized. In
addition, the need for additional appropriations during the
fiscal year of approximately $58.5 million has been identified.
All additional appropriations are anticipated to be able to be
funded from lapses of appropriation authority during the fiscal
year.
According
to a Pennsylvania Department of Revenue News Release dated May
31, 2000, the state collected $1.8 billion in General Fund
revenues in May 2000, $200.6 million (12.5%) more than
anticipated. Fiscal year-to-date General Fund collections total
$18.4 billion, which is $784.5 million (4.5%) more than
anticipated.
The
fiscal 2001 enacted budget for the General Fund is $19.9
billion, an increase of $475.5 million or 2.4%. The budget
includes $775 million of tax reductions to help working families
and to stimulate job creation and retention.
Pennsylvania is
the fifth most populous state, behind California, New York,
Texas and Florida. Pennsylvania has 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 economic
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
year period that ended in 1998 increased at an annual rate of
0.75%. This compares to a 0.29% rate for the Middle Atlantic
region and a 1.72% rate for the United States as a whole during
the period 1989 through 1998. For the five years ended with
1998, employment in the Commonwealth has increased 7.0%. The
growth in employment during this period is higher than the 2.7%
growth in the Middle Atlantic region.
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 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, 1999, the
Commonwealth had $4,924.5 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”), a state-created
agency 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,
leases, real 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 payable by
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 a statutory or moral
obligation of the Commonwealth. Some of these agencies, however,
are indirectly dependent on Commonwealth operating
appropriations. In addition, the Commonwealth may choose to take
action to financially assist these organizations. The
Commonwealth also maintains pension plans covering all state
employees, public school employees and employees of certain
state-related organizations.
The
Pennsylvania Intergovernmental Cooperation Authority (the
“PICA”) was created by Commonwealth legislation in
1991 to assist Philadelphia in remedying fiscal emergencies.
PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to
Philadelphia concerning its budgetary and fiscal affairs. At
this time, Philadelphia is operating under a five year fiscal
plan approved by PICA on June 15, 1999.
No further bonds
are to be issued by PICA for the purpose of financing a capital
project or deficit as the authority for such bond sales expired
December 31, 1994. PICA’s authority to issue debt for the
purpose of financing a cash flow deficit expired on December 31,
1996. Its ability to refund existing outstanding debt is
unrestricted. PICA had $1,014.1 million in Special Revenue bonds
outstanding as of June 30, 1999.
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, some of which, if decided
adversely to the Commonwealth could have a material adverse
impact on governmental operations.
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:
Dom
Giordano v. Tom Ridge, Governor, et al.
In
February 1999, Dom Giordano filed a petition for review
requesting the Commonwealth Court declare that Chapter 5
(relating to sports facilities financing) of the Capital
Facilities Debt Enabling Act (“the Act”) violates the
Pennsylvania Constitution. The Commonwealth Court dismissed the
petitioner’s action with prejudice. The petitioner has
appealed the Commonwealth Court’s ruling to the Supreme
Court.
County
of Allegheny v. Commonwealth of Pennsylvania
In
December 1987, the Supreme Court of Pennsylvania held in
County of Allegheny’s Commonwealth of Pennsylvania,
that the statutory scheme for county funding of the judicial
system is in conflict with the Pennsylvania Constitution.
However, the Supreme Court of Pennsylvania stayed its judgment
to afford the General Assembly an opportunity to enact
appropriate funding legislation consistent with its opinion and
ordered that the prior system of county funding shall remain in
place until this is done.
The Court
appointed a special master to devise and submit a plan for
implementation. The Interim Report of the Master
recommended a four phase transition to state funding of a
unified judicial system, during each of which specified court
employees would transfer into the state payroll system. On April
22, 1998, the General Assembly enacted the General Appropriation
Act of 1998, including an appropriation to the Supreme Court of
approximately $12 million for funding county court
administrators. This appropriation was designed to enable the
Commonwealth to implement Phase I. Release of the funding was
delayed until substantive legislation could be enacted to
facilitate the employees’ transfer to State employment. A
similar appropriation was made by the General Appropriation Act
of 1999. Thereafter, on June 22, 1999, the Governor approved Act
1999-12 under which approximately 165 county-level court
administrators are to become employees of the Commonwealth. Act
12 also triggered the release of the appropriations that had
been made for this purpose in 1998 and 1999.
Pennsylvania Association of Rural and Small Schools
(PARSS) v. Ridge
In 1991,
an association of rural and small schools and several parties
filed a lawsuit against the Governor and Secretary of Education,
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 United States District Court for the
Middle District of Pennsylvania. The federal court case has been
indefinitely stayed pending resolution of the state court
case.
The
Commonwealth Court held that Pennsylvania’s system for
funding public schools is constitutional under both the
education clause and the equal protection clause of the
Pennsylvania Constitution. On October 1, 1999, the Pennsylvania
Supreme Court affirmed the Commonwealth Court decision. In
December 1999, the Supreme Court denied the petitioner’s
motion for reconsideration. The parallel federal action remains
pending.
Ridge v.
State Employees’ Retirement Board
On
December 29, 1993, Joseph H. Ridge, a former judge of the
Allegheny Court of Common Pleas, filed suit in the Commonwealth
Court 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. Due
to the constitutional nature of the claim, it is possible that 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).
In 1996, the Commonwealth Court heard oral arguments en
banc on Judge Ridge’s motion for judgment on the
pleadings. In February 1997, the Commonwealth Court denied Judge
Ridge’s motion for judgment on the pleadings. The case is
currently in discovery.
Powell
v. Ridge
In March
1998, several residents of the City of Philadelphia on behalf of
themselves and their school-aged children, along with the School
District of Philadelphia, the Philadelphia Superintendent of
Schools, the Chairman of the Philadelphia Board of Education,
the City of Philadelphia, the Mayor of Philadelphia, and several
membership organizations interested in the Philadelphia public
schools, brought suit in the United States District Court for
the Eastern District of Pennsylvania against the Governor, the
Secretary of Education, the chairman of the State Board of
Education, and the State Treasurer. The plaintiffs claim that
the Commonwealth’s system for funding public schools has
the effect of discriminating on the basis of race and violates
Title VI of the Civil Rights Act of 1964. The plaintiffs asked
the court to declare the funding system to be illegal, to enjoin
the defendants from violating the regulation in the future and
to award counsel fees and costs.
The
Philadelphia Federation of Teachers intervened on the side of
the plaintiffs, while several leaders of the Pennsylvania
General Assembly intervened on the side of the defendants. In
addition, the U.S. Department of Justice intervened to defend
against a claim made by the legislator intervenors that a
statute waiving states’ immunity under the Eleventh
Amendment to the U.S. Constitution for Title VI claims is
unconstitutional.
The
District Court found that the plaintiffs had failed to state a
claim under the Title VI regulation at issue or under 42 U.S.C.
§1983 and dismissed the action in its entirety with
prejudice. The plaintiffs appealed. In August 1999, the U.S.
Court of Appeals for the Third Circuit reversed the District
Court’s dismissal of the action and remanded the case for
further proceedings including the filing of an answer. The
defendants and legislator intervenors filed petitions for writ
of certiorari with the U.S. Supreme Court. In December 1999, the
Supreme Court denied the petitions.
In the
District Court, the parties are beginning the process of
discovery and the development of a case management
plan.
PPG
Industries, Inc. v. Commonwealth of Pennsylvania
PPG
Industries challenged the Department of Revenue’s
application of the manufacturing exemption from the capital
stock/franchise tax to PPG’s headquarters in Pittsburgh,
which allowed the exemption only from that portion of PPG’s
headquarters property and payroll attributable to manufacturing
in the Commonwealth. PPG argued that it is entitled to the
exemption for all of its headquarters property and payroll
attributable to manufacturing, regardless of where the
manufacturing takes place. The Commonwealth successfully
defended PPG’s challenge in the Commonwealth
Court.
On
PPG’s appeal, however, the Pennsylvania Supreme Court
reversed the Commonwealth Court, holding that the manufacturing
exemption facially discriminates against interstate commerce.
The Supreme Court remanded the case to Commonwealth Court to
determine whether the capital stock/franchise tax is a
“compensatory tax” justifying the discrimination, or,
failing that, to recommend to the Supreme Court a remedy for the
discrimination.
Following briefing
and argument by the parties, the Commonwealth Court issued its
determination November 30, 1999. After taking judicial notice
that the General Assembly is considering legislation to deal
with this issue, the Court recommended the following to the
Supreme Court: (1) for the duration of the contested period,
invalidate the exemption’s “within the state”
restriction, but only in the limited “headquarters
context,” and (2) prospectively, invalidate the exemption
in its entirety, leaving to the General Assembly the task of
amending the statute to restore any exemption it chooses to
adopt in a constitutional manner.
The
General Assembly subsequently enacted amendments to the Tax
Reform Code of 1971, which are intended to cure the
constitutional infirmity.
In
response to the Commonwealth Court’s recommendation, the
Supreme Court set up a briefing schedule and briefs have been
filed. Action by the Supreme Court is pending.
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”.
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:
MIG
1/VMIG 1
|
This
designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
|
MIG
2/VMIG 2
|
This
designation denotes high quality. Margins of protection are
ample although not so large as in the preceding
group.
|
MIG
3/VMIG 3
|
This
designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength
of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to
be less well established.
|
MIG
4/VMIG 4
|
This
designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
|
SG
|
This
designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
|
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 supporting institutions) have a superior
ability for repayment of short term debt obligations. Prime-1
repayment ability will often be evidenced by many of 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 supporting institutions) have a strong ability
for repayment of short term debt 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 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.
Issue
credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor’s from other
sources Standard & Poor’s 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 the 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.
|
Long
Term Issue Credit Ratings
| AAA |
An
obligation 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 |
An
obligation 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.
|
| A |
|
An
obligation rated ‘A’ is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
|
| BBB |
|
An
obligation 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
B
CCC
CC
C
|
|
Obligations rated ‘BB,’ ‘B,’
‘CCC,’ ‘CC’ and ‘C’ are regarded
as having significant speculative characteristics.
‘BB’ indicates the least degree of speculation and
‘C’ the highest degree of speculation. While such
obligations will likely have some quality and protective
characteristics, these may be outweighed by large
uncertainties or major exposures to adverse
conditions.
|
|
| BB |
|
An
obligation rated ‘BB’ is less vulnerable to
nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions, which could lead to the
obligor’s inadequate capacity to meet its financial
commitment on the obligation.
|
| B |
|
An
obligation rated ‘B’ is more vulnerable to
nonpayment than obligations rated ‘BB’, but the
obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s
capacity or willingness to meet its financial commitment on
the obligation.
|
| CCC |
|
An
obligation rated ‘CCC’ is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its
financial commitment on the obligation.
|
| CC |
|
An
obligation rated ‘CC’ is currently highly vulnerable
to nonpayment.
|
| C |
|
The
‘C’ rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being
continued.
|
| D |
|
An
obligation 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
designation 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.
Ÿ
|
Amortization schedule—the larger the final
maturity relative to other maturities, the more likely it will
be treated as a note; and
|
Ÿ
|
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.
|
|
c |
The
‘c’ subscript is used to provide additional
information to investors that the bank may terminate its
obligation to purchase tendered bonds if the long term credit
rating of the issuer is below an investment-grade level and/or
the issuer’s bonds are deemed taxable.
|
|
p |
The
letter ‘p’ indicates that the rating is provisional.
A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely
dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality
subsequent to the completion of the project, makes no comment
on the likelihood of or the risk of default upon failure of
such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
|
|
* |
Continuance of the ratings is contingent upon Standard
& Poor’s receipt of an executed copy of the escrow
agreement or closing documentation confirming investments and
cash flows.
|
|
r |
The
‘r’ highlights derivative, hybrid, and certain other
obligations that Standard & Poor’s believes may
experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples of such
obligations are securities with principal or interest return
indexed to equities, commodities, or currencies; certain swaps
and options; and interest-only and principal-only mortgage
securities. The absence of an ‘r’ symbol should not
be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
|
| N.R. |
|
Not
rated. Debt obligations of issuers outside the United States
and its territories are rated on the same basis as domestic
corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
|
Description of Fitch IBCA, Duff & Phelps
(“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 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
CC
C
|
High
Default Risk. Default is a real
possibility. Capacity for meeting financial commitments is
solely reliant upon sustained, favorable business or economic
developments. A “CC” rating indicates that default
of some kind appears probable. “C” ratings signal
imminent default.
|
| DDD
DD
D
|
Default. Securities are
not meeting current obligations and are extremely speculative.
“DDD” designates the highest potential for recovery
of 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.
|
| 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.
|
Description of Fitch’s Commercial Paper
Ratings
|
F1+
F1
F-
|
|
Highest credit
quality. Indicates the best
capacity for timely payment of financial commitments; may have
an added “+” to denote any exceptionally strong
credit feature.
|
|
|
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.
|
|
Notes:
“+” or “-“ may be appended to a rating
to denote relative status within major rating categories. Such
suffixes are not added 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.
Rating
Alert: Ratings are placed on Rating Alert 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. Rating Alert is typically resolved over a relatively
short period.
CODE # 16 817-06-00
PART
C. OTHER INFORMATION
ITEM
23. Exhibits.
Exhibit
Number
|
|
|
|
Description
|
| 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 Arizona Municipal Money
Fund (the “Fund”) as a series of the
Registrant.(a) |
| 2. |
|
|
— |
|
By-Laws
of the Registrant.(a) |
| 3. |
|
|
— |
|
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) |
| 4. |
(a) |
|
— |
|
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) |
| 5. |
|
|
— |
|
Distribution Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.(a) |
| 6. |
|
|
— |
|
None. |
| 7. |
|
|
— |
|
Form of
Custody Agreement between the Registrant and State Street Bank
and Trust
Company.(a) |
| 8. |
(a) |
|
— |
|
Form of
Amended Transfer Agency, Shareholder Servicing Agency and
Proxy Agency
Agreement between the Registrant and Financial Data Services,
Inc. (formerly known as
Merrill Lynch Financial Data Services, Inc.)(a) |
| |
(b) |
|
— |
|
Form of
Cash Management Account Agreement.(a) |
| 9. |
|
|
— |
|
Opinion
of Brown & Wood LLP
, counsel for the Registrant.(d) |
| 10. |
|
|
— |
|
Consent
of Deloitte & Touche LLP
, independent auditors for the Registrant. |
| 11. |
|
|
— |
|
None. |
| 12. |
|
|
— |
|
Certificate of Fund Asset Management,
L.P.(a) |
| 13. |
|
|
— |
|
Distribution and Shareholder Servicing Plan between the
Registrant and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.(a) |
| 14. |
|
|
— |
|
None. |
| 15. |
|
|
— |
|
Code of
Ethics.(e) |
(a)
|
Filed
on July 31, 1995 as an exhibit to Post-Effective Amendment No.
3 to Registrant’s Registration Statement (the
“Registration Statement”) on Form N-1A.
|
(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. 3 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. 3 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. 3 to the Registration
Statement.
|
(c)
|
Filed
on July 29, 1994 as an exhibit to Post-Effective Amendment No.
2 to the Registration Statement.
|
(d)
|
Filed
on July 27, 1999 as Exhibit 9 to Post-Effective Amendment No.
8 to the Registration Statement.
|
(e)
|
Incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 8 to the Registration Statement
on Form N-1A of Merrill Lynch Middle East/Africa Fund, Inc.
(File No. 811-07155), filed on March 29, 2000.
|
Reference
is made to the Registration Statements under the Securities Act
of 1933 on Form N-1A in connection with exhibits relating to CMA
California Municipal Money Fund (File No. 33-20580), 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
24. Persons Controlled by or under
Common Control with Registrant.
The
Registrant is not controlled by, or under common control with,
any person.
Item
25.
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 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.”
|
Insofar
as the conditional advancing of indemnification monies for
actions based upon the Investment Company Act 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 distributors and each person, if any, who controls
the Distributors within the meaning of the Securities Act of
1933 (the “1933 Act”), against certain types of civil
liabilities arising in connection with the Registration
Statement or Prospectus.
Insofar
as indemnification for liabilities arising under the 1933 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 principal underwriter in connection with the
successful defense of any action or proceeding) is asserted by
such Trustee, officer or controlling person or the principal
underwriter in connection with 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
26. Business and Other Connections of
the Manager.
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 Fund, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust,
Master Internet Strategies Trust, Master Focus Twenty Trust,
Master Large Cap Series Trust, Master Premier Growth 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
U.S. Government Mortgage Fund, 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 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., Debt Strategies Fund
III, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch
Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund
II, Inc., MuniHoldings California Insured Fund V, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund V, MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II,
Inc., MuniHoldings Insured Fund III, Inc., MuniHoldings Insured
Fund IV, Inc., MuniHoldings Michigan Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund IV, Inc., MuniHoldings New York Insured
Fund, Inc., MuniHoldings New York Insured Fund IV, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II,
Inc., 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 Pennsylvania Insured 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 investment adviser for the following open-end
registered investment companies: Master Global Financial
Services Trust, 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 Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Financial Services Fund, Inc., 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 Index Fund, Inc., Merrill Lynch Intermediate
Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Real Estate Fund, Inc., Merrill Lynch Ready Assets Trust,
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 U.S.
Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Fund, Inc., The Asset Program,
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., Merrill Lynch Senior Floating Rate
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II, 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 Trusts.
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 and Merrill Lynch Intermediate Government
Bond Fund 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 (“MLFD”) is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, and Merrill
Lynch & Co., Inc. (“ML & Co.”) is 4 World
Financial Center, New York, New York 10281. The address of
Financial Data Services, Inc. (“FDS”) 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 January 1, 1998 for his, her or
its own account or in the capacity of director, officer,
employee, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Vice President and Treasurer of all
or substantially all of the investment companies listed in the
first two paragraphs of this Item 26, and Messrs. Doll, Giordano
and Monagle are officers or directors/trustees of one or more of
such companies.
Name
|
|
Position(s) with the
Investment Adviser
|
|
Other Substantial Business,
Profession, Vocation or Employment
|
| ML
& Co. |
|
Limited
Partner |
|
Financial Services Holding Company; Limited Partner
of MLAM |
| Princeton Services |
|
General
Partner |
|
General
Partner of MLAM |
| Jeffrey
M. Peek |
|
President |
|
President of MLAM; President and Director of
Princeton Services; 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 of Princeton Funds Distributor, Inc. since
1986 and Director thereof since 1991; Director of
FDS; President of Princeton Administrators, L.P. |
| Gregory
A. Bundy |
|
Chief
Operating Officer
and Managing Director |
|
Chief
Operating Officer and Managing Director of
FAM; Chief Operating Officer and Managing
Director of Princeton Services; Co-CEO of Merrill
Lynch Australia from 1997 to 1999 |
| Donald
C. Burke |
|
Senior
Vice President
and Treasurer |
|
Senior
Vice President and Treasurer of MLAM;
Senior Vice President and Treasurer of Princeton
Services; Vice President of PFD; First Vice
President of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997 |
| Michael
G. Clark |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services; Treasurer and
Director of PFD; First Vice President of MLAM
from 1997 to 1999; Vice President of MLAM from
1996 to 1997 |
| Robert
C. Doll, Jr. |
|
Senior
Vice President |
|
Senior
Vice President of FAM; Senior Vice President
of Princeton Services; Chief Investment Officer of
Oppenheimer Funds, Inc. in 1999 and Executive
Vice President thereof from 1991 to 1999 |
Name
|
|
Position(s) with the
Investment Adviser
|
|
Other Substantial Business,
Profession, Vocation or Employment
|
| Linda L.
Federici |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
| Vincent
R. Giordano |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
| Michael
J. Hennewinkel |
|
Senior
Vice President,
General Counsel and
Secretary |
|
Senior
Vice President, General Counsel and Secretary
of MLAM; Senior Vice President of Princeton
Services |
| Philip
L. Kirstein |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President, Director and Secretary of Princeton
Services |
| Debra W.
Landsman-Yaros |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services; Senior Vice
President of PFD |
| Stephen
M. M. Miller |
|
Senior
Vice President |
|
Executive Vice President of Princeton Administrators;
Senior Vice President of Princeton Services |
| Joseph
T. Monagle, Jr. |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
| Gregory
D. Upah |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
Item
27. 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 26: CBA
Money Fund; CMA Money Fund; CMA Treasury Fund; CMA Tax-Exempt
Fund; nine other series of CMA Multi-State Municipal Series
Trust; 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 26, 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 4 World Financial Center,
New York, New York 10281.
Name
|
|
Position(s) and Office(s)
with Merrill Lynch
|
|
Position(s) and Office(s)
with Registrant
|
| John L.
Steffens |
|
Vice
Chairman and Director |
|
None |
| Thomas
W. Davis |
|
Executive Vice President |
|
None |
| Barry S.
Friedberg |
|
Executive Vice President |
|
None |
| Edward
L. Goldberg |
|
Executive Vice President |
|
None |
| Jerome
P. Kenney |
|
Executive Vice President |
|
None |
| E.
Stanley O’Neal |
|
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. Schieren |
|
General
Counsel, Senior Vice President and
Director |
|
None |
| John C.
Stomber |
|
Treasurer |
|
None |
| Andrea
L. Dulberg |
|
Secretary |
|
None |
(c)
Not applicable.
Item
28. 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, FDS,
4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Item
29. Management
Services.
Other than
as set forth under the caption “Management of the
Funds—Fund Asset Management” in the Prospectus
constituting Part A of the Registration Statement and under the
caption “Management of the Funds—Management and
Advisory Arrangements” in the Statement of Additional
Information constituting Part B of the Registration Statement,
the Registrant is not a party to any management-related service
contract.
Item
30. Undertakings.
(a)
Not applicable.
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 Amendment
to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this 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 28th day of June,
2000.
|
CMA
MULTI
-STATE
MUNICIPAL
SERIES
TRUST
|
|
(Terry K. Glenn, President)
|
Pursuant
to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity
and on the date indicated.
Signature
|
|
Title
|
|
Date
|
|
|
TERRY
K. GLENN
*
(Terry K. Glenn) |
|
President (Principal Executive
Officer) and Trustee |
|
June
28, 2000 |
|
|
/s/ DONALD
C. BURKE
*
(Donald C. Burke) |
|
Treasurer (Principal Financial
and Accounting Officer) |
|
|
|
|
/s/ RONALD
W. FORBES
*
(Ronald W. Forbes) |
|
Trustee |
|
|
|
|
/s/ CYNTHIA
A. MONTGOMERY
*
(Cynthia A. Montgomery) |
|
Trustee |
|
|
|
|
/s/ CHARLES
C. REILLY
*
(Charles C. Reilly) |
|
Trustee |
|
|
|
|
/s/ KEVIN
A. RYAN
*
(Kevin A. Ryan) |
|
Trustee |
|
|
|
|
/s/ RICHARD
R. WEST
*
(Richard R. West) |
|
Trustee |
|
|
|
|
/s/ ARTHUR
ZEIKEL
*
(Arthur Zeikel) |
|
Trustee |
|
|
|
|
/s/ TERRY
K. GLENN
*By:
(Terry K. Glenn, Attorney-in-Fact) |
|
|
|
June
28, 2000 |
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
| 10 |
|
—Consent of Deloitte & Touche
LLP
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