STATEMENT OF
ADDITIONAL INFORMATION
December 29, 1997
VISTA(SM) U.S. GOVERNMENT MONEY MARKET FUND
VISTA(SM) 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
VISTA(SM) CASH MANAGEMENT FUND
VISTA(SM) PRIME MONEY MARKET FUND
VISTA(SM) FEDERAL MONEY MARKET FUND
VISTA(SM) TREASURY PLUS MONEY MARKET FUND
VISTA(SM) TAX FREE MONEY MARKET FUND
VISTA(SM) CALIFORNIA TAX FREE MONEY MARKET FUND
VISTA(SM) NEW YORK TAX FREE MONEY MARKET FUND
VISTA(SM) TAX FREE INCOME FUND
VISTA(SM) NEW YORK TAX FREE INCOME FUND
VISTA(SM) CALIFORNIA INTERMEDIATE TAX FREE INCOME FUND
One Chase Manhattan Plaza, Third Floor, New York, New York 10081
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectuses offering shares
of Vista Tax Free Income Fund, Vista California Intermediate Tax Free Income
Fund and Vista New York Tax Free Income Fund (collectively the "Income Funds"),
and Vista U.S. Government Money Market Fund, Vista 100% U.S. Treasury
Securities Money Market Fund, Vista Cash Management Fund, Vista Prime Money
Market Fund, Vista Federal Money Market Fund, Vista Treasury Plus Money Market,
Vista Tax Free Money Market Fund, Vista California Tax Free Money Market Fund
and Vista New York Tax Free Money Market Fund (collectively the "Money Market
Funds"). Any reference to a "Prospectus" in this Statement of Additional
Information is a reference to one or more of the foregoing Prospectuses, as the
context requires. Copies of each Prospectus may be obtained by an investor
without charge by contacting Vista Fund Distributors, Inc. ("VFD"), the Funds'
distributor (the "Distributor"), at the above-listed address.
This Statement of Additional Information is NOT a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by an
effective prospectus.
For more information about your account, simply call or write the Vista Service
Center at:
1-800-622-4273
Vista Service Center
P.O. Box 419392
Kansas City, MO 64141
MFT-SAI
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Table of Contents
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The Funds ................................................................. 3
Investment Policies and Restrictions ..................................... 4
Performance Information ................................................... 20
Determination of Net Asset Value ......................................... 26
Purchases, Redemptions and Exchanges ..................................... 27
Tax Matters ............................................................... 29
Management of the Trust and the Funds ..................................... 34
Independent Accountants ................................................... 50
Certain Regulatory Matters ............................................... 50
General Information ....................................................... 51
Appendix A--Description of Certain Obligations Issued or
Guaranteed by U.S. Government Agencies or Instrumentalities ............ A-1
Appendix B--Description of Ratings ....................................... B-1
Appendix C--Special Investment Considerations
Relating to New York Municipal Obligations ............................... C-1
Appendix D--Special Investment Considerations Relating to
California Municipal Obligations......................................... D-1
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THE FUNDS
Mutual Fund Trust (the "Trust") is an open-end management investment
company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on February 4, 1994. The Trust presently consists
of 12 separate series (the "Funds"). Certain of the Funds are diversified and
other Funds are non-diversified, as such term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). The shares of the Funds are
collectively referred to in this Statement of Additional Information as the
"Shares." The Income Funds, Tax Free Money Market Fund, New York Tax Free Money
Market Fund and California Tax Free Money Market Fund are collectively referred
to herein as the "Tax Free Funds."
On August 25, 1994, the shareholders of each of the existing classes of
Shares of the Vista U.S. Government Money Market Fund, Vista Global Money
Market Fund, Vista Prime Money Market Fund, Vista Tax Free Money Market Fund,
Vista California Money Market Fund, Vista New York Tax Free Money Market Fund,
Vista Tax Free Income Fund, Vista New York Tax Free Income Fund and the Vista
California Intermediate Tax Free Income Fund approved the reorganization of
each of such Funds into newly-created series of Mutual Fund Trust, effective
October 28, 1994. Prior to such approvals, each of such Funds were series of
Mutual Fund Group, an affiliated investment company.
On December 4, 1992, the shareholders of each of the existing classes of
Shares of Vista Global Money Market Fund and Vista U.S. Government Money Market
Fund approved the reorganization of each of such Funds into newly-created
series of Mutual Fund Group, effective January 1, 1993. Prior to such
approvals, on December 4, 1992, the shareholders of each of the five existing
series of Trinity Assets Trust (Trinity Money Market Fund, Trinity Government
Fund, Trinity Bond Fund, Trinity Short-Term Bond Fund and Trinity Equity Fund)
(collectively, the "Trinity Funds") approved the reorganization of each of the
Trinity Funds into newly-created series of the Trust, effective January 1,
1993. Vista Global Money Market Fund and Trinity Money Market Fund were
reorganized into classes of Shares of "Vista Worldwide Money Market Fund",
which changed its name to "Vista Global Money Market Fund" as of December 31,
1992. Vista U.S. Government Money Market Fund and Trinity Government Fund were
reorganized into classes of Shares of "Vista Government Cash Fund", which
changed its name to "Vista U.S. Government Money Market Fund" as of December
31, 1992.
On May 3, 1996, The U.S. Treasury Money Market Fund of The Hanover Funds,
Inc. ("Hanover") merged into the Vista Shares of Treasury Plus Money Market
Fund, The Government Money Market Fund of Hanover merged into the Vista Shares
of U.S. Government Money Market Fund, The Cash Management Fund of Hanover
merged into the Vista Shares of Vista Global Money Market Fund (The Cash
Management Fund of Hanover was the accounting survivor of this merger), The Tax
Free Money Market Fund of Hanover merged into the Vista Shares of Tax Free
Money Market Fund, The New York Tax Free Money Market Fund of Hanover merged
into the Vista Shares of New York Tax Free Money Market Fund, and The 100% U.S.
Treasury Securities Money Market Fund of Hanover merged into the Vista Shares
of The 100% U.S. Treasury Securities Money Market Fund. The foregoing mergers
are referred to herein as the "Hanover Reorganization."
Effective as of May 6, 1996, Vista Global Money Market Fund changed its
name to Vista Cash Management Fund.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust including the Funds. The Chase Manhattan Bank ("Chase") is
the investment adviser for the Funds. Chase also serves as the Trust's
administrator (the "Administrator") and supervises the overall administration
of the Trust, including the Funds. A majority of the Trustees of the Trust are
not affiliated with the investment adviser or sub-advisers.
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INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies
The Prospectuses set forth the various investment policies applicable to
each Fund. The following information supplements and should be read in
conjunction with the related sections of each Prospectus. As used in this
Statement of Additional Information, with respect to those Funds and policies
for which they apply, the terms "Municipal Obligations" and "tax-exempt
securities" have the meanings given to them in the relevant Fund's Prospectus.
For descriptions of the securities ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch Investors Service,
Inc. ("Fitch"), see Appendix B. For a general discussion of special investment
considerations relating to investing in (i) New York and (ii) California
Municipal Obligations, see Appendices C and D, respectively.
The management style used for the Funds emphasizes several key factors.
Portfolio managers consider the security quality that is, the ability of the
debt issuer to make timely payments of principal and interest. Also important
in the analysis is the relationship of a bond's yield and its maturity, in
which the managers evaluate the risks of investing in long-term higher-yielding
securities. Managers also use a computer model to simulate possible
fluctuations in prices and yields if interest rates change. Another step in the
analysis is comparing yields on different types of securities to determine
relative risk/reward profiles.
U.S. Government Securities. U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and
U.S. Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow
any amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the
agency or instrumentality. Agencies and instrumentalities of the U.S.
Government include but are not limited to: Federal Land Banks, Federal
Financing Banks, Banks for Cooperatives, Federal Intermediate Credit Banks,
Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, Student Loan Marketing
Association, United States Postal Service, Chrysler Corporate Loan Guarantee
Board, Small Business Administration, Tennessee Valley Authority and any other
enterprise established or sponsored by the U.S. Government. Certain U.S.
Government Securities, including U.S. Treasury bills, notes and bonds,
Government National Mortgage Association certificates and Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other U.S. Government Securities are issued or guaranteed by
federal agencies or government sponsored enterprises and are not supported by
the full faith and credit of the United States. These securities include
obligations that are supported by the right of the issuer to borrow from the
U.S. Treasury, such as obligations of Federal Home Loan Banks, and obligations
that are supported by the creditworthiness of the particular instrumentality,
such as obligations of the Federal National Mortgage Association or Federal
Home Loan Mortgage Corporation. Vista Federal Money Market Fund generally
limits its investments in agency and instrumentality obligations to obligations
the interest on which is generally not subject to state and local income taxes
by reason of federal law. Agencies and instrumentalities issuing such
obligations include the Farm Credit System Financial Assistance Corporation,
the Federal Financing Bank, The General Services Administration, Federal Home
Loan Banks, the Tennessee Valley Authority and the Student Loan Marketing
Association. For a description of certain obligations issued or guaranteed by
U.S. Government agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of
government-backed instruments.
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However, such specialized instruments may only be available from a few sources,
in limited amounts, or only in very large denominations; they may also require
specialized capability in portfolio servicing and in legal matters related to
government guarantees. While they may frequently offer attractive yields, the
limited-activity markets of many of these securities means that, if a Fund were
required to liquidate any of them, it might not be able to do so
advantageously; accordingly, each Fund investing in such securities intends
normally to hold such securities to maturity or pursuant to repurchase
agreements, and would treat such securities (including repurchase agreements
maturing in more than seven days) as illiquid for purposes of its limitation on
investment in illiquid securities.
Bank Obligations. Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings and Loan Insurance Fund of the
Federal Deposit Insurance Corporation, and foreign banks (including their U.S.
branches) having total assets in excess of $10 billion (or the equivalent in
other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of United States banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. Fixed time deposits subject to withdrawal penalties
and with respect to which a Fund cannot realize the proceeds thereon within
seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, 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. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation. Investors should also be aware that
securities of foreign banks and foreign branches of United States banks may
involve foreign investment risks in addition to those relating to domestic bank
obligations.
Commercial Paper and Other Short-Term Obligations. The commercial paper
and other short-term obligations of U.S. and foreign corporations which may be
purchased by the Vista Prime Money Market Fund and the Vista Cash Management
Fund, other than those of bank holding companies, include obligations which are
(i) rated Prime-1 by Moody's, A-1 by S&P, or F-1 by Fitch, or comparably rated
by another NRO; or (ii) determined by the advisers to be of comparable quality
to those rated obligations which may be purchased by the Vista Prime Money
Market Fund and the Vista Cash Management Fund at the date of purchase or which
at the date of purchase have an outstanding debt issue rated in the highest
rating category by Moody's, S&P, Fitch or another NRO. The commercial paper and
other short-term obligations of U.S. banks holding companies which may be
purchased by the Vista Prime Money Market Fund and the Vista Cash Management
Fund include obligations issued or guaranteed by bank holding companies with
total assets
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exceeding $1 billion. For purposes of the size standards with respect to banks
and bank holding companies, "total deposits" and "total assets" are determined
on an annual basis by reference to an institution's then most recent annual
financial statements.
Repurchase Agreements. A Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers believed
creditworthy, and only if fully collateralized by securities in which such Fund
is permitted to invest. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying debt instrument for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument and the Fund to resell the instrument at a fixed
price and time, thereby determining the yield during the Fund's holding period.
This procedure results in a fixed rate of return insulated from market
fluctuations during such period. A repurchase agreement is subject to the risk
that the seller may fail to repurchase the security. Repurchase agreements are
considered under the 1940 Act to be loans collateralized by the underlying
securities. All repurchase agreements entered into by a Fund will be fully
collateralized at all times during the period of the agreement in that the
value of the underlying security will be at least equal to 100% of the amount
of the loan, including the accrued interest thereon, and the Fund or its
custodian or sub-custodian will have possession of the collateral, which the
Board of Trustees believes will give it a valid, perfected security interest in
the collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been conclusively established. This
might become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities would not be
owned by a Fund, but would only constitute collateral for the seller's
obligation to pay the repurchase price. Therefore, a Fund may suffer time
delays and incur costs in connection with the disposition of the collateral.
The Board of Trustees believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than
would be the case with securities owned by a Fund. Repurchase agreements will
give rise to income which will not qualify as tax-exempt income when
distributed by a Tax Free Fund. Repurchase agreements maturing in more than
seven days are treated as illiquid for purposes of the Funds' restrictions on
purchases of illiquid securities. Repurchase agreements are also subject to the
risks described below with respect to stand-by commitments.
Reverse Repurchase Agreements. Reverse repurchase agreements involve sales
of portfolio securities of a Fund to member banks of the Federal Reserve System
or securities dealers believed creditworthy, concurrently with an agreement by
such Fund to repurchase the same securities at a later date at a fixed price
which is generally equal to the original sales price plus interest. A Fund
retains record ownership and the right to receive interest and principal
payments on the portfolio security involved.
High Quality Municipal Obligations. Investments by the Tax Free Money
Market Funds will be made in unrated Municipal Obligations only if they are
determined to be of comparable quality to permissable rated investments on the
basis of the advisers' credit evaluation of the obligor or of the bank issuing
a participation certificate, letter of credit or guaranty, or insurance issued
in support of the obligation. High Quality instruments may produce a lower
yield than would be available from less highly rated instruments. The Board of
Trustees has determined that Municipal Obligations which are backed by the
credit of the U.S. Government will be considered to have a rating equivalent to
Moody's Aaa.
If, subsequent to purchase by a Tax Free Money Market Fund, (a) an issue
of rated Municipal Obligations ceases to be rated in the highest short-term
rating category (the two highest categories in the case of the New York and
California Tax Free Money Market Funds) by at least two rating organizations
(or one rating organization if the instrument was rated by only one such
organization) or the Board of Trustees determines that it is no longer of
comparable quality or (b) a Money Market Fund's advisers become aware that any
portfolio security not so highly rated or any unrated security has been given a
rating by any rating organization below the rating organization's second
highest rating category, the Board of Trustees will reassess
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promptly whether such security presents minimal credit risk and will cause such
Money Market Fund to take such action as it determines is in its best interest
and that of its shareholders; provided that the reassessment required by clause
(b) is not required if the portfolio security is disposed of or matures within
five business days of the advisers becoming aware of the new rating and the
Fund's Board is subsequently notified of the adviser's actions.
To the extent that a rating given by Moody's, S&P or Fitch for Municipal
Obligations may change as a result of changes in such organizations or their
rating systems, the Funds will attempt to use comparable ratings as standards
for their investments in accordance with the investment policies contained in
the Prospectuses and this Statement of Additional Information. The ratings of
Moody's, S&P and Fitch represent their opinions as to the quality of the
Municipal Obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings may be an initial criterion for
selection of portfolio investments, the advisers also will evaluate these
securities and the creditworthiness of the issuers of such securities.
Forward Commitments. In order to invest a Fund's assets immediately, while
awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will
normally be purchased. Although, with respect to any Tax Free Fund, short-term
investments will normally be in tax-exempt securities or Municipal Obligations,
short-term taxable securities or obligations may be purchased if suitable
short-term tax-exempt securities or Municipal Obligations are not available.
When a commitment to purchase a security on a forward commitment basis is made,
procedures are established consistent with the General Statement of Policy of
the Securities and Exchange Commission concerning such purchases. Since that
policy currently recommends that an amount of the respective Fund's assets
equal to the amount of the purchase be held aside or segregated to be used to
pay for the commitment, a separate account of such Fund consisting of cash,
cash equivalents or high quality debt securities equal to the amount of such
Fund's commitments will be established at such Fund's custodian bank. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market value. If the market value of
such securities declines, additional cash, cash equivalents or highly liquid
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the respective Fund.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Fund's
portfolio are subject to changes in value based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Purchasing securities on a forward commitment basis
can involve the risk that the yields available in the market when the delivery
takes place may actually be higher or lower than those obtained in the
transaction itself. On the settlement date of the forward commitment
transaction, the respective Fund will meet its obligations from then available
cash flow, sale of securities held in the separate account, sale of other
securities or, although it would not normally expect to do so, from sale of the
forward commitment securities themselves (which may have a value greater or
lesser than such Fund's payment obligations). The sale of securities to meet
such obligations may result in the realization of capital gains or losses,
which, for consideration by investors in the Tax Free Funds, are not exempt
from federal, state or local taxation.
To the extent a Fund engages in forward commitment transactions, it will
do so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.
Illiquid Securities. For purposes of its limitation on investments in
illiquid securities, each Fund may elect to treat as liquid, in accordance with
procedures established by the Board of Trustees, certain invest-
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ments in restricted securities for which there may be a secondary market of
qualified institutional buyers as contemplated by Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") and commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act ("Section 4(2)
paper"). Rule 144A provides an exemption from the registration requirements of
the Securities Act for the resale of certain restricted securities to qualified
institutional buyers. Section 4(2) paper is restricted as to disposition under
the federal securities laws, and generally is sold to institutional investors
such as a Fund who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale of Section 4(2) paper by the
purchaser must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A and
Section 4(2) paper are liquid or illiquid for purposes of the limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
the Trustees have delegated to the advisers the determination as to whether a
particular instrument is liquid or illiquid, requiring that consideration be
given to, among other things, the frequency of trades and quotes for the
security, the number of dealers willing to sell the security and the number of
potential purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The
Trustees will periodically review the Funds' purchases and sales of Rule 144A
securities and Section 4(2) paper.
Stand-by Commitments. When a Fund purchases securities it may also acquire
stand-by commitments with respect to such securities. Under a stand-by
commitment, a bank, broker-dealer or other financial institution agrees to
purchase at a Fund's option a specified security at a specified price.
The amount payable to a Money Market Fund upon its exercise of a stand-by
commitment with respect to a Municipal Obligation normally would be (i) the
acquisition cost of the Municipal Obligation (excluding any accrued interest
paid by the Fund on the acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Fund
owned the security, plus (ii) all interest accrued on the security since the
last interest payment date during the period the security was owned by the
Fund. Absent unusual circumstances relating to a change in market value, a
Money Market Fund would value the underlying Municipal Obligation at amortized
cost. Accordingly, the amount payable by a bank or dealer during the time a
stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation. The Money Market Funds
value stand-by commitments at zero for purposes of computing their net asset
value per share.
The stand-by commitments that may be entered into by the Funds are subject
to certain risks, which include the ability of the issuer of the commitment to
pay for the securities at the time the commitment is exercised, the fact that
the commitment is not marketable by a Fund, and that the maturity of the
underlying security will generally be different from that of the commitment.
Not more than 10% of the total assets of a Money Market Fund will be invested
in Municipal Obligations that are subject to stand-by commitments from the same
bank or broker-dealer.
Floating and Variable Rate Securities; Participation Certificates.
Floating and variable rate demand instruments permit the holder to demand
payment upon a specified number of days' notice of the unpaid principal balance
plus accrued interest either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument.
Investments by the Income Funds in floating or variable rate securities
normally will involve industrial development or revenue bonds that provide for
a periodic adjustment in the interest rate paid on the obligation and may, but
need not, permit the holder to demand payment as described above. While there
is usually no established secondary market for issues of
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these types of securities, the dealer that sells an issue of such security
frequently will also offer to repurchase the securities at any time at a
repurchase price which varies and may be more or less than the amount the
holder paid for them. The floating or variable rate demand instruments in which
the Money Market Funds may invest are payable on demand on not more than seven
calendar days' notice.
The terms of these types of securities provide that interest rates are
adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term rates,
such as Treasury Bills or LIBOR (London Interbank Offered Rate), as provided in
the respective instruments. The Funds will decide which floating or variable
rate securities to purchase in accordance with procedures prescribed by Board
of Trustees of the Trust in order to minimize credit risks.
In the case of a Money Market Fund, the Board of Trustees may determine
that an unrated floating or variable rate security meets the Fund's high
quality criteria if it is backed by a letter of credit or guarantee or is
insured by an insurer that meets such quality criteria, or on the basis of a
credit evaluation of the underlying obligor. If the credit of the obligor is of
"high quality", no credit support from a bank or other financial institution
will be necessary. The Board of Trustees will re-evaluate each unrated floating
or variable rate security on a quarterly basis to determine that it continues
to meet a Money Market Fund's high quality criteria. If an instrument is ever
deemed to fall below a Money Market Fund's high quality standards, either it
will be sold in the market or the demand feature will be exercised.
The securities in which certain Funds may be invested include
participation certificates, issued by a bank, insurance company or other
financial institution, in securities owned by such institutions or affiliated
organizations ("Participation Certificates"). A Participation Certificate gives
a Fund an undivided interest in the security in the proportion that the Fund's
participation interest bears to the total principal amount of the security and
generally provides the demand feature described below. Each Participation
Certificate is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the Participation Certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Trustees of the Trust has determined meets the prescribed quality
standards for a particular Fund.
A Fund may have the right to sell the Participation Certificate back to
the institution and draw on the letter of credit or insurance on demand after
the prescribed notice period, for all or any part of the full principal amount
of the Fund's participation interest in the security, plus accrued interest.
The institutions issuing the Participation Certificates would retain a service
and letter of credit fee and a fee for providing the demand feature, in an
amount equal to the excess of the interest paid on the instruments over the
negotiated yield at which the Participation Certificates were purchased by a
Fund. The total fees would generally range from 5% to 15% of the applicable
prime rate or other short-term rate index. With respect to insurance, a Fund
will attempt to have the issuer of the Participation Certificate bear the cost
of any such insurance, although the Funds retain the option to purchase
insurance if deemed appropriate. Obligations that have a demand feature
permitting a Fund to tender the obligation to a foreign bank may involve
certain risks associated with foreign investment. A Fund's ability to receive
payment in such circumstances under the demand feature from such foreign banks
may involve certain risks such as future political and economic developments,
the possible establishments of laws or restrictions that might adversely affect
the payment of the bank's obligations under the demand feature and the
difficulty of obtaining or enforcing a judgment against the bank.
The advisers have been instructed by the Board of Trustees to monitor on
an ongoing basis the pricing, quality and liquidity of the floating and
variable rate securities held by the Funds, including Participation
Certificates, on the basis of published financial information and reports of
the rating agencies and other bank analytical services to which the Funds may
subscribe. Although these instruments may be sold by a Fund, it is intended
that they be held until maturity. Participation Certificates will only be
purchased by a Tax Free
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Fund if, in the opinion of counsel to the issuer, interest income on such
instruments will be tax-exempt when distributed as dividends to shareholders of
such Fund.
Past periods of high inflation, together with the fiscal measures adopted
to attempt to deal with it, have seen wide fluctuations in interest rates,
particularly "prime rates" charged by banks. While the value of the underlying
floating or variable rate securities may change with changes in interest rates
generally, the floating or variable rate nature of the underlying floating or
variable rate securities should minimize changes in value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed rate securities. A Fund's portfolio may
contain floating or variable rate securities on which stated minimum or maximum
rates, or maximum rates set by state law, limit the degree to which interest on
such floating or variable rate securities may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the floating
or variable rate securities is made in relation to movements of the applicable
banks' "prime rates" or other short-term rate adjustment indices, the floating
or variable rate securities are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the floating or variable rate
securities may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar maturities.
The maturity of variable rate securities is 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 security upon demand or (ii) the period remaining until
the security's next interest rate adjustment. With respect to a Money Market
Fund, the maturity of a variable rate demand instrument will be determined in
the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. With respect to the Income Funds, if variable rate
securities are not redeemed through the demand feature, they mature on a
specified date which may range up to thirty years from the date of issuance.
Tender Option Floating or Variable Rate Certificates. The Money Market
Funds may invest in tender option bonds. A tender option bond is a synthetic
floating or variable rate security issued when long term bonds are purchased in
the secondary market and are then deposited into a trust. Custodial receipts
are then issued to investors, such as the Funds, evidencing ownership interests
in the trust. The trust sets a floating or variable rate on a daily or weekly
basis which is established through a remarketing agent. These types of
instruments, to be money market eligible under Rule 2a-7, must have a liquidity
facility in place which provides additional comfort to the investors in case
the remarketing fails. The sponsor of the trust keeps the difference between
the rate on the long term bond and the rate on the short term floating or
variable rate security.
Supranational Obligations. Supranational organizations include
organizations such as The World Bank, which was chartered to finance
development projects in developing member countries; the European Community,
which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union
of various European nations steel and coal industries; and the Asian
Development Bank, which is an international development bank established to
lend funds, promote investment and provide technical assistance to member
nations of the Asian and Pacific regions.
Securities Loans. To the extent specified in its Prospectus, each Fund is
permitted to lend its securities to broker-dealers and other institutional
investors in order to generate additional income. Such loans of portfolio
securities may not exceed 30% of the value of a Fund's total assets. In
connection with such loans, a Fund will receive collateral consisting of cash,
cash equivalents, U.S. Government securities or irrevocable letters of credit
issued by financial institutions. Such collateral will be maintained at all
times in an amount equal to at least 100% of the current market value plus
accrued interest of the securities loaned. A Fund can increase its income
through the investment of such collateral. A Fund continues to be entitled to
the interest
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payable or any dividend-equivalent payments received on a loaned security and,
in addition, to receive interest on the amount of the loan. However, the
receipt of any dividend-equivalent payments by a Fund on a loaned security from
the borrower will not qualify for the dividends-received deduction. Such loans
will be terminable at any time upon specified notice. A Fund might experience
risk of loss if the institutions with which it has engaged in portfolio loan
transactions breach their agreements with such Fund. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delays in receiving additional collateral or in the recovery of the
securities or the possible loss of rights in the collateral should the borrower
experience financial difficulty. Loans will be made only to firms deemed by the
advisers to be of good standing and will not be made unless, in the judgment of
the advisers, the consideration to be earned from such loans justifies the
risk.
Zero Coupon and Stripped Obligations. The principal and interest
components of United States Treasury bonds with remaining maturities of longer
than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are separately
issued by the United States Treasury at the request of depository financial
institutions, which then trade the component parts separately. The interest
component of STRIPS may be more volatile than that of United States Treasury
bills with comparable maturities.
Zero coupon obligations are sold at a substantial discount from their
value at maturity and, when held to maturity, their entire return, which
consists of the amortization of discount, comes from the difference between
their purchase price and maturity value. Because interest on a zero coupon
obligation is not distributed on a current basis, the obligation tends to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying securities with similar maturities. The value
of zero coupon obligations appreciates more than such ordinary interest-paying
securities during periods of declining interest rates and depreciates more than
such ordinary interest-paying securities during periods of rising interest
rates. Under the stripped bond rules of the Internal Revenue Code of 1986, as
amended, investments in zero coupon obligations will result in the accrual of
interest income on such investments in advance of the receipt of the cash
corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the coupon
payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Treasury Investment Growth Receipts and generic Treasury Receipts,
are examples of stripped U.S. Treasury securities separated into their
component parts through such custodial arrangements.
Additional Policies Regarding Derivative and Related Transactions
Introduction. As explained more fully below, the Income Funds may employ
derivative and related instruments as tools in the management of portfolio
assets. Put briefly, a "derivative" instrument may be considered a security or
other instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts, structured
notes and various other over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways:
First, to reduce risk by hedging (offsetting) an investment position. Second,
to substitute for another security particularly where it is quicker, easier and
less expensive to invest in derivatives. Lastly, to speculate or enhance
portfolio performance. When used prudently, derivatives can offer several
benefits, including easier and more effective hedging, lower transaction costs,
quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for a Fund.
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Each Income Fund may invest its assets in derivative and related
instruments subject only to the Fund's investment objective and policies and
the requirement that the Fund maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to
avoid leveraging the Fund.
The value of some derivative or similar instruments in which the Income
Funds invest may be particularly sensitive to changes in prevailing interest
rates or other economic factors, and like other investments of the Funds the
ability of a Fund to successfully utilize these instruments may depend in part
upon the ability of the advisers to forecast interest rates and other economic
factors correctly. If the advisers accurately forecast such factors and has
taken positions in derivative or similar instruments contrary to prevailing
market trends, the Funds could be exposed to the risk of a loss. The Funds
might not employ any or all of the strategies described herein, and no
assurance can be given that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Funds may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Funds' current prospectuses as well as provide useful information to
prospective investors.
Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. An incorrect correlation could result
in a loss on both the hedged assets in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted.
The advisers may accurately forecast interest rates, market values or other
economic factors in utilizing a derivatives strategy. In such a case, the Fund
may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains. Strategies not involving hedging may
increase the risk to a Fund. Certain strategies, such as yield enhancement, can
have speculative characteristics and may result in more risk to a Fund than
hedging strategies using the same instruments. There can be no assurance that a
liquid market will exist at a time when a Fund seeks to close out an option,
futures contract or other derivative or related position. Many exchanges and
boards of trade limit the amount of fluctuation permitted in option or futures
contract prices during a single day; once the daily limit has been reached on
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Finally, over-the-counter
instruments typically do not have a liquid market. Lack of a liquid market for
any reason may prevent a Fund from liquidating an unfavorable position.
Activities of large traders in the futures and securities markets involving
arbitrage, "program trading," and other investment strategies may cause price
distortions in these markets. In certain instances, particularly those
involving over-the-counter transactions, forward contracts there is a greater
potential that a counterparty or broker may default or be unable to perform on
its commitments. In the event of such a default, a Fund may experience a loss.
Specific Uses and Strategies. Set forth below are explanations various
strategies involving derivatives and related instruments which may be used by
the Income Funds.
Options on Securities and Securities Indexes. The Funds may PURCHASE, SELL
or EXERCISE call and put options on (i) securities, (ii) securities indexes,
and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the Funds
may also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they
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are two-party contracts with price and other terms negotiated between buyer and
seller. As such, over-the-counter options generally have much less market
liquidity and carry the risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities a Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. A Fund may also use
combinations of options to minimize costs, gain exposure to markets or take
advantage of price disparities or market movements. For example, a Fund may
sell put or call options it has previously purchased or purchase put or call
options it has previously sold. These transactions may result in a net gain or
loss depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option which is
sold. A Fund may write a call or put option in order to earn the related
premium from such transactions. Prior to exercise or expiration, an option may
be closed out by an offsetting purchase or sale of a similar option.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
fund writing a covered call (i.e., where the underlying securities are held by
the fund) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. The
Funds will not write uncovered options.
If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, such Fund
will lose its entire investment in the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less
than the price of the related security. There can be no assurance that a liquid
market will exist when a Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.
Futures Contracts and Options on Futures Contracts. The Funds may purchase
or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Funds may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
a Fund may sell a futures contract or buy a futures option to protect against a
decline in value, or reduce the duration, of portfolio holdings. Likewise,
these instruments may be used where a Fund intends to acquire an instrument or
enter into a position. For example, a Fund may purchase a futures contract or
buy a futures option to gain immediate exposure in a market or otherwise offset
increases in the purchase price of securities or currencies to be acquired in
the future. Futures options may also be written to earn the related premiums.
When writing or purchasing options, the Funds may simultaneously enter
into other transactions involving futures contracts or futures options in order
to minimize costs, gain exposure to markets, or take
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advantage of price disparities or market movements. Such strategies may entail
additional risks in certain instances. Funds may engage in cross-hedging by
purchasing or selling futures or options on a security different from the
security position being hedged to take advantage of relationships between the
two securities.
Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Funds will
only enter into futures contracts or options on futures contracts which are
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system.
Forward Contracts. A Fund may also use forward contracts to hedge against
changes in interest-rates, increase exposure to a market or otherwise take
advantage of such changes. An interest-rate forward contract involves the
obligation to purchase or sell a specific debt instrument at a fixed price at a
future date.
Interest Rate Transactions. The Income Funds may employ interest rate
management techniques, including transactions in options (including yield curve
options), futures, options on futures, forward exchange contracts, and interest
rate swaps.
An Income Fund will only enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Income Fund receiving or
paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets
or principal. Accordingly, the risk of loss with respect to interest rate swaps
is limited to the net amount of interest payments that an Income Fund is
contractually obligated to make. If the other party to and interest rate swap
defaults, an Income Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest
rate swaps are individually negotiated, each Income Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate swap position.
An Income Fund may enter into interest rate swaps to the maximum allowed
limits under applicable law. An Income Fund will typically use interest rate
swaps to shorten the effective duration of its portfolio. Interest rate swaps
involve the exchange by an Income Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments.
Structured Products. The Income Funds may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the
issuance by that entity of one or more classes of securities ("structured
products") backed by, or representing interests in, the underlying instruments.
The cash flow on the underlying instruments may be apportioned among the newly
issued structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. A Fund may invest in structured products which represent derived
investment positions based on relationships among different markets or asset
classes.
The Income Funds may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the cost of
Funds Index. Any rise in the reference rate of an inverse floater
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(as a consequence of an increase in interest rates) causes a drop in the coupon
rate while any drop in the reference rate of an inverse floater causes an
increase in the coupon rate. A spread trade is an investment position relating
to a difference in the prices or interest rates of two securities where the
value of the investment position is determined by movements in the difference
between the prices or interest rates, as the case may be, of the respective
securities. When an Income Fund invests in notes linked to the price of an
underlying instrument, the price of the underlying security is determined by a
multiple (based on a formula) of the price of such underlying security. A
structured product may be considered to be leveraged to the extent its interest
rate varies by a magnitude that exceeds the magnitude of the change in the
index rate of interest. Because they are linked to their underlying markets or
securities, investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security.
Total return on the structured product is derived by linking return to one or
more characteristics of the underlying instrument. Because certain structured
products of the type in which the Income Fund anticipates it will invest may
involve no credit enhancement, the credit risk of those structured products
generally would be equivalent to that of the underlying instruments. An Income
Fund is permitted to invest in a class of structured products that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured products typically have higher yields and present
greater risks than unsubordinated structured products. Although an Income
Fund's purchase of subordinated structured products would have similar economic
effect to that of borrowing against the underlying securities, the purchase
will not be deemed to be leverage for purposes of an Income Fund's fundamental
investment limitation related to borrowing and leverage.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, an Income Fund's
investments in these structured products may be limited by the restrictions
contained in the 1940 Act. Structured products are typically sold in private
placement transactions, and there currently is no active trading market for
structured products. As a result, certain structured products in which the
Income Funds invest may be deemed illiquid and subject to their limitation on
illiquid investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
Additional Restrictions on the Use of Futures and Option Contracts. None
of the Funds is a "commodity pool" (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC and futures contracts and futures options
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that a Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5%
of the liquidation value of the Fund's portfolio, provided, further, that, in
the case of an option that is in-the-money, the in-the-money amount may be
excluded in calculating the 5% limitation.
When an Income Fund purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with such Fund's custodian so that the amount so segregated,
plus the initial deposit and variation margin held in the account of its
broker, will at all times equal the value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
The Income Funds' ability to engage in the transactions described herein
may be limited by the current federal income tax requirement that a Fund derive
less than 30% of its gross income from the sale or other disposition of
securities held for less than three months.
In addition to the foregoing requirements, the Board of Trustees has
adopted an additional restriction on the use of futures contracts and options
thereon, requiring that the aggregate market value of the futures
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contracts held by an Income Fund not exceed 50% of the market value of its
total assets. Neither this restriction nor any policy with respect to the
above-referenced restrictions, would be changed by the Board of Trustees
without considering the policies and concerns of the various federal and state
regulatory agencies.
Investment Restrictions
The Funds have adopted the following investment restrictions which may not
be changed without approval by a "majority of the outstanding shares" of a Fund
which, as used in this Statement of Additional Information, means the vote of
the lesser of (i) 67% or more of the shares of a Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of a Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of a
Fund.
Each Fund may not:
(1) borrow money, except that each Fund may borrow money for temporary
or emergency purposes, or by engaging in reverse repurchase transactions,
in an amount not exceeding 33 1/3% of the value of its total assets at the
time when the loan is made and may pledge, mortgage or hypothecate no more
than 1/3 of its net assets to secure such borrowings. Any borrowings
representing more than 5% of a Fund's total assets must be repaid before
the Fund may make additional investments;
(2) make loans, except that each Fund may: (i) purchase and hold debt
instruments (including without limitation, bonds, notes, debentures or
other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in the
securities of companies whose principal business activities are in the
same industry. Notwithstanding the foregoing, (i) with respect to a Fund's
permissible futures and options transactions in U.S. Government
securities, positions in options and futures shall not be subject to this
restriction; (ii) the Money Market Funds may invest more than 25% of their
total assets in obligations issued by banks, including U. S. banks; (iii)
New York Tax Free Money Market Fund, California Tax Free Money Market Fund
and Tax Free Money Market Fund may invest more than 25% of their
respective assets in municipal obligations secured by bank letters of
credit or guarantees, including participation certificates and (iv) more
than 25% of the assets of California Intermediate Tax Free Income Fund may
be invested in municipal obligations secured by bank letters of credit or
guarantees;
(4) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments but this shall not prevent a
Fund from (i) purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities or (ii) engaging in forward purchases or sales of foreign
currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by a Fund in securities backed by mortgages on real estate or
in marketable securities of companies engaged in such activities are not
hereby precluded;
(6) issue any senior security (as defined in the 1940 Act), except that
(a) a Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under appli-
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cable regulations and interpretations of the 1940 Act or an exemptive
order; (b) a Fund may acquire other securities, the acquisition of which
may result in the issuance of a senior security, to the extent permitted
under applicable regulations or interpretations of the 1940 Act; and (c)
subject to the restrictions set forth above, a Fund may borrow money as
authorized by the 1940 Act. For purposes of this restriction, collateral
arrangements with respect to a Fund's permissible options and futures
transactions, including deposits of initial and variation margin, are not
considered to be the issuance of a senior security; or
(7) underwrite securities issued by other persons except insofar as a
Fund may technically be deemed to be an underwriter under the Securities
Act of 1933 in selling a portfolio security. In addition, as a matter of
fundamental policy, notwithstanding any other investment policy or
restriction, a Fund may seek to achieve its investment objective by
investing all of its investable assets in another investment company
having substantially the same investment objective and policies as the
Fund. For purposes of investment restriction (5) above, real estate
includes Real Estate Limited Partnerships. For purposes of investment
restriction (3) above, industrial development bonds, where the payment of
principal and interest is the ultimate responsibility of companies within
the same industry, are grouped together as an "industry." Investment
restriction (3) above, however, is not applicable to investments by a Fund
in municipal obligations where the issuer is regarded as a state, city,
municipality or other public authority since such entities are not members
of any "industry." Supranational organizations are collectively considered
to be members of a single "industry" for purposes of restriction (3)
above.
In addition, each Fund is subject to the following nonfundamental
investment restrictions which may be changed without shareholder approval:
(1) Each Fund other than the Tax Free Funds may not, with respect to 75%
of its assets, hold more than 10% of the outstanding voting securities of
any issuer or invest more than 5% of its assets in the securities of any
one issuer (other than obligations of the U.S. Government, its agencies
and instrumentalities); each Tax Free Fund may not, with respect to 50% of
its assets, hold more than 10% of the outstanding voting securities of any
issuer.
(2) Each Fund may not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of a Fund. The Funds have no current intention of making short sales
against the box.
(3) Each Fund may not purchase or sell interests in oil, gas or mineral
leases.
(4) Each Income Fund may not invest more than 15% of its net assets in
illiquid securities; each Money Market Fund may not invest more than 10%
of its net assets in illiquid securities.
(5) Each Fund may not write, purchase or sell any put or call option or
any combination thereof, provided that this shall not prevent (i) the
writing, purchasing or selling of puts, calls or combinations thereof with
respect to portfolio securities or (ii) with respect to a Fund's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of puts,
calls or combinations thereof with respect to futures.
(6) Each Fund may invest up to 5% of its total assets in the securities
of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its
total assets in the securities of other investment companies.
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For purposes of the Funds' investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
In order to permit the sale of its shares in certain states, a Fund may
make commitments more restrictive that the investment policies and limitations
described above and in its Prospectus. Should a Fund determine that any such
commitment is no longer in its best interests, it will revoke the commitment by
terminating sales of its shares in the state involved.
In order to comply with certain regulatory policies, as a matter of
operating policy, each Fund will not invest for the purpose of exercising
control or management.
As a nonfundamental operating policy, the Money Market Funds will not
invest more than 25% of their respective total assets in obligations issued by
foreign banks (other than foreign branches of U.S. banks).
As a nonfundamental operating policy, the Tax Free Money Market Funds will
not invest in obligations secured by letters of credit or guarantees from
foreign banks (other than foreign branches of U.S. banks) if, after giving
effect to such investment, the value attributable to such letters of credit or
guarantees, as determined by the respective Funds' advisers, would exceed 25%
of the respective Funds' total assets.
If a percentage or rating restriction on investment or use of assets set
forth herein or in a Prospectus is adhered to at the time, later changes in
percentage or ratings resulting from any cause other than actions by a Fund
will not be considered a violation. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
Portfolio Transactions and Brokerage Allocation
Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of the adviser or sub-adviser to such Fund
and who is appointed and supervised by senior officers of such adviser or
sub-adviser. Changes in the Funds' investments are reviewed by the Board of
Trustees. The Funds' portfolio managers may serve other clients of the advisers
in a similar capacity. Money market instruments are generally purchased in
principal transactions; thus, the Money Market Funds generally pay no brokerage
commissions.
The frequency of an Income Fund's portfolio transactions the portfolio
turnover rate will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the advisers will weigh the added costs of
short-term investment against anticipated gains. Each Income Fund will engage
in portfolio trading if its advisers believe a transaction, net of costs
(including custodian charges), will help it achieve its investment objective.
For the fiscal year ended August 31, 1996, and the fiscal year ended
August 31, 1997, the annual rates of portfolio turnover for the following Funds
were as follows:
The Tax Free Income Fund: 210% and 147%, respectively; The New York Tax
Free Income Fund: 156% and 107%, respectively.
For the fiscal year ended August 31, 1996, and the fiscal year ended
August 31, 1997, the California Intermediate Tax Free Income Fund had portfolio
turnover rates of 188% and 66%, respectively.
Under the advisory agreement and the sub-advisory agreements, the adviser
and sub-advisers shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result
18
<PAGE>
in total costs or proceeds being the most favorable to the Funds. In assessing
the best overall terms available for any transaction, the adviser and
sub-advisers consider all factors they deem relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, research services provided to
the adviser or sub-advisers, and the reasonableness of the commissions, if any,
both for the specific transaction and on a continuing basis. The adviser and
sub-advisers are not required to obtain the lowest commission or the best net
price for any Fund on any particular transaction, and are not required to
execute any order in a fashion either preferential to any Fund relative to
other accounts they manage or otherwise materially adverse to such other
accounts.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the adviser or
sub-adviser to a Fund normally seeks to deal directly with the primary market
makers unless, in its opinion, best execution is available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the adviser or sub-adviser on the
tender of a Fund's portfolio securities in so-called tender or exchange offers.
Such soliciting dealer fees are in effect recaptured for the Funds by the
adviser and sub-advisers. At present, no other recapture arrangements are in
effect.
Under the advisory and sub-advisory agreements and as permitted by Section
28(e) of the Securities Exchange Act of 1934, the adviser or sub-advisers may
cause the Funds to pay a broker-dealer which provides brokerage and research
services to the adviser or sub-advisers, the Funds and/or other accounts for
which they exercise investment discretion an amount of commission for effecting
a securities transaction for the Funds in excess of the amount other
broker-dealers would have charged for the transaction if they determine in good
faith that the total commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer viewed
in terms of either that particular transaction or their overall
responsibilities to accounts over which they exercise investment discretion.
Not all of such services are useful or of value in advising the Funds. The
adviser and sub-advisers report to the Board of Trustees regarding overall
commissions paid by the Funds and their reasonableness in relation to the
benefits to the Funds. The term "brokerage and research services" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or of
purchasers or sellers of securities, furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts, and effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
The management fees that the Funds pay to the adviser will not be reduced
as a consequence of the adviser's or sub-advisers' receipt of brokerage and
research services. To the extent the Funds' portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Funds will exceed
those that might otherwise be paid by an amount which cannot be presently
determined. Such services would be useful and of value to the adviser or
sub-advisers in serving one or more of their other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the adviser and sub-advisers in carrying out their
obligations to the Funds. While such services are not expected to reduce the
expenses of the adviser or sub-advisers, they would, through use of the
services, avoid the additional expenses which would be incurred if they should
attempt to develop comparable information through their own staff.
In certain instances, there may be securities that are suitable for one or
more of the Funds as well as one or more of the adviser's or sub-advisers'
other clients. Investment decisions for the Funds and for other clients are
made with a view to achieving their respective investment objectives. It may
develop that the same investment decision is made for more than one client or
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security
19
<PAGE>
may be bought for one or more clients when one or more clients are selling that
same security. Some simultaneous transactions are inevitable when several
clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives
of more than one client. In executing portfolio transactions for a Fund, the
adviser or sub-advisers may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to be sold
or purchased with those of other Funds or their other clients if, in the
adviser's or sub-advisers' reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into consideration
the advantageous selling or purchase price, brokerage commission and other
expenses, and trading requirements, and (ii) is not inconsistent with the
policies set forth in the Trust's registration statement and the Fund's
Prospectus and Statement of Additional Information. In such event, the adviser
or a sub- adviser will allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in an equitable manner, consistent with
its fiduciary obligations to the Fund and such other clients. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as a Fund is concerned. However, it is believed
that the ability of the Funds to participate in volume transactions will
generally produce better executions for the Funds.
PERFORMANCE INFORMATION
From time to time, a Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. Because such performance information is based
on past investment results, it should not be considered as an indication or
representation of the performance of any classes of a Fund in the future. From
time to time, the performance and yield of classes of a Fund may be quoted and
compared to those of other mutual funds with similar investment objectives,
unmanaged investment accounts, including savings accounts, or other similar
products and to stock or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of a Fund or its
classes may be compared to data prepared by Lipper Analytical Services, Inc. or
Morningstar Mutual Funds on Disc, widely recognized independent services which
monitor the performance of mutual funds. Performance and yield data as reported
in national financial publications including, but not limited to, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in local or regional publications, may also be used in comparing the
performance and yield of a Fund or its classes. A Fund's performance may be
compared with indices such as the Lehman Brothers Government/Corporate Bond
Index, the Lehman Brothers Government Bond Index, the Lehman Government Bond
1-3 Year Index and the Lehman Aggregate Bond Index; the S&P 500 Index, the Dow
Jones Industrial Average or any other commonly quoted index of common stock
prices; and the Russell 2000 Index and the NASDAQ Composite Index.
Additionally, a Fund may, with proper authorization, reprint articles written
about such Fund and provide them to prospective shareholders.
A Fund may provide period and average annual "total rates of return." The
"total rate of return" refers to the change in the value of an investment in a
Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. For
Class A shares, the average annual total rate of return figures will assume
payment of the maximum initial sales load at the time of purchase. For Class B
and Class C shares, the average annual total rate of return figures will assume
deduction of the applicable contingent deferred sales charge imposed on a total
redemption of shares held for the period. One-, five-, and ten-year periods
will be shown, unless the class has been in existence for a shorter-period.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the yields and the net asset values (in the case of
the Income Funds) of the classes of shares of a Fund will vary based on market
conditions, the current market value of the securities held by a Fund and
changes in the Fund's expenses. The advisers, Shareholder Servicing Agents, the
Administrator, the Distributor and other
20
<PAGE>
service providers may voluntarily waive a portion of their fees on a
month-to-month basis. In addition, the Distributor may assume a portion of a
Fund's operating expenses on a month-to-month basis. These actions would have
the effect of increasing the net income (and therefore the yield and total rate
of return) of the classes of shares of a Fund during the period such waivers
are in effect. These factors and possible differences in the methods used to
calculate the yields and total rates of return should be considered when
comparing the yields or total rates of return of the classes of shares of a
Fund to yields and total rates of return published for other investment
companies and other investment vehicles (including different classes of
shares). The Trust is advised that certain Shareholder Servicing Agents may
credit to the accounts of their customers from whom they are already receiving
other fees amounts not exceeding the Shareholder Servicing Agent fees received,
which will have the effect of increasing the net return on the investment of
customers of those Shareholder Servicing Agents. Such customers may be able to
obtain through their Shareholder Servicing Agents quotations reflecting such
increased return.
In connection with the Hanover Reorganization, the Vista 100% U.S.
Treasury Securities Money Market Fund was established to receive the assets of
The 100% U.S. Treasury Securities Money Market Fund of Hanover, and the Vista
Cash Management Fund (formerly known as the Vista Global Money Market Fund),
which received the assets of The Cash Management Fund of Hanover, adopted the
financial history of The Cash Management Fund of Hanover. Performance results
presented for each class of the Vista 100% U.S. Treasury Securities Money
Market Fund and the Vista Cash Management Fund will be based upon the
performance of The 100% U.S. Treasury Securities Money Market Fund and The Cash
Management Fund of Hanover, respectively, for periods prior to the consummation
of the Hanover Reorganization.
Each Fund presents performance information for each class thereof since
the commencement of operations of that Fund, rather than the date such class
was introduced. Performance information for each class introduced after the
commencement of operations of the related Fund is therefore based on the
performance history of a predecessor class or classes. Performance information
is restated to reflect the current maximum front-end sales charge (in the case
of Class A Shares) or the maximum contingent deferred sales charge (in the case
of Class B Shares) when presented inclusive of sales charges. Additional
performance information may be presented which does not reflect the deduction
or sales charges. Historical expenses reflected in performance information are
based upon the distribution, shareholder servicing fees and other expenses
actually incurred during the period presented and have not been restated, for
periods during which the performance information for a particular class is
based upon the performance history of a predecessor class, to reflect the
ongoing expenses currently borne by the particular class.
Advertising or communications to shareholders may contain the views of the
advisers as to current market, economic, trade and interest rate trends, as
well as legislative, regulatory and monetary developments, and may include
investment strategies and related matters believed to be of relevance to a
Fund.
Advertisements for the Vista funds may include references to the asset
size of other financial products made available by Chase, such as the offshore
assets of other funds.
Total Rate of Return
A Fund's or class's total rate of return for any period will be calculated
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains declared during such period
with respect to a share held at the beginning of such period and with respect
to shares purchased with such dividends and capital gains distributions, by
(ii) the public offering price per share on the first day of such period, and
(b) subtracting 1 from the result. The average annual rate of return quotation
will be calculated by (x) adding 1 to the period total rate of return quotation
as calculated above, (y) raising such sum to a power which is equal to 365
divided by the number of days in such period, and (z) subtracting 1 from the
result.
21
<PAGE>
Average Annual Total Returns* (excluding sales charges)
The average annual total rate of return figures for the following Funds,
reflecting the initial investment and assuming the reinvestment of all
distributions (but excluding the effects of any applicable sales charges) for
the one and five year periods ended August 31, 1997, and for the period from
commencement of business operations to August 31, 1997, were as follows:
<TABLE>
<CAPTION>
Since Date of Date of
One Five Fund Fund Class
Fund Year Years Inception Inception Introduction
- -------------- ------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Tax Free 9/8/97
Income Fund
A Shares 9.14% 6.94% 8.92% 9/8/87
B Shares+ 8.30% 6.27% 8.57% 11/4/93
New York Tax 9/8/97
Free Income
Fund
A Shares 8.85% 6.56% 8.38% 9/8/87
B Shares+ 8.03% 5.95% 8.07% 11/4/93
California
Intermediate
Tax Free
Income Fund
A Shares 7.46% -- 5.19% 7/15/93 7/15/93
</TABLE>
- ----------
* The ongoing fees and expenses borne by Class B Shares are greater than those
borne by Class A Shares. As indicated above, the performance information for
each class introduced after the commencement of operations of the related
Fund is based on the performance history of a predecessor class or classes
and historical expenses have not been restated, for periods during which the
performance information for a particular class is based upon the performance
history of a predecessor class, to reflect the ongoing expenses currently
borne by the particular class. Accordingly, the performance information
presented in the table above and in each table that follows may be used in
assessing each Fund's performance history but does not reflect how the
distinct classes would have performed on a relative basis prior to the
introduction of those classes which would require an adjustment to the
ongoing expenses.
The performance quoted reflects fee waivers that subsidize and reduce the
total operating expenses of certain Funds (or classes thereof). Returns on
these Funds (or classes) would have been lower if there were no such waivers.
With respect to certain Funds, Chase and/or other service providers are
obligated to waive certain fees and/or reimburse expenses. Each Fund's
Prospectus discloses the extent of any agreements to waive fees and/or
reimburse expenses.
+ Performance information presented in the table above and in each table that
follows for this class of the Funds prior to the date this class was
introduced does not reflect distribution fees and certain other expenses borne
by this class which, if reflected, would reduce the performance quoted.
22
<PAGE>
Average Annual Total Returns*
(including sales charges)
With the current maximum sales charge for Class A shares (4.50%) reflected
and the currently applicable CDSC for Class B shares for each period length,
the average annual total rate of return figures for the same periods would be
as follows:
<TABLE>
<CAPTION>
Since
One Five Fund
Fund Year Years Inception
- --------------------------------- ------- ------- ----------
<S> <C> <C> <C>
Tax Free Income Fund
A Shares 4.23% 5.96% 8.42%
B Shares+ 3.30% 4.27% 8.57%
New York Tax Free Income Fund
A Shares 3.30% 4.27% 8.57%
B Shares+ 3.03% 3.95% 8.07%
California Intermediate Tax Free
Income Fund
A Shares 2.62% -- 4.02%
</TABLE>
- ----------
*See the notes to the preceding table.
The Funds may also from time to time include in advertisements or other
communications a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
a Fund with other measures of investment return.
Yield Quotations
Any current "yield" quotation for a class of shares of an Income Fund
shall consist of an annualized hypothetical yield, carried at least to the
nearest hundredth of one percent, based on a thirty calendar day period and
shall be calculated by (a) raising to the sixth power the sum of 1 plus the
quotient obtained by dividing the Fund's net investment income earned during
the period by the product of the average daily number of shares outstanding
during the period that were entitled to receive dividends and the maximum
offering price per share on the last day of the period, (b) subtracting 1 from
the result, and (c) multiplying the result by 2.
Any current "yield" for a class of shares of a Money Market Fund which is
used in such a manner as to be subject to the provisions of Rule 482(d) under
the Securities Act of 1933, as amended, shall consist of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a specific seven calendar day period and shall be calculated by
dividing the net change in the value of an account having a balance of one
Share at the beginning of the period by the value of the account at the
beginning of the period and multiplying the quotient by 365/7. For this
purpose, the net change in account value would reflect the value of additional
Shares purchased with dividends declared on the original Share and dividends
declared on both the original Share and any such additional Shares, but would
not reflect any realized gains or losses from the sale of securities or any
unrealized appreciation or depreciation on portfolio securities. In addition,
any effective yield quotation for a class of shares of a Money Market Fund so
used shall be calculated by compounding the current yield quotation for such
period by multiplying such quotation by 7/365, adding 1 to the product, raising
the sum to a power equal to 365/7, and subtracting 1 from the result. A portion
of a Tax Free Money Market Fund's income used in calculating such yields may be
taxable.
Any taxable equivalent yield quotation of a class of shares of a Tax Free
Fund, whether or not it is a Money Market Fund, shall be calculated as follows.
If the entire current yield quotation for such period is tax-exempt, the tax
equivalent yield will be the current yield quotation (as determined in
accordance with the appropriate calculation described above) divided by 1 minus
a stated income tax rate or rates. If a portion of
23
<PAGE>
the current yield quotation is not tax-exempt, the tax equivalent yield will be
the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus
a stated income tax rate or rates and (b) the portion of the yield which is not
tax-exempt.
<TABLE>
<CAPTION>
Current Effective Compound
Annualized Yield Annualized Yield
as of 8/31/97 as of 8/31/97
------------------ -------------------
<S> <C> <C>
U. S. Government Money Market Fund
Vista Shares 5.05% 5.18%
Premier Shares 5.09% 5.22%
Institutional Shares 5.40% 5.54%
Prime Money Market Fund
B Shares 4.49% 4.59%
Premier Shares 5.29% 5.43%
Institutional Shares 5.49% 5.64%
Federal Money Market Fund
Vista Shares 4.93% 5.05%
Premier Shares 5.13% 5.26%
Institutional Shares 5.36% 5.50%
Treasury Plus Money Market Fund
Vista Shares 4.87% 4.99%
Premier Shares 4.97% 5.09%
Institutional Shares 5.21% 5.35%
100% U.S. Treasury Securities
Money Market Fund
Vista Shares 4.90% 5.02%
Premier Shares 4.94% 5.06%
Institutional Shares 5.22% 5.36%
Cash Management Fund
Vista Shares 5.09% 5.22%
Premier Shares 5.19% 5.32%
Institutional Shares 5.44% 5.59%
</TABLE>
<TABLE>
<CAPTION>
Current Effective Annualized
Annualized Compound Tax Equivalent
Yield Annualized Yield Yield**
as of 8/31/97 as of 8/31/97 as of 8/31/97
--------------- ------------------ ---------------
<S> <C> <C> <C>
Tax Free Money Market Fund
Vista Shares 2.98% 3.02% 4.93%
Premier Shares 3.06% 3.11% 5.07%
Institutional Shares 3.31% 3.37% 5.48%
California Tax Free
Money Market Fund 2.88% 2.92% 5.36%
New York Tax Free
Money Market Fund 2.91% 2.96% 5.45%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Thirty-Day Tax Equivalent
Yield Thirty-Day Yield**
as of 8/31/97 as of 8/31/97
--------------- -------------------
<S> <C> <C>
Tax Free Income Fund
Class A Shares 4.29% 7.10%
Class B Shares 3.74% 6.19%
New York Tax Free Income Fund
Class A Shares 3.97% 7.43%
Class B Shares 3.42% 6.40%
California Intermediate Tax Free Income Fund 3.97% 7.38%
</TABLE>
- ----------
* The tax equivalent yields assume a federal income tax rate of 39.6% for the
Tax Free Money Market Fund and Tax Free Income Fund, a combined New York State,
New York City and federal income tax rate of 46.80% for the New York Tax Free
Money Market Fund and New York Tax Free Income Fund and a combined California
State and federal income tax rate of 46.24% for the California Tax Free Money
Market Fund and California Intermediate Tax Free Income Fund.
Non-Standardized Performance Results*
(excluding sales charges)
The table below reflects the net change in the value of an assumed initial
investment of $10,000 in the following Funds (excluding the effects of any
applicable sales charges) for the period from the commencement date of business
for each such Fund (i.e., either September 8, 1987 for the Tax Free Income and
New York Tax Free Income Funds or July 16, 1993 for the California Intermediate
Tax Free Income Fund.) The values reflect an assumption that capital gain
distributions and income dividends, if any, have been invested in additional
shares of the same class. From time to time, the Funds may provide these
performance results in addition to the total rate of return quotations required
by the Securities and Exchange Commission. As discussed more fully in the
Prospectuses, neither these performance results, nor total rate of return
quotations, should be considered as representative of the performance of the
Funds in the future. These factors and the possible differences in the methods
used to calculate performance results and total rates of return should be
considered when comparing such performance results and total rate of return
quotations of the Funds with those published for other investment companies and
other investment vehicles.
<TABLE>
<CAPTION>
Value of Value of Fund
Period Ended Initial $10,000 Capital Gains Value of Total Inception
August 31, 1997 Investment Distribution Reinvested Dividends Value Date
- ------------------------------------- ----------------- --------------- ---------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
The Tax Free Income Fund:
A Shares $12,320 $1,278 $9,877 $23,475 9/8/97
B Shares+ 12,250 1,239 9,257 22,746
The New York Tax Free Income Fund:
A Shares 11,800 1,708 8,840 22,348 9/8/97
B Shares+ 11,760 1,661 8,300 21,721
The California Intermediate Tax Free
Income Fund 9,853 249 2,220 12,322 7/15/93
</TABLE>
- ----------
* See the notes to the table captioned "Average Annual Total Return (excluding
sales charges)" above. The table above assumes an initial investment of $10,000
in a particular class of a Fund for the period from the Fund's commencement of
operations, although the particular class may have been introduced at a
subsequent date. As indicated above, performance information for each class
introduced after the commencement of operations of the related Fund is based on
the performance history of a predecessor class or classes, and historical
expenses have not been restated, for periods during which the performance
information for a particular class is based upon the performance history of a
predecessor class, to reflect the ongoing expenses currently borne by the
particular class.
25
<PAGE>
Non-Standardized Performance Results* (includes sales charges)
With the current maximum sales charge of 4.50% for Class A shares, and the
currently applicable CDSC for Class B shares for each period length, reflected,
the figures for the same periods would be as follows:
<TABLE>
<CAPTION>
Value of Value of
Period Ended Initial $10,000 Capital Gains Value of Total
August 31, 1997 Investment Distribution Reinvested Dividends Value
- ------------------------------------- ----------------- --------------- ---------------------- --------
<S> <C> <C> <C> <C>
The Tax Free Income Fund:
A Shares $11,766 $1,220 $9,432 $22,418
B Shares+ 12,250 1,239 9,257 22,746
The New York Tax Free Income Fund:
A Shares 11,269 1,632 8,442 21,343
B Shares+ 11,760 1,661 8,300 21,721
The California Intermediate Tax Free
Income Fund 9,410 238 2,120 11,768
</TABLE>
- ----------
* See the notes to the table captioned "Average Annual Total Return (excluding
sales charges)" above. The table above assumes an initial investment of $10,000
in a particular class of a Fund for the period from the Fund's commencement of
operations, although the particular class may have been introduced at a
subsequent date. As indicated above, performance information for each class
introduced after the commencement of operations of the related Fund is based on
the performance history of a predecessor class or classes, and historical
expenses have not been restated, for periods during which the performance
information for a particular class is based upon the performance history of a
predecessor class, to reflect the ongoing expenses currently borne by the
particular class.
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,to
the days listed above (other than Good Friday), the Funds are closed for
business on the following holidays: Martin Luther King Day, Columbus Day, and
Veteran's Day.
The Money Market Funds' portfolio securities are valued at their amortized
cost. Amortized cost valuation involves valuing an instrument at its cost and
thereafter accrediting discounts and amortizing premiums at a constant rate to
maturity. Pursuant to the rules of the Securities and Exchange Commission, the
Board of Trustees has established procedures to stabilize the net asset value
of each Money Market Fund at $1.00 per share. These procedures include a review
of the extent of any deviation of net asset value per share, based on available
market rates, from the $1.00 amortized cost price per share. If fluctuating
interest rates cause the market value of a Money Market Fund's portfolio to
approach a deviation of more than 1/2 of 1% from the value determined on the
basis of amortized cost, the Board of Trustees will consider what action, if
any, should be initiated. Such action may include redemption of shares in kind
(as described in greater detail below), selling portfolio securities prior to
maturity, reducing or withholding dividends and utilizing a net asset value per
share as determined by using available market quotations.
The Money Market Funds have established procedures designed to ensure that
their portfolio securities meet their high quality criteria.
Bonds and other fixed income securities (other than short-term
obligations) in a Fund's portfolio are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the Board
of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and
26
<PAGE>
electronic data processing techniques that take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or
exchange or over-the-counter prices, since such valuations are believed to
reflect more accurately the fair value of such securities. Short- term
obligations which mature in 60 days or less are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Futures and
option contracts that are traded on commodities or securities exchanges are
normally valued at the settlement price on the exchange on which they are
traded. Portfolio securities (other than short-term obligations) for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in an Income Fund's portfolio is
determined on the basis of coupon interest accrued plus amortization of
discount (the difference between acquisition price and stated redemption price
at maturity) and premiums (the excess of purchase price over stated redemption
price at maturity). Interest income on short-term obligations is determined on
the basis of interest and discount accrued less amortization of premium.
PURCHASES, REDEMPTIONS AND EXCHANGES
The Fund has established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in the Prospectuses are not
available until a completed and signed account application has been received by
the Transfer Agent. Telephone transaction privileges are made available to
shareholders automatically upon opening an account unless the privilege is
declined in Section 6 of the Account Application.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, a Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service
options chosen by the shareholder or joint shareholders in his or their latest
account application or other written request for services, including
purchasing, exchanging, or redeeming shares of such Fund and depositing and
withdrawing monies from the bank account specified in the Bank Account
Registration section of the shareholder's latest account application or as
otherwise properly specified to such Fund in writing.
Subject to compliance with applicable regulations, each Fund has reserved
the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
Investors in Class A shares may qualify for reduced initial sales charges
by signing a statement of intention (the "Statement"). This enables the
investor to aggregate purchases of Class A shares in the Fund with purchases of
Class A shares of any other Fund in the Trust (or if a Fund has only one class,
shares of such Fund), excluding shares of any Vista money market fund, during a
13-month period. The sales charge is based on the total amount to be invested
in Class A shares during the 13-month period. All Class A or other qualifying
shares of these funds currently owned by the investor will be credited as
purchases (at their current offering prices on the date the Statement is
signed) toward completion of the Statement. A 90-day back-dating period can be
used to include earlier purchases at the investor's cost. The 13-month period
would then begin on the date of the first purchase during the 90-day period. No
retroactive adjustment will be made if purchases exceed the amount indicated in
the Statement. A shareholder must notify the Transfer Agent or Distributor
whenever a purchase is being made pursuant to a Statement.
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The Statement is not a binding obligation on the investor to purchase the
full amount indicated; however, on the initial purchase, if required (or
subsequent purchases if necessary), 5% of the dollar amount specified in the
Statement will be held in escrow by the Transfer Agent in Class A shares (or if
a Fund has only one class and is subject to an initial sales charge, shares of
such Fund) registered in the shareholder's name in order to assure payment of
the proper sales charge. If total purchases pursuant to the Statement (less any
dispositions and exclusive of any distributions on such shares automatically
reinvested) are less than the amount specified, the investor will be requested
to remit to the Transfer Agent an amount equal to the difference between the
sales charge paid and the sales charge applicable to the aggregate purchases
actually made. If not remitted within 20 days after written request, an
appropriate number of escrowed shares will be redeemed in order to realize the
difference. This privilege is subject to modification or discontinuance at any
time with respect to all shares purchased thereunder. Reinvested dividend and
capital gain distributions are not counted toward satisfying the Statement.
Class A shares of a Fund may also be purchased by any person at a reduced
initial sales charge which is determined by (a) aggregating the dollar amount
of the new purchase and the greater of the purchaser's total (i) net asset
value or (ii) cost of any shares acquired and still held in the Fund, or any
other Vista fund excluding any Vista money market fund, and (b) applying the
initial sales charge applicable to such aggregate dollar value (the "Cumulative
Quantity Discount"). The privilege of the Cumulative Quality Discount is
subject to modification or discontinuance at any time with respect to all Class
A shares (or if a Fund has only one class and is subject to an initial sales
charge, shares of such Fund) purchased thereafter.
An individual who is a member of a qualified group (as hereinafter
defined) may also purchase Class A shares of a Fund (or if a Fund has only one
class and is subject to an initial sales charge, shares of such Fund) at the
reduced sales charge applicable to the group taken as a whole. The reduced
initial sales charge is based upon the aggregate dollar value of Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) previously purchased and still owned by the group plus the
securities currently being purchased and is determined as stated in the
preceding paragraph. In order to obtain such discount, the purchaser or
investment dealer must provide the Transfer Agent with sufficient information,
including the purchaser's total cost, at the time of purchase to permit
verification that the purchaser qualifies for a cumulative quantity discount,
and confirmation of the order is subject to such verification. Information
concerning the current initial sales charge applicable to a group may be
obtained by contacting the Transfer Agent.
A "qualified group" is one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Class A shares (or if a
Fund has only one class and is subject to an initial sales charge, shares of
such Fund) at a discount and (iii) satisfies uniform criteria which enables the
Distributor to realize economies of scale in its costs of distributing Class A
shares (or if a Fund has only one class and is subject to an initial sales
charge, shares of such Fund). A qualified group must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Fund and the members, must agree to include sales and other materials related
to the Fund in its publications and mailings to members at reduced or no cost
to the Distributor, and must seek to arrange for payroll deduction or other
bulk transmission of investments in the Fund. This privilege is subject to
modification or discontinuance at any time with respect to all Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) purchased thereafter.
Under the Exchange Privilege, shares may be exchanged for shares of
another fund only if shares of the fund exchanged into are registered in the
state where the exchange is to be made. Shares of a Fund may only be exchanged
into another fund if the account registrations are identical. With respect to
exchanges from any Vista money market fund, shareholders must have acquired
their shares in such money market fund by exchange from one of the Vista
non-money market funds or the exchange will be done at relative net asset value
plus the appropriate sales charge. Any such exchange may create a gain or loss
to be recognized for federal income tax purposes. Normally, shares of the fund
to be acquired are purchased on the redemption date, but such purchase may be
delayed by either fund for up to five business days if a fund determines that
it would be disadvantaged by an immediate transfer of the proceeds.
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The contingent deferred sales charge for Class B shares will be waived for
certain exchanges and for redemptions in connection with a Fund's systematic
withdrawal plan, subject to the conditions described in the Prospectuses. In
addition, subject to confirmation of a shareholder's status, the contingent
deferred sales charge will be waived for: (i) a total or partial redemption
made within one year of the shareholder's death or initial qualification for
Social Security disability payments; (ii) a redemption in connection with a
Minimum Required Distribution form an IRA, Keogh or custodial account under
section 403(b) of the Internal Revenue Code or a mandatory distribution from a
qualified plan; (iii) redemptions made from an IRA, Keogh or custodial account
under section 403(b) of the Internal Revenue Code through an established
Systematic Redemption Plan; (iv) a redemption resulting from an
over-contribution to an IRA; (v) distributions from a qualified plan upon
retirement; and (vi) an involuntary redemption of an account balance under
$500.
Class B shares automatically convert to Class A shares (and thus are then
subject to the lower expenses borne by Class A shares) after a period of time
specified below has elapsed since the date of purchase (the "CDSC Period"),
together with the pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares attributable to the
Class B shares then converting. The conversion of Class B shares purchased on
or after May 1, 1996, will be effected at the relative net asset values per
share of the two classes on the first business day of the month following the
eighth anniversary of the original purchase. The conversion of Class B shares
purchased prior to May 1, 1996, will be effected at the relative net asset
values per share of the two classes on the first business day of the month
following the seventh anniversary of the original purchase. If any exchanges of
Class B shares during the CDSC Period occurred, the holding period for the
shares exchanged will be counted toward the CDSC Period. At the time of the
conversion the net asset value per share of the Class A shares may be higher or
lower than the net asset value per share of the Class B shares; as a result,
depending on the relative net asset values per share, a shareholder may receive
fewer or more Class A shares than the number of Class B shares converted.
A Fund may require signature guarantees for changes that shareholders
request be made in Fund records with respect to their accounts, including but
not limited to, changes in bank accounts, for any written requests for
additional account services made after a shareholder has submitted an initial
account application to the Fund, and in certain other circumstances described
in the Prospectuses. A Fund may also refuse to accept or carry out any
transaction that does not satisfy any restrictions then in effect. A signature
guarantee may be obtained from a bank, trust company, broker-dealer or other
member of a national securities exchange. Please note that a notary public
cannot provide a signature guarantee.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the respective Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussions here and in each Fund's Prospectus are not intended as substitutes
for careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As
a regulated investment company, each Fund is not subject to federal income tax
on the portion of its net investment income (i.e., its investment company
taxable income, as that term is defined in the Code, without regard to the
deduction for dividends paid) and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
shareholders, provided that it distributes at least 90% of its net investment
income and at least 90% of its tax-exempt income (net of expenses allocable
thereto) for the taxable year (the "Distribution Requirement"), and satisfies
certain other requirements of the Code that are described below. Because
certain Funds invest all of their assets in Portfolios which will be classified
as partnerships for federal income tax purposes, such Funds will be deemed to
own a proportionate share of the income of the Portfolio into which each
contributes all of its assets for purposes of determining whether such Funds
satisfy the Distribution Requirement
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and the other requirements necessary to qualify as a regulated investment
company (e.g., Income Requirement (hereinafter defined), etc.).
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies (to the
extent such currency gains are directly related to the regulated investment
company's principal business of investing in stock or securities) and other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement").
In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the
value of its total assets may be invested in the securities of any one issuer
(other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses.
Each non-Money Market Fund may engage in hedging or derivatives
transactions involving foreign currencies, forward contracts, options and
futures contracts (including options, futures and forward contracts on foreign
currencies) and short sales. See "Additional Policies Regarding Derivative and
Related Transactions." Such transactions will be subject to special provisions
of the Code that, among other things, may affect the character of gains and
losses realized by the Fund (that is, may affect whether gains or losses are
ordinary or capital), accelerate recognition of income of the Fund and defer
recognition of certain of the Fund's losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. In addition,
these provisions (1) will require a Fund to "mark-to-market" certain types of
positions in its portfolio (that is, treat them as if they were closed out) and
(2) may cause a Fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
Distribution Requirement and avoid the 4% excise tax (described below). Each
Fund intends to monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when
it acquires any option, futures contract, forward contract or hedged investment
in order to mitigage the effect of these rules.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98%
of ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year
election"))(Tax-exempt interest on municipal obligations is not subject to the
excise tax). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax.
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However, investors should note that a Fund may in certain circumstances be
required to liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its net taxable
income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they will not qualify for the 70% dividends-received deduction
for corporate shareholders of a Fund. Dividends paid on Class A, Class B and
Class C shares are calculated at the same time. In general, dividends on Class
B and Class C shares are expected to be lower than those on Class A shares due
to the higher distribution expenses borne by the Class B and Class C shares.
Dividends may also differ between classes as a result of differences in other
class specific expenses.
A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
Under recently enacted legislation, the maximum rate of tax on long-term
capital gains of individuals will generally be reduced from 28% to 20% (10% for
gains otherwise taxed at 15%) for long-term capital gains realized after July
28, 1997 with respect to capital assets held for more than 18 months.
Additionally, beginning after December 31, 2000, the maximum tax rate for
capital assets with a holding period beginning after that date and held for
more than five years will be 18%. Under a literal reading of the legislation,
capital gain dividends paid by a regulated investment company would not appear
eligible for the reduced capital gain rates. However, the legislation
authorizes the Treasury Department to promulgate regulations that would apply
the new rates to capital gain dividends paid by a regulated investment company.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Each Tax Free Fund intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax Free
Fund's taxable year at least 50% of the its total assets consists of tax-exempt
municipal obligations. Distributions from a Tax Free Fund will constitute
exempt-interest dividends to the extent of its tax-exempt interest income (net
of expenses and amortized bond premium). Exempt-interest dividends distributed
to shareholders of a Tax Free Fund are excluded from gross income for federal
income tax purposes. However, shareholders required to file a federal income
tax return will be required to report the receipt of exempt-interest dividends
on their returns. Moreover, while exempt-interest dividends are excluded from
gross income for federal income tax purposes, they may be subject to
alternative minimum tax ("AMT") in certain circumstances and may have other
collateral tax consequences as discussed below. Distributions by a Tax Free
Fund of any investment company taxable income or of any net capital gain will
be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount. In
addition, under
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the Superfund Amendments and Reauthorization Act of 1986, a tax is imposed for
taxable years beginning after 1986 and before 1996 at the rate of 0.12% on the
excess of a corporate taxpayer's AMTI (determined without regard to the
deduction for this tax and the AMT net operating loss deduction) over $2
million. Exempt-interest dividends derived from certain "private activity"
municipal obligations issued after August 7, 1986 will generally constitute an
item of tax preference includable in AMTI for both corporate and noncorporate
taxpayers. In addition, exempt-interest dividends derived from all municipal
obligations, regardless of the date of issue, must be included in adjusted
current earnings, which are used in computing an additional corporate
preference item (i.e., 75% of the excess of a corporate taxpayer's adjusted
current earnings over its AMTI (determined without regard to this item and the
AMT net operating loss deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must
be included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of a Tax Free Fund is denied a deduction for
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund. Moreover, a shareholder who is (or is related to) a "substantial
user" of a facility financed by industrial development bonds held by a Tax Free
Fund will likely be subject to tax on dividends paid by the Tax Free Fund which
are derived from interest on such bonds. Receipt of exempt-interest dividends
may result in other collateral federal income tax consequences to certain
taxpayers, including financial institutions, property and casualty insurance
companies and foreign corporations engaged in a trade or business in the United
States. Prospective investors should consult their own tax advisers as to such
consequences.
Net investment income that may be received by certain of the Funds from
sources within foreign countries may be subject to foreign taxes withheld at
the source. The United States has entered into tax treaties with many foreign
countries which entitle any such Fund to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of any such Fund's assets to be
invested in various countries is not known.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis
in his shares; any excess will be treated as gain from the sale of his shares,
as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date. In addition, if the net asset
value at the time a shareholder purchases shares of a Fund reflects
undistributed net investment income or recognized capital gain net income, or
unrealized appreciation in the value of the assets of the Fund, distributions
of such amounts will be taxable to the shareholder in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3)
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who has failed to certify to the Fund that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
Each Money Market Fund seeks to maintain a stable net asset value of $1.00
per share; however, there can be no assurance that a Money Market Fund will do
this. In such a case and any case involving the Income Funds, a shareholder
will recognize gain or loss on the sale or redemption of shares of a Fund in an
amount equal to the difference between the proceeds of the sale or redemption
and the shareholder's adjusted tax basis in the shares. All or a portion of any
loss so recognized may be disallowed if the shareholder purchases other shares
of the Fund within 30 days before or after the sale or redemption. In general,
any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. However, any capital loss arising from the sale or redemption of shares
held for six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, paid to a foreign shareholder
from net investment income will be subject to U.S. withholding tax at the rate
of 30% (or lower treaty rate) upon the gross amount of the dividend. Such a
foreign shareholder would generally be exempt from U.S. federal income tax on
gains realized on the sale of shares of the Fund and capital gain dividends and
amounts retained by the Fund that are designated as undistributed capital
gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable
at a reduced treaty rate) unless such shareholders furnish the Fund with proper
notification of their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
State and Local Tax Matters
Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding
taxes. Most states provide that a RIC may pass through (without restriction) to
its shareholders state and local income tax exemptions available to direct
owners of certain types of U.S. government securities (such as U.S. Treasury
obligations). Thus, for residents of these states, distributions derived from a
Fund's investment in certain types of U.S. government securities should be free
from state and local income taxes to the extent that the interest income from
such investments would have been exempt from state and local income taxes if
such securities had been held directly by the respective shareholders
themselves. Certain states,
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however, do not allow a RIC to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities unless the RIC holds at least a required amount of U.S.
government securities. Accordingly, for residents of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities may not be entitled to the exemptions from state and
local income taxes that would be available if the shareholders had purchased
U.S. government securities directly. Shareholders' dividends attributable to a
Fund's income from repurchase agreements generally are subject to state and
local income taxes, although states and regulations vary in their treatment of
such income. The exemption from state and local income taxes does not preclude
states from asserting other taxes on the ownership of U.S. government
securities. To the extent that a Fund invests to a substantial degree in U.S.
government securities which are subject to favorable state and local tax
treatment, shareholders of such Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
Rules of state and local taxation of ordinary income dividends and capital gain
dividends from RICs may differ from the rules for U.S. federal income taxation
in other respects. Shareholders are urged to consult their tax advisers as to
the consequences of these and other state and local tax rules affecting
investment in a Fund.
Effect of Future Legislation
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in
effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
MANAGEMENT OF THE TRUST AND THE FUNDS
Trustees and Officers
The Trustees and of the Trust officers and their principal occupations for
at least the past five years are set forth below. Their titles may have varied
during that period.
Fergus Reid, III--Chairman of the Trust. Chairman and Chief Executive
Officer, Lumelite Corporation, since September 1985; Trustee, Morgan Stanley
Funds. Age: 65. Address: 202 June Road, Stamford, CT 06903.
*H. Richard Vartabedian--Trustee and President of the Trust. Investment
Management Consultant; formerly, Senior Investment Officer, Division Executive
of the Investment Management Division of The Chase Manhattan Bank, N.A.,
1980-1991. Age: 61. Address: P.O. Box 296, Beach Road, Hendrick's Head,
Southport, ME 04576.
William J. Armstrong--Trustee. Vice President and Treasurer,
Ingersoll-Rand Company. Age: 55. Address: 49 Aspen Way, Upper Saddle River, NJ
07458.
John R.H. Blum--Trustee. Attorney in private practice; formerly a Partner
in the law firm of Richards, O'Neil & Allegaert; Commissioner of Agriculture
State of Connecticut, 1992-1995. Age: 68. Address: 322 Main Street,
Lakeville,CT 06039.
Stuart W. Cragin, Jr.--Trustee. Retired; formerly President, Fairfield
Testing Laboratory, Inc. He has previously served in a variety of marketing,
manufacturing and general management positions with Union Camp Corp., Trinity
Paper & Plastics Corp., and Conover Industries. Age: 64. Address: 108 Valley
Road, Cos Cob, CT 06807.
Roland R. Eppley, Jr.--Trustee. Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.; formerly Director of The Hanover Funds, Inc.
Age: 65. Address: 105 Coventry Place, Palm Beach Gardens, FL 33418.
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Joseph J. Harkins--Trustee. Retired; Commercial Sector Executive and
Executive Vice President of The Chase Manhattan Bank, N.A. from 1985 through
1989. He has been employed by Chase in numerous capacities and offices from
1954 through 1989. Director of Blessings Corporation, Jefferson Insurance
Company of New York, Monticello Insurance Company and National. Age: 65.
Address: 257 Plantation Circle South, Ponte Vedra Beach, FL 32082.
*Sarah E. Jones--Trustee. President and Chief Operating Officer of Chase
Mutual Funds Corp.; formerly Managing Director for the Global Asset Management
and Private Banking Division of the Chase Manhattan Bank. Age: 46. Address: One
Chase Manhattan Plaza, Third Floor, New York, New York 10081.
W.D. MacCallan--Trustee. Director of The Adams Express Co. and Petroleum &
Resources Corp.; formerly Chairman of the Board and Chief Executive Officer of
The Adams Express Co. and Petroleum & Resources Corp.; Director of The Hanover
Funds, Inc. and The Hanover Investment Funds, Inc. Age: 70. Address: 624 East
45th Street, Savannah, GA 31405.
W. Perry Neff--Trustee. Independent Financial Consultant; Director of
North America Life Assurance Co., Petroleum & Resources Corp. and The Adams
Express Co.; formerly Director and Chairman of The Hanover Funds, Inc.;
formerly Director, Chairman and President of The Hanover Investment Funds, Inc.
Age: 70. Address: RR 1 Box 102, Weston, VT 05181.
*Leonard M. Spalding, Jr.--Trustee. Chief Executive Officer of Chase
Mutual Funds Corp.; formerly President and Chief Executive Officer of Vista
Capital Management; and formerly Chief Investment Executive of the Chase
Manhattan Private Bank. Age: 62. Address: One Chase Manhattan Plaza, Third
Floor, New York, New York 10081.
Richard E. Ten Haken--Trustee; Chairman of the Audit Committee. Formerly
District Superintendent of Schools, Monroe No. 2 and Orleans Counties, New
York; Chairman of the Board and President, New York State Teachers' Retirement
System. Age: 63. Address: 4 Barnfield Road, Pittsford, NY 14534.
Irving L. Thode--Trustee. Retired; formerly Vice President of Quotron
Systems. He has previously served in a number of executive positions with
Control Data Corp., including President of its Latin American Operations, and
General Manager of its Data Services business. Age: 66. Address: 80 Perkins
Road, Greenwich, CT 06830.
Martin R. Dean--Treasurer. Associate Director, Accounting Services, BISYS
Fund Services; formerly Senior Manager, KPMG Peat Marwick (1987-1994). Age: 33.
Address: 3435 Stelzer Road, Columbus, OH 43219.
Lee Schultheis--Assistant Treasurer and Assistant Secretary. President,
BISYS Fund Distributors; formerly Managing Director, Forum Financial Group.
Age: 41. Address: One Chase Manhattan Plaza, Third Floor, New York, NY 10081.
W. Anthony Turner--Secretary. Senior Vice President and Regional Client
Executive, BISYS Fund Services; formerly Senior Vice President, First Union
Brokerage Services, Inc. and Senior Vice President, NationsBank. Age: 36.
Address: 125 West 55th Street, New York, NY 10019.
- ----------
*Asterisks indicate those Trustees that are "interested persons" (as defined in
the 1940 Act). Mr. Reid is not an interested person of the Trust's investment
advisers or principal underwriter, but may be deemed an interested person of
the Trust solely by reason of being chairman of the Trust.
35
<PAGE>
The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Armstrong,
Eppley, MacCallan and Thode. The function of the Audit Committee is to
recommend independent auditors and monitor accounting and financial matters.
The Audit Committee met two times during the fiscal period ended August 31,
1997.
The Board of Trustees of the Trust has established an Investment
Committee. The members of the Investment Committee are Messrs. Vartabedian
(Chairman), Reid and Spalding. The function of the Investment Committee is to
review the investment management process of the Trust.
The Trustees and officers of the Trust appearing in the table above also
serve in the same capacities with respect to Mutual Fund Group, Mutual Fund
Variable Annuity Trust, Mutual Fund Select Group, Mutual Fund Select Trust,
Capital Growth Portfolio, Growth and Income Portfolio, and International Equity
Portfolio (these entities, together with the Trust, are referred to below as
the "Vista Funds").
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisers is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the advisers. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended August 31, 1997 for each Trustee of the Trust:
<TABLE>
<CAPTION>
U.S. New York California
Government Cash Tax Free Prime Tax Free Tax Free
Money Management Money Money Money Money
Market Fund Fund Market Fund Market Fund Market Fund Market Fund
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee $ 25,653.12 $ 15,603.85 $ 4,564.75 $ 7,867.48 $ 4,552.98 $ 232.56
H. Richard Vartabedian, Trustee 22,147.67 13,572.80 3,987.88 6,890.64 4,015.45 201.72
William J. Armstrong, Trustee 14,096.36 8,648.09 2,541.07 4,394.24 2,564.42 128.76
John R.H. Blum, Trustee 15,703.56 9,595.85 2,815.73 4,854.28 2,844.01 143.31
Stuart W. Cragin, Jr., Trustee 14,765.14 9,048.49 2,658.64 4,593.77 2,676.96 134.49
Roland R. Eppley, Jr., Trustee 14,765.14 9,048.49 2,658.64 4,593.77 2,676.96 134.49
Joseph J. Harkins, Trustee 15,389.67 9,415.33 2,762.55 4,769.24 2,793.55 140.31
Sarah E. Jones, Trustee 0.00 0.00 0.00 0.00 0.00 0.00
W.D. MacCallan, Trustee 14,765.14 9,048.49 2,658.64 4,593.77 2,676.96 134.49
W. Perry Neff, Trustee 15,389.67 9,415.33 2,762.55 4,769.24 2,793.55 140.31
Leonard M. Spalding, Jr., Trustee 0.00 0.00 0.00 0.00 0.00 0.00
Richard E. Ten Haken, Trustee 14,765.14 9,048.49 2,658.64 4,593.77 2,676.96 134.49
Irving L. Thode, Trustee 14,765.14 9,048.49 2,658.64 4,593.77 2,676.9 134.49
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
100% U.S.
Treasury California Treasury
Federal Plus New York Tax Intermediate Securities
Money Money Tax Free Free Tax Free Money Market
Market Fund Market Fund Income Fund Income Fund Income Fund Fund
------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee $ 3,921.97 $ 10,013.99 $547.05 $421.65 $ 124.85 $ 9,881.87
H. Richard Vartabedian, Trustee 3,417.14 8,653.82 479.59 370.09 108.47 8,577.22
William J. Armstrong, Trustee 2,171.59 5,514.80 305.09 235.27 68.67 5,460.25
John R.H. Blum, Trustee 2,407.23 6,086.05 337.94 260.85 76.77 6,038.45
Stuart W. Cragin, Jr. Trustee 2,277.76 5,771.25 319.72 246.70 72.30 5,717.52
Roland R. Eppley, Jr. Trustee 2,277.76 5,771.25 319.72 246.70 72.30 5,717.52
Joseph J. Harkins, Trustee 2,364.57 5,969.62 331.88 256.25 75.30 5,927.39
Sarah E. Jones, Trustee 0.00 0.00 0.00 0.00 0.00 0.00
W.D. MacCallan, Trustee 2,277.76 5,771.25 319.72 246.70 72.30 5,717.52
W. Perry Neff, Trustee 2,364.57 5,969.62 331.88 256.25 75.30 5,927.39
Leonard M. Spalding, Jr., Trustee 0.00 0.00 0.00 0.00 0.00 0.00
Richard E. Ten Haken, Trustee 2,277.76 5,771.25 319.72 246.70 72.30 5,717.52
Irving L. Thode, Trustee 2,277.76 5,771.25 319.72 246.70 72.30 5,717.52
</TABLE>
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits Accrued From
as Fund Expenses (1) "Fund Complex" (2)
---------------------- -------------------
<S> <C> <C>
Fergus Reid, III, Trustee $ 56,368 $129,500
H. Richard Vartabedian, Trustee 47,622 102,750
William J. Armstrong, Trustee 38,372 67,000
John R.H. Blum, Trustee 41,363 73,000
Stuart W. Cragin, Jr., Trustee 34,965 68,500
Roland R. Eppley, Jr., Trustee 53,267 68,500
Joseph J. Harkins, Trustee 52,508 71,500
Sarah E. Jones, Trustee -- --
W.D. MacCallan, Trustee 66,323 68,500
W. Perry Neff, Trustee 66,323 71,500
Leonard M. Spalding, Jr., Trustee -- --
Richard E. Ten Haken, Trustee 31,463 68,500
Irving L. Thode, Trustee 41,876 68,500
</TABLE>
- ----------
(1) Data reflects total benefits accrued by Mutual Fund Group, Mutual Fund
Select Group, Capital Growth Portfolio, Growth and Income Portfolio and
International Equity Portfolio for the fiscal year ended October 31, 1997
and by the Trust, Mutual Fund Select Trust, and Mutual Fund Variable Annuity
Trust for the fiscal year ended August 31, 1997.
(2) Data reflects total compensation earned during the period January 1, 1997 to
December 31, 1997 for service as a Trustee to the Trust, Mutual Fund Group,
Mutual Fund Variable Annuity Trust, Mutual Select Group, Mutual Fund Select
Trust, Capital Growth Portfolio, Growth and Income Portfolio and
International Equity Portfolio.
As of October 31, 1997, the Trustees and officers as a group owned less
than 1% of each Fund's outstanding shares, all of which were acquired for
investment purposes. For the fiscal year ended August 31, 1997, the Trust paid
its disinterested Trustees fees and expenses for all the meetings of the Board
and any committees attended in the aggregate amount of approximately $569,995
which amount was then apportioned among the Funds comprising the Trust.
37
<PAGE>
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not
an employee of any of the Funds, the advisers, administrator or distributor or
any of their affiliates) may be entitled to certain benefits upon retirement
from the Board of Trustees. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Trustee has attained age 65 and has completed at
least five years of continuous service with one or more of the investment
companies advised by the adviser (collectively, the "Covered Funds"). Each
Eligible Trustee is entitled to receive from the Covered Funds an annual
benefit commencing on the first day of the calendar quarter coincident with or
following his date of retirement equal to the sum of (i) 8% of the highest
annual compensation received from the Covered Funds multiplied by the number of
such Trustee's years of service (not in excess of 10 years) completed with
respect to any of the Covered Funds and (ii) 4% of the highest annual
compensation received from the Covered Funds for each year of Service in excess
of 10 years, provided that no Trustee's annual benefit will exceed the highest
annual compensation received by that Trustee from the Covered Funds. Such
benefit is payable to each eligible Trustee in monthly installments for the
life of the Trustee.
Set forth below in the table are the estimated annual benefits payable to
an eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of October 31, 1997, the estimated credited years
of service for Messrs.Reid, Vartabedian, Armstrong, Blum, Cragin, Eppley,
Harkins, Neff, MacCallan, Spalding, TenHaken, Thode and Ms. Jones are 12, 4, 9,
12, 4, 8, 6, 7, 7, 0, 12, 4 and 0, respectively.
<TABLE>
<CAPTION>
Highest Annual Compensation Paid by All Vista Funds
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$60,000 $80,000 $100,000 $120,000 $140,000
<CAPTION>
Years of
Service Estimated Annual Benefits Upon Retirement
- ---------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
14 $57,600 $76,800 $ 96,000 $115,200 $134,400
12 52,800 70,400 88,000 105,600 123,200
10 48,000 64,000 80,000 96,000 112,000
8 38,400 51,200 64,000 76,800 89,600
6 28,800 38,400 48,000 57,600 67,200
4 19,200 25,600 32,000 38,400 44,800
</TABLE>
Effective August 21, 1995, the Trustees instituted a Deferred Compensation
Plan for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which
each Trustee (who is not an employee of any of the Funds, the advisers,
administrator or distributor or any of their affiliates) may enter into
agreements with the Funds whereby payment of the Trustee's fees are deferred
until the payment date elected by the Trustee (or the Trustee's termination of
service). The deferred amounts are invested in shares of Vista funds selected
by the Trustee. The deferred amounts are paid out in a lump sum or over a
period of several years as elected by the Trustee at the time of deferral. If a
deferring Trustee dies prior to the distribution of amounts held in the
deferral account, the balance of the deferral account will be distributed to
the Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death.
Messrs. Eppley, Ten Haken, Thode and Vartabedian have each executed a
deferred compensation agreement for the 1997 calendar year and as of October
31, 1997 they had contributed $55,334, $27,669, $49,803, and $83,000,
respectively.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or
with respect to any matter unless it is finally adjudicated that they did not
act in good faith in
38
<PAGE>
the reasonable belief that their actions were in the best interest of the
Trust. In the case of settlement, such indemnification will not be provided
unless it has been determined by a court or other body approving the settlement
or other disposition, or by a reasonable determination based upon a review of
readily available facts, by vote of a majority of disinterested Trustees or in
a written opinion of independent counsel, that such officers or Trustees have
not engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
Adviser and Sub-Advisers
Chase acts as investment adviser to the Funds pursuant to an Investment
Advisory Agreement, dated as of May 6, 1996 (the "Advisory Agreement"). Subject
to such policies as the Board of Trustees may determine, Chase is responsible
for investment decisions for the Funds. Pursuant to the terms of the Advisory
Agreement, Chase provides the Funds with such investment advice and supervision
as it deems necessary for the proper supervision of the Funds' investments. The
advisers continuously provide investment programs and determine from time to
time what securities shall be purchased, sold or exchanged and what portion of
the Funds' assets shall be held uninvested. The advisers to the Funds furnish,
at their own expense, all services, facilities and personnel necessary in
connection with managing the investments and effecting portfolio transactions
for the Funds. The Advisory Agreement for the Funds will continue in effect
from year to year only if such continuance is specifically approved at least
annually by the Board of Trustees or by vote of a majority of a Fund's
outstanding voting securities and by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on such Advisory Agreement.
Under the Advisory Agreement, the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Funds
with greater opportunities and flexibility in accessing investment
expertise.
Pursuant to the terms of the Advisory Agreement and the sub-advisers'
agreements with the adviser, the adviser and sub-advisers are permitted to
render services to others. Each advisory agreement is terminable without
penalty by the Trust on behalf of the Funds on not more than 60 days', nor less
than 30 days', written notice when authorized either by a majority vote of a
Fund's shareholders or by a vote of a majority of the Board of Trustees of the
Trust, or by the adviser or sub-adviser on not more than 60 days', nor less
than 30 days', written notice, and will automatically terminate in the event of
its "assignment" (as defined in the 1940 Act). The advisory agreements provide
that the adviser or sub-adviser under such agreement shall not be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio
transactions for the respective Fund, except for wilful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder.
In the event the operating expenses of the Funds, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to the Funds imposed by the securities laws or regulations
thereunder of any state in which the shares of the Funds are qualified for
sale, as such limitations may be raised or lowered from time to time, the
adviser shall reduce its advisory fee (which fee is described below) to the
extent of its share of such excess expenses. The amount of any such reduction
to be borne by the adviser shall be deducted from the monthly advisory fee
otherwise payable with respect to the Funds during such fiscal year; and if
such amounts should exceed the monthly fee, the adviser shall pay to a Fund its
share of such excess expenses no later than the last day of the first month of
the next succeeding fiscal year.
39
<PAGE>
Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that Chase may render services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser of the Fund and are under the common control of Chase as long as all
such persons are functioning as part of an organized group of persons, managed
by authorized officers of Chase.
Chase, on behalf of the Funds (other than the Cash Management Fund and the
Tax Free Money Market Fund), has entered into an investment sub-advisory
agreement dated as of May 6, 1996 with Chase Asset Management, Inc. ("CAM").
Texas Commerce Bank, National Association ("TCB") is the sub-investment adviser
to the Cash Management Fund and the Tax Free Money Market Fund pursuant to a
separate sub-investment advisory agreement between Chase and TCB dated as of
May 6, 1996. With respect to the day- to-day management of the Funds, under the
sub-advisory agreements, the sub-advisers make decisions concerning, and place
all orders for, purchases and sales of securities and help maintain the records
relating to such purchases and sales. The sub-advisers may, in their
discretion, provide such services through their own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of Chase; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the sub-adviser. This arrangement will not result in the
payment of additional fees by the Funds.
Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range of
banking and investment services to customers throughout the United States and
around the world. Also included among the Chase accounts are commingled trust
funds and a broad spectrum of individual trust and investment management
portfolios. These accounts have varying investment objectives.
CAM is a wholly-owned operating subsidiary of the Adviser. CAM is
registered with the Securities and Exchange Commission as an investment adviser
and provides discretionary investment advisory services to institutional
clients, and the same individuals who serve as portfolio managers for CAM also
serve as portfolio managers for Chase.
TCB has been in the investment counselling business since 1987 and is
ultimately controlled and owned by Chase Manhattan Corporation. TCB renders
investment advice to a wide variety of corporations, pension plans,
foundations, trusts and individuals.
In consideration of the services provided by the adviser pursuant to the
Advisory Agreement, the adviser is entitled to receive from each Fund an
investment advisory fee computed daily and paid monthly based on a rate equal
to a percentage of such Fund's average daily net assets specified in the
relevant Prospectuses. However, the adviser may voluntarily agree to waive a
portion of the fees payable to it on a month-to-month basis. For its services
under its sub-advisory agreement, CAM (or TCB in the case of the Cash
Management Fund and the Tax Free Money Market Fund) will be entitled to receive
with respect to each such Fund, such compensation, payable by the adviser out
of its advisory fee, as is described in the relevent Prospectuses.
40
<PAGE>
For the fiscal years ended August 31, 1995, August 31, 1996 and August 31,
1997, Chase was paid or accrued the following investment advisory fees with
respect to the following Funds, and voluntarily waived the amounts in
parentheses following such fees with respect to each such period:
<TABLE>
<CAPTION>
Fiscal Year- Fiscal Year- Fiscal Year-
ended ended ended
Fund 8/31/95 8/31/96 8/31/97
- -------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Tax Free Money Market Fund
Paid or Accrued $ 440,282 $ 602,984 $ 898,976
Waived none none none
New York Tax Free Money
Market Fund
Paid or Accrued $ 381,647 $ 564,728 $ 895,216
Waived none none none
Tax Free Income Fund
Paid or Accrued $ 307,093 $ 286,711 $ 248,543
Waived ($ 287,095) ($ 222,662) ($ 124,746)
New York Tax Free Income Fund
Paid or Accrued $ 333,493 $ 328,622 $ 320,945
Waived ($ 219,772) ($ 105,922) ($ 40,479)
Federal Money Market Fund
Paid or Accrued $ 389,075 $ 590,313 $ 782,294
Waived ($ 118,975) none none
Treasury Plus Money Market Fund
Paid or Accrued $ 22,663 $ 665,556 $1,983,716
Waived 22,663 65,952 none
Prime Money Market Fund
Paid or Accrued $ 352,679 $1,110,393 $1,595,402
Waived $ 216,306 ($ 50,805) none
California Intermediate
Tax Fee Income Fund
Paid or Accrued $ 102,004 $ 92,752 $ 79,332
Waived ($ 102,004) ($ 90,335) ($ 66,295)
California Tax Free
Money Market Fund
Paid or Accrued $ 55,870 $ 48,544 $ 44,776
Waived ($ 44,112) ($ 37,587) ($ 31,249)
U.S. Government
Money Market Fund
Paid or Accrued $1,440,186 $2,959,311 $5,173,975
Waived none none none
</TABLE>
For the period December 1, 1995 through August 31, 1996, and the fiscal
year ended August 31, 1997, Chase was paid or accrued investment advisory fees
and voluntarily waived the amount in parentheses, $1,518,404 ($197,536) and
$2,010,632, respectively, for the 100% U.S. Treasury Securities Money
Market Fund.
For the period December 1, 1995 through August 31, 1996, and the fiscal
year ended August 31, 1997, Chase was paid or accrued investment advisory fees
and voluntarily waived the amount in parentheses, $1,781,610 ($195,420) and
$3,165,847, respectively, for the Cash Management Fund.
41
<PAGE>
Administrator
Pursuant to an Administration Agreement (the "Administration Agreement"),
Chase serves as administrator of the Funds. Chase provides certain
administrative services to the Funds, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Funds' independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust with applicable laws and regulations
excluding those of the securities laws of various states; arranging for the
computation of performance data, including net asset value and yield;
responding to shareholder inquiries; and arranging for the maintenance of books
and records of the Funds and providing, at its own expense, office facilities,
equipment and personnel necessary to carry out its duties. Chase in its
capacity as administrator does not have any responsibility or authority for the
management of the Funds, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares.
Under the Administration Agreement Chase is permitted to render
administrative services to others. The Administration Agreement will continue
in effect from year to year with respect to each Fund only if such continuance
is specifically approved at least annually by the Board of Trustees or by vote
of a majority of such Fund's outstanding voting securities and, in either case,
by a majority of the Trustees who are not parties to the Administration
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Administration Agreement is terminable without penalty by the Trust
on behalf of each Fund on 60 days' written notice when authorized either by a
majority vote of such Fund's shareholders or by vote of a majority of the Board
of Trustees, including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, or by Chase on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Funds, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Administration Agreement.
In addition, the Administration Agreement provides that, in the event the
operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for
any fiscal year exceed the most restrictive expense limitation applicable to
that Fund imposed by the securities laws or regulations thereunder of any state
in which the shares of such Fund are qualified for sale, as such limitations
may be raised or lowered from time to time, Chase shall reduce its
administration fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by Chase
shall be deducted from the monthly administration fee otherwise payable to
Chase during such fiscal years; and if such amounts should exceed the monthly
fee, Chase shall pay to such Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Fund a fee computed daily
and paid monthly at an annual rate equal to 0.05% of each Money Market Fund's
average daily net assets, and 0.10% of each Income Fund's average daily net
assets, on an annualized basis for the Fund's then-current fiscal year. Chase
may voluntarily waive a portion of the fees payable to it with respect to each
Fund on a month-to-month basis.
42
<PAGE>
For the years ended August 31, 1995, August 31, 1996 and August 31, 1997
Chase was paid or accrued administration fees, and voluntarily waived the
amounts in parentheses for the following Funds:
<TABLE>
<CAPTION>
Fiscal Year- Fiscal Year- Fiscal Year
ended Ended ended
8/31/95 8/31/96 8/31/97
---------------- ----------------- ----------------
<S> <C> <C> <C>
Federal Money Market Fund
Paid or Accrued $ 194,538 $ 295,156 $ 391,147
Waived ($ 61,243) none none
Treasury Plus Money Market Fund
Paid or Accrued $ 11,331 $ 332,778 $ 991,858
Waived ($ 11,331) ($ 49,071) none
Prime Money Market Fund
Paid or Accrued $ 176,340 $ 550,477 $ 797,701
Waived ($ 88,982) ($ 33,604) none
California Intermediate
Tax Fee Income Fund
Paid or Accrued $ 34,001 $ 30,917 $ 26,444
Waived ($ 34,001) ($ 30,917) ($ 19,912)
California Tax Free
Money Market Fund
Paid or Accrued $ 27,935 $ 24,272 $ 22,388
Waived ($ 21,527) ($ 15,097) none
U.S. Government
Money Market Fund
Paid or Accrued $ 720,093 $1,479,655 $2,586,987
Waived none none none
U.S. Treasury Securities
Money Market Fund
Paid or Accrued -- $ 741,264* $1,005,316
Waived -- none none
Tax Free Money Market Fund
Paid or Accrued $ 220,141 $ 301,492 $ 449,487
Waived none none none
New York Tax Free Money
Market Fund
Paid or Accrued $ 190,823 $ 282,364 $ 447,608
Waived none none none
Tax Free Income Fund
Paid or Accrued $ 102,364 $ 95,570 $ 82,848
Waived ($ 64,572) ($ 52,872) none
New York Tax Free Income Fund
Paid or Accrued $ 111,164 $ 109,541 $ 106,982
Waived ($ 81,265) ($ 17,606) none
Cash Management Fund
Paid or Accrued -- $ 872,983* $1,582,924
Waived -- none none
</TABLE>
- ----------
*Paid or accrued administrative fees for the period December 1, 1995 through
August 31, 1996.
43
<PAGE>
Distribution Plans
The Trust has adopted separate plans of distribution pursuant to Rule
12b-1 under the 1940 Act (a "Distribution Plan") including Distribution Plans
on behalf of the Class A and Class B shares of the Tax Free Income Fund and the
New York Tax Free Income Fund, the Class B and Class C shares of the Prime
Money Market Fund, the shares of the California Intermediate Tax Free Income
Fund, the Vista Shares of the Money Market Funds (except the Cash Management
Fund), and the Premier Shares of the U.S. Government Money Market Fund, which
provides that each of such classes of such Funds shall pay for distribution
services a distribution fee (the "Distribution Fee"), including payments to the
Distributor, at annual rates not to exceed the amounts set forth in their
respective Prospectuses. There is no distribution plan for the Cash Management
Fund. The Distributor may use all or any portion of such Distribution Fee to
pay for Fund expenses of printing prospectuses and reports used for sales
purposes, expenses of the preparation and printing of sales literature and
other such distribution-related expenses.
Class B and Class C shares pay a Distribution Fee of up to 0.75% of
average daily net assets. The Distributor currently expects to pay sales
commissions to a dealer at the time of sale of Class B shares of the Income
Funds of up to 4.00% of the purchase price of the shares sold by such dealer.
The Distributor will use its own funds (which may be borrowed or otherwise
financed) to pay such amounts. Because the Distributor will receive a maximum
Distribution Fee of 0.75% of average daily net assets with respect to Class B
and Class C shares, it will take the Distributor several years to recoup the
sales commissions paid to dealers and other sales expenses.
No class of shares of a Fund will make payments or be liable for any
distribution expenses incurred by other classes of shares of such Fund.
The Institutional Shares of the Money Market Funds have no distribution
plan. There is no distribution plan for Premier Shares for any Money Market
Fund other than the U.S. Government Money Market Fund.
Some payments under the Distribution Plans may be used to compensate
broker-dealers with trail or maintenance commissions in an amount not to exceed
0.25% annualized of the average net asset value of Class A shares, 0.25%
annualized of the average net asset value of the Class B shares, 0.75%
annualized of the average net asset value of Class C shares or 0.25% annualized
of the average daily net asset value of the shares of the California
Intermediate Tax Free Income Fund maintained in a Fund by such broker-dealers'
customers. Trail or maintenance commissions will be paid to broker-dealers
beginning the 13th month following the purchase of such shares. Since the
distribution fees are not directly tied to expenses, the amount of distribution
fees paid by a class of a Fund during any year may be more or less than actual
expenses incurred pursuant to the Distribution Plans. For this reason, this
type of distribution fee arrangement is characterized by the staff of the
Securities and Exchange Commission as being of the "compensation variety" (in
contrast to "reimbursement" arrangements by which a distributor's payments are
directly linked to its expenses). With respect to Class B shares of the Income
Funds, because of the 0.75% annual limitation on the compensation paid to the
Distributor during a fiscal year, compensation relating to a large portion of
the commissions attributable to sales of Class B shares in any one year will be
accrued and paid by a Fund to the Distributor in fiscal years subsequent
thereto. However, the Shares are not liable for any distribution expenses
incurred in excess of the Distribution Fee paid. In determining whether to
purchase Class B shares of the Income Funds, investors should consider that
compensation payments could continue until the Distributor has been fully
reimbursed for the commissions paid on sales of Class B shares.
Each class of shares is entitled to exclusive voting rights with respect
to matters concerning its Distribution Plan.
44
<PAGE>
Each Distribution Plan provides that it will continue in effect
indefinitely if such continuance is specifically approved at least annually by
a vote of both a majority of the Trustees and a majority of the Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust and who
have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Trustees"). The continuance of each Distribution Plan was most recently
approved on October 13, 1995.
Each Distribution Plan requires that the Trust shall provide to the Board
of Trustees, and the Board of Trustees shall review, at least quarterly, a
written report of the amounts expended (and the purposes therefor) under the
Distribution Plan. Each Distribution Plan further provides that the selection
and nomination of Qualified Trustees shall be committed to the discretion of
the disinterested Trustees (as defined in the 1940 Act) then in office. Each
Distribution Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or, with respect to a particular Fund, by vote of a majority
of the outstanding voting Shares of the class of such Fund to which it applies
(as defined in the 1940 Act). Each Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without
a vote of the majority of both the Trustees and the Qualified Trustees. Each of
the Funds will preserve copies of any plan, agreement or report made pursuant
to a Distribution Plan for a period of not less than six years from the date of
the Distribution Plan, and for the first two years such copies will be
preserved in an easily accessible place.
For the fiscal year ended August 31, 1997, the Distributor was paid or
accrued the following Distribution Fees and voluntarily waived the amounts in
parenthesis following such fees with respect to the Shares of each Fund:
<TABLE>
<CAPTION>
Paid/Accrued Waived
-------------- -------------
<S> <C> <C>
U.S. Government Money Market Fund
Vista Shares $2,054,400
Premier Shares $ 905,148
100% Treasury Securities Money Market Fund
Vista Shares $1,905,353
Treasury Plus Money Market Fund
Vista Shares $1,503,214
Prime Money Market Fund
B Shares $ 80,931
Federal Money Market Fund
Vista Shares $ 337,875
Tax Free Money Market Fund
Vista Shares $ 586,572
New York Tax Free Money Market Fund
Vista Shares $ 895,216
California Tax Free Money Market Fund $ 44,776
Tax Free Income Fund
A Shares $ 171,088
Tax Free Income Fund
B Shares $ 108,092
New York Tax Free Income Fund
A Shares $ 234,149
New York Tax Free Income Fund
B Shares $ 99,915
California Intermediate Fund $ 66,110 ($ 39,544)
</TABLE>
45
<PAGE>
With respect to the shares of the following Funds, the Distribution Fees
were allocated as follows:
<TABLE>
<CAPTION>
Printing, Advertising
Postage and Sales & Administrative
Fund Handling Compensation Filings
- --------------------------------------------- ------------- -------------- -----------------
<S> <C> <C> <C>
U.S. Government Money Market Fund
Vista Shares $439,642 $1,259,347 $355,411
Premier Shares 193,702 554,856 156,591
100% Treasury Money Market Fund
Vista Shares 407,746 1,167,981 329,626
Treasury Plus Money Market Fund
Vista Shares 321,688 921,470 260,056
Federal Money Market Fund
Vista Shares 72,305 207,117 58,452
Tax Free Money Market Fund
Vista Shares 121,674 348,535 98,363
New York Tax Free Money Market Fund
Vista Shares 191,576 548,767 154,872
California Tax Free Money Market Fund
Vista Shares 9,582 27,448 7,746
Tax Free Income Fund
A Shares 36,613 104,877 29,598
New York Tax Free Income Fund
A Shares 50,108 143,533 40,508
California Intermediate Tax Free Income Fund
A Shares 5,685 16,285 4,596
</TABLE>
With respect to the Class B shares of the Funds, the Distribution Fee was
paid to FEP Capital L.P. for acting as finance agent.
Distribution and Sub-Administration Agreement
The Trust has entered into a Distribution and Sub-Administration Agreement
dated August 24, 1995 (prior to such date, the Distributor served the Trust
pursuant to a contract dated August 23, 1994 (April 15, 1994 with respect to
the Treasury Plus Money Market Fund and Federal Money Market Fund)) (the
"Distribution Agreement") with the Distributor, pursuant to which the
Distributor acts as the Funds' exclusive underwriter, provides certain
administration services and promotes and arranges for the sale of each class of
Shares. The Distributor is a wholly-owned subsidiary of BISYS Fund Services,
Inc. The Distribution Agreement provides that the Distributor will bear the
expenses of printing, distributing and filing prospectuses and statements of
additional information and reports used for sales purposes, and of preparing
and printing sales literature and advertisements not paid for by the
Distribution Plans. The Trust pays for all of the expenses for qualification of
the shares of each Fund for sale in connection with the public offering of such
shares, and all legal expenses in connection therewith. In addition, pursuant
to the Distribution Agreement, the Distributor provides certain
sub-administration services to the Trust, including providing officers,
clerical staff and office space.
The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
such Fund's outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or "interested
persons" (as defined in the 1940 Act) of
46
<PAGE>
any such party. The Distribution Agreement is terminable without penalty by the
Trust on behalf of each Fund on 60 days' written notice when authorized either
by a majority vote of such Fund's shareholders or by vote of a majority of the
Board of Trustees of the Trust, including a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust, or by the
Distributor on 60 days' written notice, and will automatically terminate in the
event of its "assignment" (as defined in the 1940 Act). The Distribution
Agreement also provides that neither the Distributor nor its personnel shall be
liable for any act or omission in the course of, or connected with, rendering
services under the Distribution Agreement, except for willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations or duties.
In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to that Fund imposed by the securities laws or regulations
thereunder of any state in which the shares of such Fund are qualified for
sale, as such limitations may be raised or lowered from time to time, the
Distributor shall reduce its sub-administration fee with respect to such Fund
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by the Distributor shall
be deducted from the monthly sub-administration fee otherwise payable with
respect to such Fund during such fiscal year; and if such amounts should exceed
the monthly fee, the Distributor shall pay to such Fund its share of such
excess expenses no later than the last day of the first month of the next
succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of 0.05% of the net assets of each Fund. The
Distributor may voluntarily agree to from time to time waive a portion of the
fees payable to it under the Distribution Agreement with respect to each Fund
on a month-to-month basis. For the fiscal years ended August 31, 1995, August
31, 1996 and August 31, 1997, the Distributor was paid or accrued the following
sub-administration fees under the Distribution Agreement, and voluntarily
waived the amounts in parentheses following such fees:
<TABLE>
<CAPTION>
Fiscal Year- Fiscal Year- Fiscal Year-
Ended Ended Ended
8/31/95 8/31/96 8/31/97
-------------- -------------- -------------
<S> <C> <C> <C>
Federal Money Market Fund
Paid or Accrued $194,538 $295,156 $391,147
Waived 9,048 -- --
Treasury Plus Money Market Fund
Paid or Accrued 11,331 332,778 991,858
Waived 11,331 16,881 --
Prime Money Market Fund
Paid or Accrued 176,342 550,477 797,701
Waived -- -- --
California Intermediate
Tax Fee Income Fund
Paid or Accrued 17,001 15,459 13,222
Waived -- -- --
California Tax Free
Money Market Fund
Paid or Accrued 27,935 24,272 22,388
Waived -- -- --
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year- Fiscal Year- Fiscal Year-
Ended Ended Ended
8/31/95 8/31/96 8/31/97
------------- -------------- --------------
<S> <C> <C> <C>
U.S. Government
Money Market Fund
Paid or Accrued $720,093 $1,479,655 $2,586,987
Waived -- -- --
100% Treasury Securities
Money Market Fund
Paid or Accrued -- 265,361 1,005,316
Waived -- -- --
Cash Management Fund
Paid or Accrued -- 402,255 1,582,924
Waived -- -- --
Tax Free Money Market Fund
Paid or Accrued 220,141 301,492 449,488
Waived -- -- --
New York Tax Free Money
Market Fund
Paid or Accrued 190,823 282,364 447,608
Waived -- -- --
Tax Free Income Fund
Paid or Accrued 51,182 47,785 41,424
Waived -- -- --
New York Tax Free Income Fund
Paid or Accrued 55,582 54,770 53,491
Waived -- -- --
</TABLE>
Shareholder Servicing Agents, Transfer Agent and Custodian
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent to provide certain services
including but not limited to the following: answer customer inquiries regarding
account status and history, the manner in which purchases and redemptions of
shares may be effected for the Fund as to which the Shareholder Servicing Agent
is so acting and certain other matters pertaining to the Fund; assist
shareholders in designating and changing dividend options, account designations
and addresses; provide necessary personnel and facilities to establish and
maintain shareholder accounts and records; assist in processing purchase and
redemption transactions; arrange for the wiring of funds; transmit and receive
funds in connection with customer orders to purchase or redeem shares; verify
and guarantee shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnish (either
separately or on an integrated basis with other reports sent to a shareholder
by a Shareholder Servicing Agent) quarterly and year-end statements and
confirmations of purchases and redemptions; transmit, on behalf of the Fund,
proxy statements, annual reports, updated prospectuses and other communications
to shareholders of the Fund; receive, tabulate and transmit to the Fund proxies
executed by shareholders with respect to meetings of shareholders of the Fund;
and provide such other related services as the Fund or a shareholder may
request. Shareholder servicing agents may be required to register pursuant to
state securities law.
48
<PAGE>
Each Shareholder Servicing Agent may voluntarily agree from time to time
to waive a portion of the fees payable to it under its Servicing Agreement with
respect to each Fund on a month-to-month basis. Fees payable to the Shareholder
Servicing Agents (all of which currently are related parties) and the amounts
voluntarily waived for the following periods were as follows:
<TABLE>
<CAPTION>
9/1/94 9/1/95 9/1/96
through through through
8/31/95 8/31/96 8/31/97
--------------------- ----------------------- ------------------------
Fund payable waived payable waived payable waived
- --------------------------- ---------- ---------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Money Market Fund
Vista Shares $816,674 $ -- $3,193,687 $791,007 $7,190,397 $ --
Premier Shares 684,952 -- 2,336,485 194,645 2,262,869 --
100% Treasury
Securities Money
Market Fund
Vista Shares -- -- 4,161,761 803,962 6,668,735 $2,256,995
Premier Shares -- -- 126 -- 7,214 7,214
Cash Management
Fund
Vista Shares 348,428 $106,710 4,086,512 143,866 6,991,098 613,426
Premier Shares 421,596 46 368,896 30,771 997,708 46,586
Treasury Plus
Money Market Fund
Vista Shares n/a n/a 1,747,171 711,428 5,261,249 1,664,171
Premier Shares 2,971 2,971 172,057 21,998 308,459 --
Federal Money Market Fund
Vista Shares 354,682 140,653 880,856 584,851 1,182,562 396,234
Premier Shares 109,180 15,790 455,489 41,636 803,743 61,730
Prime Money Market Fund
B Shares 10,080 5,488 25,702 25,702 26,977 17,624
Premier Shares 82,617 72,534 910,639 214,388 1,148,882 339,705
Tax Free Money
Market Fund
Vista Shares 367,259 -- 1,029,700 264,273 1,989,537 768,241
Premier Shares 344,945 131,039 465,133 139,053 323,826 --
N.Y. Tax Free
Money Market Fund 954,117 -- 1,976,547 415,903 3,133,258 1,253,304
California Tax Free
Money Market Fund 139,675 139,675 169,905 152,096 156,716 102,864
Tax Free Income Fund
A Shares 223,990 179,192 201,911 173,806 171,088 163,770
B Shares 31,921 -- 37,015 -- 36,031 --
N.Y. Tax Free Income Fund
A Shares 256,481 205,185 241,773 208,893 234,149 226,909
B Shares 21,430 -- 32,078 -- 33,305 --
California Intermediate
Tax Free Fund 85,003 85,003 77,293 77,293 66,110 66,110
</TABLE>
There is no Shareholder Servicing Agent, and thus no shareholder servicing
fees, for the Institutional Shares of the Money Market Funds.
49
<PAGE>
The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of each Fund for which Chase receives such compensation as is from time
to time agreed upon by the Trust and Chase. As custodian, Chase provides
oversight and record keeping for the assets held in the portfolios of each
Fund. Chase also provides fund accounting services for the income, expenses and
shares outstanding for the Funds. Chase is located at 3 Metrotech Center,
Brooklyn, NY 11245. For additional information, see the Prospectuses.
INDEPENDENT ACCOUNTANTS
The financial statements incorporated herein by reference from the Trust's
Annual Reports to Shareholders for the fiscal year ended August 31, 1997, and
the related financial highlights which appear in the Prospectuses, have been
incorporated herein and included in the Prospectuses in reliance on the reports
of Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
independent accountants of the Funds, given on the authority of said firm as
experts in accounting and auditing. Price Waterhouse LLP provides the Funds
with audit services, tax return preparation and assistance and consultation
with respect to the preparation of filings with the Securities and Exchange
Commission.
CERTAIN REGULATORY MATTERS
Banking laws, including the Glass-Steagall Act as currently interpreted,
prohibit bank holding companies and their affiliates from sponsoring,
organizing, controlling, or distributing shares of, mutual funds, and generally
prohibit banks from issuing, underwriting, selling or distributing securities.
These laws do not prohibit banks or their affiliates from acting as investment
adviser, administrator or custodian to mutual funds or from purchasing mutual
fund shares as agent for a customer. Chase and the Trust believe that Chase
(including its affiliates) may perform the services to be performed by it as
described in the Prospectus and this Statement of Additional Information
without violating such laws. If future changes in these laws or interpretations
required Chase to alter or discontinue any of these services, it is expected
that the Board of Trustees would recommend alternative arrangements and that
investors would not suffer adverse financial consequences. State securities
laws may differ from the interpretations of banking law described above and
banks may be required to register as dealers pursuant to state law.
Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of any
of the Funds, including outstanding loans to such issuers which may be repaid
in whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. Government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types of U.S. Government obligations and municipal
obligations. Chase and its affiliates may sell U.S. Government obligations and
municipal obligations to, and purchase them from, other investment companies
sponsored by the Funds' distributor or affiliates of the distributor. Chase
will not invest any Fund assets in any U.S. Government obligations, municipal
obligations or commercial paper purchased from itself or any affiliate,
although under certain circumstances such securities may be purchased from
other members of an underwriting syndicate in which Chase or an affiliate is a
non-principal member. This restriction my limit the amount or type of U.S.
Government obligations, municipal obligations or commercial paper available to
be purchased by any Fund. Chase has informed the Funds that in making its
investment decision, it does not obtain or use material inside information in
the possession of any other division or department of Chase, including the
division that performs services for the Trust as custodian, or in the
possession of any affiliate of Chase. Shareholders of the Funds should be aware
that, subject to applicable legal or regulatory restrictions, Chase and its
affiliates may exchange among themselves certain information about the
shareholder and his account. Transactions with affiliated broker-dealers will
only be executed on an agency basis in accordance with applicable federal
regulations.
50
<PAGE>
GENERAL INFORMATION
Description of Shares, Voting Rights and Liabilities
Mutual Fund Trust is an open-end, management investment company organized
as Massachusetts business trust under the laws of the Commonwealth of
Massachusetts on February 4, 1994. Because certain of the Funds comprising the
Trust are "non-diversified", more than 5% of any of the assets of any such Fund
may be invested in the obligations of any single issuer, which may make the
value of the shares in such a Fund more susceptible to certain risks than
shares of a diversified mutual fund. The fiscal year-end of the Funds in the
Trust is August 31.
The Trust currently consists of 12 series of shares of beneficial
interest, par value $.001 per share. With respect to the Money Market Funds and
certain of the Income Funds, the Trust may offer more than one class of shares.
The Trust has reserved the right to create and issue additional series or
classes. Each share of a series or class represents an equal proportionate
interest in that series or class with each other share of that series or class.
The shares of each series or class participate equally in the earnings,
dividends and assets of the particular series or class. Expenses of the Trust
which are not attributable to a specific series or class are allocated amount
all the series in a manner believed by management of the Trust to be fair and
equitable. Shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held. Shares of each series or class
generally vote together, except when required under federal securities laws to
vote separately on matters that may affect a particular class, such as the
approval of distribution plans for a particular class. With respect to shares
purchased through a Shareholder Servicing Agent and, in the event written proxy
instructions are not received by a Fund or its designated agent prior to a
shareholder meeting at which a proxy is to be voted and the shareholder does
not attend the meeting in person, the Shareholder Servicing Agent for such
shareholder will be authorized pursuant to an applicable agreement with the
shareholder to vote the shareholder's outstanding shares in the same proportion
as the votes cast by other Fund shareholders represented at the meeting in
person or by proxy.
Shareholders of the Vista Shares, Premier Shares and Institutional Shares
of the Money Market Funds bear the fees and expenses described herein and in
the Prospectuses. The fees paid by the Vista Shares to the Distributor and
Shareholder Servicing Agent under the distribution plans and shareholder
servicing arrangements for distribution expenses and shareholder services
provided to investors by the Distributor and Shareholder Servicing Agents,
absent waivers, generally are more than the respective fees paid under
distribution plans and shareholder servicing arrangements adopted for the
Premier Shares. The Institutional Shares pay no distribution or Shareholder
Servicing fee. As a result, absent waivers, at any given time, the net yield on
the Vista Shares will be lower than the yield on the Premier Shares and the
yield on the Premier Shares will be lower than the yield on Institutional
Shares. Standardized yield quotations will be computed separately for each
class of shares of a Fund.
The Vista Tax Free Income Fund and Vista New York Tax Free Income Fund
offer both Class A and Class B shares. The classes of shares have several
different attributes relating to sales charges and expenses, as described
herein and in the Prospectuses. In addition to such differences, expenses borne
by each class of a Fund may differ slightly because of the allocation of other
class-specific expenses. For example, a higher transfer agency fee may be
imposed on Class B shares than on Class A shares. The relative impact of
initial sales charges, contingent deferred sales charges, and ongoing annual
expenses will depend on the length of time a share is held.
The Vista Prime Money Market Fund offers both Class B and Class C shares.
The classes of shares have different attributes relating to sales charges and
expenses as described in the Prospectus. The relative impact of contingent
deferred sales charges will depend upon the length of time a share is held.
51
<PAGE>
Selected dealers and financial consultants may receive different levels of
compensation for selling one particular class of shares rather than another.
The Trust is not required to hold annual meetings of shareholders but will
hold special meetings of shareholders of a series or class when, in the
judgment of the Trustees, it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have, under certain circumstances, the right to
communicate with other shareholders in connection with requesting a meeting of
shareholders for the purpose of removing one or more Trustees. Shareholders
also have, in certain circumstances, the right to remove one or more Trustees
without a meeting. No material amendment may be made to the Trust's Declaration
of Trust without the affirmative vote of the holders of a majority of the
outstanding shares of each portfolio affected by the amendment. The Trust's
Declaration of Trust provides that, at any meeting of shareholders of the Trust
or of any series or class, a Shareholder Servicing Agent may vote any shares as
to which such Shareholder Servicing Agent is the agent of record and which are
not represented in person or by proxy at the meeting, proportionately in
accordance with the votes cast by holders of all shares of that portfolio
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record. Any shares so voted by a
Shareholder Servicing Agent will be deemed represented at the meeting for
purposes of quorum requirements. Shares have no preemptive or conversion
rights. Shares, when issued, are fully paid and non-assessable, except as set
forth below. Any series or class may be terminated (i) upon the merger or
consolidation with, or the sale or disposition of all or substantially all of
its assets to, another entity, if approved by the vote of the holders of
two-thirds of its outstanding shares, except that if the Board of Trustees
recommends such merger, consolidation or sale or disposition of assets, the
approval by vote of the holders of a majority of the series' or class'
outstanding shares will be sufficient, or (ii) by the vote of the holders of a
majority of its outstanding shares, or (iii) by the Board of Trustees by
written notice to the series' or class' shareholders. Unless each series and
class is so terminated, the Trust will continue indefinitely.
Certificates are issued only upon the written request of a shareholder,
subject to the policies of the investor's Shareholder Servicing Agent, but the
Trust will not issue a stock certificate with respect to shares that may be
redeemed through expedited or automated procedures established by a Shareholder
Servicing Agent. No certificates are issued for shares of the Money Market
Funds or Class B shares of the Income Funds.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts of
interest that can arise in connection with personal trading activities of such
persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions,
pre-clearance requirements and blackout periods.
52
<PAGE>
Principal Holders
As of November 28, 1997, the following persons owned of record, directly
or indirectly, 5% or more of the outstanding shares of the following classes of
the following Funds:
<TABLE>
<S> <C>
CA Tax Free Money Market
Union Bank of Switzerland NY .................. 27.21%
Attn: Andrew Fox VP
1345 Avenue of the Americas
New York, NY 10105-0302
Cudd and Company .............................. 26.17%
Omnibus Account #1
PTIS Div. Attn: Andrew C. Olson
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
Client Services .............................. 19.59%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
Saul A. Fox ................................. 8.51%
950 Tower Lane
Suite 1950
Foster City, CA 94404-2131
National Financial Services Corporation ...... 8.05%
for the Excel Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Cash Management Money Market--Institutional
The Chase Manhattan Bank ..................... 72.71%
Global Services Omnibus
Attn: Alex Kwong
3 Chase Metro Center
7th Floor
Brooklyn, NY 11245-0001
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
Cash Management Money Market--Premier Shares
The Chase Manhattan Bank ..................... 24.85%
Global Services Omnibus
Attn: Alex Kwong
3 Chase Metro Center
7th Floor
Brooklyn, NY 11245-0001
National Financial Services Corporation ...... 23.60%
for the Excel Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Cudd and Company .............................. 11.47%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
Cash Management Money Market--Vista Shares
Client Services .............................. 11.94%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
National Financial Services Corporation ...... 6.43%
for the Excel Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Federal Money Market Institutional
Cudd and Company .............................. 51.16%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
The Chase Manhattan Bank ..................... 19.56%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
</TABLE>
54
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<S> <C>
Health Management Systems Inc. ............... 10.60%
Attn: Barbara Mounadi
401 Park Avenue
4th Floor
New York, NY 10016-8808
Federal Money Market--Premier Shares
National Financial Services Corporation ...... 72.71%
for the Excel Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Cudd and Company .............................. 6.27%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
Federal Money Market--Vista Shares
Client Services .............................. 27.14%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
National Financial Services Corporation ...... 5.29%
for the Excel Ben of our Cust
Attn: Mike McLaughlin
Church Street Station
PO Box 3908
New York, NY 10008-3752
New York Tax Free Income A
Cudd and Company .............................. 16.61%
Custody Division
1211 Avenue of the Americas
35th floor
New York, NY 10036
New York Tax Free Money Market
Client Services .............................. 20.08%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
</TABLE>
55
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<TABLE>
<S> <C>
Cudd and Company .............................. 19.83%
C/O Chase Manhattan Bank
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036
National Financial Services Corporation ...... 17.17%
for the Excel Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Prime Money Market B Shares
John P. Teets & .............................. 6.80%
Robert E. Rymer JT Ten
Holly Hill Farm
320 Country Road 730
Riceville, TN 37370-5726
Prime Money Market--Institutional Shares
The Chase Manhattan Bank ..................... 21.66%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
The Chase Manhattan Bank ..................... 10.33%
Global Services Omnibus
Attn: Alex Kwong
3 Chase Metro Center
7th Floor
Brooklyn, NY 11245-0001
Capita Equipment Receivables Trust ............ 8.49%
1996-1 Cash Collateral Account
Chase Manhattan Global Trust
450 West 33rd Street
15th Floor
New York, NY 10001-2603
Merrill Lynch Life Insurance Co ............... 7.95%
Attn: Treasury
Merrill Lynch Insurance Group Services
48D4 Deer Lake Drive East
4th Floor
Jacksonville, FL 32246-6484
</TABLE>
56
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<S> <C>
Prime Money Market Premier Shares
Chase Manhattan Bank NA ..................... 57.42%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
Chase Sallie Mae Education Loan Trust ...... 10.56%
Attn: Richard Lorenzen
450 West 33rd Street
15th Floor
New York, NY 10001-2603
ABFS 1997-2 ................................. 8.89%
Chase Manhattan Bank Global Trust
Attn: Conor Waters
450 West 33rd Street
15th Floor
New York, NY 10001-2603
Tax Free Money Market Institutional Shares
Cudd and Company ........................... 30.00%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
The Chase Manhattan Bank .................. 15.29%
Global Services Omnibus
Attn: Alex Kwong
3 Chase Metro Center
7th Floor
Brooklyn, NY 11245-0001
Union Bank of Switzerland .................. 8.13%
Branch as Custodian
Attn: Andrew Fox
1345 Avenue of the Americas
New York, NY 10105-0302
CST FBO Benjamin L. & ..................... 6.55%
Mary F. Doskocil
5306 Mansfield Road
Arlington, TX 76017-2754
Reese Design LTD ........................... 5.63%
Attn: Michael Krainz
8226 Bee Caves Road
Austin, TX 78746-4909
</TABLE>
57
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<S> <C>
Tax Free Money Market--Premier Shares
Cudd and Company .............................. 36.07%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
National Financial Services Corporation ...... 18.41%
for the Excel Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
Joel E. Smilow .............................. 5.39%
Joan L. Smilow JTWROS
100 Beachside Avenue
Greens farm, CT 06436
Tax Free Money Market--Vista Shares
Client Services .............................. 26.92%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
Cudd and Company .............................. 20.96%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
Obie & Co .................................... 10.90%
C/O Texas Commerce Bank
Attn: Stif Unit 17 HCB 98
PO Box 2558
Houston, TX 77552-2558
</TABLE>
58
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<S> <C>
Treasury Plus Money Market--Vista Shares
Prime Receivables Series 1992-1 ..................... 22.19%
Principle Account
Chemical Account
Attn: Dennis Kildea
450 West 33rd Street
15th Floor
New York, NY 10001-2603
Obie & Co ............................................. 18.00%
C/O Texas Commerce Bank
Attn: Stif Unit 17 HCB 98
PO Box 2558
Houston, TX 77552-2558
Client Services ....................................... 6.22%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
Treasury Plus Money Market--Premier Shares
The Chase Manhattan Bank .............................. 68.24%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
CCTC Holdings Inc. / Media One of Delaware Inc. ...... 8.20%
Attn: Steven Marrero
450 West 33rd Street
15th Floor
New York, NY 10001-2603
</TABLE>
59
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<S> <C>
Treasury Plus Money Market--Institutional Shares
The Chase Manhattan Bank ........................ 23.57%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
The Chase Manhattan Bank ........................ 13.90%
Global Services Omnibus AC
Attn: Alex Kwong
3 Chase Metro Center
7th Floor
Brooklyn, NY 11245-0001
The Chase Manhattan Bank ........................ 12.76%
Global Services Omnibus
Attn: Alex Kwong
3 Chase Metro Center
7th Floor
Brooklyn, NY 11245-0001
Kinetic Concepts Inc ........................... 12.03%
Attn: Cash Manager
PO Box 659508
San Antonio, TX 78265-9508
AT & T Capital Corporation ..................... 7.42%
Attn: Kathleen Beck ATT Capital Corp
44 Whippany Road
2nd Floor
Morristown, NJ 07960-4558
Obie & Co ....................................... 5.15%
C/O Texas Commerce Bank
Attn: Stif Unit 17 HCB 98
PO Box 2558
Houston, TX 77552-2558
</TABLE>
60
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<S> <C>
US Government Money Market--Vista Shares
Obie & Co .................................... 18.77%
C/O Texas Commerce Bank
Attn: Stif Unit 17 HCB 98
PO Box 2558
Houston, TX 77552-2558
Cudd and Company .............................. 11.88%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
Client Services .............................. 10.37%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
Obie & Co .................................... 5.76%
C/O Texas Commerce Bank
Attn: Stif Unit 17 HCB 98
PO Box 2558
Houston, TX 77552-2558
US Government Money Market--Premier Shares
The Chase Manhattan Bank ..................... 30.26%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
The Chase Manhattan Bank ..................... 16.80%
Global Services Omnibus
Attn: Alex Kwong
3 Chase Metro Center
7th Floor
Brooklyn, NY 11245-0001
Penlin & Co ................................. 14.59%
The Chase Manhattan Bank
Attn: P. Whalen
PO Box 1412
Rochester, NY 14603-1412
National Financial Services Corporation ...... 8.90%
for the Excel Ben of our Cust
Church Street Station
PO Box 3752
New York, NY 10008-3752
</TABLE>
61
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<S> <C>
US Government Money Market--Institutional Shares
The Chase Manhattan Bank ........................ 21.35%
Attn: Deborah Derenzo
4 New York Plaza
9th Floor
New York, NY 10004-2413
The Chase Manhattan Bank ........................ 13.33%
Global Sec Services Omnibus AC
Attn: Alex Kwong
3 Chase MetroTech Center
7th Floor
Brooklyn, NY 11245-0001
Delaware Economic Development Authority ......... 11.39%
State Street Bank of Conn as debtor
Chase Manhattan Bank Global Trust
Attn: R.J. Halleran
450 West 33rd Street
15th Floor
New York, NY 10001-2603
The Chase Manhattan Bank ........................ 9.17%
Global Sec Services Omnibus
Attn: Alex Kwong
3 Chase MetroTech Center
7th Floor
Brooklyn, NY 11245-0001
Obie & Co ....................................... 6.77%
C/O Texas Commerce Bank
Attn: Stif Unit 17 HCB 98
PO Box 2558
Houston, TX 77552- 2558
Cudd and Company ................................. 5.51%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
100% US Securities Money Market Fund--Vista
Client Services ................................. 13.37%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
</TABLE>
62
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<S> <C>
100% US Securities Money Market Fund--Premier
The Chase Manhattan Bank ........................ 60.29%
Global Sec Services Omnibus
Attn: Alex Kwong
3 Chase MetroTech Center
7th Floor
Brooklyn, NY 11245-0001
The Breast Cancer Research Foundation ............ 19.77%
Attn: J. Krupskas
767 5th Ave
40th Floor
New York, NY 10153-0001
Alexander Katz .................................... 11.11%
499 N. Broadway
White Plains, NY 10603-3242
100% US Securities Money Market Fund--Institutional
Cudd and Company ................................. 28.02%
Omnibus Account #1
PTIS Div.
1211 Avenue of the Americas
35th floor
New York, NY 10036-8701
The Chase Manhattan Bank ........................ 18.48%
Global Sec Services Omnibus
Attn: Alex Kwong
3 Chase MetroTech Center
7th Floor
Brooklyn, NY 11245-0001
Obie & Co ....................................... 13.37%
C/O Texas Commerce Bank
Attn: Stif Unit 17 HCB 98
PO Box 2558
Houston, TX 77552-2558
Client Services ................................. 9.58%
Attn: Sevan Marinos
1211 Avenue of the Americas
33rd floor
New York, NY 10036-8701
Spanish Broadcasting Inc. ........................ 8.25%
Attn: Jose Garcia
26 West 56th Street
New York, NY 10019-8099
</TABLE>
63
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<S> <C>
Louisiana Pacific ......... 5.94%
Attn: Aura Caldas
450 W 33rd Street
15th Floor
New York, NY 10001-2603
AT&T Capital Corp ......... 5.71%
AT&T Capital Markets
295 N Maple Avenue
Room 713421
Basking Ridge, NJ 07920-1025
</TABLE>
Financial Statements
The 1997 Annual Report to Shareholders of each Fund including the reports
of independent accountants, financial highlights and financial statements for
the fiscal year ended August 31, 1997 contained therein, are incorporated
herein by reference.
Specimen Computations of Offering Prices Per Share
<TABLE>
<S> <C>
New York Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1997 ...................................................... $11.80
Maximum Offering Price per Share ($11.80 divided by .955) (reduced on
purchases of $100,000 or more) ....................................... $12.36
New York Tax Free Income Fund B Shares (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1997 ...................................................... $11.76
Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1997 ...................................................... $12.32
Maximum Offering Price per Share ($12.32 divided by .955) (reduced on
purchases of $100,000 or more) ....................................... $12.90
Tax Free Income Fund B Shares (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1997 ...................................................... $12.25
California Intermediate Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at
August 31, 1997 ...................................................... $10.07
Maximum Offering Price per Share ($10.07 divided by .955) (reduced on
purchases of $100,000 or more) ....................................... $10.54
</TABLE>
The Shares of the Money Market Funds are offered for sale at Net Asset
Value.
64
<PAGE>
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
Maritime Administration Bonds--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA Bonds--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA Debentures--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
FHA Insured Notes--are bonds issued by the Farmers Home Administration of
the U.S. Government and are guaranteed by the U.S. Government.
GNMA Certificates--are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA
and the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates. The average life of a GNMA
Certificate is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures may result in the return of the greater
part of principal invested far in advance of the maturity of the mortgages in
the pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee. As the prepayment rate of individual mortgage pools will vary
widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates. The yield which will be earned on GNMA
Certificates may vary form their coupon rates for the following reasons: (i)
Certificates may be issued at a premium or discount, rather than at par; (ii)
Certificates may trade in the secondary market at a premium or discount after
issuance; (iii) interest is earned and compounded monthly which has the effect
of raising the effective yield earned on the Certificates; and (iv) the actual
yield of each Certificate is affected by the prepayment of mortgages included
in the mortgage pool underlying the Certificates. Principal which is so prepaid
will be reinvested, although possibly at a lower rate. In addition, prepayment
of mortgages included in the mortgage pool underlying a GNMA Certificate
purchased at a premium could result in a loss to a Fund. Due to the large
amount of GNMA Certificates outstanding and active participation in the
secondary market by securities dealers and investors, GNMA Certificates are
highly liquid instruments. Prices of GNMA Certificates are readily available
from securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the pool
of mortgages backing each Certificate. If agency securities are purchased at a
premium above principal, the premium is not guaranteed by the issuing agency
and a decline in the market value to par may result in a loss of the premium,
which may be particularly likely in the event of a prepayment. When and if
available, U.S. Government obligations may be purchased at a discount from face
value.
FHLMC Certificates and FNMA Certificates--are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.
GSA Participation Certificates--are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed
by the U.S. Government.
A-1
<PAGE>
New Communities Debentures--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
Public Housing Bonds--are bonds issued by public housing and urban renewal
agencies in connection with programs administered by the Department of Housing
and Urban Development of the U.S. Government, the payment of which is secured
by the U.S. Government.
Penn Central Transportation Certificates--are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.
SBA Debentures--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
Washington Metropolitan Area Transit Authority Bonds--are bonds issued by
the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.
FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes and Bonds--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. Armory Board Bonds--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
Export-Import Bank Certificates--are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF RATINGS*
The ratings of Moody's and Standard & Poor's represent their opinions as
to the quality of various Municipal Obligations. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields while Municipal Obligations of the same maturity and coupon
with different ratings may have the same yield.
Description of Moody's four highest 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 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 payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Description of Moody's three highest ratings of state and municipal notes
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the
short run. A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation or commercial paper programs; such
ratings will be designated as "VMIG." Short-term ratings on issues with demand
features are differentiated by the use of the VMIG symbol to reflect such
characteristics as payment upon periodic demand rather than fixed maturity
dates and payment relying on external liquidity. Symbols used are as follows:
MIG-1/VMIG-1--Notes bearing this designation are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2/VMIG-2--Notes bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
- ----------
* As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time
to time revise such ratings, they undertake no obligation to do so.
B-1
<PAGE>
MIG-3/VMIG-3--Notes bearing this designation are of favorable quality,
where all security elements are accounted for but there is lacking the
undeniable strength of the preceding grade, liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
Description of Standard & Poor's four highest municipal bond ratings
AAA--Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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 ratings of municipal notes
and tax-exempt demand bonds
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
--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--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for
B-2
<PAGE>
example, "AAA/B-1+"). For the newer "demand notes," S&P's note rating symbols,
combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+").
Description of Standard & Poor's two highest commercial paper ratings
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
B-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Description of Moody's two highest 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 three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2 and Prime-3.
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Description of Fitch's ratings of municipal notes and tax-exempt demand bonds
Municipal Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issuer, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's financial strength and
credit quality.
AAA--Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated
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AAA. Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1.
A--Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstance than bonds with higher ratings.
BBB--Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position
of credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
F-3--Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
although near-term adverse changes could cause these securities to be rated
below investment grade.
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APPENDIX C
SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New York Intermediate Tax Free Income Fund in New York
municipal securities are summarized below. The following information
constitutes only a brief summary, does not purport to be a complete description
and is largely based on information drawn from official statements relating to
securities offerings of New York municipal obligations available as of the date
of this Statement of Additional Information. The accuracy and completeness of
the information contained in such offering statements has not been
independently verified.
New York State
New York State Financing Activities. There are a number of methods by
which New York State (the "State") may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation borrowing (i.e., borrowing for more than
one year) unless the borrowing is authorized in a specific amount for a single
work or purpose by the New York State Legislature (the "Legislature") and
approved by the voters. There is no limitation on the amount of long-term
general obligation debt that may be so authorized and subsequently incurred by
the State. With the exception of general obligation housing bonds (which must
be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes ("TRANs"), and (ii) in anticipation of the receipt
of proceeds from the sale of duly authorized but unissued bonds, by issuing
bond anticipation notes ("BANs"). TRANs must mature within one year from their
dates of issuance and may not be refunded or refinanced beyond such period.
BANS may only be issued for the purposes and within the amounts for which bonds
may be issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job
Development Authority and the Port Authority of New York and New Jersey. The
State has never been called upon to make any direct payments pursuant to such
guarantees. The State-guaranteed bonds of the Port Authority of New York and
New Jersey were fully retired on December 31, 1996. State-guaranteed bonds
issued by the Thruway Authority were fully retired on July 1, 1995.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State- guaranteed bonds to refinance certain of
its outstanding bonds and notes in order to restructure and improve JDA's
capital structure. Due to concerns regarding the economic viability of its
programs, JDA's loan and loan guarantee activities had been suspended since the
Governor took office in 1995. As a result of the structural imbalances in JDA's
capital structure, and defaults in its loan portfolio and loan guarantee
program incurred between 1991 and 1996, JDA would have experienced a debt
service cash flow shortfall had it not completed its recent refinancing. JDA
anticipates that it will transact additional refinancings in 1999, 2000 and
2003 to complete its long-term plan of finance and further alleviate cash flow
imbalances which are likely to occur in future years. The State does not
anticipate that it will be called upon to make any payments pursuant
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to the State guarantee in the 1997-98 fiscal year. JDA recently resumed its
lending activities under a revised set of lending programs and underwriting
guidelines.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual- obligation financing, which involve obligations
of public authorities or municipalities that are State-supported but not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ("LGAC") to restructure the way the State makes certain
local aid payments.
The State also participates in the issuance of certificates of
participation ("COPs") in a pool of leases entered into by the State's Office
of General Services on behalf of several State departments and agencies
interested in acquiring operational equipment, or in certain cases, real
property. Legislation enacted in 1986 established restrictions upon and
centralized State control, through the Comptroller and the Director of the
Budget, over the issuance of COPs representing the State's contractual
obligation, subject to annual appropriation by the Legislature and availability
of money, to make installment or lease-purchase payments for the State's
acquisition of such equipment or real property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees although there can be no assurance that
such a default or call will not occur in the future.
The State also employs moral obligation financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. There has never been a default on
any moral obligation debt of any public authority although there can be no
assurance that such a default will not occur in the future.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1997-98 fiscal
year. The State expects to issue $605 million in general obligation bonds
(including $140 million for purposes of redeeming outstanding BANs) and $140
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $311 million in COPs during the State's
1997-98 fiscal year for equipment purchases. The projection of the State
regarding its borrowings for the 1997-98 fiscal year may change if
circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $1.9 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for
1997-98 capital projects. Included therein are borrowings by (i) DASNY for the
State University of New York ("SUNY"), The City University of New York
("CUNY"), health facilities, and mental health facilities; (ii) the Thruway
Authority for the Dedicated Highway and Bridge Trust Fund and Consolidated
Highway Improvement Program; (iii) UDC
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(doing business as the Empire State Development Corporation) for prison and
youth facilities; (iv) the Housing Finance Agency ("HFA") for housing programs;
and (v) borrowings by the Environmental Facilities Corporation ("EFC") and
other authorities. In addition, in the 1997 legislative session, the
Legislature also approved two new authorizations for lease-purchase and
contractual obligation financings. An aggregate $425 million was authorized for
four public authorities (Thruway Authority, DASNY, UDC and HFA) for the
Community Enhancement Facility Program for economic development purposes,
including sports facilities, cultural institutions, transportation,
infrastructure and other community facility projects. DASNY was also authorized
to issue up to $40 million to finance the expansion and improvement of
facilities at the Albany County airport.
In addition to the arrangements described above, State law provides for
the creation of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities. The Municipal
Assistance Corporation for The City of New York ("MAC") was created to provide
financing assistance to New York City (the "City"). To enable MAC to pay debt
service on its obligations, MAC receives, subject to annual appropriation by
the Legislature, receipts from the 4% New York State Sales Tax for the benefit
of New York City, the State-imposed stock transfer tax and, subject to certain
prior liens, certain local assistance payments otherwise payable to the City.
The legislation creating MAC also includes a moral obligation provision. Under
its enabling legislation, MAC's authority to issue bonds and notes (other than
refunding bonds and notes) expired on December 31, 1984. In 1995, the State
created the Municipal Assistance Corporation for the City of Troy ("Troy MAC").
The bonds issued by Troy MAC, however, do not include moral obligation
provisions.
The 1997-1998 State Financial Plan. The State's budget for the State's
1997-98 fiscal year, commencing on April 1, 1997 and ending on March 31, 1998,
was enacted by the Legislature on August 4, 1997. The State Financial Plan for
the 1997-98 fiscal year (the "State Financial Plan") was formulated on August
11, 1997 and is based on the State's budget as enacted by the Legislature and
signed into law by the Governor, as well as actual results for the first
quarter of the current fiscal year. The State Financial Plan is updated in
October and January. The State Financial Plan currently is projected to be
balanced on a cash basis; however there can be no assurance that the State
Financial Plan will continue to be in balance. Total General Fund receipts and
transfers from other funds are projected to be $35.09 billion, while total
General Fund disbursements and transfers to other funds are projected to be
$34.60 billion. After adjustments for comparability, the adopted 1997-98 budget
projects a year-over-year increase in General Fund disbursements of 5.2
percent. As compared to the Governor's proposed budget as revised in February
1997, the State's adopted budget for 1997-98 increases General Fund spending by
$1.70 billion, primarily from increases for local assistance ($1.3 billion).
Resources used to fund these additional expenditures include $540 million in
increased revenues projected for 1997-98, increased resources produced in the
1996-1997 fiscal year that will be utilized in 1997- 1998, reestimates of
social service, fringe benefit and other spending, and certain non-recurring
resources.
The State Financial Plan includes actions that will have an effect on the
budget outlook for State fiscal year 1997-98 and beyond. The State Division of
the Budget ("DOB") estimates that the 1997-98 State Financial Plan contains
actions that provide non-recurring resources or savings totaling approximately
$270 million. These include the use of $200 million in federal reimbursement
funds available from retroactive social service claims approved by the federal
government in April 1997. The balance is composed of various other actions,
primarily the transfer of unused special revenue fund balances to the General
Fund.
The State closed projected budget gaps of $5.0 billion, $3.9 billion and
$2.3 billion for its 1995-96 through 1997-98 fiscal years, respectively. The
1998-99 gap was projected at $1.68 billion, in the outyear projections
submitted to the legislature in February 1997. As a result of changes made in
the enacted budget, that gap is now expected to be about the same or smaller
than the amount previously projected, after application of the $530 million
reserve for future needs. The expected gap is smaller than the three previous
budget gaps closed by the State.
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The outyear projection will be impacted by a variety of factors. Certain
actions taken in the State's 1997-98 fiscal year, such as medicaid and welfare
reforms, are expected to provide recurring savings in future fiscal years.
Continued controls on State agency spending will also provide recurring
savings. The availability of $530 million in reserves created as a part of the
1997-98 adopted budget and included in the State Financial Plan is expected to
benefit the 1998-99 fiscal year. Sustained growth in the State's economy and
continued declines in welfare case load and health care costs would also
produce additional savings in the State Financial Plan. Finally, various
federal actions, including the potential benefit effect on State tax receipts
from changes to the federal tax treatment of capital gains, would potentially
provide significant benefits to the State over the next several years.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce disbursements as it enacts the budget for that year, and under
the State Constitution, the Governor is required to propose a balanced budget
each year. There can be no assurance, however, that the Legislature will enact
the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring
receipts and disbursements in future fiscal years.
Uncertainties with regard to the economy, as well as the outcome of
certain litigation now pending against the State, could produce adverse effects
on the State's projections of receipts and disbursements. For example, changes
to current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
1996-97 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A delay in the adoption of the State's budget
beyond the statutory April 1 deadline could delay the projected receipt by the
City of State aid, and there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.
The following discussion summarizes the State Financial Plan and recent
fiscal years with particular emphasis on the State's General Fund. Pursuant to
statute, the State updates the financial plan at least on a quarterly basis.
Due to changing economic conditions and information, public statements or
reports may be released by the Governor, members of the Legislature, and their
respective staffs, as well as others involved in the budget process from time
to time. Those statements or reports may contain predictions, projections or
other items of information relating to the State's financial condition,
including potential operating results for the current fiscal year and projected
baseline gaps for future fiscal years, that may vary materially and adversely
from the information provided herein.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1997-98 fiscal year, the General Fund is expected by
the State to account for approximately 48 percent of total governmental-funds
disbursements and 71 percent of total State Funds disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types.
The General Fund is currently projected to be balanced on a cash basis for
the 1997-98 fiscal year; however there can be no assurance that the General
Fund will remain balanced for the entire fiscal year. Total
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receipts are projected to be $35.09 billion, an increase of $2 billion over
total receipts in the prior fiscal year. Total General Fund disbursements are
projected to be $34.60 billion, an increase of $2.05 billion over the total
amount disbursed and transferred in the prior fiscal year.
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise more than 42
percent of total governmental funds receipts and disbursements in the 1997-98
fiscal year, about three-quarters of that activity relates to Federally-funded
programs.
Projected receipts in this fund type total $28.22 billion, an increase of
$2.51 billion over the prior year. Projected disbursements in this fund type
total $28.45 billion, an increase of $2.43 billion over 1996-97 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $21.19 billion in the
1997-98 fiscal year. Remaining projected spending of $7.26 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority (the "MTA") funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs which
deliver services financed by user fees.
Capital Projects Funds account for the financial resources used for the
acquisition, construction, or rehabilitation of major State capital facilities
and for capital assistance grants to certain local governments or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax dollars transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1997-98 fiscal year, activity in these
funds is expected to comprise 5 percent of total governmental receipts and
disbursements.
Total receipts in this fund type are projected at $3.30 billion. Bond and
note proceeds are expected to provide $605 million in other financing sources.
Disbursements from this fund type are projected to be $3.70 billion, a decrease
of $154 million (4.3 percent) over prior-year levels. The Dedicated Highway and
Bridge Trust Fund is the single largest dedicated fund, comprising an estimated
$982 million (27 percent) of the activity in this fund type. Total spending for
capital projects will be financed through a combination of sources: federal
grants (29 percent), public authority bond proceeds (31 percent), general
obligation bond proceeds (15 percent), and pay-as-you-go revenues (25 percent).
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1997-98 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General Fund,
and other funds established to accumulate moneys for the payment of debt
service. In the 1997-98 fiscal year, total disbursements in this fund type are
projected at $3.17 billion, an increase of $64 million or 25 percent, most of
which is explained by increases in the General Fund transfer. The projected
transfer from the General Fund of $2.07 billion is expected to finance 65
percent of these payments.
Prior Fiscal years. A narrative description of cash-basis results in the
General Fund is presented below for the prior three fiscal years.
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New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. A national recession, followed by the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in receipts and
three budget deficits during those years. During its last five fiscal years,
however, the State has recorded balanced budgets on a cash basis, with positive
fund balances as described below. There can be no assurance, however, that such
trends will continued.
Fiscal year 1996-97. The State ended its 1996-97 fiscal year on March 31,
1997 in balance on a cash basis, with a General Fund cash surplus as reported
by DOB of approximately $1.4 billion. The cash surplus was derived primarily
from higher-than-expected revenues and lower-than-expected spending for social
services programs. The Governor in his Executive Budget applied $1.05 billion
of the cash surplus amount to finance the 1997-98 Financial Plan, and the
additional $373 million is available for use in financing the 1997-98 Financial
Plan when enacted by the State Legislature.
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the event
of any future General Fund deficit, as provided under the State Constitution
and State Finance Law. In addition, $41 million remains on deposit in the CRF.
This fund assists the State in financing any extraordinary litigation costs
during the fiscal year. The remaining $75 million reflects amounts on deposit
in the Community Projects Fund. This fund was created to fund certain
legislative initiatives. The General Fund closing fund balance does not include
$1.86 billion in the tax refund reserve account, of which $521 million was made
available as a result of the Local Government Assistance Corporation ("LGAC")
financing program and was required to be on deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the
previous fiscal year (excluding deposits into the tax refund reserve account).
General Fund disbursements and transfers to other funds totaled $32.90 billion
for the 1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal
year.
Fiscal Year 1995-96. The State ended its 1995-96 fiscal year on March 31,
1996 with a General Fund cash surplus. The DOB reported that revenues exceeded
projections by $270 million, while spending for social service programs was
lower than forecast by $120 million and all other spending was lower by $55
million. From the resulting benefit of $445 million, a $65 million voluntary
deposit was made into the TSRF, and $380 million was used to reduce 1996-97
Financial Plan liabilities by accelerating 1996-97 payments, deferring 1995-96
revenues, and making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9
million deposit to the Revenue Accumulation Fund. The closing fund balance
includes $237 million on deposit in the TSRF, to be used in the event of any
future General Fund deficit as provided under the State Constitution and State
Finance Law. In addition, $41 million is on deposit in the CRF. The CRF was
established in State fiscal year 1993-94 to assist the State in financing the
costs of extraordinary litigation. The remaining $9 million reflects amounts on
deposit in the Revenue Accumulation Fund. This fund was created to hold certain
tax receipts temporarily before their deposit to other accounts. In addition,
$678 million was on deposit in the tax refund reserve account, of which $521
million was necessary to complete the restructuring of the State's cash flow
under the LGAC program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions
enacted and effective in both 1994 and 1995. General Fund
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disbursements totaled $32.68 billion for the 1995-96 fiscal year, a decrease of
2.2 percent from 1994-95 levels. Mid-year spending reductions, taken as part of
a management review undertaken in October at the direction of the Governor,
yielded savings from Medicaid utilization controls, office space consolidation,
overtime and contractual expense reductions, and statewide productivity
improvements achieved by State agencies.
Fiscal Year 1994-95. The State ended its 1994-95 fiscal year with the
General Fund in balance. The $241 million decline in the fund balance reflects
the planned use of $264 million from the CRF, partially offset by the required
deposit of $23 million to the TSRF. In addition, $278 million was on deposit in
the tax refund reserve account, $250 million of which was deposited to continue
the process of restructuring the State's cash flow as part of the LGAC program.
The closing fund balance of $158 million reflects $157 million in the TSRF and
$1 million in the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9 percent
from 1993-94 levels. General Fund disbursements totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.
The increase in disbursements was primarily the result of one-time litigation
costs for the State, funded by the use of the CRF, offset by $188 million in
spending reductions initiated in January 1995 to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects.
Other Funds. Activity in the three other governmental funds has remained
relatively stable over the last three fiscal years, with federally-funded
programs comprising approximately two-thirds of these funds. The most
significant change in the structure of these funds has been the redirection of
a portion of transportation-related revenues from the General Fund to two new
dedicated funds in the Special Revenue and Capital Projects fund types. These
revenues are used to support the capital programs of the Department of
Transportation and the MTA.
In the Special Revenue Funds, disbursements increased from $24.38 billion
to $26.02 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees
for criminal justice programs.
Disbursements in the Capital Projects Funds declined from $3.62 billion to
$3.54 billion over the last three years, as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health
and environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained
stable, and reimbursements from public authority bonds (primarily
transportation related) increased. The increase in the negative fund balance in
1994-95 resulted from delays in reimbursements caused by delays in the timing
of public authority bond sales.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and
the continued implementation of the LGAC fiscal reform program. The increases
were moderated by the refunding savings achieved by the State over the last
several years using strict present value savings criteria. The growth in LGAC
debt service was offset by reduced short-term borrowing costs reflected in the
General Fund.
State Financial Plan Considerations. The economic and financial condition
of the State may be affected by various financial, social, economic and
political factors. These factors can be very complex, may vary from fiscal year
to fiscal year, and are frequently the result of actions taken not only by the
State and its agencies and instrumentalities, but also by entities, such as the
federal government, that are not under the control of the State. For example,
various proposals relating to federal tax and spending policies that are
currently being publicly discussed and debated could, if enacted, have a
significant impact on the State's
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financial condition in the current and future fiscal years. Because of the
uncertainty and unpredictability of the changes, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent
of corporate and governmental restructuring, federal fiscal and monetary
policies, the level of interest rates, and the condition of the world economy,
which could have an adverse effect on the State. There can be no assurance that
the State economy will not experience results in the current fiscal year that
are worse than predicted, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or
revenue sources is generally made by estimating the change in yield of such tax
or revenue source caused by economic and other factors, rather than by
estimating the total yield of such tax or revenue source from its estimated tax
base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such
as the business and personal income taxes, are consistent with estimates of
total liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the
federal government, and changes in the demand for and use of State services.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Actual results, however, could differ materially and
adversely from the projections set forth in this Annual Information Statement.
In the past, the State has taken management actions and made use of internal
sources to address potential State Financial Plan shortfalls, and DOB believes
it could take similar actions should variances occur in its projections for the
current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget
gaps for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce disbursements as it enacts the budget for that year, and under
the State Constitution, the Governor is required to propose a balanced budget
each year. There can be no assurance, however, that the Legislature will enact
the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring
receipts and disbursements in future fiscal years.
The State Financial Plan is based upon a July 1997 projection by DOB of
national and State economic activity. The information below summarizes the
national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1997-98 Financial Plan.
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On August 22, 1996 the President signed the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996 (the "1996 Welfare Act"). This new
law made significant changes to welfare and other benefit programs. Major
changes included conversion of AFDC into the TANF block grant to states, new
work requirements and durational limits on recipients of TANF, and limits on
assistance provided to immigrants. City expenditures as a result of welfare
reform are estimated in the Financial Plan at $49 million in fiscal year 1998,
$45 million in fiscal year 1999, $38 million in fiscal year 2000 and $44
million in fiscal year 2001. In addition, the City's naturalization initiative,
CITIZENSHIP NYC, will assist immigrants made ineligible under Federal law to
regain eligibility for benefits, by helping them through the application
process for citizenship. The Financial Plan assumes that 75% of those
immigrants who otherwise would have lost benefits will become citizens,
resulting in projected savings to the City in public assistance expenditures of
$6 million in fiscal year 1999, $24 million in fiscal year 2000 and $25 million
in fiscal year 2001. Federal legislation enacted August 5, 1997, reinstated
eligibility for even more immigrants currently on the rolls than projected. The
outyear estimates made by OMB are preliminary and depend on a variety of
factors, which are impossible to predict, including the implementation of
workfare and child care programs modified by newly enacted State law, the
impact of possible litigation challenging the law, and the impact of adverse
economic developments on welfare and other benefit programs. In accordance with
the Federal welfare reform law, the Governor submitted a State plan to the
Federal government and such plan was deemed complete as of December 2, 1996.
New York State's welfare reform, bringing the State into compliance with the
1996 Welfare Act and making changes to the Home Relief program, was signed into
law on August 20, 1997. The Governor submitted an amended State plan to the
Federal government, reflecting these changes, on September 20, 1997.
Implementation of the changes at the State level will in part determine the
possible costs or savings to the City. it is expected that OMB's preliminary
estimates of potential costs will change, based on new policies to be developed
by the State and City with respect to benefits no longer funded as Federal
entitlements.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalance in the
State Financial Plan primarily through General Fund expenditure reductions and
without increases in taxes or deferrals of scheduled tax reductions. It is
expected by the State DOB that the State Financial Plan will reflect a
continuing strategy of substantially reduced State spending, including agency
consolidations, reductions in the State workforce, and efficiency and
productivity initiatives. The division of the Budget intends to update the
State Financial Plan and provide an update to the Annual Information Statement
upon release of the 1997-98 Executive Budget.
U.S. Economy. The national economy has resumed a more robust rate of
growth after a "soft landing" in 1995, with approximately 14 million jobs added
nationally since early 1992. The State economy has continued to expand, but
growth remains somewhat slower than in the nation. Although the State has added
approximately 300,000 jobs since late 1992, employment growth in the State has
bee hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense, and banking industries. Government
downsizing has also moderated these job gains.
DOB forecasts that national economic growth will be quite strong in the
first half of calendar 1997, but will moderate considerably as the year
progresses. The overall growth rate of the national economy for calendar year
1997 is expected to be practically identical to the consensus forecast of a
widely followed survey of national economic forecasters. Growth in real Gross
Domestic Product for 1997 is projected to be 3.6 percent, with an anticipated
decline in net exports and continued restraint in Federal spending more than
offset by increases in consumption and investment. Inflation, as measured by
the Consumer Price Index, is projected to remain subdued at about 2.6 percent
due to improved productivity and foreign competition. Personal income and wages
are projected to increase by 6.0 percent and 6.7 percent respectively.
New York Economy. The forecast of the State's economy shows moderate
expansion during the first half of calendar 1997 with the trend continuing
through the year. Although industries that export goods and services are
expected to continue to do well, growth is expected to be moderated by tight
fiscal constraints on the health care and social services industries.
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The forecast for continued growth, and any resultant impact on the State's
1997-98 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment could lead to a significant improvement in consumer
spending. Investments could also remain robust. Conversely, hints of
accelerating inflation or fears of excessively rapid economic growth could
create upward pressures on interest rates. In addition, the State economic
forecast could over- or underestimate the level of future bonus payments or
inflation growth, resulting in forecasted average wage growth that could differ
significantly form actual growth. Similarly, the State forecast could fail to
correctly account for declines in banking employment and the direction of
employment change that is likely to accompany telecommunications and energy
deregulation.
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of
its workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. The following paragraphs summarize the state of major
sectors of the New York economy:
Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related
services, such as information processing, law and accounting, is the
State's leading economic sector. The services sector accounts for more
than three of every ten nonagricultural jobs in New York and has a
noticeably higher proportion of total jobs than does the rest of the
nation.
Manufacturing: Manufacturing employment continues to decline in
importance in New York, as in most other states, and New York's economy is
less reliant on this sector than is the nation. The principal
manufacturing industries in recent years produced printing and publishing
materials, instruments and related products, machinery, apparel and
finished fabric products, electronic and other electric equipment, food
and related products, chemicals and allied products, and fabricated metal
products.
Trade: Wholesale and retail trade is the second largest sector in terms
of nonagricultural jobs in New York but is considerably smaller when
measured by income share. Trade consists of wholesale businesses and
retail businesses, such as department stores and eating and drinking
establishments.
Finance, Insurance and Real Estate: New York City is the nation's
leading center of banking and finance and, as a result, this is a far more
important sector in the State than in the nation as a whole. Although this
sector accounts for under one-tenth of all nonagricultural jobs in the
State, it contributes over one-sixth of all nonfarm labor and proprietors'
income.
Agriculture: Farming is an important part of the economy of large
regions of the State, although it constitutes a very minor part of total
State output. Principal agricultural products of the State include milk
and dairy products, greenhouse and nursery products, apples and other
fruits, and fresh vegetables. New York ranks among the nation's leaders in
the production of these commodities.
Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the
employment accounted for by local governments. Public education is the
source of nearly one-half of total state and local government employment.
Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a
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whole during an economic recession that is concentrated in manufacturing and
construction, but likely to be more affected during a recession that is
concentrated in the service-producing sector.
In the calendar years 1987 through 1996, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover. The total employment growth rate in
the State has been below the national average since 1987. The unemployment rate
in the State dipped below the national rate in the second half of 1981 and
remained lower until 1991; since then, it has been higher. According to data
published by the US Bureau of Economic Analysis, total personal income in the
State has risen more slowly than the national average since 1988.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because the City is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.
Financial Plan Update. The State is required to issue Financial Plan
updates to the cash-basis State Financial Plan in July, October, and January,
respectively. These quarterly updates reflect analysis of actual receipts and
disbursements for each respective period and revised estimates of receipts and
disbursements for the then current fiscal year. The First Quarter Update was
incorporated into the cash-basis State Financial Plan of August 15, 1997 (the
"August Financial Plan").
The State issued its first update to the cash-basis 1997-98 State
Financial Plan (the "Mid-Year Update") on October 30, 1997. No revisions were
made to the estimates of receipts and disbursements based on the current
economic forecasts for both the nation and the State. The Mid-Year Update
continues to reflect a balanced 1997-98 State Financial Plan, with a projected
General Fund reserve for future needs of $530 million. This projected surplus
is now considered to be at the low end of the range of possible outcomes for
the 1997-98 fiscal year.
The forecast of the State economy also remains unchanged from the one
formulated with the August Financial Plan. Steady growth was projected to
continue through the second half of 1997. Personal income was projected to
increase by 6.1 percent in 1997 and 4.5 percent in 1998, reflecting projected
wage growth fueled in part by financial sector bonus payments. The forecast
projected employment increases of 1.4 percent in 1997 and 1.0 percent in 1998.
The projected 1997-98 closing fund balance in the General Fund of $927
million reflects a reserve for future needs of $530 million, a balance of $332
million in the Tax Stabilization Reserve Fund (following a payment of $15
million during the current fiscal year) and a balance of $65 million in the
Contingency Reserve Fund (following a deposit of $24 million during the current
fiscal year). These two reserves remain available to help offset potential
risks to the Financial Plan. Based upon experience to date, it is likely that
the closing fund balance will be larger, providing additional resources for the
1998-99 fiscal year.
All governmental funds receipts and disbursements are also unchanged. The
projected closing fund balance for all governmental funds remains $1.43
billion. The annual increase in spending for all governmental funds remains
approximately 7 percent. Total projected receipts in all governmental funds
(excluding transfers) are approximately $67.31 billion. All funds disbursements
(excluding transfers) are $67.37 billion. Total net other financing sources
across all governmental funds are projected at $505 million.
On September 11, 1997, the State Comptroller released a report entitled
"The 1997-98 Budget: Fiscal Review and Analysis" in which he identified several
risks to the State Financial Plan and estimated that the
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State faces a potential imbalance in receipts and disbursements of
approximately $1.5 billion for the State's 1998-99 fiscal year and
approximately $3.4 billion for the State's 1999-00 fiscal year. The 1998-99
fiscal year estimate by the State Comptroller is within the range discussed by
the Division of the Budget in the section entitled "Outyear Projections of
Receipts and Disbursements" in the Annual Information Statement of August 15,
1997. Any increase in the 1997-98 reserve for future needs would reduce this
imbalance further and, based upon results to date, such an outcome is
considered possible. In addition, the Comptroller identified risks in future
years from an economic slowdown and from spending and revenue actions enacted
as a part of the 1997-98 budget that will add pressure to future budget
balance. The Governor is required to submit a balanced budget each year to the
State Legislature.
On August 11, 1997 President Clinton exercised his line item veto powers
to cancel a provision in the Federal Balanced Budget Act of 1997 that would
have deemed New York State's health care provider taxes to be approved by the
federal government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was sanctioned by federal
legislation in 1987 and 1991. However, the federal Health Care Financing
Administration (HCFA) regulations governing the use of provider taxes require
the State to seek waivers from HCFA that would grant explicit approval of the
provider taxing system now in place. The State filed the majority of these
waivers with HCFA in 1995 but has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-98 Financial Plan does not anticipate
any provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the
HCFA regulations governing such taxes. The Governor has stated that this
proposal does not appear to address all of the State's concerns, and
negotiations are ongoing between the State and HCFA. In addition, the City of
New York and other affected parties in the health care industry have filed a
lawsuit challenging the constitutionality of the President's line item veto.
On July 31, 1997, the New York State Tax Appeals Tribunal delivered a
decision involving the computation of itemized deductions and personal income
taxes of certain high income taxpayers. By law, the State cannot appeal the
Tribunal's decision. The decision will lower income tax liability attributable
to such taxpayers for the 1997 and earlier open tax years, as well as on a
prospective basis.
Ratings Agencies. On August 28, 1997, Standard & Poor's ("S&P") revised
its ratings on the State's general obligation bonds to A from A-, and, in
addition, revised its ratings on the State's moral obligation, lease purchase,
guaranteed and contractual obligation debt. S&P rated the State's general
obligation bonds AA- from August 1987 to March 1990 and A+ from November 1982
to August 1987. In March 1990, S&P lowered its rating of all of the State's
general obligation bonds from AA- to A. On January 13, 1992, S&P lowered its
rating on the State's general obligation bonds from A to A-, and, in addition,
reduced its ratings on the State's moral obligation, lease purchase, guaranteed
and contractual obligation debt. On April 26, 1993 S&P revised the rating
outlook assessment to stable. On February 14, 1994, S&P revised its outlook on
the State's general obligation bonds to positive and, on August 5, 1996,
confirmed its A- rating.
On February 10, 1997, Moody's confirmed its A2 rating on the State's
general obligation long-term indebtedness. On June 6, 1990, Moody's changed its
ratings on all of the State's outstanding general obligation bonds from A1 to
A, the rating having been A1 since May 27, 1986. On November 12, 1990, Moody's
confirmed the A rating. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1.
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Authorities. The fiscal stability of the State is related in part to the
fiscal stability of its public authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit
markets could be impaired, and the market price of its outstanding debt may be
materially adversely affected, if any of its public authorities were to default
on their respective obligations. As of September 30, 1996 there were 17 public
authorities that had outstanding debt of $100 million or more each, and the
aggregate outstanding debt, including refunding bonds, of all state public
authorities was $75.4 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects financed or operated,
such as tolls charged for the use of highways, bridges or tunnels, rentals
charged for housing units, and charges for occupancy at medical care
facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State HFA, the New York State Urban Development Corporation and certain other
Authorities have in the past required and continue to require substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts, may be
required for these, or other, Authorities in the future. In addition, certain
other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
Metropolitan Transportation Authority. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line
on Staten Island. Through its affiliated agency, the Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance the mass
transit portion of these operations, the MTA has depended, and will continue to
depend for operating support upon a system of State, local government and TBTA
support, and, to the extent available, Federal operating assistance, including
loans, grants and operating subsidies. If current revenue projections are not
realized and/or operating expenses exceed current projections, the TA or
commuter railroads may be required to seek additional State assistance, raise
fares or take other actions.
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Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by
the MTA and a special one-quarter of 1 percent regional sales and use tax--that
provide revenues for mass transit purposes, including assistance to the MTA. In
addition, since 1987, State law has required that the proceeds of a one quarter
of 1% mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. Further, in 1993 the State dedicated a portion of the State
petroleum business tax to fund operating or capital assistance to the MTA. For
the 1997-98 fiscal year, total State assistance to the MTA is projected to
total approximately $1.2 billion, an increase of $76 million over the 1996-97
fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance
a portion of a new $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board approved the 1995-99 Capital Program. This plan supersedes
the overlapping portion of the MTA's 1992-96 Capital Program. This is the
fourth capital plan since the Legislature authorized procedures for the
adoption, approval and amendment of MTA capital programs and is designed to
upgrade the performance of the MTA's transportation systems by investing in new
rolling stock, maintaining replacement schedules for existing assets and
bringing the MTA system into a state of good repair. The 1995-99 Capital
Program assumes the issuance of an estimated $5.1 billion in bonds under this
$6.5 billion aggregate bonding authority. The remainder of the plan is
projected to be financed through assistance from the State, the federal
government, and the City of New York, and from various other revenues generated
from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1995-99
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional assistance.
Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1997-98
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
Municipal Indebtedness. Municipalities and school districts have engaged
in substantial short-term and long-term borrowings. In 1995, the total
indebtedness of all localities in the State other than the City was
approximately $19.0 billion. A small portion (approximately $102.3 million) of
that indebtedness represented
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borrowing to finance budgetary deficits and was issued pursuant to State
enabling legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Eighteen localities had
outstanding indebtedness for deficit financing at the close of their fiscal
year ending in 1995.
From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, the City or any of the Authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect certain localities and require increasing State
assistance in the future.
Litigation. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (i)
employee welfare benefit plans seeking a declaratory judgment nullifying on the
ground of federal preemption provisions of Section 2807-c of the Public Health
Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans; (ii) several challenges to provisions
of Chapter 81 of the Laws of 1995 which alter the nursing home Medicaid
reimbursement methodology; (iii) the validity of agreements and treaties by
which various Indian tribes transferred title to the State of certain land in
central and upstate New York; (iv) challenges to the practice of using
patients' Social Security benefits for the costs of care of patients of State
Office of Mental Health facilities; (v) an action against State and City
officials alleging that the present level of shelter allowance for public
assistance recipients is inadequate under statutory standards to maintain
proper housing; (vi) challenges to the practice of reimbursing certain Office
of Mental Health patient care expenses from the client's Social Security
benefits; (vii) alleged responsibility of State officials to assist in
remedying racial segregation in the City of Yonkers; (viii) alleged
responsibility of the State Department of Environmental Conservation for a
plaintiff's inability to complete construction of a cogeneration facility in a
timely fashion and the damages suffered thereby; (ix) challenges to the
promulgation of the State's proposed procedure to determine the eligibility for
and nature of home care services for Medicaid recipients; (x) a challenge to
State implementation of a program which reduces Medicaid benefits to certain
home-relief recipients; (xi) a challenge to the constitutionality of petroleum
business tax assessments authorized by Tax Law SS 301; (xii) an action for
reimbursement from the State for certain costs arising out of the provision of
preschool services and programs for children with handicapping conditions,
pursuant to Sections 4410 (10) and (11) of the Education Law; and (xiii) a
challenge to the constitutionality of the Clean Water/ Clean Air Bond Act of
1996 and its implementing regulations.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1997-98 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1997, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $364
million. There can be no assurance that an adverse decision in any of the above
cited proceedings would not exceed the amount of the 1997-98 State Financial
Plan reserves for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1997-98 State Financial Plan.
New York City
The fiscal health of the State may also be particularly affected by the
fiscal health of the City, which continues to require significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. The State could
also be affected by
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the ability of the City to market its securities successfully in the public
credit markets. The City has achieved balanced operating results for each of
its fiscal years since 1981 as reported in accordance with the then-applicable
GAAP standards. The City's financial plans are usually prepared quarterly, and
the annual financial report for its most recent completed fiscal year is
prepared at the end of October of each year.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities and a "Control Period" from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to exercise various
fiscal-monitoring functions over the City, and upon the occurrence or
"substantial likelihood and imminence" of the occurrence of certain events,
including, but not limited to a City operating budget deficit of more than $100
million, the Control Board is required by law to reimpose a Control Period.
Currently, the City and its "Covered Organizations" (i.e., those which
receive or may receive money from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "City Financial
Plan"), which the City prepares annually and updates periodically and which
includes the City's capital revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
projections set forth in the City Financial Plan are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected federal or State
aid is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases
in taxes and reductions in essential City services. The City might also seek
additional assistance from the State. Unforeseen developments and changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's financial plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements for, and financial plan compliance by, the City and its Covered
Organizations. According to recent staff reports, while economic recovery in
New York City has been slower than in other regions of the country, a surge in
Wall Street profitability resulted in increased tax revenues and generated a
substantial surplus for the City in City fiscal year 1996-97. Although several
sectors of the City's economy have expanded recently, especially tourism and
business and professional services, City tax revenues remain heavily dependent
on the continued profitability of the securities industries and the course of
the national economy. These reports have also indicated that recent City
budgets have been balanced in part through the use of non-recurring resources;
that the City Financial Plan tends to rely on actions outside its direct
control; that the City has not yet brought its long-term expenditure growth in
line with recurring revenue growth; and that the City
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is therefore likely to continue to face substantial gaps between forecast
revenues and expenditures in future years that must be closed with reduced
expenditures and/or increased revenues. In addition to these monitoring
agencies, the Independent Budget Office ("IBO") has been established pursuant
to the City Charter to provide analysis to elected officials and the public on
relevant fiscal and budgetary issues affecting the City.
The City Financial Plan currently projects revenues and expenditures for
the 1998 fiscal year balanced in accordance with GAAP; however, there can be no
assurance that revenues and expenditures will be balanced. The City Financial
Plan includes increased tax revenue projections; reduced debt service costs;
the assumed restoration of Federal funding for programs assisting certain legal
aliens; additional expenditures for textbooks, computers, improved education
programs and welfare reform, law enforcement, immigrant naturalization,
initiatives proposed by the City Council and other initiatives; and a proposed
discretionary transfer in the 1998 fiscal year of $300 million of debt service
due in the 1999 fiscal year for budget stabilization purposes. In addition, the
City Financial Plan reflects the discretionary transfer in the 1997 fiscal year
of $1.3 billion of debt service due in the 1998 and 1999 fiscal years, and
includes actions to eliminate a previously projected budget gap for the 1998
fiscal year. These gap closing actions include (i) additional agency actions
totaling $621 million (ii) the proposed sale of various assets; (iii)
additional State aid of $294 million, including a proposal that the State
accelerate a $142 million revenue sharing payment to the City from March 1999;
and (iv) entitlement savings of $128 million which would result from certain of
the reductions in Medicaid spending proposed in the Governor's 1997-1998
Executive Budget and the State making available to the City $77 million of
additional Federal block grant aid, as proposed in the Governor's 1997-1998
Executive Budget. The City Financial Plan also sets forth projections for the
1999 through 2001 fiscal years and projects gaps of $1.8 billion, $2.8 billion
and $2.6 billion for the 1999 through 2001 fiscal years, respectively.
The Financial Plan assumes approval by the State Legislature and the
Governor of (i) a tax reduction program proposed by the City totaling $272
million, $435 million, $465 million and $481 million in the 1998 through 2001
fiscal years, respectively, which includes a proposed elimination of the 4%
City sales tax on clothing items under $500 as of December 1, 1997, and (ii) a
proposed State tax relief program, which would reduce the City property tax and
personal income tax, and which the Financial Plan assumes will be offset by
proposed increased State aid totaling $47 million, $254 million, $472 million
and $722 million in the 1998 through 2001 fiscal years, respectively.
The Financial Plan also assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999 and the extension of which is
projected to provide revenue of $166 million and $494 million in the 2000 and
2001 fiscal years, respectively, and of the extension of the 12.5% personal
income tax surcharge, which is scheduled to expire on December 31, 1998 and the
extension of which is projected to provide revenue of $188 million, $527
million and $554 million in the 1999 through 2001 fiscal years, respectively;
and (ii) collection of the projected rent payments for the City's airports,
totaling $385 million, $175 million, and $170 million in the 1999, 2000 and
2001 fiscal years, respectively, which may depend on the successful completion
of negotiations with the Port Authority or the enforcement of the City's rights
under the existing leases through pending legal actions. The Financial Plan
provides no additional wage increases for City employees after their contracts
expire in fiscal years 2000 and 2001. 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.
The City's financial plans have been the subject of extensive public
comment and criticism. The City Comptroller has issued a report commenting on
certain developments since the release of the Financial Plan. In his report the
City Comptroller noted, among other things, that tax revenues for the first
quarter of the 1998 fiscal year were above projections in the City Financial
Plan. However, the report also noted that if the stock market decline which has
occurred in recent days were to continued, tax revenue forecasts for subsequent
fiscal years might have to be revised downward. The report concluded that the
City faces, with respect to the
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1998 fiscal year, a possible $112 million surplus or a possible net budget gap
of up to $440 million, and, with respect to the 1999 and subsequent fiscal
years, total net budget gaps between $1.9 billion and $2.8 billion, $2.6
billion and $4.0 billion, and $2.4 billion and $3.8 billion for the 1999
through 2001 fiscal years, which include the gaps set forth in the City
Financial Plan.
In connection with the Financial Plan, the City has outlined a gap-closing
program for the 1999, 2000 and 2001 fiscal years to eliminate the remaining
$1.8 billion, $2.8 billion and $2.6 billion projected gaps for such fiscal
years. This program, which is not specified in detail, assumes for the 1999,
2000 and 2001 fiscal years, respectively, additional agency programs to reduce
expenditures or increase revenues by $580 million, $853 million and $762
million; savings from restructuring City government and privatization and
procurement initiatives of $285 million, $550 million and $550 million;
additional revenue initiatives and asset sales of $180 million, $135 million
and $60 million; additional State aid of $350 million, $500 million and $500
million; additional entitlement cost containment initiatives of $300 million,
$675 million and $675 million; and the availability of $100 million, $100
million and $100 million of the General Reserve. There can be no assurance that
these gap-closing measures can be implemented as planned.
The City's projected budget gaps for the 2000 and 2001 fiscal years do not
reflect the savings expected to result from the prior years' programs to close
the gaps set forth in the City Financial Plan. Thus, for example, recurring
savings anticipated from the actions which the City proposes to take to balance
the fiscal year 1999 budget are not taken into account in projecting the budget
gaps for the 2000 and 2001 fiscal years.
The City's projected budget gaps for the 2000 and 2001 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the City Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1998 budget are not taken into account in projecting the budget
gaps for the 2000 and 2001 fiscal years.
Although the City has maintained balanced budgets in each of its last
seventeen fiscal years, and is projected to achieve balanced operating results
for the 1998 fiscal year, there can be no assurance that the gap- closing
actions proposed in the City Financial Plan can be successfully implemented or
that the City will maintain a balanced budget in future years without
additional State aid, revenue increases or expenditure reductions. Additional
tax increases and reductions in essential City services could adversely affect
the City's economic base.
Assumptions. The City Financial Plan is based on numerous assumptions,
including the condition of the City's and the region's economy and a modest
employment recovery and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The City 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 1998 through 2001 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,
in the context of the State's current financial condition, to provide the aid
contemplated by the City Financial Plan and to take various other actions to
assist the City; the ability of HHC, 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 City Financial Plan; 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 proposed reductions in City
personnel and other 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; the City's ability to market its securities
successfully in the public credit markets; 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.
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The projections and assumptions contained in the City Financial Plan are
subject to revision which may involve substantial change, and no assurance can
be given that these estimates and projections, which include actions which the
City expects will be taken but which are not within the City's control, will be
realized. The principal projections and assumptions described below are based
on information available in June 1997.
City Employees. Substantially all of the City's full-time employees are
members of labor unions. The Financial Emergency Act requires that all
collective bargaining agreements entered into by the City and the Covered
Organizations be consistent with the City's current financial plan, except for
certain awards arrived at through impasse procedures. During a Control Period,
and subject to the foregoing exception, the Control Board would be required to
disapprove collective bargaining agreements that are inconsistent with the
City's current financial plan.
Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i)
during the period of negotiations between the City and a union representing
municipal employees concerning a collective bargaining agreement; (ii) if an
impasse panel is appointed, then during the period commencing on the date on
which such panel is appointed and ending sixty days thereafter or thirty days
after it submits its report, whichever is sooner, subject to extension under
certain circumstances to permit completion of panel proceedings; or (iii)
during the pendency of an appeal to the Board of Collective Bargaining.
Although State law prohibits strikes by municipal employees, strikes and work
stoppages by employees of the City and the Covered Organizations have occurred.
The City 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 and sewer funds, will increase from an
estimated level of 203,401 on June 30, 1997 to an estimated level of 203,465 by
June 30, 2001, before implementation of the gap closing program outlined in the
City Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The City has reached settlements with unions representing
approximately 86% of the City's workforce. The City Financial Plan reflects the
costs of the settlements and assumes similar increases for all other
City-funded employees.
The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
The projections for the 1998 through 2001 fiscal years reflect the costs
of the settlements with the United Federation of Teachers ("UFT") and a
coalition of unions headed by District Council 37 of the American Federation of
State, County and Municipal Employees ("District Council 37"), which together
represent approximately two-thirds of the City's workforce, and assume that the
City will reach agreement with its remaining municipal unions under terms which
are generally consistent with such settlements. The settlement provides for a
wage freeze in the first two years, followed by a cumulative effective wage
increase of 11% by the end of the five year period covered by the proposed
agreements, ending in fiscal years 2000 and 2001. Additional benefit increases
would raise the total cumulative effective increase to 13% above present costs.
Costs associated with similar settlements for all City-funded employees would
total $49 million, $459 million and $1.2 billion in the 1997, 1998 and 1999
fiscal years, respectively, and exceed $2 billion in each fiscal year after the
1999 fiscal year. Subsequently, the City reached settlements, through
agreements or statutory impasse procedures, with bargaining units which,
together with the UFT and District Council 37, represent approximately 86% of
the City's workforce. There can be no assurance that the City will reach an
agreement with the unions that have not yet reached a settlement with the City
on the terms contained in the City Financial Plan.
Reports on the City Financial Plan. From time to time, the Control Board
staff, MAC, OSDC, the City Comptroller and others issue reports and make public
statements regarding the City's financial condition,
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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. It is reasonable to
expect that reports and statements will continue to be issued and to engender
public comment.
On September 18, 1997, the City Comptroller issued a report commenting on
developments with respect to the 1998 fiscal year. The report noted that the
City's adopted budget, which is reflected in the City Financial Plan, had
assumed additional State resources of $612 million in the 1998 fiscal year, and
that the approved State budget provided resources of only $216 million for
gap-closing purposes. The report further noted that, while the City will
receive $322 million more in education aid in the 1998 fiscal year than assumed
in the City's adopted budget, it is unlikely that the funding will be entirely
available for gap-closing purposes. In addition, the report noted that the
City's financial statements currently contain approximately $643 million in
uncollected State education aid receivables from prior years as a result of the
failure of the State to appropriate funds to pay these claims, and that the
staff of BOE has indicated that an additional $302 million in prior year claims
is available for accrual. The report stated that the City Comptroller maintains
the position that no further accrual of prior year aid will take place,
including $75 million in aid assumed in the City's adopted budget for the 1998
fiscal year, unless the State makes significant progress to retire the
outstanding prior year receivables. On October 28, 1997, the City Comptroller
issued a subsequent report commenting on recent developments. With respect to
the 1997 fiscal year, the report noted that the City ended the 1997 fiscal year
with an operating surplus of $1.367 billion, before certain expenditures and
discretionary transfers, of which $1.362 billion was used for expenditures due
in the 1998 fiscal year. With respect to tax revenues for the 1998 fiscal year,
the report noted that total tax revenues in the first quarter of the 1998
fiscal year were $244.3 million above projections in the City Financial Plan,
excluding audit collections which were $31.2 million less than projected. The
report stated that the increased tax revenues included $110.3 million of
greater than projected general property tax receipts, which resulted, in part,
from a prepayment discount program, and increased revenues from the personal
income, banking corporation, general corporation and unincorporated business
taxes. The report noted that Wall Street profits exceeded expectations in the
first half of the 1997 calendar year. However, the report noted that the stock
market in the last two weeks of October has declined as a result of currency
turmoil in Southeast Asia. The report noted that, while tax revenues in the
1998 fiscal year should not be significantly affected by the recent stock
market decline, since there is a lag between activity on Wall Street and City
tax revenues, if the current stock market decline persists, tax revenue
forecasts for subsequent years will have to be revised downward. The report
noted that the City was not affected by the October 1987 stock market crash
until the 1990 fiscal year, when revenues from the City's business and real
estate taxes fell by 20% over the 1989 fiscal year. The report also noted that
expenditures for short-term and long-term debt issued during the first half of
the 1998 fiscal year are estimated to be between approximately $53.9 million
and $58.8 million below levels anticipated in the City's adopted budget for the
1998 fiscal year, approximately $20 million below anticipated levels in the
1999 fiscal year and approximately $30 million below anticipated levels in each
of fiscal years 2000 and 2001 due to less borrowing and lower interest rates
than assumed.
On July 16, 1997, the City Comptroller issued a report on the City
Financial Plan. With respect to the 1998 fiscal year, the report identified a
possible $112 million surplus or a possible total net budget gap of up to $440
million, depending primarily on whether the tax reduction program proposed in
the City Financial Plan is implemented and the 14% personal income tax
surcharge is extended beyond December 31, 1997. The risks identified in the
report for the 1998 fiscal year include (i) $178 million related to BOE,
resulting primarily from unidentified expenditure reductions and prior year
State aid receivables; (ii) State aid totaling $115 million which is assumed in
the City Financial Plan but not provided for in the Governor's Executive
Budget; (iii)
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State approval of the extension of the 14% personal income tax surcharge beyond
December 31, 1997, which would generate $169 million in the 1998 fiscal year;
(iv) City proposals for State aid totaling $271 million, including the
acceleration of $142 million of State revenue sharing payments from the 1999
fiscal year to the 1998 fiscal year, which are subject to approval by the
Governor and/or the State Legislature; and (v) the assumed sale of the Coliseum
for $200 million, which may be delayed. The report noted that these risks could
be partially offset by between $597 million and $765 million in potentially
available resources, including $200 million of higher projected tax revenues,
$150 million of possible additional State education aid and the possibility
that the proposed sales tax reduction will not be enacted, which would result
in $157 million of additional tax revenues in the 1998 fiscal year. With
respect to the 1998 fiscal year, the report stated that the City has budgeted
$200 million in the General Reserve and included in the City Financial Plan a
$300 million surplus to be used in the 1999 fiscal year, making the potential
$440 million budget gap manageable. However, the report also expressed concern
as to the sustainability of profits in the securities industry.
With respect to the 1999 and subsequent fiscal years, the report
identified total net budget gaps of between $1.9 billion and $2.8 billion, $2.6
billion and $4.0 billion, and $2.4 billion and $3.8 billion for the 1999
through 2001 fiscal years, respectively, which include the gaps set forth in
the City Financial Plan. The potential risks and potential available resources
identified in the report for the 1999 through 2001 fiscal years include most of
the risks and resources identified for the 1998 fiscal year, except that the
additional risks for the 1999 through 2001 fiscal years include (i) assumed
payments from the Port Authority relating to the City's claim for back rentals
and an increase in future rentals, part of which are the subject of
arbitration, totaling $350 million, $140 million and $135 million in the
1999-2001 fiscal years, respectively; and (ii) State approval of the extension
of the 12.5% personal income tax surcharge beyond December 31, 1998, which
would generate $190 million, $527 million and $554 million in the 1999 through
2001 fiscal years, respectively.
On July 15, 1997, the staff of the Control Board issued a report
commenting on the City Financial Plan. The report stated that, while the City
should end the 1998 fiscal year with its budget in balance, the City Financial
Plan still contains large gaps beginning in the 1999 fiscal year, reflecting
revenues which are not projected to grow during the Financial Plan Period and
expenditures which are projected to grow at about the rate of inflation. The
report identified net risks totaling $485 million, $930 million, $1.2 billion
and $1.4 billion for 1998 through 2001 fiscal years, respectively, in addition
to the gaps projected in the City Financial Plan for fiscal years 1999 through
2001. The principal risks identified in the report included (i) potential tax
revenues shortfalls totaling $150 million, $300 million and $400 million for
the 1999 through 2001 fiscal years, respectively, based on historical average
trends; (ii) BOE's structural gap, uncertain State funding of BOE and
implementation by BOE of various unspecified actions, totaling $163 million,
$209 million, $218 million and $218 million in the 1998 through 2001 fiscal
years, respectively; (iii) the proposed sale of certain assets in the 1998
fiscal year totaling $248 million, which could be delayed; (iv) assumed
additional State actions totaling $271 million, $121 million, $125 million and
$129 million in the 1998 through 2001 fiscal years, respectively; (v) revenues
from the extension of the 12.5% personal income tax surcharge beyond December
31, 1998, totaling $188 million, $527 million and $554 million in the 1999
through 2001 fiscal years, respectively, which requires State legislation; and
(vi) the receipt of $350 million, $140 million and $135 million from the Port
Authority in the 1999 through 2001 fiscal years, respectively, which is the
subject of arbitration. Taking into account the risks identified in the report
and the gaps projected in the City Financial Plan, the report projected a gap
of $485 million for the 1998 fiscal year, which could be offset by available
reserves, and gaps $2.7 billion, $4.1 billion and $4.0 billion for the 1999
through 2001 fiscal years, respectively. The report also noted that (i) if the
securities industry or economy slows down to a greater extent than projected,
the City could face sudden and unpredictable changes to its forecast; (ii) the
City's entitlement reduction assumptions require a decline of historic
proportions in the number of eligible welfare recipients; (iii) the City has
not yet shown how the City's projected debt service, which would consume 20% of
tax revenues by the 1999 fiscal year, can be accommodated on a recurring basis;
(iv) the City is deferring recommended capital maintenance; and (v) continuing
growth in enrollment at BOE has helped create projected gaps of over $100
million annually at BOE. However, the report noted that if proposed tax
reductions
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are not approved, additional revenue will be realized, ranging from $272
million in the 1998 fiscal year to $481 million in the 2001 fiscal year.
On July 2, 1997, the staff of the OSDC issued a report on the City
Financial Plan. The report projected a potential surplus for the 1998 fiscal
year of $190 million, due primarily to the potential for greater than forecast
tax revenues, and projected budget gaps for the 1999 through 2001 fiscal years
which are slightly less than the gaps set forth in the City Financial Plan for
such years. The report also identified risks of $518 million, $1.1 billion,
$1.3 billion and $1.4 billion for the 1998 through 2001 fiscal years,
respectively. The additional risks identified in the report relate to: (i) the
receipt of Port Authority lease payments totaling $350 million, $140 million
and $135 million in the 1999 through 2001 fiscal years, respectively; (ii) City
proposals for State aid totaling $271 million, $121 million, $125 million and
$129 million in the 1998 through 2001 fiscal years, respectively, including the
acceleration of $142 million of State revenue sharing payments from the 1999
fiscal year to the 1998 fiscal year, which are subject to approval by the
Governor and/or the State Legislature; (iii) the receipt of $200 million in the
1998 fiscal year in connection with the proposed sale of the New York Coliseum;
(iv) the receipt of $47 million in the 1998 fiscal year from the sale of
certain other assets; (v) uncertain State education aid and expenditure
reductions relating to BOE totaling $325 million in each of the 1999 through
2001 fiscal years; (vi) State approval of a three-year extension to the City's
12.5% personal income tax surcharge, which is scheduled to expire on December
31, 1998 and which would generate revenues of $230 million, $525 million and
$550 million in the 1999 through 2001 fiscal years, respectively; and (vii) the
potential for additional funding needs for the City's labor reserve totaling
$104 million, $225 million and $231 million in the 1999 through 2001 fiscal
years, respectively, to pay for collective bargaining increases for the Covered
Organizations, which the City Financial Plan assumes will be paid for by the
Covered Organizations, rather than the City. The report also noted that the
City Financial Plan assumes that the State will extend the 14% personal income
tax that is scheduled to expire in December 1997, which would generate revenues
of $200 million in the 1998 fiscal year and $500 million annually in subsequent
fiscal years, and that the City Financial Plan makes no provision for wage
increases after the expiration of current contracts in fiscal year 2000, which
would add $430 million to the 2001 fiscal year budget gap if employees receive
wage increases at the projected rate of inflation. The report noted that the
City Financial Plan includes an annual General Reserve of $200 million and sets
aside an additional $300 million in the 1998 fiscal year to reduce the budget
gap for the 1999 fiscal year if such funds are not needed in the 1998 fiscal
year. With respect to the gap-closing program for the 1999 through 2001 fiscal
years, the report noted that the City has broadly outlined a program that
relies heavily on unspecified agency actions, savings from reinvention and
other unspecified initiatives and uncertain State aid and entitlement program
reductions which depend on the cooperation of others.
The report concluded that while 1997 was an unexpectedly good fiscal year
for City revenues, the City projects that the rate of spending for the 1998
fiscal year will grow substantially faster than the rate of revenues,
reflecting increasing costs for labor, debt service, Medicaid and education,
and that the gaps for the subsequent fiscal years continue to present a
daunting challenge. With respect to the economy, the report noted that the
major risks to the City's economic and revenue forecasts continue to relate to
the pace of both the national economy and activity on Wall Street, that the
potential exists for a national recession over the next four years, and that
Wall Street volatility can have a negative effect, as was apparent in 1994 when
the Federal Reserve repeatedly raised interest rates and the profits of
securities firms fell. Other concerns identified in the report include: (i) $76
million in retroactive claims for State education aid included in the City
Financial Plan for the 1998 fiscal year which may not be realized; (ii) a
potential risk of $698 million in State education aid owed to the City by the
State for prior years, all or a portion of which the City could be forced to
write-off if further delays occur in the State agreeing to fund these claims;
and (iii) the potential adverse impact on HHC over the long-term of the planned
expansion of managed care which emphasizes out-patient services with fixed
monthly fees, uncertainty covering projected savings from a proposal that most
Medicaid recipients be required to enroll in managed care, which is subject to
approval by the Federal Government, and the possibility that the recent Federal
budget agreement could substantially reduce aid to hospitals which serve a
large number of medically indigent patients.
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On May 27, 1997, the IBO released a report analyzing the financial plan
published on May 8, 1997 (the "May Financial Plan"). In its report, the IBO
estimated gaps of $27 million, $91 million, $2.1 billion, $2.9 billion and $2.9
billion for the 1997 through 2001 fiscal years, respectively, which include the
gaps set forth in the May Financial Plan for fiscal years 1999 through 2001.
The gaps estimated in the IBO report reflect (i) uncertainty concerning the
size and timing of projected airport rents of $270 million and $215 million in
the 1998 and 1999 fiscal years, respectively, which are the subject of an
ongoing dispute between the Port Authority and the City; and (ii) additional
funding needs for the City's labor reserve totaling $104 million, $224 million
and $231 million in the 1999 through 2001 fiscal years, respectively, to pay
for collective bargaining increases for the Covered Organizations, which the
May Financial Plan assumes will be paid for by the Covered Organizations,
rather than the City. These reduced revenues and increased expenditures
identified in the IBO report are substantially offset by tax revenue forecasts
which exceed those in the May Financial Plan. However, the report noted that
the May Financial Plan assumes continued strong revenue growth and that, in the
event of an economic downturn, the City will be required to increase taxes in a
slow economy or reduce spending when it is most needed. With respect to the tax
reductions proposed in the May Financial Plan, the IBO stated that the
principal question is whether the City will be able to afford the tax
reductions. In addition, the report discussed various issues with implications
for the City's 1998 budget. These issues include the reliance in the budget on
a number of State legislative actions, including (i) $294 million from
legislation the City has requested to increase State aid; (ii) $128 million in
savings attributable to both a larger City share of Federal welfare grant funds
and State reforms to Medicaid; and (iii) $115 million to restore expenditure
reductions proposed in the Governor's Executive Budget. The report also noted
that the City's claim for $900 million of State reimbursement of prior year
education expenditures remains unresolved, that proposals affecting the MTA,
including proposals to eliminate two-fare zones for bus and subway riders, will
result in a significant reduction in revenues for the MTA, and that the
implementation of changes in the City's computer system, resulting from the
inability of the current computer system to recognize the year 2000, could cost
the City up to $150 million to $200 million over the next three years. In a
subsequent report released on June 16, 1997, the IBO noted that in the City
Financial Plan the City had deferred to fiscal years 1999 through 2001 the
assumed receipt of back airport rents, and that the tax revenue forecasts for
the 1998 fiscal year in the City Financial Plan are closer than the forecasts
in the May Financial Plan to the IBO's forecast of City tax revenues in its May
report.
On August 25, 1997, the IBO issued a report relating to recent
developments regarding welfare reform. The report noted that Federal
legislation adopted in August 1997, modified certain aspects of the 1996
Welfare Act, by reducing SSI eligibility restrictions for certain legal aliens
residing in the country as of August 22, 1996, resulting in the continuation of
Federal benefits, by providing funding to the states to move welfare recipients
from public assistance and into jobs and by providing continued Medicaid
Coverage for those children who lose SSI due to stricter eligibility criteria.
In addition, the report noted that the State had enacted the Welfare Reform Act
of 1997 which, among other things, requires the City to achieve work quotas and
other work requirements and requires all able-bodied recipients to work after
receiving assistance for two years. The report noted that this provision could
require the City to spend substantial funds over the next several years for
workfare and day care in addition to the funding reflected in the City
Financial Plan. The report also noted that the State Welfare Reform Act of 1997
established a Food Assistance Program designed to replace Federal food stamp
benefits for certain classes of legal aliens denied eligibility for such
benefits by the 1996 Welfare Act. The report noted that if the City elects to
participate in the Food Assistance Program, it will be responsible for 50% of
the costs for the elderly and disabled. The IBO has stated that it will release
an updated report to provide a detailed analysis of these developments and
their likely impact on the City.
On October 31, 1996, the IBO released a report assessing the costs that
could be incurred by the City in response to the 1996 Welfare Act, which, among
other things, replaces the AFDC entitlement program with TANF, imposes a
five-year time limit on TANF assistance, requires 50% of states' TANF caseload
to be employed by 2002, and restricts assistance to legal aliens. The report
noted that if the requirement that all recipients work after two years of
receiving benefits is enforced, these additional costs could be substantial
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starting in 1999, reflecting costs for worker training and supervision of new
workers and increased child care costs. The report further noted that, if
economic performance weakened, resulting in an increased number of public
assistance cases, potential costs to the City could substantially increase.
States are required to develop plans during 1997 to implement the new law. The
report noted that decisions to be made by the State which will have a
significant impact on the City budget include the allocation of block grant
funds between the State and New York local governments such as the City and the
division between the State and its local governments of welfare costs not
funded by the Federal government.
Finally, the report noted that the new welfare law's most significant
fiscal impact is likely to occur in the years 2002 and beyond, reflecting the
full impact of the lifetime limit on welfare participation which only begins to
be felt in 2002 when the first recipients reach the five-year limit and are
assumed to be covered by Home Relief. In addition, the report noted that, given
the constitutional requirement to care for the needy, the 1996 Welfare Act
might well prompt a migration of benefit-seekers into the City, thereby
increasing City welfare expenditures in the long run. The report concluded that
the impact of the 1996 Welfare Act on the City will ultimately depend on the
decisions of State and City officials, the performance of the local economy and
the behavior of thousands of individuals in response to the new system.
Seasonal Financing. 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. Although the City's current
financial plan projects $2.4 billion of seasonal financing for the 1998 fiscal
year, the City expects to undertake only approximately $1.4 billion of seasonal
financing. The City has issued $1.075 billion of short-term obligations on
October 15, 1997 and expects to issue additional short-term obligations 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.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. 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.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the City Financial Plan. The City is a party to
numerous lawsuits and is the subject of numerous claims and investigations. The
City has estimated that its potential future liability on account of
outstanding claims against it as of June 30, 1997 amounted to approximately
$3.5 billion. This estimate was made by categorizing the various claims and
applying a statistical model, based primarily on actual settlements by type of
claim during the preceding ten fiscal years, and by supplementing the estimated
liability with information supplied by the City's Corporation Counsel.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state
and local income taxes, could have a severe impact on funding methods under
which municipalities operate. With respect to property taxes, the report noted
that the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest
deduction would result in a significant reduction in affordability and, thus,
in the demand for, and the valuation of, real estate. The report noted that
rapid losses in property valuations would be felt by many municipalities,
hurting their revenue raising abilities. In addition, the report noted that the
loss of the current deduction for real property and state and local income
taxes from Federal income tax
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liability would make rate increases more difficult and increase pressures to
lower existing rates, and that the cost of borrowing for municipalities could
increase if the tax-exempt status of municipal bond interest is worth less to
investors. Finally, the report noted that tax anticipation notes issued in
anticipation of property taxes could be hurt by the imposition of a flat tax,
if uncertainty is introduced with regard to their repayment revenues, until
property values fully reflect the loss of mortgage and property tax deductions.
Ratings Agencies. On July 10, 1995, S&P revised downward its rating on
City general obligation bonds from A-to BBB+ and removed City bonds from
CreditWatch. S&P stated that "structural budgetary balance remains elusive
because of persistent softness in the City's economy, highlighted by weak job
growth and a growing dependence on the historically volatile financial services
sector." Other factors identified by S&P's in lowering its rating on City bonds
included a trend of using one-time measures, including debt refinancings, to
close projected budget gaps, dependence on unratified labor savings to help
balance the City Financial Plan, optimistic projections of additional federal
and State aid or mandate relief, a history of cash flow difficulties caused by
State budget delays and continued high debt levels. In 1975, S&P suspended its
A rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P. On
July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 10, 1995, S&P revised its rating of City
bonds downward to BBB+, as discussed above. On November 25, 1996, S&P issued a
report which stated that, if the City reached its debt limit without the
ability to issue bonds through other means, it would cause a deterioration in
the City's infrastructure and significant cutbacks in the capital plan which
would eventually impact the City's economy and revenues, and could have
eventual negative credit implications.
Moody's rating for City general obligation bonds is Baa1. On July 17,
1997, Moody's changed its outlook on City bonds to positive from stable. On
March 1, 1996, Moody's stated that the rating for the City's Baa1 general
obligation bonds remains under review for a possible downgrade pending the
outcome of the adoption of the City's budget for the 1997 fiscal year and in
light of the status of the debate on public assistance and Medicaid reform; the
enactment of a State budget, upon which major assumptions regarding State aid
are dependent, which may be extensively delayed; and the seasoning of the
City's economy with regard to its strength and direction in the face of a
potential national economic slowdown. Moody's ratings of City bonds were
revised in November 1981 from B (in effect since 1977) to Ba1, in November 1983
to Baa, in December 1985 to Baa1, in May 1988 to A and again in February 1991
to Baa1.
Fitch Investors Service, Inc. ("Fitch") rates City general obligation
bonds A- since July 15, 1993. On February 28, 1996, Fitch placed the City's
general obligation bonds on FitchAlert with negative implications. On November
5, 1996, Fitch removed the City's general obligation bonds from FitchAlert
although Fitch stated that the outlook remains negative. Since then Fitch has
revised the outlook to stable. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised downward
or withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of the City's general obligation bonds.
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APPENDIX D
SPECIAL INVESTMENT CONSIDERATIONS
RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
Overview
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per share and the interest
income of, the Vista California Tax Free Money Market Fund or the Vista
California Intermediate Tax Free Income Fund, or result in the default of
existing obligations, including obligations which may be held by the Vista
California Tax Free Money Market Fund or the Vista California Intermediate Tax
Free Income Fund. The following section provides only a brief summary of the
complex factors affecting the financial condition of California, and is based
on information obtained from California, as publicly available prior to the
date of this Statement of Additional Information. The information contained in
such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local
issuers may be unrelated to the creditworthiness of California, and that there
is no obligation on the part of California to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1994. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50 states
and one of the largest in the world. The State's population of more than 32
million represents over 12% of the total United States population and grew by
26% in the 1980s, more than double the national rate. Population growth slowed
to less than 1% annually in 1994 and 1995, but rose to 1.9% in 1996. During the
early 1990's, net population growth in the State was due to births and foreign
immigration.
Total personal income in the State, at an estimated $810 billion in 1996,
accounts for almost 13% of all personal income in the nation. Total employment
is over 14 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
were all severely affected, particularly in Southern California. Job losses
were the worst of any post-war recession. Employment levels stabilized by late
1993 and steady job growth has occurred since early 1994. Pre-recession job
levels were reached in 1996. Unemployment, while remaining higher than the
national average, has come down from its 10% recession peak to 6.5% in spring,
1997. Economic indicators show a steady and strong recovery underway in
California since the start of 1994 particularly in export-related industries,
services, electronics, entertainment and tourism. The residential housing
sector grew much more slowly than in prior recoveries, but by late 1997 had
reached prerecession levels of new housing starts. Recent developments in Asian
economies may impact exports, but it is not yet clear whether how these
developments will affect the State's economy overall. Any delay or reversal of
the recovery may create new shortfalls in State revenues.
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Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full
cash value of the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2% per year, except under
new construction or change of ownership (subject to a number of exemptions).
Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay
debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme
Court in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on
Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State
Constitution, which contain a number of provisions affecting the ability of
local agencies to levy and collect both existing and future taxes, assessments,
fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended
or increased without voter approval after December 31, 1994 must be approved by
a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment,
imposed by a [local government] upon a parcel or upon a person as an incident
of property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which
generate revenues exceeding the funds required to provide the property related
service or are used for unrelated purposes. There are new notice, hearing and
protest procedures for levying or increasing property related fees and charges,
and, except for fees or charges for sewer, water and refuse collection services
(or fees for electrical and gas service, which are not treated as "property
related" for purposes of Article XIIID), no property related fee or charge may
be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments,
fees and charges. Consequently, local voters could, by future initiative,
repeal, reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
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The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as
reasonable user charges or fees, and certain other non-tax funds, including
bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been
under the State limit. State appropriations were $6.7 billion under the limit
for fiscal year 1996-97.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in
laws or the California Constitution may also affect the ability of the State or
local issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of
November 1, 1997, the State had outstanding approximately $18.2 billion of
long-term general
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obligation bonds, plus $618 million of general obligation commercial paper
which will be refunded by long-term bonds in the future, and $6.1 billion of
lease-purchase debt supported by the State General Fund. The State also had
about $8.7 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1996-97, debt service on general
obligation bonds and lease purchase debt was approximately 5.0% of General Fund
revenues.
Recent Financial Results. The principal sources of General Fund revenues
in 1995-1996 were the California personal income tax (45% of total revenues),
the sales tax (34%), bank and corporation taxes (13%), and the gross premium
tax on insurance (2%). The State maintains a Special Fund for Economic
Uncertainties (the "SFEU"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund, but which is required to be replenished as
soon as sufficient revenues are available. Year-end balances in the SFEU are
included for financial reporting purposes in the General Fund balance. Because
of the recession and an accumulated budget deficit, no reserve was budgeted in
the SFEU from 1992-93 to 1995-96.
General. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Starting in mid-1990, the State has faced adverse economic, fiscal, and
budget conditions. The 1990-1994 economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (education, health, welfare
and corrections) growing at rates significantly higher than the growth rates
for the principal revenue sources of the General Fund. These structural
concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of the recession and these factors, among
others, the State experienced substantial revenue shortfalls, and greater than
anticipated social service costs, in the early 1990's. The State accumulated
and sustained a budget deficit in the budget reserve, the SFEU, approaching
$2.8 billion at its peak at June 30, 1993. The Legislature and Governor agreed
on a number of different steps to respond to the adverse financial conditions
and produce Budget Acts in the Years 1991-92 to 1994-95 (although not all of
these actions were taken in each year):
[bullet] significant cuts in health and welfare program expenditures;
[bullet] transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in
mandates on local government;
[bullet] transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some
other districts to local school districts, thereby reducing State
funding for schools;
[bullet] reduction in growth of support for higher education programs,
coupled with increases in student fees;
[bullet] revenue increases (particularly in the 1992-93 Fiscal Year budget),
most of which were for a short duration;
[bullet] increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have
produced much less federal aid than the State Administration had
requested); and
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[bullet] various one-time adjustment and accounting changes (some of which
have been challenged in court).
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results, with revenues equaling or exceeding expenditures
starting in FY 1992-93. As a result, the accumulated budget deficit of about
$2.8 billion was eliminated by June 30, 1997, when the State showed a positive
balance of about $408 million, on a budgetary basis, in the SFEU.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. For a two-month period in the summer of 1992,
pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April, 1996.
The 1995-96 and 1996-97 Budget Acts reflected significantly improved
financial conditions, as the State's economy recovered and tax revenues soared
above projections. Over the two years, revenues averaged about $2 billion
higher than initially estimated. Most of the additional revenues were allocated
to school funding, as required by Proposition 98, and to make up shortfalls in
federal aid for health and welfare costs and costs of illegal aliens. The
budgets for both these years showed strong increases in funding for K-14 public
education, including implementation of initiatives to reduce class sizes for
lower elementary grades to not more than 20 pupils. Higher education funding
also increased. Spending for health and welfare programs was kept in check, as
previously-implemented cuts in benefit levels were retained.
The final results for FY 1996-97 showed General Fund revenues of $49.2
billion and expenditures of $48.9 billion. The improved revenues allowed the
repayment of the last of the recession-induced budget deficits; the SFEU had a
balance of $408 million on a budgetary basis ($281 million on a cash basis) as
of June 30, 1997, the first significant positive balance in the decade. In
1996-97, the State implemented its regular cash flow borrowing program with the
issuance of $3.0 billion of Revenue Anticipation Notes which matured on June
30, 1997, and did not require any external borrowing over the end of the fiscal
year.
Fiscal Year 1997-98 Budget. With continued strong economic recovery and
surging tax receipts, the State entered the 1997-98 Fiscal Year in the
strongest financial position in the decade. However, in May 1997, the
California Supreme Court ruled that the State had acted illegally in 1993 and
1994 by using a deferral of payments to the Public Employees Retirement Fund to
help balance earlier budgets. In response to this court decision, the Governor
ordered an immediate repayment to the Retirement Fund of about $1.235 billion,
which was made in late July, 1997, and substantially "used up" the expected
additional revenues for the fiscal year.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The Budget
Act assumes General Fund revenues and transfers of $52.5 billion, and contains
expenditures of $52.8 billion. As a result, the budget reserve (SFEU) is
reduced to an estimated $112 million at June 30, 1998. The Budget Act also
contains $14.4 billion of Special Fund expenditures. Following enactment of the
Budget Act, the State plans to carry out its normal annual cash flow borrowing,
totaling $3.0 billion to mature June 30, 1998.
The 1997-98 Budget Act provides another year of rapidly increasing funding
for K-14 public education. Total General Fund support will reach $5,150 per
pupil, more than 20% higher than the recession-period levels which were in
effect as late as FY 1993-94. The $1.75 billion in new funding will be spent on
class size reduction and other initiatives, as well as fully funding growth and
cost of living increases. Support
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for higher education units in the State also increased by about 6 percent.
Because of the pension payment, most other State programs were funded at levels
consistent with prior years, and several initiatives had to be dropped. These
included additional assistance to local governments, state employee raises, and
funding of a bond bank.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," to become effective January 1, 1998, will emphasize
programs to bring aid recipients into the workforce. As required by federal
law, new time limits will be placed on receipt of welfare aid. Grant levels for
1997-98 remain at the reduced, prior years' levels.
Although, as noted, the 1997-98 Budget Act projects a budget reserve in
the SFEU of $112 million on June 30, 1998, the General Fund fund balance on
that date also reflects $1.25 billion of "loans" which the General Fund made to
local schools in the recession years, representing cash outlays above the
mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund
and from schools' entitlements. The 1997-98 Budget Act contained a $200 million
appropriation from the General Fund toward this settlement
Department of Finance reports in December, 1997 indicated that General
Fund revenues for the first five months of the fiscal year were about 2.2%
below projections, with most of the shortfall attributable to a 20% shortfall
in bank and corporation tax receipts. Receipts from personal income taxes
(principally from withholding) and sales taxes, which together are the
strongest indicators of the economy's condition, were essentially on target. A
more detailed projection of FY 1997-98 and FY 1998-99 revenues and expenditures
will be released by the Governor in early January as part of his 1998-99 Budget
Proposal.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a
growing population with many immigrants. These factors which limit State
spending growth also put pressure on local governments. There can be no
assurances that, if economic conditions weaken, or other factors intercede, the
State will not experience budget gaps in the future.
Bond Rating. The ratings on California's long-term general obligation
bonds were reduced in the early 1990's from "AAA" levels which had existed
prior to the recession. In 1996, Fitch and Standard & Poor's raised their
ratings of California's general obligation bonds, which as of November 1997
were assigned ratings of "A+" from Standard & Poor's, "A1" from Moody's and
"AA-" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
Legal Proceedings. The State is involved in certain legal proceedings
(described in the State's recent financial statements) that, if decided against
the State, may require the State to make significant future expenditures or may
substantially impair revenues. Trial courts have recently entered tentative
decisions or injunctions which would overturn several parts of the State's
recent budget compromises. The matters covered by these lawsuits include
reductions in welfare payments and the use of certain cigarette tax funds for
health costs. All of these cases are subject to further proceedings and
appeals, and if California eventually loses, the final remedies may not have to
be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
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various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
the State's General Fund surplus to local agencies, the reallocation of certain
State rev enues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately
75% of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. While the Governor initially proposed to
grant new aid to local governments from the State's improved fiscal condition
in 1997-98, the decision to repay the State pension fund eliminated these
moneys.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in August
1990, although such plans were put off after the Governor approved legislation
to provide additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1996-96 and FY1996-97. Los Angeles County's debt was downgraded by
Moody's and S&P in the summer of 1995. Orange County, which emerged from
Federal Bankruptcy Court protection in June 1996, has significantly reduced
county services and personnel, and faces strict financial conditions following
large investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in
August, 1997 in order to comply with the federal welfare reform law. Generally,
counties play a large role in the new system, and are given substantial
flexibility to develop and administer programs to bring aid recipients into the
workforce. Counties are also given financial incentives if either at the county
or statewide level, the "Welfare-to-Work" programs exceed minimum targets;
counties are also subject to financial penalties for failure to meet such
targets. Counties remain responsible to provide "general assistance" for
able-bodied indigents who are ineligible for other welfare programs. The
long-term financial impact of the new CalWORKs system on local governments is
still unknown.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the
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event the facility being leased is unavailable for beneficial use and occupancy
by the municipality during the term of the lease. Abatement is not a default,
and there may be no remedies available to the holders of the certificates
evidencing the lease obligation in the event abatement occurs. The most common
cases of abatement are failure to complete construction of the facility before
the end of the period during which lease payments have been capitalized and
uninsured casualty losses to the facility (e.g., due to earthquake). In the
event abatement occurs with respect to a lease obligation, lease payments may
be interrupted (if all available insurance proceeds and reserves are exhausted)
and the certificates may not be paid when due. Litigation is brought from time
to time which challenges the constitutionality of such lease arrangements.
Other Considerations
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program), including
risks related to the policy of awarding exclusive contracts to certain
hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal
Obligations in which the Fund may invest, future allocations of state revenues
to local governments or the abilities of state or local governments to pay the
interest on, or repay the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance
coverage rates; (ii) an insurer to perform on its contracts of insurance in the
event of widespread losses; or (iii) the federal or State government to
appropriate sufficient funds within their respective budget limitations.
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